Opinion ID: 4190211
Heading Depth: 4
Heading Rank: 3

Heading: The market participant doctrine

Text: There is another interpretive presumption, namely the market participant doctrine, that plaintiffs assert would lead to a conclusion that there should be no preemption of CEQA here. The doctrine acknowledges that in some circumstances, states may be acting not as regulators of others, but as participants in a marketplace who themselves need to deal with private parties to obtain services or products. In this proprietary capacity they generally should have the same freedom as private actors in the market, just as they must ordinarily carry the same burdens. (Reeves, Inc. v. Stake (1980) 447 U.S. 429, 439 (Reeves) [state, which owned and operated a cement plant, was permitted to sell preferentially to in-state private purchasers; ―state proprietary activities may be, and often 8 A petition for reconsideration and request for stay was denied on the ground that a majority of the STB could not agree on its disposition. (California High-Speed Rail Authority, Petition (STB, May 4, 2015, No. FD 35861) 2015 WL 2070594.) The matter is pending on appeal in the United States Court of Appeals for the Ninth Circuit. 60 are, burdened with the same restrictions imposed on private market participants. Evenhandedness suggests that, when acting as proprietors, States should similarly share existing freedoms from federal constraints, including the inherent limits of the Commerce Clause‖ (fn. omitted)].) Whereas the commerce clause of the federal Constitution implies a limitation on state authority to interfere with interstate commerce, ―either through prohibition or through burdensome regulation‖ (Hughes v. Alexandria Scrap Corp. (1976) 426 U.S. 794, 806), at the same time the Supreme Court has recognized the importance of state sovereignty in the market sphere as well. The high court has cautioned that notwithstanding the scope of Congress‘s authority under the commerce clause, ―[r]estraint in this area is . . . counseled by considerations of state sovereignty, the role of each State ‗ ―as guardian and trustee for its people,‖ ‘ [citation], and ‗the long recognized right of trader or manufacturer, engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal.‘ [Citation.]‖ (Reeves, supra, 447 U.S. at pp. 438-439, fns. omitted.) The high court has cautioned that whereas the market participant doctrine acknowledges that a state can influence a discrete area of economic activity in which it participates, the doctrine does not afford ―carte blanche to impose any conditions that the State has the economic power to dictate, and does not validate any requirement merely because the State imposes it upon someone with whom it is in contractual privity. [Citation.] [¶] The limit of the market-participant doctrine must be that it allows a State to impose burdens on commerce within the market in which it is a participant, but allows it to go no further. The State may not impose conditions, whether by statute, regulation, or contract, that have a substantial regulatory effect outside of that particular market.‖ South-Central Timber Dev. v. Wunnicke (1984) 467 U.S. 82, 97-98.) Here, of course, we do not simply confront the inherent or implied limits imposed by the commerce clause on state regulation, but an express preemption provision. The 61 market participant doctrine applies, however, in both situations. And when there is a preemptive federal statute, a presumption as to its proper interpretation arises from the market participant doctrine. A congressional preemption clause ordinarily displaces regulatory action on the part of states, but the high court has held that it is unlikely that Congress also meant to reach the proprietary conduct of the states. (Boston Harbor, supra, 507 U.S. at pp. 231232; Wisconsin Dept. of Industry v. Gould Inc. (1986) 475 U.S 282, 290 (Gould).) At the same time, reviewing courts must remain aware of the special power of the state in the marketplace. The high court in Gould, supra, 475 U.S. 282, for example, acknowledged that even state purchasing decisions involving private contractors may in some circumstances have such an impact in the marketplace as to be regulatory. (Id. at p. 290.) Thus in Gould, a Wisconsin statute under which state purchasing agents were barred from expending state funds to contract with private employers who had repeatedly violated the National Labor Relations Act (NLRA) was essentially regulatory and therefore was preempted under the NLRA. The state law imposed a ―supplemental sanction‖ on NLRA violations by private employers (id. at p. 288), and was inconsistent with congressional intent to prevent states from ―providing their own regulatory or judicial remedies for conduct prohibited or arguably prohibited by the Act.