EPA’s “Sham Recycling” Rule Partially Discarded by D.C. Circuit

On July 7, 2017, the U.S. Court of Appeals for the District of Columbia struck down portions of a 2015 U.S. Environmental Protection Agency final rule designed to limit “sham recycling” of hazard waste materials. See American Petroleum Institute v. Environmental Protection Agency, 2017 WL 2883867 (2017).

In 2015, EPA promulgated a final rule (Final Rule) under the Resource Conservation and Recovery Act (RCRA) attempting to prevent “sham recycling.” The Final Rule came as a result of years of negotiation, and litigation. Yet, subsequent to promulgation both industry and environmental groups challenged the regulation on multiple fronts. Industry groups argued that portions of the rule including the so called “legitimacy test” to determine when materials are actually recycled or just discarded.

The difference between legitimate recycling and sham recycling is significant because legitimate recycling is highly encouraged and supports the primary purpose of RCRA whereas sham recycling exposes the offender to enforcement actions and penalties. To address this question, the Final Rule requires that all recycling of hazardous secondary materials meet a legitimacy test or else be labeled “sham” and subjected to full RCRA regulation (and potential penalties). See 40 C.F.R. § 261.2(g).

To satisfy the legitimacy test for recycling of a particular material, an entity must prevail on all four factors. First, the hazardous secondary material must “provide[ ] a useful contribution to the recycling process.” § 260.43(a)(1). Second, “[t]he recycling process must produce a valuable product or intermediate.” § 260.43(a)(2). Third, the persons controlling the secondary material must “manage the hazardous secondary material as a valuable commodity.” § 260.43(a)(3). Fourth, “[t]he product of the recycling process must be comparable to a legitimate product or intermediate.” § 260.43(a)(4).

In American Petroleum Institute v. EPA, the court reviewed, among other things, industry groups’ challenge to Factors 3 and 4 of the test. The industry petitioners complained that mandating Factors 3 and 4 across all recycling resulted in EPA unlawfully regulating non-discarded materials. The court found that Factor 3’s requirements was not unreasonable and left it in place as it is within EPA’s authority to impose such a requirement. However, in a 2-1 decision, the court sided with the industry groups as to Factor 4 and vacated it.

Factor 4 was designed to “prevent recyclers from loading products with hazardous secondary materials that provide no recognizable benefit to the product and are simply along for the ride.” The obvious concern is that a “purported recycler might incorporate hazardous constituents into the final product when they were not needed to make that product effective as a way to avoid proper disposal of that material, which would be sham recycling.”

Factor 4 created two tracks, one covering products for which there is an analogue of undoubted legitimacy, the other addressing products with no such analogue. However, as the court noted, the criteria set forth under these two tracks failed to draw a satisfactory line between genuine and sham. Factor 4 also offered a complicated exception aimed at preventing products from being labelled a sham when they in fact pose no “significant human health or environmental risk.” However, the court found that Factor 4’s complex provisions fall short of the aim and “imposes tasks tangential to disposal…and thus tangential to EPA’s authority…even when EPA has offered little reason to doubt a product’s legitimacy.

For now, the first three factors of the legitimacy test are still in place and recyclers will have to meet the criteria for all three. It remains to be seen if the EPA will revisit “legitimacy” with further rulemaking.

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