MTBE Litigation Update: South Tahoe And Beyond

In an effort to curb release of harmful automotive emissions, Congress passed amendments to the Clean Air Act in 1992 requiring oxygenates in fuel. Since then, methyl tertiary butyl ether (MTBE) has been used as the oxygenate of choice, rather than the ethanol alternative. However, concerns have grown about the hazards of MTBE, and many now believe that those hazards outweigh the benefit of the reduced emissions that MTBE provides.

An article written by the authors, titled "Myth or Reality: The Dangers of MTBE", appearing in the August 2001 issue of For the Defense, discussed the concerns about MTBE, pending MTBE litigation and legislation, and suggested strategies for potential defendants facing the possibility of costly MTBE regulation and litigation. The current article provides an update, and discusses the South Tahoe verdict, where a San Francisco jury found the defendants liable for manufacturing, selling and supplying a defective product (MTBE). This article also updates other current MTBE litigation, along with proposed and enacted state and federal MTBE legislation.

Background

MTBE is added to gasoline to reduce emissions of smog-forming pollutants and toxins from automobile tail pipes. However, when underground storage tanks leak, or MTBE gasoline otherwise escapes to the environment, groundwater and public drinking water sources may become contaminated. MTBE is highly soluble in water which, combined with its high incidence of use, has led to many cases of groundwater contamination. It takes only a few parts per billion of MTBE to contaminate a water source, and only five parts per billion affects taste. MTBE contamination effectively renders water undrinkable, as the water takes on a turpentine color and taste. Many people are also concerned that MTBE may be a carcinogen. While no scientific evidence confirms this claim, such fear is not easily allayed.

The possible health concerns, undrinkable water, and costly cleanup, along with a belief that oil companies knew of the risks associated with MTBE and chose to mislead about or hide those risks, have prompted state and federal government attempts at MTBE regulation, as well as lawsuits by both government and private plaintiffs.

South Tahoe

Recent events in a San Francisco Superior Court may affect the results and settlements in future and pending MTBE lawsuits. There, the South Tahoe Public Utility District brought product liability claims against more than thirty oil refineries, fuel distributors, and gas retailers. The results included multi-million dollar out-of-court settlements by some defendants, and an April 15, 2002 jury verdict of liability for the remaining defendants. South Tahoe Public Utility District v. Atlantic Richfield Co., No. 99-9128, Superior Court, San Francisco County.

The South Tahoe District maintained 34 drinking water wells that serviced homes and businesses in South Lake Tahoe, in California's Tahoe basin. Beginning in 1996, the District began testing drinking water wells for MTBE. As of now, 12 of the District's 34 drinking water wells have been shut down because of the presence of MTBE contamination in nearby plumes, and in some instances because the MTBE had reached the water wells. Those wells provide water to over 12,600 homes and businesses in the Lake Tahoe area, and the water demand triples during Tahoe's busy summer season. The District initially determined leaking tanks to be the cause of the MTBE contamination, and it replaced those vessels with new, double-walled tanks. However, MTBE was still allegedly leaking into the groundwater.

The District implemented a clean-up plan to provide reasonable drinking water to the South Lake Tahoe community, at a cost of over $6 million. The District estimated the total cost at $50 million, and sought to recover that amount in damages from the defendants.

In 1998, the District filed suit against 31 refineries, including Exxon, Chevron, Shell, Tosco, and Unocal, along with distributors and local retailers. The District claimed that oil companies had known for decades that gasoline escapes from storage tanks, and that MTBE severely contaminates groundwater upon escape. However, the District alleged, the oil companies failed to adequately warn the government, customers, or water agencies of the risk involved with MTBE. The District sought payment for all present and future costs of remediation, along with punitive damages.

This case differs from previous MTBE lawsuits in that the District brought claims based on product liability, rather than the environmental statutory and common law negligence claims that were brought by plaintiffs in other MTBE lawsuits. Bringing a product liability claim broadened the possible defendant pool, and allowed the District to include the oil refiners, fuel distributors and gas stations among the defendants.

In August 2001, Exxon agreed to pay the District $12 million in damages related to the contaminated wells. Prior to that settlement, Atlantic Richfield Co., and Unocal settled with the District at sums of $3.25 million and $1.6 million, respectively. "Exxon Corp.'s $12 Million Settlement Accepted by South Tahoe Public Utility District," at The MTBE E-Resource, available at http://www.mtbe-eresource.com/exxon.cfm (Aug. 13, 2001). In September 2001, Chevron settled the lawsuit for $10 million. In all, settlement agreements aggregated over $30 million. The case went to trial with the remaining defendants, including ARCO Chemical Co., Shell Oil, and Tosco Corp.

