In an important decision involving the establishment and regulation of medical marijuana dispensaries in particular, and agency action in general, the California Supreme Court resolved a conflict between two California Courts of Appeal (the Third District and the Fourth District) that had answered in different ways the question of when a change in zoning constitutes a “project” under CEQA. In so doing, the Supreme Court potentially expanded the universe of development projects in California that will require environmental review under CEQA.

In Union of Medical Marijuana Patients, Inc. v. City of San Diego, 2019 DJDAR 7893 (August 19, 2019), the Court noted that the City had decided not to conduct any environmental review in connection with its adoption of its Ordinance No. O-20356, which amended existing city zoning regulations to cap the number of cannabis dispensaries in the city and limit where in the city those businesses could be located.

The City defended the adoption of the ordinance on the ground that the “[o]rdinance is not subject to CEQA …, in that it is not a ‘Project,’” arguing in part that “environmental review would be more appropriate at the time each dispensary applies for a conditional use permit ….”

The Union (UMMP) contended that any enactment or amendment of a zoning ordinance is a CEQA project as a matter of law (a position the Court rejected) and that this particular ordinance had the potential to “cause either a direct physical change in the environment, or a reasonably foreseeable indirect physical change in the environment” (the position the Court ultimately adopted, as is discussed further below). Such effects might include “new retail construction to accommodate the businesses” and “a citywide change in patterns of vehicle traffic from the businesses’ customers, employees, and suppliers.”

The Supreme Court first reiterated that CEQA review involves a three-tiered “decision tree” process: (1) initially, the agency undertaking or approving the activity must determine if the proposed activity is subject to CEQA at all (which includes answering the question whether the proposed activity is a “project”); (2) next, the agency must decide if the activity qualifies for one of many potentially applicable exemptions; and (3) last, where the activity is covered by the statute, and not subject to an exemption, the agency must take the appropriate environmental review of the activity.

Second, the Supreme Court identified as the central controversy on appeal the fact that “two separate provisions of the Public Resources Code are potentially relevant” (to wit, the definition of a “project” in Section 21065 and the general applicability provisions of Section 21080). As noted above, the Court, in harmonizing these two sections, agreed with the Court of Appeal below that Section 21080 does not, as a matter of law, conclusively declare that the amendment of a zoning ordinance, in and of itself, is a “project” under CEQA. Rather, Section 21080 must be read to incorporate the definition of “project” in Section 21065, which means that there must also be the potential for a direct or reasonably foreseeable indirect physical change in the environment in order for CEQA to be triggered.

Third, the Supreme Court, in applying these principles to the ordinance at issue, concluded that, even though “[i]t ultimately might prove true that, in the context of the City, the actual environmental impacts of the Ordinance will be minimal,” the question for the reviewing agency to answer is not whether there actually is a likely impact on the environment, but only whether there is a causal mechanism that plausibly could give rise to an environmental effect.

On this last point, the Court explained that, unless a “postulated causal mechanism” potentially giving rise to an environmental effect is “tenuous,” the agency will be putting “the cart before the horse” by failing to explore those potential effects “in the second and, if warranted, the third tiers of the CEQA process.”

The Court in so doing emphasized that agencies must fully consider the potential effects of an activity in the first tier of CEQA’s three-tiered decision tree and, ”[i]f the proposed activity is the sort that is capable of causing direct or reasonably foreseeable indirect effects on the environment,” an agency may not move forward without further CEQA analysis. This likely will result in additional proposed projects being subject to negative declarations, mitigated negative declarations, and EIR’s under CEQA.