Since we’ve been preoccupied with the litigation over SEC’s climate disclosure rules, it’s time for a break. Something new and different. How about the litigation over the California climate disclosure rules: Senate Bill 253, the Climate Corporate Data Accountability Act, and Senate Bill 261, Greenhouse gases: climate-related financial risk? (See this PubCo post.) In January, the U.S. and California Chambers of Commerce, the American Farm Bureau Federation and others filed a complaint (and in February, an amended complaint) against two executives of the California Air Resources Board and the California Attorney General challenging these two California laws. The lawsuit seeks declaratory relief that the two laws are void because they violate the First Amendment, are precluded under the Supremacy Clause by the Clean Air Act, and are invalid under the Constitution’s limitations on extraterritorial regulation, particularly under the dormant Commerce Clause. The litigation also seeks injunctive relief to prevent CARB from taking any action to enforce these two laws. (See this PubCo post.) CARB has just filed a motion to dismiss the amended complaint for lack of subject matter jurisdiction and failure to state a claim. Interestingly, however, the motion does not seek dismissal of Plaintiffs’ First Amendment claim (except as to the Attorney General, whom the motion seeks to exclude altogether on the basis of sovereign immunity), even though CARB asserts that Plaintiffs’ First Amendment challenge is “legally flawed.” No further explanation is provided.
As you may recall, Senate Bill 253, the Climate Corporate Data Accountability Act, mandates disclosure of GHG emissions data—Scopes 1, 2 and 3—by all U.S. business entities (public or private) with total annual revenues in excess of a billion dollars that “do business in California.” SB 253 has been estimated to apply to about 5,300 companies. The companion bill, SB261, Greenhouse gases: climate-related financial risk, requires subject companies to prepare reports disclosing their climate-related financial risk in accordance with TCFD framework and describing their measures adopted to reduce and adapt to that risk. With a lower reporting threshold of total annual revenues in excess of $500 million, SB 261 has been estimated to apply to over 10,000 companies.
According to the motion, the two laws were intended “to increase transparency and improve access to information about the greenhouse gas (GHG) emissions and climate-related financial risks of the largest companies doing business in California. Both laws reference existing climate change reporting protocols that provide metrics for determining the required information. And both laws are complementary additions to an expanding suite of climate reporting regimes. The disclosures required by these two laws are intended to help California residents, consumers, companies, and investors make decisions informed by greater understanding of the sources and volumes of GHG emissions produced by major companies doing business in California and the climate-related financial risks those companies face.”
The motion contends that Plaintiffs’ “claims arising under the Supremacy Clause and the limits on extraterritorial regulation are not justiciable,” because CARB “has not yet proposed regulations governing their enforcement, and Plaintiffs have not pled an injury-in-fact.” SB 253 directed CARB to “develop and adopt regulations,” but, to date, CARB had not even “initiated the rulemaking process to issue and adopt” the implementing or enforcing regulations required by the statute. Similarly, CARB has not initiated the rulemaking process to issue the regulations required under SB261 related to administrative penalties recoverable when a covered entity fails to publish the required report.
Accordingly, with regard to SB 253, the motion contends that, in the absence of these implementing regulations, Plaintiffs’ Supremacy Clause and extraterritoriality claims are “not ripe for adjudication.” The “mere existence of a statute is not sufficient,” and there has not yet been a threat of enforcement against a “concrete plan” to violate the law. In addition, CARB advocates, “even if the minimum constitutional requirements were met here, the Court should decline to exercise jurisdiction on prudential grounds.” Given that many of Plaintiffs’ allegations are “based on speculation about how the disclosure requirements will be applied and enforced,” the Court “should avoid deciding a pre-enforcement challenge that does not permit CARB to first propose and finalize its regulations.” In addition, if there are no regulations, Plaintiffs will “not suffer any substantial hardship.” Further, CARB takes issue with the claims related to extraterritoriality and the Supremacy clause regarding provisions of both laws because, without having established the danger of a direct injury under the laws, Plaintiffs have no standing.
In addition, CARB contends that the claim under the Supremacy Clause “relies on an erroneous factual premise and…lacks a cognizable legal theory.” CARB asserts that Plaintiffs have “failed to identify any federal law that preempts these state disclosure laws”: the Clean Air Act—the only law identified by Plaintiffs—is not applicable to the reporting frameworks under the two California laws, and “Plaintiffs fail to identify any provision of the Clean Air Act that even arguably conflicts with these state statutes.” That is, the two California statutes don’t regulate GHG emissions; they simply require disclosures. Moreover, the Clean Air Act, they argue, “preserves state authority in the field of air pollution.” As a result, CARB maintains, Plaintiffs have not stated a claim under the Supremacy Clause. Nor, CARB asserts, have Plaintiffs identified “any provision of the Constitution—or any specific ‘principle of federalism’—that conflicts with the challenged state statutes.”