At trial, the District argued that the defendant companies knew of MTBE-related dangers since 1981, but that they discouraged environmental testing, and failed to adequately warn their customers. ARCO Chemical argued that it could not be liable for failure to warn, because its customers were sophisticated companies that were already aware of the dangers that MTBE presented. Shell asserted that at the time of MTBE use, the scientific evidence showed that MTBE would not leak into wells, and that wholesale customers are subject to strict rules about caring for underground tanks. Shell also contended that the wholesale customers knew that they were responsible for leak prevention. The judge granted a non-suit motion for the defendants Tosco and Ultramar regarding negligence, stating that the District was unable to show that the court should impose negligence liability upon the defendants for selling gasoline containing MTBE. "Defendants' Nonsuit Motions in South Tahoe MTBE Case Denied," The MTBE E-Resource, available at http://www.mtbe-eresource.com/defendant.cfm (Jan. 2, 2002).

The jury questions regarding the liability phase of the trial were based on a products liability claim. Samples of some of the questions given to the jury are:

• Was gasoline containing MTBE manufactured, sold, or supplied by any of the following defendants defective in design because the risk of harm inherent in its design outweighed the benefits of that design?"
• "As to each defendant, did the defect exist when the gasoline containing MTBE left the possession of such defendant?"
• "Was gasoline containing MTBE manufactured, sold or supplied by any of the following defendants defective because of a failure to warn?"
• "Do you find by clear and convincing evidence that defendant…acted with malice in selling gasoline containing MTBE that was defective in design because the risk of harm inherent in the design outweighed the benefits of that design?"

The defendants further argued that they were required by the Clean Air Act, 42 U.S.C. § 7545(c)(4)(a), to use MTBE because ethanol was not abundant enough to provide the needed gasoline supply for California. This argument paralleled the concerns expressed by California Governor Davis and several Northeastern states, regarding problems with Clean Air Act compliance.

Similar types of federal preemption arguments were raised by oil companies, with varying degrees of success, in other lawsuits. In a class action filed against Chevron and Gulf, a New Jersey federal judge found the strict liability claims to be federally preempted, as the Clean Air Act required the use of an oxygenate and "MTBE was an oxygenate that Congress contemplated would be used frequently." Holten. v. Chevron U.S.A., No. 00-4703 (AET) (D.N.J., July 8, 2001). However, other preemption arguments have been rejected. In New York, a class action was allowed to proceed, as the judge found that nothing in the text or the purpose of the Clean Air Act preempts complaints concerning groundwater contamination from MTBE. In Re Methyl Tertiary Butyl Ether Products Liability Litigation, No. 00 Civ. 1898 (SAS) (S.D.N.Y. Aug. 20, 2001).

In South Tahoe, the jury rejected the federal preemption argument, as well as the defendants' other arguments. The jury found the defendants liable under a product liability theory, finding that the defendants' gasoline containing MTBE was defective in design because the risk of harm inherent in its design outweighed the benefits. The jury also decided that gasoline containing MTBE was defective because of the defendants' failure to warn. In addition, the jury found that both Shell Oil Company and Lyondell Chemical Company (formerly ARCO Chemical) acted with malice in selling the defective MTBE gasoline.

The South Tahoe jury's finding of liability is the first in the United States to pronounce gasoline containing MTBE as a defective product. The jury is now deliberating damages, and has yet to come to a determination. In the wake of the verdict, a jury determination of damages may be unnecessary as attorneys for both sides are considering settlement.

The South Tahoe verdict and settlements, along with other recent large settlements in California, likely mean more problems for MTBE defendants. Plaintiffs' attorneys believe that the South Tahoe verdict will encourage more MTBE strict liability lawsuits. Several MTBE contamination lawsuits are pending, and final results in these cases will clarify the MTBE liability issues.

Pending Contamination Lawsuits

Government entities and private plaintiffs have brought several lawsuits concerning present and future MTBE contamination in drinking water wells. Defendants in these pending lawsuits include companies at all levels of involvement, from major oil refiners to local gasoline retailers. In England v. Atlantic Richfield Oil Co., No. 00L 331, Madison County, Illinois (filed April 11, 2000), ten petroleum companies are accused of marketing and producing MTBE despite knowing of its especially contaminative effects on drinking water. In Pennsylvania, a suit was brought against Exxon Mobil, Tosco Corp., and Circle K, alleging they engaged in ultrahazardous activity through the storage of products containing MTBE. Anders v. Exxon Mobil Co., No. 20006893-25-2, Pa. Common Pleas, Bucks County. In Massachusetts, the town of Sturbridge filed a complaint against Mobil, Atlantic Richfield and Shell, alleging town wells were contaminated with MTBE from leaking tanks. Sturbridge v. Mobil Oil Corp., No.4:01 CV 40019, Mass. Dist. Ct., Worcester County (filed Feb. 6, 2001).

