On July 27, the California Supreme Court released its long-awaited decision in Friends of the Eel River v. North Coast Railroad Authority (S222472), resolving a split among the State’s courts of appeal—but arguably conflicting with federal precedent—with respect to the scope of federal preemption of CEQA with respect to state-owned rail projects.
We discussed the oral arguments in this case in a prior blog post. In a 6-1 opinion authored by Chief Justice Cantil-Sakauye (with Justice Corrigan dissenting), the Court has now held that application of CEQA to a railroad project undertaken by a state entity, North Coast Railroad Authority (“NCRA”), was not preempted by the federal Interstate Commerce Commission Termination Act (“ICCTA”). The Court relied on a distinction between a state’s “regulation” of private railroad operations (which is clearly preempted) and a state’s “self-governance” with respect to a state-owned rail project (which, the Court held, is not preempted). As a result, the Court reversed the judgment of the First Appellate District and remanded the matter for further proceedings on petitioners’ CEQA claims.
The First District Court of Appeal’s Ruling Rejecting CEQA Challenges as Preempted by Federal Law
The Court’s decision arose from two separate actions filed in Marin County Superior Court that challenged NCRA’s reopening of intrastate rail service on a portion of the rail line running from Lombard, in Napa County, to Arcata, in Humboldt County. NCRA was created by the Legislature in 1989, after the private owners/operators of the line failed economically, to ensure that service on the line was not permanently abandoned. NCRA, as owner of the rail line, is required by statute to provide freight service on the line. In 2006, NCRA granted a franchise to a private party, Northwestern Pacific Railroad Company (“NWPCo”), to operate freight service on the line.
The project proposed using state (Caltrans) funding to allow for limited freight service by NWPCo on the Russian River division of the line between Lombard in Napa County and Willits in Mendocino County. The project also included efforts to rehabilitate, repair, and construct certain sections of the line. Compliance with CEQA and preparation of an EIR was mandated in the master funding agreement with Caltrans and related project planning and policy documents as a condition for release of funding and approval of the project.
In June 2011, NCRA, acting as CEQA lead agency, prepared and certified an EIR for the project. Petitioners Friends of the Eel River and Californians for Alternatives to Toxics filed separate mandate actions challenging the adequacy of the EIR under CEQA. NCRA removed the cases to federal court, arguing the claims were preempted, but the federal court found the cases were not subject to complete preemption or removal, and remanded them to state court.
In April 2013, NCRA issued a resolution rescinding its June 2011 certification of the EIR. The new resolution “clarified” that NCRA did not approve a “project” as defined by CEQA when it certified the EIR, and it explained that the EIR was not legally required for resumption of freight rail operations—which had occurred in July 2011—because “the ICCTA preempts CEQA’s application over railroad operations on the line.”
NCRA and NWPCo prevailed in the trial court based on this preemption defense, which relies on the ICCTA provision stating that the remedies provided under that statute with respect to “regulation of rail transportation” are “exclusive and preempt the remedies provided under Federal or State law” (49 U.S.C. § 10501(b)). The First District Court of Appeal affirmed (see (2014) 230 Cal.App.4th 85), finding that the “expansive language” of ICCTA’s “broadly worded express preemption provision,” gives the federal Surface Transportation Board (“STB”) exclusive jurisdiction over transportation by rail carriers and the construction, acquisition and operation of railroad tracks and facilities, even if located entirely in one state. The appellate court noted a uniform line of federal court and STB cases concluding that state statutes requiring environmental review and permitting as a condition to railroad operations constitute regulation that is preempted by the ICCTA, and it concluded that the ICCTA expressly preempts CEQA review of proposed rail operations in this case. In doing so, the court held that the “market participant” doctrine did not apply to defeat preemption—a ruling that it acknowledged was squarely in conflict with the Third District Court of Appeal’s decision in Town of Atherton v. California High-Speed Rail Authority (2014) 228 Cal.App.4th 314.
The Supreme Court Reverses, Holding CEQA Not Preempted by Federal Law for State-Owned Rail Lines
In a 6-1 decision authored by the Chief Justice, the Supreme Court reversed the First District, holding that the ICCTA does not preempt application of CEQA to the NCRA project.
