U.S. Department of Justice Prohibits Settlement Agreements Involving Payments to Third Parties, May Impact Resolution of Environmental Disputes

In a memorandum dated June 5 and entitled “Prohibition on Settlement Payments to Third Parties,” the United States Department of Justice (DOJ) announced an important new policy that will likely limit the ability of settling defendants to make payments to third parties, a practice that has become commonplace. With respect to environmental disputes, the new policy threatens defendants’ ability to utilize long-standing settlement provisions that have funded environmental projects or local organizations (known as Supplemental Environmental Projects, or SEPs).

The memorandum, which is effective immediately, states that a settlement agreement may not “direct[] or provide[] for a payment or loan to any non-governmental person or entity that is not a party to the dispute.” Additionally, the “policy applies to all civil and criminal cases litigated under the direction of the Attorney General and includes civil settlement agreements, cy pres agreements or provisions, plea agreements, non-prosecution agreements, and deferred prosecution agreements.” The memorandum provides for three exceptions: (1) payments or loans that provide restitution to a victim or that directly remedy the harm that is sought to be redressed, (2) payments for legal or other professional services, and (3) payments expressly authorized by statute, including restitution and forfeiture.

In environmental cases, defendants’ ability to fund SEPs – which are often sought in exchange for penalty mitigation – will likely depend on how DOJ applies the exception allowing for “payment[s] … that directly remed[y] the harm that is sought to be redressed.” Such a close nexus between the remedy and the harm is not currently required when SEPs are approved, so settling defendants will need to carefully tailor any proposed third-party projects to meet this exacting standard.