‖ (Id. at p. 286.) But even in the context of the NLRA and state contracts with private actors, the high court has confirmed the vitality of the market participant doctrine. Under certain circumstances involving a state as owner of property or purchaser of goods or services, the high court has acknowledged that the public entity may be permitted to ―manage its own property when it pursues its purely proprietary interests . . . where analogous private conduct would be permitted‖ and is not seen thereby to be engaging in regulatory conduct. (Boston Harbor, supra, 507 U.S. at p. 231, italics added.) ―When a State owns and manages property, for example, it must interact with private participants in the 62 marketplace. In so doing, the State is not subject to pre-emption by the NLRA, because pre-emption doctrines apply only to State regulation.‖ (Id. at p. 227.) The Supreme Court in Boston Harbor distinguished Gould, supra, 475 U.S. 282, explaining that the Gould rule addressed a state agency‘s attempt, through limitations on state expenditures, to compel NLRA compliance on the part of a private employer — a matter ―unrelated to the employer‘s performance of contractual obligations to the State‖ but rather demonstrating an intent to deter NLRA violations. (Boston Harbor, supra, 507 U.S. at p. 229.) The high court in Boston Harbor also pointed out that it was merely permitting the public entity to act in the same way any other proprietor could act. The disputed contract in that case was between public and private entities and involved a development project. The contract‘s prehire provisions, challenged as regulatory, would actually be permitted under the NLRA in private contracts in the construction industry, and the same freedom was contemplated when the public entity acted as a proprietor and market participant. (Boston Harbor, supra, 507 U.S. at p. 231.) The court said: ―To the extent that a private purchaser may choose a contractor based upon that contractor‘s willingness to enter into a prehire agreement, a public entity as purchaser should be permitted to do the same.‖ (Ibid., italics omitted.) Boston Harbor reflects a situation in which the state can interact in the marketplace in the same way as a private actor without being considered as engaging in preempted regulatory conduct. By contrast, when the state engages with private persons in the marketplace with tools that are not available to private actors, the high court has viewed this as regulatory, and therefore the state‘s action will be preempted. (American Trucking, supra, ___ U.S. ___, ___ [133 S.Ct. at p. 2103] [federal law preempts a municipal entity‘s requirement of its private lessees that they impose certain contractual terms on private parties on pain of potential misdemeanor prosecution].) 63 Unlike plaintiffs, we do not find the market participant doctrine fully on point, because it ordinarily is used to analyze preemption when a state interacts with private parties as a participant in a private marketplace for goods, labor, or services. When a state engages in the private marketplace on terms available to any other proprietor, it may be presumed that such conduct is not regulation in the sense ordinarily meant by federal preemption provisions. Here, by contrast, our focus is not on the state‘s interactions with the private railroad marketplace, or even on its interactions with its private lessee, NWPCo, but on the state‘s ability to govern the state‘s own subsidiary, NCRA — the governmental subdivision of the state through which the state proposes to enter into and engage with the railroad marketplace. Nevertheless, elements of the case law concerning the doctrine are instructive. One useful element is related to our earlier discussion of Nixon, supra, 541 U.S. 125, and Gregory, supra, 501 U.S. 452, in that, similarly, it is based in part on the presumption that Congress will not interfere lightly with state sovereignty. Furthermore, the market participant doctrine also instructs, in part, that because states operating in a private marketplace are subject to the same burdens imposed by Congress on private proprietors, courts will presume that Congress would afford states, as proprietors, the same freedoms as private proprietors. These ideas are useful because in a sense, application of CEQA is not solely a matter of self-governance by the state. CEQA can be seen as an expression of how the state, as proprietor, directs that a state enterprise will be run — an expression that can be analogized to private corporate bylaws and guidelines governing corporate subsidiaries. To the extent a private corporate parent would have a zone of freedom under the ICCTA to govern how its subsidiaries will engage in the railroad business — including the freedom to direct them to undertake environmental fact finding as a condition of approving or going forward with their projects — the state presumably has the same sphere of freedom of action. 