Law360 - December 2, 2014.

On Oct. 7, 2014, the Association of American Railroads and two of its member rail carriers filed suit against California's Office of Spill Prevention and Response in an effort to strike down the state's recent effort to regulate rail.

Tucked among the lengthy provisions of SB 861, a budget trailer bill enacted on June 20, 2014, amendments to the state's oil spill prevention regime bring transportation of crude oil by rail under OSPR's regulatory umbrella. The new law expands OSPR's regulatory reach from coastal waters inland, by extending the scope of the agency's jurisdiction to include threats to state surface waters from crude oil entering the state by pipeline and rail. SB 861 requires a rail carrier to demonstrate financial fitness as a precondition to operating within the state, and to submit contingency plan and other reports to the state. Any failures to adhere to the new requirements make the railroads liable for civil and criminal fines.

According to the AAR, SB 861 is preempted by federal law "several times over." The AAR's main argument is that the new law is invalid because the Federal Rail Safety Act of 1970 preempts it. The FRSA contains a potent express preemption provision that allows states to adopt or enforce their own railroad safety laws only until the Secretary of Transportation "prescribes a regulation or issues an order covering the subject matter of the State requirement." 49 U.S.C. Section 20106(a). Thereafter, a state may enact or enforce an "additional or more stringent law," but only when that law is necessary to address a local safety hazard, is not incompatible with the federal safety law, and does not unreasonably burden interstate commerce.

FRSA preemption has strong case support from the U.S. Supreme Court and a memorable D.C Circuit decision. Both cases involved CSX Transportation Inc., one of the largest railroads in the country and a vigilant guardian of FRSA preemption. In CSX Transportation Inc. v. Easterwood, 507 U.S. 658 (1993), the Supreme Court held that federal law has preemptive effect where it "substantially subsume[s] the subject matter of the relevant state law." In that case, certain state warning device claims or accidents at grade crossings were found to be preempted by federal law.

In CSX Transportation Inc. v. Williams, 406 F.3d 667 (D.C. Cir. 2005), the D.C. Circuit held that a law enacted by the District of Colombia to regulate the rail routing of hazardous material was preempted by the FRSA. D.C. had passed an ordinance banning all rail (or truck) shipments of hazardous materials within 2.2 miles of the U.S. Capitol. CSXT sued seeking a declaration that the ordinance was invalid[1] and an injunction against its enforcement.

Citing the intent of Congress that the FRSA promote safety in every area of railroad operations and mandated national uniformity in railroad safety laws, the court concurred in CSXT's position. Williams, 406 F.3d at 670; see 49 U.S.C. Section 20106(a)(1). Specifically, the court concluded that the D.C. ordinance regulated the same subject as a hazardous material train route rule promulgated pursuant to the HMTA,[2] that it did not address a local impact, that it was incompatible with the federal routing rule and that it unreasonably burdened interstate commerce. In assessing the burden on interstate commerce issue, the court said "it is appropriate for us to consider the practical and cumulative impact were other States to enact legislation similar to the [D.C. ordinance]." Williams, 406 F.3d at 673. The court noted that the "California Senate currently is considering a bill that would ban hazardous shipments within three miles of the city hall of any ‘urban region'" and (quoting the argument of the United States) that "‘it would not take many similar bans to wreak havoc with the national system of hazardous materials shipment.'" Id.

Applying these precedents, the AAR contends that federal law preempts SB 861 because FRSA-based regulations and orders issued by the U.S. Department of Transportation already govern the subject matter of hazardous materials transportation, including oil spill contingency planning. Federal regulations on the subject include 49 C.F.R. Part 130, which details requirements for oil spill response planning and response plan implementation in the event of an oil discharge during transportation. Other rules and orders govern the transportation of oil by rail under the rubric of hazardous material regulation.[3]

SB 861 also requires railroads to adopt and implement "best achievable technology" to protect against future oil spills. The AAR argues that two additional federal statutes, the Locomotive Inspection Act, 49 U.S.C. Section 20701, and the Safety Appliances Act, 49 U.S.C. Section 20302, also preempt SB 861 to the extent that the state law seeks to regulate locomotive design and construction, and railcar safety devices.[4]

The relief the AAR seeks is no half measure: The AAR wants the court to conclude that federal law preempts California's regulation of oil spill contingency plans and financial fitness with respect to railroads, and to declare that the relevant provisions of SB 861 are invalid and unenforceable.

Until such time as the court resolves the controversy, however, the AAR seeks a preliminary injunction prohibiting enforcement of the state law against the AAR's members. The AAR contends that the injunction is warranted on several grounds. The most noteworthy is that the AAR and its members will suffer irreparable harm without such relief, as none of the expense of complying with the unconstitutional law is compensable — because California is immune from damages under the Eleventh Amendment. The AAR points to an array of costs its members would incur for out-of-pocket expenditures, redeployment of staff and other resources and modifications to rail operations resulting from SB 861.[5]

For its part, the state contends that, even if Eleventh Amendment sovereign immunity did not bar the AAR's suit on its face, the court lacks jurisdiction to hear the claims because regulations implementing SB 861 have not yet been promulgated. Arguing that the case is not yet ripe for judicial determination, the state has asked the court to withhold judgment until after final regulations are issued and to dismiss the complaint in the meantime. According to the state, absent final regulations detailing how SB 861 will be implemented and enforced, the complex preemption issues that are the subject of the AAR's complaint cannot be adequately assessed.

California will have an uphill battle to defend this law and SB 861 appears to be on the same destination as the District of Columbia's hazardous material routing law — invalidation. But industry watchers will need to wait until the new year for an answer. The AAR and California's Office of Spill Prevention and Response will be in court on Jan. 15 to defend dueling motions — the state's motion to dismiss and the AAR's motion for preliminary injunction.