The Ninth Circuit Court of Appeals recently upheld – for the second time – California’s Low Carbon Fuel Standard (“LCFS”) against constitutional challenges brought by industry groups. The case, Rocky Mountain Farmers Union v. Corey (9th Cir. 2019) (No. 17-16881) (“Rocky Mountain II”), considered the groups’ claims that all 3 historical versions of the LCFS violate the Commerce Clause and the “federal structure of the Constitution” by regulating extraterritorially. The court held that while the plaintiff’s claims had changed form since the first time the court upheld the LCFS, “both the regulations and the claims have the same core structure now as they did then.” The court used this similarity to guide its analysis and uphold the district court’s dismissal.

The Rocky Mountain II decision is a strong affirmation of states’ ability as policy laboratories to address the risks associated with greenhouse gas emissions without violating the Commerce Clause by regulating commerce in other states. “California did not enact the LCFS because it thinks that it is the state that knows how best to protect Iowa’s farms, Maine’s fisheries, or Michigan’s lakes. California’s interest in the lifecycle of the fuels used by its consumers arises from a concern for the effects of the production and use of these fuels on California’s own air quality, snowpack, and coastline.” In the Ninth Circuit’s view, “California should be encouraged to continue and to expand its efforts to find a workable solution to lower carbon emissions, or to slow their rise.” It remains to be seen whether more states will follow in establishing clean fuel programs.

In the first case, decided in 2014 and known as Rocky Mountain I, an en banc panel of the Ninth Circuit held that the 2011 LCFS did not facially discriminate against interstate commerce in ethanol or crude oil, did not regulate extraterritorially, and did not discriminate in purpose or effect against crude oil.  On remand, the district court dismissed plaintiffs’ revised claims against the 2015 version of the LCFS as well as their claims against the 2011 and 2012 versions, leading to the appeal that resulted in Rocky Mountain II.

Federalism 101: Ninth Circuit Edition

After swiftly determining that plaintiff’s claims against the now-repealed 2011 and 2012 LCFS are moot, the court considered plaintiffs’ Commerce Clause claims against the 2015 LCFS. It disposed of each using a foundational constitutional concept: federalism.

The court acknowledged that states may not regulate extraterritorially or discriminate against interstate commerce. But the court cautioned that it is reluctant to subject states to unwarranted scrutiny under the Commerce Clause for fear that it will “frustrate the theory and utility of our federalism” by restricting states’ ability to “perform their role as laboratories for experimentation.” In that spirit, the court reiterated its holding in Rocky Mountain I authorizing California to regulate “local harms” and structure its internal markets to disincentivize production of harmful products for sale in California. In other words, states may regulate the in-state harm caused by products sold in-state. This, according to the court, is a “classic exercise of police power.” The court concluded that the value of this experimentation is reinforced by the fact that Oregon followed suit by enacting its Oregon Clean Fuels Program, which was modeled after California’s LCFS.

Oregon’s program is the subject of parallel litigation, Am. Fuel & Petrochemical Mfrs. v. O’Keefe (9th Cir. 2018) (No. 15-35834). Somewhat unsurprisingly, in September 2018, the Ninth Circuit upheld the Oregon program, rejecting a claim that it regulates and attempts to control conduct occurring in other states. In Rocky Mountain II, the Ninth Circuit noted that O’Keefe is “not materially distinguishable” and relied upon O’Keefe to reject plaintiffs’ novel argument that the LCFS violates the “federal structure” of the constitution, which was not before the court in Rocky Mountain I. In doing so, the court stated that, “Plaintiffs have not identified which constitutional provisions or doctrine outside the Commerce Clause they believe govern their structural federalism claims, if any do.”

State Litigation

The LCFS is also being challenged in California state courts. In POET, LLC v. Cal. Air Res. Bd. (2017) 10 Cal.App.5th 764 (“POET II”), a biofuels manufacturer challenged the LCFS, but the superior court dismissed all of the case’s claims as moot in light of earlier related litigation. On appeal, the Fifth Appellate District ruled in plaintiffs’ favor and found that the California Air Resources Board (“CARB”) had failed to comply with the California Environmental Quality Act when adopting the LCFS. The case is now back before the trial court for argument about CARB’s recent extension of the LCFS program.

Stay Tuned for More

The industry group plaintiffs in O’Keefe have already petitioned the U.S. Supreme Court for certiorari, but the Supreme Court has yet to act. The Rocky Mountain II plaintiffs have signaled a similar willingness to petition the U.S. Supreme Court for review. It would appear that both cases are not ripe for adjudication by the Supreme Court, as both were largely decided by Rocky Mountain I, which the Court declined to hear in 2014 despite the lengthy dissent from the Court’s decision many viewed as an invitation to grant cert. However, Commerce Clause jurisprudence in the Supreme Court has varied widely over the years, and with the additions of Justices Gorsuch and Kavanaugh, the makeup of the Court has changed significantly since 2014. The Court has also shown a willingness in recent years to intervene in climate litigation. In short, this litigation may not be over yet. There may even be as many sequels of Rocky Mountain as those of Rocky the movie.