In Friends of the Eel River v. North Coast Rail Road Authority, 2017 Cal. LEXIS 5650, the California Supreme Court addressed whether the federal Interstate Commerce Commission Termination Act (ICCTA) preempts the application of the California Environmental Quality Act (CEQA) for a California railroad project governed by the state’s North Coast Rail Authority (NCRA) and operated by a privately leased entity.
NCRA was sued under CEQA for inadequacies in its rail line project EIR. NCRA argued that the line was subject to federal ICCTA regulation instead of CEQA, removed the matter to the Ninth Circuit, and rescinded its EIR. The federal court remanded the matter to state court. The trial court held that the ICCTA preempted CEQA, and the First Appellate District affirmed. In December of 2014, the California Supreme Court granted petitioners’ petition for review as it related to the preemption issue.
The Court examined the ICCTA’s statutory construction and historical background, finding that although the ICCTA contains an express preemption provision and contemplates a unified national rail system, it was intended to combat rail monopolies while minimizing the need for federal regulatory control. The ICCTA expressly allows private rail owners to govern themselves internally via market-based self-correction and corporate bylaws, as long as those internal governances do not conflict with the ICCTA or other federal regulatory agencies. The Court concluded that this freedom to govern a private rail company translates to the freedom to govern state-controlled rail companies as well.
The Court held that the federal interest in railroads does not entirely sweep away the exercise of a state’s regulatory police powers when such regulation merely implicates rail transport, and that it does not follow that any and all state regulations touching on powers that may be federally regulated are preempted. The Court determined that application of CEQA to a public entity charged with developing state property is not a classic regulatory behavior, especially when there is no encroachment on the regulatory domain of the Surface Transportation Board or inconsistency with the ICCTA. Rather, application of CEQA constitutes self-governance on the part of a sovereign state. The Court presumed that Congress did not intend to preempt a state’s adoption and use of the tools of self-governance, or to leave the state without any means of establishing the basic principles under which it will undertake significant capital expenditures. The Court further concluded that ICCTA’s preemption of CEQA would be improper because it would allow the state to start and fund a rail line, but restrict how work is done on the line, unlike private owners.
The Court, relying on analyses of Gregory v. Ashcroft (1991) 501 U.S. 452, Garcia v. San Antonio Metro. Transit Auth. (1985) 469 U.S. 528, and Nixon v. Missouri Municipal League (2004) 541 U.S. 125, held that when interpreting Congressional legislation, there must be unmistakably clear language to establish an intrusive exercise of Congress’ commerce clause powers against a state. The Court explained that when there is the possibility of preemption, the law should be presumed as preserving a State’s chosen disposition of its own power, in the absence of a clear and plain statement from the legislature. The Court utilized the presumption argument to support the view that CEQA is not preempted in this case, and concluded that preemption would interpose improper federal authority between a State and its municipal subdivisions. Particularly, the Court found that it would be improper to preempt the state’s ability to dictate how its own subdivision addresses environmental concerns caused by the state’s own railroad business.
Examining the market participant doctrine, the Court found that the while the doctrine ordinarily is used to analyze preemption when a state interacts with private parties as a participant in a private marketplace for goods, labor, or services, it does not address a state’s ability to govern its own governmental subsidiary. Nevertheless, the Court continued its analysis of the doctrine, and found that because states operating in a private marketplace are subject to the same burdens imposed by Congress on private owners, courts will presume that Congress would afford states, as owners, the same freedoms as private parties. The Court held that the state’s application of CEQA to NCRA’s proceedings can be analogized to a private corporation enforcing its bylaws.
The Court concluded that Congress did not intend to intrude upon state self-governance in this context. The Court found that affirming preemption would commit the state to a one-way ratchet—able to enter the rail business, but unable to require anything of the subordinate agency it set up to carry out the state’s rail initiative.
The Court was careful to establish that CEQA actions might cross the line into preempted regulation if the review process imposes unreasonable burdens outside the particular market in which the state is the owner and developer of a railroad enterprise. The Court also acknowledged that its holding does not mean that the ICCTA has no power to govern state-owned rail lines. State-owned rail lines, like private ones, clearly must comply with STB and ICCTA, and state regulation of rail carriers is preempted by these provisions.
The California Supreme Court found that Congress did not pen the ICCTA to infringe upon state self-governance in a manner dissimilar from private railway owners. Preempting the state’s ability to adopt laws governing its own development schemes would leave the state without the tools necessary to govern its own subdivision. This preemption would deprive the state of the ability to make decisions to carry out the goals the state embraced concerning development projects, including undertaking environmental mitigation or deciding not to undertake a project at all because of its environmental hazards. Although CEQA may be preempted by federal law when it imposes unreasonable burdens on rail line owners, when addressing the competing interests surrounding governance over NCRA’s contested railway, enforcing environmental procedures which California has imposed on itself does not constitute grounds for ICCTA preemption.