Extracted from Law360

California Gov. Arnold Schwarzenegger's administration was distinguished by two hallmark pieces of environmental legislation: the 2006 Global Warming Solutions Act and the 2008 Green Chemistry Initiative. Both statutory initiatives were intended to fill a perceived gap created by inaction at the federal level on the control of greenhouse gas emissions and the chemical safety of consumer products. Through the Global Warming Solutions Act, California pledged to reduce its greenhouse gas emissions to 1990 levels by the year 2020. In its Green Chemistry Initiative, California promised to revolutionize how consumer products were manufactured, elevating considerations of chemical safety to a new level. 

As implementing regulations were developed, however, the scope of both legislative efforts — asserting the reach of California’s regulatory control well beyond California’s own boundaries – became a concern to many. Thus, to implement the goals of the Global Warming Solutions Act, the California Air Resources Board (“CARB”) promulgated a Low Carbon Fuel Standard requiring all businesses selling transportation fuels in California, regardless of their location, to reduce the carbon intensity of their fuels. In a similar fashion, to implement the Green Chemistry Initiative, the California Department of Toxic Substances Control (“DTSC”) promulgated its “Safer Consumer Product Regulations,” requiring manufacturers of designated consumer products sold into California, regardless of their location, to follow a complex protocol of evaluating the safety of chemicals utilized in their products, including whether safer alternative chemicals might be available. 

On Jan. 22, 2014, the Ninth Circuit Court of Appeals issued an order that will very likely send the Global Warming Solutions Act to the U.S. Supreme Court, to determine whether the breadth of its requirements constitute an unconstitutional regulation of interstate commerce. Such a step may also have a profound impact on the constitutionality of regulations recently issued to implement California’s Green Chemistry Initiative. 

While the CARB and DTSC regulatory programs implement very different legislative mandates, both share one fundamental characteristic: impacting both interstate and international commerce through the use of California’s economic leverage to control the conduct of manufacturers located elsewhere. Thus, both programs raise the same constitutional issue: Are the mandates which are imposed on manufacturers outside of California as the price for selling their products in one of the world’s largest economies, consistent with the fundamental tenet of our federal system that the authority of the several states is limited to their boundaries and that “[n]o State can legislate except with reference to its own jurisdiction.” Bonaparte v. Tax Court, 104 U.S. 592, 594 (1881). 

In constitutional terms, the permissible extraterritorial reach of state regulation is assessed under the “dormant Commerce Clause” — a negative constitutional command limiting state powers over interstate commerce which arises from the express constitutional grant to Congress of the power to "regulate Commerce ... among the several States." Am. Trucking Ass’ns v. Mich. Pub. Serv. Comm’n, 545 U.S. 429, 433 (2005); Shamrock Farms Co. v. Veneman, 146 F.3d 1177, 1179 (9th Cir. 1998). 

As the first of California’s recent landmark environmental initiatives to reach the stage of final implementing regulations, the constitutionality of CARB’s regulation of out-of-state fuel manufacturers, through the fuel standard’s “carbon intensity” provisions, has been the first dormant Commerce Clause challenge to reach the federal courts. Based upon recent developments, it appears to be well on its way to a final determination by the Supreme Court. 

The challenge to CARB’s regulatory program was brought in the Eastern District of California in 2009 by the Rocky Mountain Farmer’s Union and a variety of other non-California entities interested in the manufacture and sale of ethanol fuel in California . These plaintiffs claimed that the carbon intensity attributed to their fuel by CARB’s regulations violated the dormant Commerce Clause by: (1) facially discriminating against out-of-state fuel (emissions from the transportation of fuel from the Midwest and overseas to California was included by CARB in its carbon intensity calculation); and (2) constituting impermissible extraterritorial regulation by California. 

In December 2011, the district court agreed. Rocky Mountain Farmers Union v. Goldstene, 843 F.Supp.2d 1071 (E.D. Cal. 2011). On the question of whether California’s program offended the dormant Commerce Clause as impermissible extraterritorial regulation, the district court found — through CARB’s own words — that a purpose of its regulations was to reduce greenhouse gas emissions associated with the production of ethanol by “incentivizing” state growers to “adopt production methods which result in lower emissions.” 843 F. Supp.2d at 1091. Concluding that CARB “cannot dispute that the ‘practical effect’ of the regulation is to control this conduct, occurring wholly outside of California,” the district court found that CARB’s fuel standard “impermissibly attempts to ‘control conduct beyond the boundary of the state.’ Healy, 491 U.S. at 336-37.” Id. 

