As we’ve pointed out before, given the prevailing views on climate disclosure among folks in the new Administration, including the nominee for SEC Chair—and all that portends for the SEC’s climate disclosure regulation—the States may, in many ways, take on much larger significance. Case in point: California’s climate disclosure laws and the ongoing litigation challenges there. In January last year, the U.S. and California Chambers of Commerce, the American Farm Bureau Federation and others filed a complaint (and in February, an amended complaint) against two executives of the California Air Resources Board and the California Attorney General challenging these two California laws. The lawsuit seeks declaratory relief that the two laws are void because they violate the First Amendment, are precluded under the Supremacy Clause by the Clean Air Act, and are invalid under the Constitution’s limitations on extraterritorial regulation, particularly under the dormant Commerce Clause. The litigation also seeks injunctive relief to prevent CARB from taking any action to enforce these two laws. (See this PubCo post.) California then filed a motion to dismiss the second and third causes of action in the amended complaint for lack of subject matter jurisdiction (Rule 12b-1) and failure to state a claim (Rule 12b-6). Interestingly, however, the motion did not seek dismissal of Plaintiffs’ First Amendment claim (except as to the Attorney General, whom the motion sought to exclude altogether on the basis of sovereign immunity), even though California asserted that Plaintiffs’ First Amendment challenge was “legally flawed.” Plaintiffs then moved for summary judgment on the First Amendment claim, and California moved to deny that motion or to defer it, enabling the parties to conduct discovery. In November of last year, in this Order, the Federal District Court for the Central District of California denied Plaintiffs’ motion to dismiss as to that first claim (violation of the First Amendment) and granted California’s motion to deny or defer the motion for summary judgment. (See this PubCo post.) Now, in Chamber of Commerce v. California Air Resources Board, the Court has issued an Order granting California’s motion to dismiss and dismissing Plaintiffs’ second and third causes of action under the Supremacy Clause and dormant Commerce Clause (as invalid extraterritorial regulation). Stay tuned.
You may recall that California Senate Bill 253, the Climate Corporate Data Accountability Act, mandates disclosure of GHG emissions data—Scopes 1, 2 and 3—by all U.S. business entities (public or private) with total annual revenues in excess of a billion dollars that “do business in California.” SB 253 has been estimated to apply to about 5,300 companies. The companion bill, SB 261, Greenhouse gases: climate-related financial risk, with a lower reporting threshold of total annual revenues in excess of $500 million, requires subject companies to prepare reports disclosing their climate-related financial risk, in accordance with TCFD framework, and describing their measures adopted to reduce and adapt to that risk. SB 261 has been estimated to apply to over 10,000 companies. SB 219, signed into law last year, tweaks some of the requirements of those bills. (See this PubCo post, this PubCo post and this PubCo post.)
Order
As noted above, California had moved to dismiss Plaintiffs’ Supremacy Clause and extraterritoriality claims on “the basis that Plaintiffs lack standing, the claims are not ripe, and Plaintiffs fail to state a claim on which relief can be granted.”
Standing and ripeness. The Court began with standing and ripeness. As described by the Court, the “State argues that Plaintiffs lack standing to pursue their Supremacy Clause and extraterritoriality claims as to SB 261 and as to SB 253’s Scope 1 and Scope 2 reporting requirements because Plaintiffs fail to raise an injury in fact…. At this stage, the State does not contest that Plaintiffs have standing to challenge SB 253’s Scope 3 reporting requirement…. But the State does argue that Plaintiffs’ challenges to SB 253, including the Scope 3 reporting requirement, is not ripe for review.”
According to the Court, standing requires that the plaintiff have “(1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision.” In addition, for a “pre-enforcement challenge” such as this, the plaintiff “must also show three things for it to be ripe for review: (1) an ‘intention to engage in a course of conduct arguably affected with a constitutional interest’; (2) that the conduct is ‘proscribed by a statute’; and (3) that there is a ‘credible threat of prosecution’ under that statute.” Although the Court found that Plaintiffs’ general allegations were adequate to show an injury from the burden of reporting, the analysis of the pre-enforcement challenge for SB 253 was more problematic.
As to SB 261, Plaintiffs were able to demonstrate, in their pre-enforcement challenge, that they had standing to challenge SB 261 and that this challenge was ripe: Plaintiffs’ current business practices were in conflict with and would violate the law and there was a credible threat of enforcement.