The Court began by acknowledging that “the national system of railroads is of peculiarly federal, not state, concern,” and it would undermine the goals of the ICCTA “if states could compel the rail industry to comply with regulation of railroads that conflicted with federal law, or even to comply with supplementary regulation of railroads on a state-by-state basis.” As a result, “in the ordinary regulatory setting in which a state seeks to govern private economic conduct, applying CEQA to condition state permission to go forward with railroad operations would be preempted.”
However, the Court found that this principle did not resolve the application of CEQA to the project proposed by NCRA, a state governmental entity. The Court focused on the fact that “[t]he ICCTA preempts solely regulation of rail transportation” (emphasis added). Yet, “when the state establishes the general law according to which the state’s own subsidiaries are to use the funds and powers allocated by the state — including for railroad projects — this constitutes not regulation but instead self-governance on the part of the state. We will conclude that CEQA may be considered a matter of self-governance in this setting — the control exercised by the state over its own subdivision.” The Court found this analogous to the situation covered by the market participant doctrine, where a state ordinarily has the same “freedom of action” as a private entity in connection with state market activities that are not regulatory in nature. Because the Court found no evidence that Congress intended to “preempt such self-governance” by the owner of a rail line, it concluded that application of CEQA to the NCRA project was not preempted.
In developing the distinction between regulation and self-governance—and placing CEQA’s application here in the second category—the Court was careful to construct an argument that might withstand scrutiny by the U.S. Supreme Court (if NCRA pursues review). The opinion describes CEQA as a state policy “adopted by the Legislature to govern how the state itself and the state’s own subdivisions will exercise their responsibilities.” When CEQA applies to the state’s issuance of a permit for private development of property, this is “plainly regulatory.” However, where the state itself owns property and proposes to develop it, CEQA “is not classic regulatory behavior” but rather “self-governance on the part of a sovereign state and at the same time on the part of an owner.”
The opinion places this concept of “CEQA as self-governance” in the context of U.S. Supreme Court precedent holding that an interpretation of a federal statute that would infringe on state sovereignty should not be adopted “absent unmistakably clear language of intent to achieve that result.” This juxtaposition allows the Court to conclude that it is “extremely unlikely that Congress, in enacting the ICCTA, intended to preempt a state’s adoption and use of the tools of self-governance in this situation, or to leave the state, as owner, without any means of establishing the basic principles under which it will undertake significant capital expenditures.”
Given this holding, the California Supreme Court concluded that reversal was required, and the CEQA actions would be allowed to proceed. However, while petitioners can pursue available CEQA remedies against NCRA, the Court agreed with the appellate court that petitioners could not seek an injunction under CEQA against NWPCo to halt its freight operations: “such an application of state law would be tantamount to the operation of state environmental preclearance rules” that federal courts and the STB have agreed are preempted with respect to private rail carriers such as NWPCo.
Concurrence and Dissent
Justice Kruger wrote a brief concurring opinion to emphasize the limits of the majority opinion. Although the majority determined that CEQA is not categorically preempted by the ICCTA in this case, Kruger noted that, on remand, this decision does not foreclose a finding that a particular CEQA remedy may be preempted by the ICCTA, to the extent that remedy unreasonably interferes with the jurisdiction of the STB.
Justice Corrigan, the lone dissenter, authored an opinion challenging the majority’s “entirely novel theory construing regulation as a form of ‘self-governance’.” Finding no basis for treating public activity different from private activity in this context, Corrigan stated that “today’s holding will displace the longstanding supremacy of federal regulation in the area of railroad operations by allowing third party plaintiffs to thwart or delay public railroad projects with CEQA suits. Such an outcome is both unfair to public entities and inimical to the deregulatory purpose of ICCTA” and is in “direct conflict with the stated views of the STB.”
Although this decision will narrowly apply to a limited set of publicly-sponsored rail projects in California, those projects will now face significantly increased costs and delays, due to the need to comply with CEQA and fend off any CEQA-related litigation challenges.
More importantly, this decision is the most recent evidence that the California Supreme Court, as currently composed, includes a supermajority of justices who are unafraid to take an expansive view of the reach and scope of state environmental law—even when doing so involves pushing back against a solid wall of federal court and agency decisions.