A district court has ruled that federal law does not preempt an indirect source rule that targets emissions associated with warehouses in Southern California.

On December 14, 2023, a US federal judge rejected claims that federal law preempts the South Coast Air Quality Management District’s (SCAQMD or the District) adoption of Rule 2305 (Rule), upholding the first-in-the-nation Rule[1] that regulates trucking emissions from warehouses.

Rule 2305 is the Warehouse Indirect Source Rule (ISR) — Warehouse Actions and Investments to Reduce Emissions (WAIRE) Program. As described in this Latham blog post, the WAIRE Program applies to certain warehouses in the South Coast Air Basin and imposes a compliance obligation based on the number of truck visits to that warehouse per year. Warehouse operators can meet that obligation by taking any number of emissions-reducing actions, either from the “WAIRE Menu” or through a custom plan approved by the District.

As detailed in this Latham Client Alert, plaintiff, the California Trucking Association (CTA), filed a complaint in the US District Court for the Central District of California on August 5, 2021, alleging that Rule 2305 is preempted by federal law, is not authorized by state law, and is an unlawful tax. Airlines for America (A4A), a trade group representing US commercial airlines, intervened as a plaintiff in opposition to Rule 2305. The California Attorney General, the California Air Resources Board (CARB), and a group of environmental NGOs intervened in defense of Rule 2305. In October and November 2022, CTA and A4A filed motions for summary judgment and the District and defendant-intervenors filed oppositions in December 2022. The summary judgment briefing is analyzed in detail in this Latham blog post.

Plaintiffs argued that the federal Clean Air Act (CAA), the Federal Aviation Administration Authorization Act (FAAAA), and the Airline Deregulation Act (ADA) preempt Rule 2305. The crux of the preemption argument is that Rule 2305 is a mandate requiring warehouse operators to purchase zero-emission (ZE) or near-zero-emission (NZE) trucks, which Plaintiffs argue violates the CAA prohibition on local or state regulation of vehicle emission standards, and violates the FAAAA and ADA prohibition on local or state regulation that affects prices, routes, or services of air carriers.

A hearing on the motions for summary judgment was held on April 17, 2023. The parties later stipulated that they had each received adequate notice of the possibility that the court could grant summary judgment to the plaintiffs or defendants. They also agreed that the briefing on the motions had been sufficient for the court to grant summary judgment to either set of parties on the CAA, FAAAA, and ADA preemption claims.[2]

Court Rules CAA Does Not Preempt Rule 2305

The CAA prohibits any local or state agency from adopting “any standard relating to the control of emissions from new motor vehicles or new motor vehicle engines.” It also prohibits local and state agencies from requiring any type of approval “relating to the control of emissions from any new motor vehicle or new motor vehicle engine” as a precondition to sale or registration of such vehicle.[3] Plaintiffs CTA and A4A argued that Rule 2305 violates both of these prohibitions and is therefore preempted and the court disagreed on both counts.

• Court rules that Rule 2305 is not an “emission standard”

Plaintiffs CTA and A4A argued that Rule 2305 is an impermissible emission standard because the Rule’s purpose and effect is to mandate the purchase of ZE and NZE trucks. SCAQMD defended the rule by arguing that the Rule does not set an “emission standard” because it does not mandate the purchase of ZE and NZE trucks — regulated entities are free to comply with the Rule by many means that do not involve the purchase of ZE and NZE trucks.

The court held that Rule 2305 is not an “emissions standard” such that it violates the CAA because regulated entities can comply with the Rule by taking actions unrelated to the purchase of ZE trucks, meaning it does not command that any business purchase vehicles with certain emission characteristics.[4] The court elaborated that “the District is permitted to increase the number of ZE and NZE trucks in use by incentivizing their purchase so long as the District’s incentives do not amount to an attempt to compel the purchase of ZE and NZE trucks.”[5] In fact, the court noted that SCAQMD had presented data from compliance reports submitted by regulated warehouses as evidence that many warehouse operators planned to, or did in fact, meet their WAIRE Points Compliance Obligation (WPCO) through measures other than acquiring ZE/NZE trucks.[6]

• Court rules that Rule 2305 does not “relate to the control of emissions from new motor vehicles”

Plaintiffs argued the Rule relates to the control of emissions from new motor vehiclesbecause it mandates the purchase of vehicles with particular emission characteristics. SCAQMD countered that the Rule does not “relate to the control of emissions” because it is an indirect source rule that applies to warehouses, not the individual trucks that visit them.