The analysis with regard to SB 253 was largely the same, except for “one critical difference: SB 253, on its own, does not mandate any action from any of Plaintiffs’ members or any other reporting entity.” Instead, under SB 253, CARB is required to develop and adopt regulations that will require disclosure under the statute’s framework. And there are no “published CARB regulations imposing any obligation on reporting entities.” The absence of implementing regulations may mean that the claims are not ripe, unless “it is clear that any standard required would impermissibly burden interstate commerce.” At this point, it was “not clear to the Court that any possible regulations CARB issues would impermissibly burden interstate commerce or violate the Supremacy Clause.” In addition, the Court found that Plaintiffs had “failed to show a concrete plan to violate SB 253 where the law, on its own, does not obligate Plaintiffs’ members to take any action,” and there was not the same clear threat of enforcement. As a result, the Court found that “Plaintiffs’ Supremacy Clause and extraterritoriality challenges to SB 253 are not ripe for review.”
And even if Plaintiffs’ SB 253 challenge were ripe, the Court said that it “would decline to exercise jurisdiction on prudential grounds”: Plaintiffs had not “identified any hardship to delaying court consideration until after CARB issues regulations actually imposing requirements on Plaintiffs.“
Accordingly, while the Court found standing did exist as to Plaintiffs’ Supremacy Clause and extraterritoriality challenges to SB 261, “whether labelled as standing or ripeness, the Court finds that Plaintiffs’ Supremacy Clause and extraterritoriality challenges to SB 253 are not yet justiciable. Thus, the Court GRANTS the State’s Motion as to Plaintiffs’ Supremacy Clause and extraterritoriality challenges to SB 253 without prejudice.”
Failure to state a claim—Supremacy Clause. The Court next turned to the merits of the case. Plaintiffs claimed that SB 261 violates the Supremacy Clause. As described by the Court, “Plaintiffs allege that ‘California lacks the authority to regulate greenhouse-gas emissions outside of its own borders’ under the Clean Air Act and ‘principles of federalism inherent in the structure of’ the Constitution.”
According to the Court, under the Supremacy Clause, “federal law preempts state law when ‘1) Congress enacts a statute that explicitly pre-empts state law; (2) state law actually conflicts with federal law; or (3) federal law occupies a legislative field to such an extent that it is reasonable to conclude that Congress left no room for state regulation in that field.’ …These are known as express, conflict, and field preemption, respectively.” In identifying an applicable source of federal law, Plaintiffs “point generally to the Clean Air Act and foreign affairs,” as well as federalism, but California “notes Plaintiffs’ failure to point to specific text in the Constitution or Clean Air Act.”
But as a preliminary matter, the Court sought to identify what exactly SB 261 regulated. Certainly speech, but what else? Plaintiffs claimed that the “State is ‘attempt[ing] to regulate greenhouse-gas emissions.’” But, the Court pointed out, in the complaint, they “acknowledge that the legislation ‘do[es] not directly require reductions in greenhouse-gas emissions in other states.’… Instead, they allege that the State enacted SB 261 ‘to force actual reductions’ through ‘disclosure.”’ But even assuming the truth of the allegations, as required at this stage, the Court concluded that the “Plaintiffs do not state a claim on which relief can be granted. Plaintiffs fail to cite any relevant authority to support the proposition that a disclosure regime intended to regulate emissions through third-party actions is a de facto regulatory scheme subject to preemption.” Plaintiffs cited cases about infringement of civil liberties and prohibiting a state from regulating emissions through the imposition of damages, where the solution to avoiding liability was to follow the de facto regulation restricting emissions. But the Court found that SB 261 did not impose that kind of choice. Rather, it “imposes no liability for failure to reduce emissions; only for failure to disclose climate-related financial risk and the measures adopted to reduce such risk….If Plaintiffs want to avoid liability, all they must do is make disclosures in accordance with the legislation, not reduce their emissions. The public pressure of which Plaintiffs complain is not imposed by the statute, even if it provides information that supports such campaigns.”
The Court then turned to “whether the law’s compelled disclosure is preempted by the Constitution or federal law.” But Plaintiffs failed to “identify a source of federal law that preempts the disclosure at issue here.” SB 261 does “not regulate greenhouse-gas emissions” nor was there any basis for preemption tied to foreign affairs. Plaintiffs did not refer to any Clean Air Act provision or regulation “concerning disclosure of emissions that would support the notion that the field of the Clean Air Act encompasses mere disclosure of climate-related information and, in particular, climate risks and the measures adopted to minimize such risk.” Nor did SB 261 fail under conflict preemption as a consequence of “empowering the EPA to set emissions standards through the Clean Air Act.”
Accordingly, the Court found that Plaintiffs were “unable to allege facts that could cure the deficiencies noted by the Court…. The Court thus GRANTS the State’s Motion and dismisses Plaintiffs’ Supremacy Clause claim as to SB 261 with prejudice.”
