California Supreme Court Holds CEQA Applies to State Entity’s Railroad Project on State-Owned Rail Line As Act of “Self-Governance”, Not “Regulation” That Would Be Preempted By Federal Law

by Miller Starr Regalia

On July 7, 2017, the California Supreme Court filed its 69-page opinion, written by Chief Justice Cantil-Sakauye and joined by five other justices, in Friends of the Eel River v. North Coast Railroad Authority, et al. (2017) __ Cal.5th ___.  The Court held that the Interstate Commerce Commission Termination Act of 1995 (“ICCTA”; 49 U.S.C., § 10101 et seq.) does not exempt the application of CEQA to a railroad project undertaken by a state public entity, defendant North Coast Railroad Authority (NCRA), on a rail line also owned by that entity.  The Court acknowledged that ICCTA’s federal regulatory scheme would preempt a state’s imposition of environmental regulation such as CEQA on a privately owned railroad.  That is because settled federal law holds ICCTA preempts a state’s imposition of “environmental preclearance requirements” that have the effect of preventing or delaying the operation of a privately owned railroad.  But the Court also held that, as applied to govern the conduct of subdivisions of the sovereign state, the CEQA process constitutes an act of “self-governance” and not preempted “regulation” within the meaning of ICCTA.

In reaching its conclusion that CEQA applied to NCRA’s project to restore and resume freight service in the “Russian River division” of an intrastate railroad line running between Napa and Humboldt counties, the Supreme Court’s extensive federal preemption analysis relied heavily on the “presumption that, in the absence of unmistakably clear language, Congress does not intend to deprive the state of sovereignty over its own subdivisions to the point of upsetting the usual constitutional balance of state and federal powers.”  The Court reasoned that while ICCTA is a “deregulating” act, which contemplates a unified nationwide rail industry subject to relatively limited federal regulation and under which states are not free to fill regulatory voids, it also leaves both private and state owners with a “considerable sphere of action free from regulation.”  As a result of this “sphere of regulatory freedom” enjoyed by railroad owners, the State, as owner, is free to voluntarily subject itself when undertaking its own railroad projects to state environmental laws such as CEQA as a matter of “self-governance.”  The Court reasoned this situation is analogous to the “freedom” of a private corporate owner to rely on its own internal corporate rules and by-laws to guide its market-based decisions.

The Court’s analysis of the ICCTA and federal preemption law also referenced the “market participant doctrine” exception to preemption as not fully on point, but nonetheless somewhat supportive and instructive to the extent “CEQA can be seen as an expression of how the state, as proprietor, directs that a state enterprise will be run – an expression that can be analogized to private corporate bylaws and guidelines governing corporate subsidiaries.”

While ruling NCRA’s project was subject to CEQA (and attendant citizen suit enforcement actions), and reversing the Court of Appeal’s contrary holding in that regard, the Supreme Court agreed with the Court of Appeal’s holding that CEQA causes of action could not support plaintiffs’ prayer for an injunction against NCRA’s private-entity operator and franchisee, real party in interest Northwestern Pacific Railroad Company (NWPCo).  Per the high Court: “Such an application of state law would be tantamount to the operation of state environmental preclearance rules that … cannot be used to halt railroad operations pending compliance. [citation] … [T]he order directly restraining NWPCo from operating freight service pending CEQA compliance would not involve simply the state’s autonomy and control over its subdivisions, but would constitute use of state law to restrict operations by a private rail carrier – a classic example of state regulation.” It added: “Whether NWPCo would be able to carry on with service despite the application of CEQA to NCRA is a question that is beyond the scope of this case.”  Acknowledging that applying CEQA and its remedies to state-entity NCRA may have some impact on private party NWPCo, however, the Court stated “this is merely derivative of the state’s efforts at self-governance in this marketplace.”

Justice Kruger separately concurred.  She emphasized that while under the majority’s holding the ICCTA did not categorically preempt plaintiffs’ CEQA claims as applied to NCRA, it still remained relevant to the proceedings on remand because under it particular CEQA remedies might be preempted “as applied” to the extent they unreasonably interfered with the jurisdiction of the federal Surface Transportation Board (STB), which has authorized service over the railroad line at issue.

Justice Corrigan’s dissenting opinion stated she did “not follow” the majority opinion’s “logic” that a generally applicable state law could be considered a “regulation” of private, but not public, activity within the same sphere, and that such reasoning “appears to be unsupported by precedent.”  Focusing on the practical implications of what she termed the majority’s “entirely novel theory construing regulation as a form of “self-governance[,]”” she observed that “neither NCRA nor any of the other state agencies involved in this case subscribe to the self-governance theory.  The majority’s approach forces the state to undertake a burden no private railroad owner must bear.”  She argued that the Court’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” and decried this outcome as “both unfair to public entities and inimical to the deregulatory purpose of ICCTA.”  She concluded by further questioning the “wisdom” of the majority holding’s creation of a “direct conflict with the stated views of the STB.”

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Miller Starr Regalia

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