Also pending is a class action in a federal court in Pennsylvania, claiming that MTBE causes progressive neuron destruction in many who are exposed. Tina Wall v. Sunoco Inc., No. 3:CV-01-0809 (M.D.Pa.). In Texas, thirteen families are claiming that Chevron dumped MTBE at a pump station, and that the chemical has been found in ground water under the pump station, adjacent to the families' properties. The complaint also alleges that Chevron violated the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), 42 U.S.C. § 9601 et seq., and the Resource Conservation and Recovery Act (RCRA), 42 U.S.C. § 321 et seq., along with the Texas Water Code. McCauley v. Chevron Pipe Line Co., No. 49712, (Tex. Dist. Ct., 43d Dist., Parker County, filed Feb. 26, 2002).

MTBE Legislation and Related Hurdles

As the battle over MTBE continues in the courtroom, state and federal lawmakers are taking steps to ban, or greatly reduce, MTBE usage, while calling for an increase in ethanol use.

Many state governments, and Congress, have introduced legislation calling for bans or tighter regulation on MTBE use. While MTBE's effect on health remains unsettled, many states believe that the water contamination that occurs from a small amount of MTBE is enough to outweigh MTBE's positive effect of reducing harmful fuel emissions.

In response to greater concerns and greater incidences of MTBE contamination, five states (Illinois, Kansas, New Hampshire, South Dakota, and Washington) recently enacted legislation banning, or greatly reducing, MTBE use by 2004. Similarly, six other states (Indiana, Missouri, New Jersey, Ohio, Pennsylvania, and Rhode Island) have legislation pending, all of which call for a ban or massive reduction of MTBE use within the next few years. Despite states' efforts, a move away from MTBE fuel faces several significant obstacles.

In 1999, responding to growing MTBE problems, especially in Santa Monica and South Lake Tahoe (where many water sources were shut off due to contamination), California Governor Gray Davis issued an executive order banning the use of MTBE by the end of 2002. However, concerns over possible deleterious effects of implementing the ban caused Governor Davis to move the deadline to the end of 2003. The problems with ban implementation in California, and all states considering such action, stem from the Clean Air Act.

The Clean Air Act requires the use of oxygenates in fuel, as an effort to reduce harmful automobile emissions. At the moment, MTBE and ethanol are the only two oxygenates available for use in fuel. MTBE is less expensive than ethanol, and has therefore been the oxygenate of choice throughout the years. Bans on MTBE would necessitate using ethanol to comply with the Clean Air Act, implicating significant concerns over ethanol supply and price. Governor Davis based the extension primarily on the possible gas shortages and price increases that a switch to ethanol could cause.

Northeastern states contemplating similar bans have joined together to examine the feasibility of, and problems with, a switch to ethanol. The Northeastern states fear that using ethanol would increase gasoline prices by 3 to 11 cents per gallon. Such price increases are expected because of a perceived lack of ethanol industry infrastructure to support the supply, transport, blending, and storage of the large quantities of ethanol that would be needed as more states ban MTBE.

The ethanol industry responds to these concerns by asserting that the cost for refiners to switch to ethanol is relatively small. The industry claims that no major technical hurdles to such a switch exist. It also believes that supply can be met by delivering ethanol through existing petroleum pipelines, and by supplying the West Coast through marine tankers. California looked upon such assertions skeptically, saying the ethanol industry failed to take into account the Northeastern demand, and greatly underestimated California's probable ethanol demand. However, the ethanol industry claims that gasoline refiners and marketers have invested in anticipation of a switch away from MTBE. Likewise, farmers across the country have added more than a billion gallons of ethanol capacity. Nonetheless, the best solution in the states' eyes would be a repeal of the oxygenate requirement in the Clean Air Act, that would free them from mandated use of MTBE or ethanol. Alternatively, the states seek a provision authorizing a state-by-state waiver of the requirement.

Such a repeal or waiver authority may be hard to come by. The federal Environmental Protection Agency refused to grant California the waiver because of the possible negative impact a waiver may have on the production of ozone. In 2001, the overwhelming majority of the United States House of Representatives voted against an amendment to an energy bill that would have implemented the waiver for California. Despite the overwhelming loss in 2001, lawmakers in both the House and Senate have drafted new legislation calling for actions such as increased use of ethanol, and Clean Air Act waiver amendments.