The focus next turned to CARB’s appeal to the Ninth Circuit which, two years later, reversed the district court. In a 2-to-1 decision, the appellate panel concluded that the fuel standard neither discriminated against out-of-state producers (“the [f]uel [s]tandard does not isolate California and protect its producers from competition”) nor that it had the “practical effect” of regulating conduct beyond California’s boundaries, finding instead that it regulated “only the California market.” Rocky Mountain Farmers Union v. Corey, 730 F.3d 1070, 1101 (9th Cir. 2013). 

On the extraterritorial question, Ronald Gould, a justice for the Ninth Circuit, writing for the two justice panel majority, took the district court to task for straying from the “modern” view of the dormant Commerce Clause, characterizing its application today as essentially limited to “price affirmation” cases where a manufacturer’s ability to sell in one state depended upon an affirmation that the prices charged were as low as those charged by the manufacturer in other states. Id., at 1101-1102. 

That’s where matters stood on the extraterritoriality argument — a doctrine narrowed by modern case law to only pricing cases — until October 2013, when Rocky Mountain petitioned for Ninth Circuit en banc review. Review was ultimately denied by an order of the Ninth Circuit issued on Jan. 22, 2014, but six justices took the occasion to draft a strongly worded dissent, drawing attention to what these justices concluded was the threat of California’s regulatory scheme “to [b]alkanize our national economy.” Rocky Mt. Farmers Union v. Corey, 2014 U.S. App. LEXIS 1149, * 25. (9th Cir., Jan. 22, 2014). 

Bristling at the panel majority’s characterization of the dormant Commerce Clause as “mere ‘archaic formalism’,” Justice Norman Smith, writing for the six dissenters, proceeded to lay out the doctrine’s “critical place in our constitutional order,” including “the rule that ‘a state law that has the ‘practical effect’ of regulating commerce occurring wholly outside that [s]tate’s borders is invalid ...‘ Healy v. Beer Inst., 491 U.S. 324, 332 (1989).” Id., at *30, *33. In measuring the fuel standard against the Supreme Court’s holding in Healy, Justice Smith concluded that CARB’s regulations were unconstitutional because “the ethanol regulations plainly have extraterritorial reach, as they seek to influence out-of-state land use decisions and production methods.” Id., at * 39. 

Therein lies the nub of the issue that will ultimately determine the constitutional fate of the DTSC’s Safer Consumer Product Regulations as well: How literally should the “practical effect” test of Healy and its progeny be applied? If that language is taken at face value, and ultimately applied by the Supreme Court to CARB’s fuel standard as Justice Smith and his five fellow justices did in their Rocky Mountain dissent, it would be very hard to argue that the DTSC’s program, as currently written, could survive. That program, which, to paraphrase Justice Smith, “seek[s] to influence out-of-state ... production methods” of consumer products sold in California by mandating the protocol which out-of-state manufacturers of designated products must follow in assessing the chemicals which they use, clearly has, to that extent, the practical effect of regulating that commerce. 

Will that be enough to convince the Supreme Court that California — or one of the several other states embracing increased regulation of chemicals in consumer products in a similar fashion[1] — have exceeded the constitutional limits of a state’s power? Will the court see in such groundbreaking regulatory efforts what the Rocky Mountain dissent did, namely “a regime that threatens the very sort of ‘economic [b]alkanization that had plagued relations among the [c]olonies and later among the [s]tates under the Articles of Confederation.’” 

According to Justice Gould, author of the Ninth Circuit panel’s original Rocky Mountain decision, it should not be. Rather, offering a spirited defense of the panel decision against the six dissenters’ arguments for en banc review, Justice Gould construed the Supreme Court’s precedent very differently, as only reining in California’s authority when its regulations seek to “mandate compliance” with California’s “preferred policies in wholly out-of state transactions,” allowing California to freely “regulate commerce within its boundaries even if one of its goals is to influence the out-of-state choices by market participants.” 

The battle lines on how far California’s environmental regulators can reach are clearly drawn. The only question now is when the Supreme Court will choose to weigh in. Such a day seems close at hand. As Justice Gould wrote, even though he expressed concerns as to the suitability of the Rocky Mountain record for further review where the issues were decided on preliminary motions, before a comprehensive factual record was developed, he also acknowledged the helpfulness of the Supreme Court intervening at this moment to “give meaning to, or limit, the general principle that state experimentation,” of the sort often reflected by California’s environmental programs, “is often a desirable predicate to actions by other states or the federal government.” 

When the court elects to do so, the impact on two of California’s recent environmental initiatives could be substantial.