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A “Sticky” Situation: Addressing PFAS Risk in Corporate Transactions

Friday, May 3, 2019

Loyti Cheng

Co-head of the Environmental Practice Group and Counsel, Davis Polk & Wardwell LLP

Michael Comstock

Associate, Davis Polk & Wardwell LLP

PFAS is a catch-all term for the chemical compounds per- and polyfluoroalkyls (including PFOA, PFOS, and replacements such as GenX). Seemingly overnight, these substances have gone from something talked about mainly by environmental lawyers and advocates to something that the public is increasingly focused on. The reasons for this shift include EPA’s and the states’ move to regulate these substances, recent lawsuits targeting PFAS manufacturers, and a better understanding of the way these substances may persist in the environment and harm human health. Because the future costs and obligations regarding the cleanup of, and human exposure to, PFAS are uncertain and likely significant, they present a challenge for environmental attorneys and their clients when performing deal diligence and negotiating contracts.

PFAS have been used since the 1940s, and because they are chemically stable and heat-resistant, they are in a variety of consumer products (such as non-stick cookware and waterproof coatings) and are used for industrial or commercial applications such as firefighting foam. Because of their widespread use, EPA has stated that most people in the United States have been exposed to PFAS. Further, because PFAS can “bioaccumulate,” or gradually increase, in humans, and do not naturally break down in the environment, PFAS can persist long after initial exposure or release. In humans, potential health effects from PFAS exposure reportedly include high cholesterol, low infant birth rates, immune system effects, thyroid disease, and kidney and testicular cancer. In the environment, PFAS migrate through soil, groundwater, and air, sometimes traveling miles from the site of initial contamination or release, and are generally resistant to some traditional remedial methods. 

The public understanding of PFAS, and their regulation by EPA, increased after a class-action lawsuit alleging drinking water contamination and adverse human health effects from the production of PFOA received a verdict of $343 million in 2005. In 2006, EPA asked eight companies to cease production of PFOA and PFOS in the United States (by 2015, all eight companies had done so). In 2016, EPA issued a drinking water health advisory for PFOA and PFOS, and these substances were banned from food packaging in the United States.

Most recently at the federal level, in February 2019, EPA released its PFAS Management Plan, which sets forth a series of regulatory steps that will provide clearer guidance for companies’ future obligations regarding PFAS cleanup and human exposure. While EPA issued a non-enforceable drinking water health advisory for PFOA and PFOS in 2016, the PFAS Management Plan states that EPA is evaluating the need to create “maximum contaminant levels,” or enforceable drinking water standards, for PFOA and PFOS under the Safe Drinking Water Act. In addition, EPA has stated that it is taking steps to propose designating PFOA and PFOS as hazardous substances under the Superfund program, which would give EPA additional authority to address PFAS contamination (for example, by requiring responsible parties to conduct or pay for remedial activities). In the interim, EPA has stated that it will develop non-binding cleanup recommendations. The PFAS Management Plan also outlines other steps that EPA is taking with respect to PFAS regulation.

In parallel to EPA’s regulatory initiatives, state regulation and private lawsuits have proceeded. Numerous states have already adopted or proposed PFAS cleanup or drinking water standards; for example, New York and New Jersey have proposed binding drinking water standards that are significantly more stringent than EPA’s PFAS health advisory standard. New Jersey has also ordered five chemical companies to fund PFAS remediation in the state, which could easily cost hundreds of millions of dollars. And in just the past few years, there have been a series of significant settlements and developments in PFAS litigation. These include a personal injury settlement of $670 million in 2017, an $850 million settlement in 2018 for PFAS contamination in Minnesota, and the consolidation of over 75 class action lawsuits that allege health and environmental impacts from PFAS firefighting foam.

In the face of increasing litigation risk, as well as the costs of future PFAS remediation that will result from EPA’s and the states’ regulation of PFAS, environmental attorneys and their clients face significant uncertainties in performing diligence and negotiating purchase agreements with respect to transactions involving companies with potential PFAS risk. While the settlements above include significant amounts, PFAS litigation and the public health community’s understanding of PFAS’ potential links to adverse health conditions are still in the early stages, and it is unclear, for example, how such litigation will progress if and when it moves from PFAS manufacturers to nonmanufacturers (such as users of firefighting foam or distributors of PFAS-containing products). In addition, the relative lack of precedents for large-scale PFAS remediation and uncertainty regarding future cleanup standards makes it difficult for environmental consultants to prepare accurate cost estimates for future remediation.

As such, environmental attorneys need to be proactive in diligencing and contracting for PFAS risk. For example, attorneys need to ensure that environmental consultants on deals are actively looking into PFAS liabilities, and also need to thoroughly review a target company’s current and past products (to identify PFAS usage) and environmental insurance policies (to determine potential PFAS coverage). Attorneys should also become familiar with relevant PFAS regulatory standards, such as in jurisdictions where a target company operates. When it comes to negotiating purchase agreements, attorneys should ensure that environmental provisions and defined terms are broad enough to cover PFAS, and consider the use of specific indemnities if warranted in the context of a particular transaction. While the uncertainty and potential magnitude of PFAS risk is daunting, attorneys need to become familiar with it, because the regulation and litigation of PFAS exposure and contamination will be playing out for years to come.