Supplemental Environmental Projects (SEPs) are projects included in enforcement settlements that provide environmental or public health benefits related to the violations being resolved. SEPs have been used as an element of federal environmental settlements since the 1980s. Regulators like that SEPs encourage settlement and result in tangible environmental benefits. The regulated community likes the community goodwill associated with SEPs and the ability to offset potential fines by 80% of the estimated cost of the SEP.
However, SEPs have detractors and in March 2020 the Department of Justice issued a memo halting the use of SEPs. By way of explanation the memo restated legal arguments first raised against the use of SEPs in the 1980s. Specifically, that SEPs divert funds that would otherwise be collected by Treasury, in violation of the Miscellaneous Receipts Act (“MRA”). EPA Guidance has established criteria directly addressing SEP compliance with the MRA since 2002.
In response to the March 2020 memo, environmental plaintiffs filed an action in federal court seeking a judicial declaration that the memo was unlawful. DOJ responded by moving to dismiss while also issuing a clarifying memo purporting to distinguish the newly prohibited SEPs from the often indistinguishable and permissible equitable mitigation projects. Regardless, the federal action was rendered moot when both memos were rescinded by the Biden administration in February.
While the withdrawn DOJ memos prohibiting the use of SEPs are now inoperative, potential parties to settlements should be aware that a federal rule finalized in December 2020 prohibits settlement agreements requiring defendants to provide goods or services to third parties for SEPs (28 CFR 50.28), and that the rule stands in tension with portion of EPA’s 2015 SEP Guidance regarding third-party SEP recipients. The rule remains in effect while the Biden administration considers whether it should be withdrawn or revised.