In two companion decisions released in October, 2015, the U.S. Court of Appeals, First Circuit, considered the extent to which federal preemption of state and local laws applies to railroad operations involving the construction and operation of a proposed propane transload and storage, and a constructed wood pellet transload and production facility.  See Grosso v. Surface Transportation Board, 2015 WL 6108060; and Padgett v. Surface Transportation Board, 2015 WL 6108047.

Questions relating to the extent of rail preemption have received substantial attention in the northeast in recent years due to questions that arise about the business operations of primarily short-line railroads which compete with non-railroad businesses in ancillary activities conducted at rail yards, in some cases without obtaining state and local environmental and zoning permits. 

In the recent cases, Grafton & Upton Railroad Company (G&U), a short line railroad, proposed to build a propane transload and storage facility in Grafton, Massachusetts and a wood pellet transload and processing facility in Upton, Massachusetts, both adjacent to its rail line, without state or local environmental or zoning approvals. 

Under the Interstate Commerce Commission Termination Act (ICCTA), the federal Surface Transportation Board (STB) has exclusive jurisdiction over activities that constitute “transportation by rail carrier,” and state laws governing regulation of rail transportation are preempted. 49 U.S.C. §10501.

Upton Wood Pellet Facility – Grosso v. STB

Several neighbors to a rail yard operated by G&U petitioned the STB to institute a declaratory order proceeding in order to challenge the construction and operation of a wood pellet transload and processing facility that G&U constructed at a railyard in the Town of Upton. G&U had convinced the Town’s Selectmen that its activities were preempted by ICCTA and that the Town’s zoning bylaws therefore did not apply, including special permit requirements and height limits.  The petitioners argued that the facility was engaged in manufacturing and was therefore not “transportation by rail carrier” and also that the company that G&U hired to operate the facility was not a rail carrier and the facility was therefore not entitled to preemption.

The STB commenced a proceeding, but denied the petitioners the right to conduct discovery on the question of G&U’s status. The STB then issued a declaratory order finding that the activities conducted at the facility were “transportation” and not manufacturing, and that the use of a non-rail carrier operator was not a sham to avoid state and local rules.

The petitioners appealed the decision to the First Circuit Court of Appeals. The first issue in contention was the extent of deference that the Court was required to give to the STB’s decision on preemption. The STB, the U.S. Department of Justice and G&U all argued that the Court must provide substantial deference under the Supreme Court’s seminal agency deference decision, Chevron U.S.A. v. Natural Resources Defense Council, 467 U.S. 837 (1984). This is a critical argument because under the Chevron standard, federal courts will offer substantial deference to an agency to interpret a statutory or regulatory language when the language is not clear and the interpretation falls within the area of expertise of the agency. Court decisions in cases involving agency discretion are often determined on the question of whether Chevron deference is required.

Here, the Court emphatically refused to apply Chevron deference, indicating that such deference is not appropriate for STB determinations on preemption. Instead, in contravention of the arguments provided, the Court applied a much lesser form of deference, known as Skidmore deference, which merely allows the Court to defer to the agency’s determination if the Court finds the interpretation provided by the agency to be persuasive. This leaves the Court with far more discretion than if Chevron deference were to apply. And indeed the decision in this case is a direct result of the application of this lower deference standard.

Turning to the primary substantive issue in the case, the Court then evaluated whether the activities to be conducted at the facility constituted traditional transloading or went beyond and constituted manufacturing. In its evaluation, the Court several times referred to STB precedent on transloading which Beveridge & Diamond participated in creating, in the case of New England Transrail, STB Finance Docket No. 34797 (STB June 29, 2007). Ultimately, after weighing the facts, and pointedly by not applying Chevron deference, the Court determined that the STB had not focused on a critical question – whether certain activities involving vacuuming, screening, bagging and palletizing wood pellets facilitated the physical movement of property and therefore constituted “transportation”. Instead, the Court found that the STB had incorrectly focused on the cost efficiency of conducting these activities at the rail facility. In the Court’s view, this “would result in a vast regulatory gap in which state and local regulation would be eliminated simply because the facilities were economically connected to rail transportation.” 

Using the STB’s New England Transrail decision as guidance, the Court explained that the STB had in that case conducted the appropriate analysis, and had found that some activities – in that case the shredding of construction debris at a transload facility – would not be preempted because those activities were not necessary for the loading process and therefore were not properly considered “transportation” activities.  In the Upton matter, the Court found that there had been no STB finding that the various vacuuming, screening, bagging and palletizing activities  facilitated the transloading process. For this reason, the Court remanded the case to the STB to make this determination.

Grafton Propane Facility – Padgett v. STB

This case arose from a cease and desist order issued by the Town of Grafton in an attempt to force G&U to comply with its local permitting requirements when it began construction of a propane transload facility at its railyard. The Town issued the order and then filed a complaint in state trial court seeking an injunction. The state court enjoined further construction and directed G&U to file a petition with the STB.

Prior to filing its STB petition, G&U restructured its project by terminating its contracts with private parties to finance, construct and operate the facility. G&U then filed its petition with the STB, and the STB opened a declaratory order proceeding and issued a decision, concluding that G&U would hire staff with the necessary expertise to operate the facility on its own, that the construction and operation of the facility - as reconfigured - did constitute transportation by rail carrier, and that the state permitting requirements and local zoning ordinances were therefore preempted. The STB also found that state fire safety and construction codes were not preempted as long as they were applied in a non-discriminatory manner.

The Town appealed the STB decision to the First Circuit Court of Appeals, on the basis of several arguments, none of which the Court found persuasive.

First, the Court found no merit to the argument that state law was preempted by ICCTA but local law was not. While the statute only identifies state law in its preemption language, courts have consistently held that the language is interpreted to include local law, and the First Circuit quickly dispensed with that issue.

Second, the Court found no basis to question the STB’s finding that the facility would be operated by G&U rather than a private party. The Court indicated that it would typically defer to an agency’s findings of fact, and that the facts stated by the STB established a basis on which the agency could conclude that G&U would operate the facility in the future.

Third, the Court refused to consider a new argument by the Town that it had not raised with the STB during the declaratory order proceeding, on the basis that the failure to raise an argument with an agency constitutes a waiver of that argument upon judicial review of the agency’s final action. Therefore, the Court did not consider the Town’s belated challenge to preemption on the basis that preemption would not apply to health and safety regulations. There is case law that supports the proposition asserted by the Town, and the facts of the case suggest that this would have been an interesting question for the Court to evaluate, but it was not considered due to the Town’s late introduction of the issue.   

Conclusion

Questions of when state and local law apply to activities at rail yards and along rail lines, and which laws may apply under certain circumstances, continue to draw attention and in some cases raise controversy.  This is a fascinating area, and the status of the law remains somewhat unsettled.