Sharing is Daring: Shared Services Agreements and Operator Liability

A Michigan District Court recently found that shared services agreements between parent companies and their subsidiaries made parents potentially liable for environmental claims against their subsidiaries. The court held that the agreements plus the actual involvement by the parent companies in the activities of the subsidiaries supported a claim that the parent companies were “operators” of a subsidiary facility, and thus subject to liability for environmental violations by that facility. Parent companies looking to isolate themselves from subsidiary liability will need to review their shared services agreements and involvement in subsidiary decision making to ensure roles are sufficiently defined. 

In United States v. EES Coke Battery LLC, the United States brought an enforcement action against a coke facility, owned and operated by EES Coke Battery LLC (EES) claiming violations of the Clean Air Act (CAA).¹ The United States amended its complaint to include EES’ immediate parent, DTE Energy Services, Inc. (DTEES), and DTEES’ parent, DTE Energy Resources, LLC. (DTEER). The United States claimed that, based on involvement of the two parent companies in the operations of the subsidiary, the two companies should be considered “operators” of the subsidiary’s facility under the CAA (which imposes liability on owners and operators) and thus equally liable with the subsidiary. The court denied the companies’ motions to dismiss, and they subsequently filed this motion for summary judgment arguing that the standard corporate protections for parent companies remained in place.

The court disagreed, however, holding that liability of the parent companies was an issue of triable fact. The court relied on the Supreme Court’s decision in United States v. Best Foods, holding that while a parent company is protected from liability for the acts of its subsidiary under standard state corporate law, the parent company could still be liable as an “operator” if it was actually and actively involved in the decisions leading to the environmental liability.² The court noted that several employees of both parent companies had senior roles as to the subsidiary’s air pollution operations and participated in decisions that led to the enforcement action. The court held that this level of active involvement subjected the parent companies to liability.

In addition to the active involvement of employees of the parent companies, the court based its decision on the shared services agreement under which the companies managed the environmental activities of the subsidiary. The court quoted extensively from the shared service agreement between the subsidiary and its parent DTEES, which stated that DTEES would provide “all services as may be required to facilitate the proper management and administration of [the subsidiaries’] activities” at the facility and detailed the services to be provided. DTEES argued that the presence of the shared service agreement documented that actions taken by DTEES employees were attributable to the subsidiary, but the court disagreed, noting that Best Foods requires looking beyond corporate formalities in favor of looking at actual control. DTEER had a similar agreement with its subsidiary DTEES, which the court also held that it allowed DTEER to exercise actual control over the air pollution control activities and the ultimate subsidiary, and therefore subjected DTEER to “operator” liability.

The court found that the parent companies could not escape potential liability as a matter of law but still allowed the parent companies the opportunity to prove at trial that they did not have requisite control for liability. The court’s focus on the shared services agreements in finding that requisite control should not be ignored. Many companies have shared services agreements with their subsidiaries to provide economies of scale, whether for engineering, environmental, legal, or other services. The shared services agreements cited in the opinion may be broader than the norm by allowing parent companies to directly control subsidiary operations. In general, to mitigate risk to parent companies for their subsidiaries’ liabilities, shared services agreements should carefully define the respective roles of the parent and subsidiary to avoid that type of parent control. Companies should review and revise their shared services agreements and involvement in subsidiary decision making accordingly to reduce the risk of parent company liability.