August 6, 2021 - This Week at the Ninth

This Week at the Ninth: Toxic Water and Railroad Taxes

This week, the Court examines whether EPA guidance on water toxicity tests could be challenged under the APA, and addresses whether California’s scheme for taxing railroad property contravenes federal law. 

SOUTHERN CALIFORNIA ALLIANCE v. EPA
The Court holds that trade associations for California water treatment plants could not challenge EPA guidance providing a method for evaluating the results of a water toxicity test because the guidance was unreviewable non-final agency action.

Panel: Judges Miller, Forrest, and Schiltz (D. Minn.), with Judge Miller writing the opinion.

Key Highlight: “The Administrative Procedure Act allows a plaintiff to challenge only final agency action, and an agency’s action is final only if it imposes legal consequences. Because the guidance at issue imposes no such consequences, we conclude that the APA does not permit this challenge, and we affirm the district court’s judgment in favor of the agency.”

Background: The Clean Water Act prohibits “the discharge of any pollutant by any person” into U.S. waters without a permit. The EPA requires certain permit holders to pass a “whole effluent toxicity” (WET) test, which measures the aggregate effect of a discharge on aquatic organisms by exposing a test population of organisms to a discharge and counting how many die or become immobilized. In June 2010, the EPA issued guidance explaining a new statistical method called the Test of Significant Toxicity (TST), which, among other things, presumes that a sample is toxic absent statistically significant evidence to the contrary. The EPA explained that adopting TST would provide more accurate results than methods authorized by previous regulations, which did not control for false negatives. Although the EPA amended the relevant regulations governing WET tests several times after issuing the 2010 guidance, it never promulgated TST as a formal rule.

Trade associations representing municipal agencies that operate wastewater treatment plants in California filed suit in December 2016, alleging that the EPA violated the Administrative Procedure Act by issuing the TST guidance without following notice-and-comment rulemaking procedures, and that the EPA had violated its own regulations by requiring and using the TST in discharge permits. The district court dismissed the complaint as time-barred by the APA’s six-year statute of limitations. Plaintiffs amended their complaint to allege that the EPA’s actions were ultra vires and in violation of the Clean Water Act. The district court determined that “[a]dding this label . . . does nothing to change the substance of [p]laintiffs’ allegations,” and dismissed with prejudice.

Result: The Ninth Circuit affirmed on different grounds. Declining to address the timeliness of the complaint, the Court concluded that the 2010 guidance was unreviewable because it was not final agency action. As the Court explained, to be deemed final, an agency action “must mark the ‘consummation’ of the agency’s decisionmaking process” and “must be one by which ‘rights or obligations have been determined,’ or from which ‘legal consequences will flow.’” While the EPA conceded the first requirement was satisfied, the Court concluded that the second was not. Even viewing the 2010 guidance as a departure from earlier regulations, the Court reasoned that “it creates no concrete consequences on its own.” While the guidance provided a new testing option, “it is permits, not guidance documents, that create consequences for regulated entities like plaintiffs.”  That is because the statute authorizes penalties only for violations of “permit conditions.” And “an agency action is not final when subsequent agency decision making is necessary to create any practical consequences.”

The Court concluded that it did not matter that the EPA later referenced TST in a spreadsheet that the EPA circulated to state water regulators and two 2015 emails that the EPA sent to state permitting authorities. Those documents made clear that “The EPA considers the TST one option for interpreting the WET test data necessary to obtain a discharge permit.” Finally, the Ninth Circuit noted that plaintiffs could challenge individual permitting decisions in state court. 

BNSF RAILWAY CO. v. COUNTY OF ALAMEDA
The Court holds that California’s method of taxing railroad property violates the Railroad Revitalization and Regulatory Reform Act.

The Panel: Chief Judge Thomas and Judges Bress and Bumatay, with Chief Judge Thomas writing the opinion.

Key Highlight: “[T]he Counties’ proposal to compare BNSF’s tax rate only to the rate applied to State-assessed property, a limited set of property mostly owned by utility companies that pay the same tax rate as BNSF, runs contrary to the purpose of the 4-R Act. Congress’s goal in passing this legislation was to ensure railroads were treated equally as taxpayers. To do so, the statute instructs comparison to ‘commercial and industrial property’—a deliberately broad term. Moreover, a comparison to entities paying the same tax rate would deprive this subsection of nearly all meaning.” (citations omitted).

Background: Most property within California is assessed at the county level. But certain property, including railroad property, is assessed by the State. A complicated system, which is different for county-assessed and state-assessed property, then determines the actual rate that a taxpayer must pay to the county.

The Railroad Revitalization and Regulatory Reform Act (4-R Act) prohibits differential treatments of state taxation of railroad property. Invoking the 4-R act, BSNF sued a number of California counties, alleging that the tax rate it had paid exceeded the average countywide tax rate. The district court granted BSNF’s motion for a preliminary injunction, enjoining the collection of taxes at a rate higher than the average countywide rate.

Result: The Ninth Circuit affirmed. First, the Court concluded that the district court had correctly issued a preliminary injunction based solely on BSNF’s likelihood of showing a statutory violation, rather than the ordinary 4-factor standard for preliminary injunctive relief. As the Court explained, Ninth Circuit precedent established that the 4-R Act superseded the traditional equitable test. The Court rejected the counties’ argument that a 1982 Supreme Court case concerning the Water Pollution and Control Act mandated a different conclusion, explaining that this decision pre-dated the relevant Ninth Circuit precedent, and in any event was not inconsistent with that precedent.

Next, the Court held that the district court had correctly concluded that BSNF was likely to show a 4-R Act violation. As the Court observed, applying the 4-R Act in California is difficult, giving the complexity of identifying a proper comparator tax rate for purposes of determining whether there has been discrimination. The district court had properly adhered to Ninth Circuit precedent by looking to the average tax rate for all property, as neither party had presented evidence regarding the preferred method of comparison to the tax roll containing the highest percentage of commercial and industrial property.

The Court rejected the counties’ argument that BSNF’s tax rates should have been compared only to the rates paid by other state-assessed taxpayers. It explained that the 4-R Act requires comparison to the commercial and industrial property in the same assessment jurisdiction, and that “[c]ommercial and industrial property in California certainly is not limited to the small subset of State-assessed property.” As the Court further observed, such a limited comparison would also evade the purpose of the 4-R Act by essentially eliminating any comparators besides similarly situated utilities.

Finally, the Court rejected the counties’ argument that any difference in tax rates did not amount to discrimination because they were “justified in taxing BSNF at the unitary rate.” As the Court explained, “no independent showing of discrimination is required” where a railroad’s claim is that its tax rate exceeds the rate for other commercial and industrial property.