CARB also argues that there is no violation of the dormant Commerce Clause or claim for “extraterritorial regulation” because neither of the California laws “is driven by economic protectionism” (see Nat’l Pork Producers Council v. Ross), or “imposes a cognizably significant burden on interstate commerce” under Pike v. Bruce Church, Inc. In Pork Producers, they contend, SCOTUS reaffirmed an anti-protectionist focus in the dormant Commerce Clause, distinguishing the case before the Court from cases “where the State ‘deliberately prevented out-of-state firms from undertaking competitive pricing or deprived businesses and consumers in other States of whatever competitive advantages they may possess.’… In other words, the decisions in those cases manifested ‘the familiar concern with preventing purposeful discrimination against out-of-state economic interests’ and did not establish an extraterritoriality doctrine.” Citing Pork Producers, CARB asserts that “the ‘very core of … dormant Commerce Clause jurisprudence’ is its ‘antidiscrimination principle’—the prohibition against ‘state laws driven [] by economic protectionism.’” But, CARB contends, “Plaintiffs cannot state a claim under this actual dormant Commerce Clause principle because they cannot allege any facts that, if proven, could establish that either Senate Bill 253 or 261 is ‘designed to benefit in-state economic interests by burdening out-of-state competitors.’” The laws will apply to all companies in any state that satisfy the conditions and meet the thresholds. Nor do Plaintiffs state a claim under Pike, which would require that “the application of these state statutes imposes a ‘substantial burden on interstate commerce’”; in this instance, CARB contends, there is no discriminatory purpose or interference with the flow of goods interstate. According to CARB, the “courts have consistently rejected mere compliance costs as substantial burdens on interstate commerce, even when the compliance costs are purportedly sizable.”
SideBar
As noted above, the dormant Commerce Clause was at issue before SCOTUS in National Pork Producers v. Ross. In that case, SCOTUS upheld another California law, adopted by the voters in Prop 12, which requires, for pork sold in California, that “a sow cannot be confined in such a way that it cannot lie down, stand up, fully extend its limbs, or turn around without touching the side of its stall or another animal.” The pork industry sued, contending that the law unfairly applied to many businesses outside of California and unduly burdened interstate commerce, violating the dormant Commerce Clause. The pork industry estimated that the cost of compliance would increase production costs, affecting both California and out-of-state producers, but because California imports almost all the pork it consumes, most of the compliance costs would fall on farms outside of California. The district court held that the complaint failed to state a claim as a matter of law and dismissed the case. The decision was then affirmed by the Ninth Circuit.
The pork industry appealed to SCOTUS. The industry acknowledged that Prop 12 did not discriminate against out-of-state producers. That put the industry in a tough spot from the get-go. Instead, the industry invoked a purported “extraterritoriality doctrine,” which, they claimed, prohibits, on an “almost per se” basis, the “enforcement of state laws that have the ‘practical effect of controlling commerce outside the State,’ even when those laws do not purposely discriminate against out-of-state interests.” SCOTUS disagreed, concluding that the “argument falter[ed] out of the gate.” In the Court’s view, the purported “almost per se” extraterritoriality doctrine “would cast a shadow over laws long understood to represent valid exercises of the States’ constitutionally reserved powers.”
Alternatively, the industry asserted, the Court must apply the balancing test enunciated in Pike v. Bruce Church, Inc. The industry contended that, under Pike, “a court must at least assess ‘the burden imposed on interstate commerce’ by a state law and prevent its enforcement if the law’s burdens are ‘clearly excessive in relation to the putative local benefits.’” However, on the issue of the viability of the Pike balancing test in this instance (where no discrimination or transportation is involved), the opinions were fractured: a minority (Justices Gorsuch, Thomas and Barrett) concluded that the Pike balancing test created “a task no court is equipped to undertake,” particularly where, as here, the “competing goods are incommensurable.“ To reach a decision as to which set of concerns should win out, “[y]our guess is as good as ours. More accurately,” Gorsuch said. “your guess is better than ours. In a functioning democracy, policy choices like these usually belong to the people and their elected representatives.”
The majority, however, disagreed, endorsing the continued viability of the Pike balancing test. As Justice Sotomayor (joined by Justice Kagan) wrote in her partially concurring opinion, a majority of the Court did not support the view that “judges are not up to the task that Pike prescribes.” Applying that test, however, the Justices splintered again. In the end, a plurality of four Justices (as counted by Justice Kavanaugh in his dissent) declined to find that the industry had met the threshold requirement of plausibly alleging a substantial burden on interstate commerce, a requirement that Sotomayor asserted “plaintiffs must satisfy before courts need even engage in Pike’s balancing and tailoring analyses.” As Gorsuch phrased it, the substantial harm to interstate commerce alleged by the industry “remains nothing more than a speculative possibility” and insufficient to state a claim. Dissenting, Chief Justice Roberts, joined by Justices Alito, Kavanaugh and Jackson, would have found that the industry had “plausibly alleged a substantial burden against interstate commerce, and would therefore vacate the judgment and remand the case for the court below to decide whether petitioners have stated a claim under Pike.” Accordingly, the Court affirmed the judgment of the Ninth Circuit. (See this PubCo post (SideBar).)
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