Welcome news on the environmental front: the Supreme Court has clarified a parent company's liability for its subsidiaries' activities.

• Author: Hammer, Stuart
• Position: Ruling on United States v Bestfoods

It is a familiar scenario: Your company is sued for cleanup costs because of contamination, allegedly caused by a subsidiary s facility. You cannot believe that a court would actually hold your company responsible for cleanup costs - after all, while your company does exercise some control over the subsidiary, it has little actual contact with the polluting facility.

Yet, prior to this summer's U.S. Supreme Court decision in United States v. Bestfoods, many courts would indeed have found your company liable for cleanup costs. To add insult to injury, different courts applied different standards of liability, thus making it difficult for a parent company to take actions to insulate itself from liability.

The Bestfoods decision is welcome news for corporate parents because it adds clarity to the law of parent company liability and narrows the circumstances under which a corporate parent could be liable for the actions of its subsidiary.

Suing Corporate Parents. The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) empowers the federal government and private parties to recover costs incurred in cleaning up a facility. Parent companies whose subsidiaries owned or operated a polluting facility are frequent targets in CERCLA actions, particularly when the subsidiaries no longer exist or are incapable of paying their share of cleanup costs.

Prior to Bestfoods, courts were divided as to the circumstances under which a parent corporation could be liable under CERCLA for its subsidiary's actions. Some courts held parent companies liable if they actively participated in and exercised control over their subsidiary's business. Others held parent companies liable if they merely had the authority to control their subsidiary's operations, even if such authority went unexercised. Still other courts refused to hold parent companies liable unless the requirements necessary to pierce the corporate veil were met.

The Bestfoods Decision. Bestfoods limits the circumstances under which corporate parents can be directly liable. No longer will a parent company be liable simply because it had the "authority to control" its subsidiary or even because it had "actual control." Courts will now focus on the parent's relationship with the polluting facility itself, not simply on the parent's relationship with the subsidiary. A parent company can be involved with the subsidiary's facility so long as this involvement does not exceed the accepted...