The court held that the Rule is not preempted on this basis because it relates to a facility-by-facility review of indirect sources of emissions. Rule 2305 takes a “facility-by-facility” approach because the WPCO is based on the number of trucks visiting each individual warehouse, and the number of truck trips correlates to the amount of non-truck emissions at each warehouse.[7] For example, if more trucks visit a warehouse with cargo to unload, more onsite cargo handling equipment is used. The court reasoned that if the District sought to regulate truck emissions, the District would make the WPCO dependent on the number of miles traveled by the trucks visiting the warehouse; instead, the Rule focuses on controlling “pollution emitted within the vicinity of warehouses” and therefore bases compliance only on the number of truck visits to those warehouses.[8]

Plaintiffs also argued that the CAA provision that allows for promulgation of indirect source rules only authorizes regulations applicable to “new or modified” indirect sources. The court quickly dismisses this argument, noting that the provision at issue says that permissible indirect source rules “includ[e]” those relating to new or modified indirect sources, but that this language is not limiting.[9] The court cited legislative history showing that indirect source rules may “provide[] for the review of new, existing or modified indirect sources.”[10]

Court Rules FAAAA and ADA Do Not Preempt Rule 2305

FAAAA and ADA provisions, and the standard applied to determine preemption, are similar and the court analyzed them together. Under both laws, state or local regulations that are “significantly related to rates, routes, or services, even indirectly” are preempted, while regulations that have only a “tenuous, remote, or peripheral connection to rates, routes, or services” are not preempted.[11] The court reviewed case law that has limited the scope of the term “relates to” in FAAAA and ADA preemption, and reasoned that a state law generally does not relate to a motor carrier’s prices, routes, or services unless it compels a specific result affecting the carrier’s relationship with its customers.[12]

Plaintiff A4A argued that the Rule compels a result by specifying the types of vehicles that air carriers must use, and that the Rule imposes compliance costs that air carriers will necessarily pass on to customers. The court recognized that trucking operations are integral to an air carrier’s integrated delivery system, but held that Rule 2305 is not preempted by the FAAAA or ADA because it has only an indirect connection to motor carrier prices, services, and routes.

The court provided four reasons for its conclusion.

First, the Rule generally applies to all warehouses and is not limited to warehouses that air carriers use. The court held that “the Rule does not impede the Congressional purpose of ensuring that air carriers are not regulated as public utilities.”[13]

Second, the Rule’s potential to increase the costs of doing business is insufficient for preemption because the Rule does not interfere with the relationship between air carriers and their customers (as would, e.g., tariffs).[14]

Third, even if the Rule compelled the purchase of ZE/NZE trucks, its effect is still peripheral because it does not require the air carriers to offer specific prices to customers or have an effect different from any other regulation that affects the air carrier’s cost of compliance (e.g., labor laws).[15]

Fourth, the Rule is consistent with the purposes of the ADA and FAAAA to ensure that airlines would not be operated and regulated as public utilities.[16] The court concluded that the Rule therefore does not disrupt any relevant balance of federal and state authority.[17]

Next Steps

The court asked the parties to file a joint report stating the parties’ positions on scheduling of additional proceedings in this action, including a proposed date for expert discovery cutoff and last date to file motions, within 14 days from issuance of the order. This report shall also include the parties’ positions on whether the federal court should retain supplemental jurisdiction over the plaintiffs’ state law claims. As described in this Latham Client Alert, the plaintiffs’ state law claims argue that the District lacks authority to adopt an indirect source rule under state law, and that the Rule 2305 mitigation fee is an unconstitutional tax.

Plaintiffs also may appeal the court’s order granting summary judgment to the District on the federal claims of preemption. Under federal rules, the plaintiffs may file an appeal of the order with the US Court of Appeals for the Ninth Circuit within 30 days.

Separate from the litigation, the Environmental Protection Agency (EPA) has formally proposed to include Rule 2305 in the California State Implementation Plan (SIP), with the proposed rule published in the Federal Register on October 12, 2023.[18] EPA concluded that Rule 2305 meets the applicable requirements to be included in the SIP and would strengthen the SIP. The comment period closed on November 13, 2023, and the final rule has not yet been published.

Latham & Watkins will closely follow further developments related to this litigation and federal approval of Rule 2305.

Endnotes

[1] Order re: Plaintiff’s Motion for Summary Judgment as to Plaintiff’s Complaint for Declaratory Judgment and Injunctive Relief [Dkt. 65]; and Plaintiff-Intervenor Airlines for America’s Motion for Summary Judgment [Dkt. 73], Docket No. 162.

[2] Order at p. 2.

[3] 42 U.S.C. 7543(a) [CAA § 209].

[4] Order at p. 24.

[5] Ibid.

[6] Order at p. 27; see also Order at pp. 15-17 for discussion of compliance data.

[7] Order at p. 28.

[8] Order at p. 25.

[9] Order at p. 28; see also 42 U.S.C. 7410(a)(5)(D) [CAA § 110(a)(5)(D)].

[10] Order at p. 28.

[11] Order at p. 30.

[12] Order at p. 31.

[13] Order at p. 33.

[14] Id.

[15] Order at pp. 33-34.

[16] Order at p. 34.

[17] Id.

[18] 88 Fed. Reg. 70,616, Air Plan Approval; California; South Coast Air Quality Management District (Oct. 12, 2023).