Supplemental environmental projects or “SEPs” are “environmental” projects that a defendant agrees to undertake as part of a negotiated settlement of a federal enforcement action. SEPs have been used as a discretionary vehicle for the government to reduce/affect/mitigate a civil monetary penalty in exchange for a defendant performing a project that is otherwise not required by law. Some defendants find SEPs worthwhile, providing a conduit to spend money on projects with concrete environmental benefits as compared to paying money into the US Treasury. SEPs have been especially popular with municipalities allowing public funds to be spent on beneficial projects directed toward community needs. SEPs are also viewed favorably by regulators as providing another route to advance broader environmental protections as part of a singular enforcement action.

In recent years, however, many private sector defendants found the SEP process to be too bureaucratic, too lengthy and uncertain, and too costly, with many electing to just pay the civil penalty. In a series of memorandum issued by the Trump Administration’s Department of Justice, DOJ found SEPs to be proscribed as a violation of the Miscellaneous Receipts Act, 31 U.SC. § 3302, by diverting funds (penalties) that the US would otherwise receive to “third parties” that obtain the environmental/financial benefit of the SEP. This SEP ban was codified into the federal regulations in December 2020. Although the Biden Administration has withdrawn the DOJ memoranda limiting the use of SEPs, SEPs still face an uncertain and tenuous future in light of the regulatory ban.

SEPs – Thumbs Up! SEPs under the Bush 1, Clinton, Bush 2 and Obama Administrations

February 1991 – EPA issues policy on use of SEPs in EPA settlement. This guidance document sets out the basic framework of SEPs.[1]

May 1, 1998. EPA issues a comprehensive SEP Policy, setting forth the basic parameters for a SEP – including types of permissible SEP projects, terms and conditions for settlement and method for calculation of penalty. This policy withdraws the February 1991 policy.

1998 – 2015. EPA issues over fifteen SEP policies and guidance documents and EPA and DOJ engage in a long history of including SEPs in Consent Decrees and Settlement Agreements.

March 18, 2015. EPA issues an Update that revokes and consolidates the fifteen years of SEP guidance into one comprehensive policy manual. This 2015 policy provides EPA’s full-throated endorsement of the use of SEPs in civil enforcement actions “where appropriate.”

SEPs – Thumbs Down! SEPs under the Trump Administration

The Trump Administration embarked on a continuous whittling away of SEPs, starting with the former Attorney General (AG) Jeff Sessions’ memorandum prohibiting settlement payments to third parties in federal settlement agreements up to the eventual issuance of a formal rule prohibiting SEPs.

June 5, 2017. AG Sessions issues a broad based Memorandum prohibiting settlement payments to third parties as part of several federal enforcement proceedings, but includes an exception for addressing environmental harm, allowing payments for actions that directly mitigate impacts.

January 9, 2018. Acting Assistant Attorney General (AAG) Jeffrey Wood, issues a Memorandum providing additional guidance regarding how SEPs could comply with AG Sessions’ June 5, 2017 Memorandum. This Memorandum tightens the circumstances for SEP approval, generally requiring that the SEP directly remedy the harm at issue.

November 7, 2018. AG Sessions issues a Memorandum placing new limits on consent decrees and settlement agreements with state and local governments and notes that consent decrees may not be used “to achieve general policy goals or to extract greater or different relief from the defendant than could be obtained through agency enforcement action or litigation of the matter to judgment.”

August 21, 2019. Jeffrey Clark, AAG for the Department of Justice’s Environmental and Natural Resources Division (ENRD) issues a Memorandum addressing the November 2018 AG Sessions Memorandum, finding that SEPs are prohibited in settlement agreements with state and local governments and committing to perform a more in depth review of SEPs.

March 12, 2020. AAG Clark follows his August 21, 2019 Memorandum with a lengthy Memorandum, expanding that analysis to settlement agreements and consent decrees with private parties, concluding that SEPs violate the Miscellaneous Receipts Act (31 U.SC. §3302) and are not authorized without additional Congressional Action. In the view of the Trump Administration, this analysis is neither pro- nor anti-environment, but a commitment to the rule of law.

December 16, 2020. Trump Administration issues a “Midnight Rule” banning payments to non-governmental third parties. This rule removes the exception for addressing environmental harms and was apparently intended to prohibit or severely limit SEPs. See 28 C.F.R. § 50.28.

January 12, 2021. In his final days in office, AAG Clark issues another lengthy Memorandum describing the limited circumstances under which ENRD DOJ attorneys may include “equitable mitigation” requirements in settlement agreements, highlighting that equitable mitigation is not a “SEP” and notes that SEPs are a form of “congressionally unauthorized penalties.”

January 13, 2021. AAG Clark issues his final Memorandum that reinforces his position that SEPs are unlawful based on the December 16, 2020 regulation prohibiting settlement payments to non-governmental third parties and, once again, supports his Memorandum with lengthy legal analysis.

SEPs – Thumbs Up? SEPs under the Biden Administration

The Biden Administration has taken quick action to express its support of SEPs and withdraw the various DOJ Memorandum that restrict the use of SEPs. However, EPA and DOJ are still determining how to issue SEPs in light of the December 16, 2020 rule.

February 4, 2021. DOJ Deputy Assistant Attorney General Jean Williams issues a Memorandum withdrawing DOJ policies barring SEP on the grounds that such policies are “inconsistent with long standing Division policy and practice” and “may impede the full exercise of enforcement discretion.”

April 26, 2021. An April 26 Memorandum issued by Larry Starfield, Acting Chief of EPA’s Office of Environmental and Compliance Assistance (OECA) identifies SEPs as a potential tool to secure environmental and public health benefits beyond the typical injunctive relief. The April 26 Memorandum notes that the “inclusion of SEPs in judicial settlements is currently severely limited” due to the DOJ rule and policies and that rule and policies are under review at DOJ and use should be limited until those issues are resolved.

April 30, 2021. An April 30 Memorandum issued by Acting Chief Starfield regarding strengthening enforcement in Environmental Justice (EJ) Communities also identifies SEPs as a valuable tool to the EJ “holistic” enforcement efforts, also noting the potential limits set by the Trump Rule.[2]

Where Do SEPs Go From Here?

As stated above, EPA was quick to express their support of SEPs and the use of SEPs as a tool to promote the Biden Administration’s Environmental Justice platform. However, EPA has recognized that the December 15, 2020 Rule creates a significant stumbling block to reinstate SEPs. In a January 2021 statement to Inside EPA, Jonathan Brightbill, who replaced Clark as DOJ’s enforcement chief at the end of the Trump Administration, stated that he did not believe that the SEP ban could be reversed easily due to the federal codification of the ban and based on the legal analysis in the March 12, 2020 memorandum.[3] While EPA and DOJ continue to seek a pathway to renew SEPs, it appears that, for the time being, SEPs will be limited to EPA resolution of administrative matters or those that can be characterized as “mitigation” projects.

It is anticipated that the Biden administration will continue to review and eventually act to replace the rule. In addition, if EPA wants to encourage more wholesale inclusion of SEPs in settlement agreements to support its Environmental Justice initiatives, EPA should consider SEP policy improvements that address bureaucratic hurdles and other limitations that have caused private parties to reject SEPs in the past. SEPs can be a win-win for all involved but creativity and flexibility is needed to fully harness the power of SEPs in the future.