Failure to state a claim—Extraterritoriality. As described by the Court, Plaintiffs, invoking the dormant Commerce Clause, “allege that SB 261 ‘intrude[s]’ on Congress’s ‘authority to regulate interstate and foreign commerce’ and ‘place[s] upon interstate commerce a burden that far outweighs any benefits to’ California.” According to the Court, citing a 2013 9th Circuit case, “the primary purpose of the dormant Commerce Clause is to prohibit statutes that discriminate against interstate commerce by providing benefits to in-state economic interests while burdening out-of-state competitors.” And SCOTUS takes a two-tier approach to the analysis: “[1] When a state statute directly regulates or discriminates against interstate commerce, or when its effect is to favor in-state economic interests over out-of-state interests, we have generally struck down the statute without further inquiry. [2] When, however, a statute has only indirect effects on interstate commerce and regulates evenhandedly, we have examined whether the State’s interest is legitimate and whether the burden on interstate commerce clearly exceeds the local benefits.” Tier 2 is referred to as the “Pike test.”
Applying the first tier—direct regulation or discrimination—the Court concluded that the claim would fail. First, the Court asserted that Plaintiffs’ claim that SB 261 was enacted with a “discriminatory purpose” came rather late in the day (and could potentially fail on that basis). But, even so, the Court concluded that “such a claim would fail here because plaintiffs cannot allege SB 261 discriminates against interstate commerce”; it “contains no ‘differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter.’… Nor does it ‘effectively prevent[] the sale’ of goods in other states or ‘erect[] an economic barrier protecting a major local industry against competition from without the state.’” The Court explained that Plaintiffs’ theory was that SB 261 was essentially a workaround—California really wanted to “regulate greenhouse-gas emissions, but if it had tailored SB 261 to California products or businesses—such that only California products or businesses would have to comply with the law— SB 261 would have put the State at a competitive disadvantage.” Hence, SB 261. But the Court wasn’t buying it: “SB 261 applies to both California and out-of-state businesses doing business in California equally, and as Plaintiffs allege, it imposes new reporting obligations on companies doing business in California, regardless of whether they are California companies.” Nor did the Court buy Plaintiffs’ allegation of a discriminatory purpose: courts “assume that the objectives articulated by the legislature are actual purposes of the statute,” and “neither Plaintiffs’ allegations nor the objectives articulated by the legislature support such a purpose.” As a result, “Plaintiffs do not (nor could they) allege that the purpose of SB 261 is to benefit California businesses at the expense of out-of-state competitors.”
Applying the second tier—burden on interstate commerce, the Pike test—the Court concluded that Plaintiffs “fail to plead a Pike claim on which relief can be granted.” The Court quickly disposed of all three of Plaintiffs’ allegations of “significant burdens on interstate and foreign commerce. First, to the assertion that “SB 261 ‘require[s] companies to spend significant time and money . . . making public statements regarding climate change,’” the Court responded that engaging in interstate commerce will necessarily have that effect, and “increased compliance costs, without more, do not constitute a significant burden on interstate commerce.” Second, to the allegation that “the legislation will subject companies, including those that do not [do] business in California, ‘to significant political and economic pressure,’” the Court asserted that “Plaintiffs do not explain how these ‘pressures’ are burdens on interstate commerce. Nor do they show that these indirect pressures are among the derivative burdens courts have considered susceptible to challenge under the dormant Commerce Cause.” Third, to the allegation that “the law impermissibly ‘build[s] up domestic commerce through burdens upon the industry of other States’ by requiring disclosure from companies that ‘do little business in California,’ but not requiring disclosure from in-state companies that fall just below the revenue threshold,” the Court responded that, while there may be truth to the allegation, “Plaintiffs fail to articulate how this independently burdens commerce, a showing required to state a Pike claim.” Accordingly, the Court concluded that Plaintiffs “fail to plausibly allege a significant burden on interstate commerce. Absent such an allegation, Plaintiffs, by definition, cannot show that ‘the burden on interstate commerce clearly exceeds the local benefits.’… Therefore, Plaintiffs’ allegations about the limited, if not nonexistent, benefits of the legislation… cannot save its claim.” As a result, “the Court GRANTS the State’s Motion to Dismiss Plaintiffs’ extraterritoriality claim as to SB 261….without prejudice.”
Accordingly, the Court granted the State’s Motion to Dismiss, dismissing both Counts II and III from the First Amended Complaint. In summary, the Court held that, as to SB 253, it lacked jurisdiction over Plaintiffs’ Supremacy Clause and extraterritoriality causes of action, and therefore dismissed those claims without prejudice under Rule 12(b)(1). As to SB 261, the Court dismissed with prejudice Plaintiffs’ Supremacy Clause cause of action, and dismissed without prejudice Plaintiffs’ extraterritoriality cause of action, each for failure to state a claim under Rule 12(b)(6).
