The United States Supreme Court recently established standards for determining when a parent corporation will be liable for the actions of a subsidiary under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), 42 U.S.C. § 9601 et seq. See United States v. Bestfoods, No. 97-454, slip op. (June 8, 1998); 1998 WL 292076 (U.S.). The Bestfoods decision restricts the circumstances in which a parent corporation will be liable for a subsidiary’s actions by narrowing the basis for CERCLA "operator" liability. The Supreme Court held that the test for direct CERCLA "operator" liability must be focused on the parent corporation’s relationship with the particular facility at issue rather than on the general parent-subsidiary relationship.

CERCLA provides that any person who owns or operates a facility at which hazardous substances are disposed is strictly liable for the costs of investigating and remediating the resulting contamination. 42 U.S.C. § 9607(a)(2). The difficult question is determining which activities are sufficient to render a parent corporation an "operator" of the facility for purposes of CERCLA liability. CERCLA’s definitional section provides no guidance since an "operator" is defined as "any person…operating" the facility. 42 U.S.C. § 9601(20)(A)(ii). Therefore, the Supreme Court relied upon the generally accepted meaning of the word "operate" and held that:

1998 WL 292076, 7. In so ruling, the Supreme Court rejected the "actual control" test that had been accepted by the First, Second, Third and Eleventh Circuits.

The "actual control" test imposed CERCLA "operator" liability on a parent corporation if the parent participates in managing the general business of its subsidiary. The Supreme Court held that the "actual control" test was flawed because CERCLA "operator" liability is based upon evidence that a party is directly operating a polluting facility. Ordinary acts of corporate ownership, such as the adoption of by-laws, election of directors, and participation in the affairs of the subsidiary in the normal course of business are insufficient to give rise to CERCLA "operator" liability.

The Supreme Court further held that CERCLA "operator" liability may be imposed if an agent of the parent manages or directs activities at a polluting facility even though the agent does not have an official position within the subsidiary. The Court cautioned that such a situation requires careful evaluation because the level of interference in the operations of a subsidiary that may give rise to CERCLA liability has to be distinguished from a parent corporation’s normal, permissible oversight of its subsidiary’s operations. "The critical question is whether, in degree and detail, actions directed to the facility by an agent of the parent alone are eccentric under accepted norms of parental oversight of a subsidiary’s facility." Id. at 10. Therefore, "’activities that involve the facility but which are consistent with the parent’s investor status, such as monitoring the subsidiary’s performance, supervision of the subsidiary’s finance and capital budget decisions, and articulation of general policies and procedures, should not give rise to direct liability.’" Id. at 10, quoting Oswald, "Bifurcation of the Owner and Operator Analysis under CERCLA", 72 Wash. U.L.Q. 223, 282 (1994).

In addition, the Supreme Court noted that CERCLA liability could be imposed on a parent corporation for the acts of its subsidiary if the facts establish a basis for piercing the corporate veil. Proof that the parent was misusing the corporate form for a wrongful purpose is required.

Analyzing the facts at issue in Bestfoods, the Supreme Court determined that there was some evidence indicating that agents of the parent had participated in the operation of the subsidiary’s facility to the extent that CERCLA "operator" liability might be imposed. The parent corporation’s governmental and environmental affairs director had "played a conspicuous part in dealing with the toxic risks emanating from the operation of the plant." Id. at 11. Accordingly, the Supreme Court remanded to the trial court for reevaluation of the role the parent corporation’s agents played in operating the polluting facility in light of the standards set forth in its opinion.

While the Bestfoods decision has narrowed the circumstances in which a parent corporation may be responsible for the CERCLA liability of its subsidiary, the Supreme Court declined to establish a clear standard for determining what level of control over a facility’s operations will be sufficient to impose CERCLA "operator" liability on a parent corporation. That question must be resolved by the lower courts on a case-by-case basis. Nevertheless, the Bestfoods decision should have a significant impact on CERCLA litigation. The Court’s rejection of the "actual control" test limits CERCLA "operator" liability to circumstances where the parent corporation actively directs the operations of the polluting facility. Indeed, the Supreme Court’s decision suggests that a parent corporation will only be liable as a CERCLA "operator" if the parent actively manages or directs a facility’s hazardous substance handling practices or environmental compliance activities. However, even if that portion of the Court’s decision is considered dicta, a parent corporation’s potential CERCLA liability has been substantially limited by the Bestfoods decision.