Damned if You Do, Damned if You Don’t – Avoiding Parent Corporation Liability for Environmental Violations at Subsidiary Facilities

In United States v. EES Coke Battery LLC, the United States District Court for the Eastern District of Michigan found three parent corporations liable for a total of $120,000,000 in penalties and other damages for violations of the Clean Air Act at a coke oven battery owned by their subsidiary. The case illustrates the risks when parent corporations go beyond appropriate management and control of subsidiaries by exercising eccentric involvement in operation of their facilities.

EES Coke Battery owns and operates a coke battery facility on Zug Island, River Rouge, in Michigan. The coke oven battery consists of 85 six-meter-high ovens used to produce blast furnace coke, an essential component in steel manufacturing. In 2013 and 2014, EES applied to the Michigan Department of Environment, Great Lakes and Energy (administering the Clean Air Act permitting program in Michigan under delegation from the EPA) for modifications to its air permits to increase the use of coke oven gas to fire the ovens. In its application, EES concluded that the change would not constitute a “major modification” that would have required it to install significantly more air pollution controls. Although the Michigan agency approved EES’s permit as a non-major modification, in 2020, the EPA issued a Notice of Violation alleging that the change caused a significant increase in SO2 emissions, rendering the change a major modification.

EPA sued EES and three of its parent corporations, alleging that they also were liable as “operators” of the coke oven battery: DTE Energy Services, Inc.; DTE Energy Resources, LLC.; and DTE Energy Company (two, three, and four corporate tiers above EES, respectively). The court found that EES had no employees of its own and that the parent companies exercised a high degree of control over the facility, including environmental decision-making and emissions-related activities. The facts illustrated that the parent corporations’ employees directed and controlled all activities at the facility, interacted with governmental agencies in applying for and complying with applicable permits, including preparing and signing permit applications, and exercised day-to-day control over facility operations.

The Clean Air Act imposes strict liability on owners or operators for violations.[1] “Owner or operator” is broadly defined as “any person who owns, leases, operates, controls, or supervises a stationary source.” [2]  Given the breadth of the definition, the Court looked to precedent under the Comprehensive Environmental Response Compensation and Liability Act (“CERCLA or “superfund”)[3] which employs a similar definition of “operator.” In United States v. Best Foods, 524 U.S. 51 (1998) the Supreme Court articulated the standard under CERCLA for parent corporation direct liability as an “operator” of a facility. The Best Foods court distinguished between parent corporation control of a subsidiary (which it found did not create parent liability, absent corporate veil piercing) and parent control of the subsidiary’s facility itself (which renders the parent an operator). The court in the instant case applied Best Foods’ distinction between control of the subsidiary and control of the facility to conclude that:

The former, which typically involves activities that ‘are consistent with the parent’s investor status, such as monitoring of the subsidiary’s performance, supervision of the subsidiary’s finance and capital budget decisions, and articulation of general policies and procedures,’ does not, without more, give rise to operator liability. Rather, to be directly liable as an operator, the parent company must have ‘actively participated in, and exercised control over, the operations of the facility itself.’ This operation must ‘specifically relate [ ] to pollution, that is, operations having to do with leakage or disposal of hazardous waste, or decisions about compliance with environmental regulations.’

Noting that among many other factors employees of the parent companies exercised day-to-day control over facility operations, made decisions regarding the permit applications, and decided not to install additional emissions control equipment that would have reduced emissions, the court found all three parent companies fully liable as operators for $100,000,000 in penalties and an additional $20,000,000 in injunctive relief sought by an environmental organization.

The case illustrates the challenges faced by multi-tiered corporate organizations, in which parent companies often provide some or all of the resources to administer and manage their subsidiaries, particularly for environmental compliance. It does not mean that each corporate entity must stand completely on its own when it comes to managing facilities that may have an environmental impact. It remains appropriate for parent corporations to oversee and administer their subsidiaries’ operations. But the clear message is that a parent corporation cannot hide behind a separate corporate entity to avoid liability for its own operation of subsidiary facilities that results in environmental harm.

[1] United States v. Anthony Dell’Aquilla Enters. and Subsidiaries, 150 F. 3d 329, 322 (3d Cir. 1998).

[2] 42 U.S.C. §7411 (a) (5)

[3] 42 U.S.C.§ 9601 et. seq.