Recently, both the House of Representatives and the Senate have passed federal energy bills that addresses the use of oxygenates. The Senate bill (S. 517) calls for $200 million from the EPA's Leaking Underground Storage Tank (LUST) Fund to be used for MTBE prevention, compliance and remediation. The Senate bill also includes an ethanol mandate, gradually increasing the nation's use of ethanol to 5 billion gallons in 2012, along with a ban on MTBE four years after the bill's enactment. The House bill (H.R. 4) appropriates $200 million from the LUST fund to finance MTBE remediation. The House bill does not include an ethanol mandate, but rather calls for studies examining the need for increased ethanol use and ways to promote cleaner burning fuel. The two bills are now in conference, as legislators attempt to reconcile the bills' differences.

Across the Atlantic, the European Union is also looking into the effects of, and methods to contain MTBE. Finland has recently completed an MTBE risk assessment for the European Union. The study concluded that MTBE is not a carcinogen, but that the foul odor and taste resulting from contamination does render water undrinkable. The study suggests risk reduction strategies of improving water monitoring, storage leak prevention, and introduction of storage tank standards. Unlike the current legislation in the United States, the European Union is not considering a ban or restriction on MTBE.

Opposition to MTBE Legislation

Even with the Clean Air Act oxygenate requirement, and Congress' and the EPA's refusal to grant waivers, states willing to use the ethanol alternative continue to move forward with MTBE legislation. In response, oil companies filed several lawsuits in attempts to stop the legislation.

In California, the Oxygenated Fuels Association (OFA) filed suit in federal court, claiming that California's ban on MTBE was preempted by the Clean Air Act, 42 U.S.C. § 7545(c)(4)(A), which provides that no state may, for the purposes of emission control, create any control or prohibition regarding any component of a fuel or fuel additive. OFA also argued that the ban violated the Commerce Clause of the United States Constitution.

In finding for California on preemption, the federal court stated that the same section of the act pointed to by OFA as prohibiting the ban included an exception that allows California to set its own fuel standards. The court also stated that the only reason refiners use MTBE is because of the federal oxygenate requirements, and California's ban is only substituting one oxygenate for another. The court went on to note that even if OFA could successfully make a preemption argument, California has broad police powers concerning the health of its citizens. In rejecting OFA's commerce clause claim, the court stated that the Commerce Clause did not prohibit California's action because Congress expressly authorized California to regulate the content of gasoline. Oxygenated Fuels Association v. Davis, Civ. No. 5-01-0156 DFG GGH (E.D. Cal. Sept. 4, 2001). OFA has since filed an appeal.

In New York, OFA challenged New York's ban on MTBE, claiming the ban violated the Supremacy Clause of the U.S. Constitution. In finding for New York, the federal district court stated that the state statute was not explicitly preempted because New York's statute was enacted for the purpose of preventing water pollution, and the Clean Air Act only prohibited state action that regulated fuels for emission control. Although Congress delegated authority to preempt state legislation to the EPA, and although the EPA stated an intent to preempt all state legislation in the area, the court held that the EPA's powers are not that broad. It held that the EPA is to respond to cost, feasibility, supply and demand, but that the EPA may not control those factors. The court also stated that the legislative history showed that Congress did not intend for the EPA to force states to use an additive that the state felt was harmful to its citizens' health. Oxygenated Fuels Association, Inc. v. George Pataki and Eliot Spitzer, No. 1:00-CV-1073 (N.D.N.Y. May 18, 2001).

The Pataki court also rejected OFA's claims of implied and/or conflict preemption. The court stated that the language of the Clean Air Act itself, along with a deference to state police power, worked against implied preemption. The court further ruled against conflict preemption because it was not able to determine if the New York law actually created obstacles to the federal reformulated gas program. With victories in the courtroom and in the capital buildings, government restrictions on MTBE may become more commonplace.

Conclusion

The recent South Tahoe verdict must be evaluated carefully with a recognition that it adds another weapon to the plaintiff's arsenal. Beyond traditional strict liability claims under the citizen suit provisions of RCRA, CERCLA, and their state counterparts, the products liability theory provides a large and financially viable class of defendants. This increased scope of potential liability imposes a strong financial incentive on potential defendants to identify and inventory possible cleanup sites. An analysis of whether prior- or post-sale owners/operators are responsible is also advisable, along with a review of whether adequate insurance coverage exists to address early resolution of any claims. The outcome of the MTBE bans at the state and federal level will only establish MTBE liability benchmarks, and not significantly reduce or eliminate contribution claims.

This article was published in For The Defense, August 2002.