64 To make this point more concrete, we provide a hypothetical example. A private corporate conglomerate might require its subsidiaries, including its rail subsidiary, to perform environmental studies to discover what climate impacts a proposed project may have, to identify liabilities in the event of the adoption of a federal carbon tax or, on the asset side of the ledger, the availability of greenhouse gas credits for a project with climate benefits in the event of the establishment of a broad cap-and-trade system. A corporate conglomerate could make the results of environmental study one element of the cost-benefit analysis it requires of its subsidiary or an element of its own retained control over the subsidiary. To ensure accomplishment of its own sustainability goals, or even as a matter of public relations, a corporation, as part of its internal governance policies or its bylaws, could adopt a process that permitted shareholder or stakeholder challenges to its handling of the environmental review process. In our view, the application of CEQA to NCRA proceedings and decisions would perform a similar decisionmaking function and afford similar enforcement mechanisms. We see little reason to suppose that when Congress forbade states to regulate rail transportation, it meant to prevent states, as owners of railroad lines, to have the freedom of action we believe would be retained by private businesses under the ICCTA.9 9 The Court of Appeal in the present case rejected plaintiffs‘ reliance on the market participant doctrine because petitioner‘s suit to enforce CEQA was not itself a proprietary activity in the marketplace: ―NCRA, a political subdivision of the state, undertook a project to reopen the Russian River Division of the line. As part of that project, it prepared an EIR, which is now challenged by [plaintiffs] as inadequate. Even if the project to reopen the line is viewed as proprietary and the initial decision to prepare the EIR a component of this ‗proprietary‘ action, a writ proceeding by a private citizen‘s group challenging the adequacy of the review under CEQA is not a part of this proprietary action.‖ We do not believe that the market participant doctrine applies solely to enforcement actions that are themselves literally proprietary or commercial conduct in the market. This was certainly not the case in Boston Harbor, supra, 507 U.S. 218, for example. Rather, what is critical is whether the state is engaged in proprietary or (Footnote continued on next page) 65 F. NWPCo Despite our conclusion concerning NCRA, we agree with the Court of Appeal that CEQA causes of action cannot be the basis for an injunctive order directed specifically at NWPCo to halt NWPCo‘s freight operations — a form of relief that falls within plaintiffs‘ prayer. Such an application of state law would be tantamount to the operation of state environmental preclearance rules that the Auburn court and others have agreed cannot be used to halt railroad operations pending compliance. (See, e.g., Auburn, supra, 154 F.3d 1025.) The Gregory-Nixon presumption regarding congressional intent would not be fully applicable, either, since the order directly restraining NWPCo from operating freight service pending CEQA compliance would not involve simply the state‘s autonomy and control over its subdivisions, but would constitute use of state law to restrict operations by a private rail carrier — a classic example of state regulation. (Footnote continued from previous page) essentially regulatory conduct, with special attention to whether the same enforcement tools would be available to private parties. The Court of Appeal also implied that the doctrine can be applied solely as a shield by a state seeking to avoid preemption, and not as a sword for citizens seeking to enforce state law. As our discussion above indicates, however, the market participant doctrine is an aspect of a preemption question, which is a question of law. (See Farm Raised Salmon Cases (2008) 42 Cal.4th 1077, 1089, fn. 10 [preemption as question of law].) Application of the market participant doctrine turns on congressional intent underlying the preemption clause under review, and on whether the state is involved in essentially regulatory behavior. Because these questions of law simply lead a court to the proper interpretation of a federal statute, we are not persuaded the market participant doctrine cannot be raised simply because plaintiffs are not a state or local entity wishing to shield assertedly proprietary activity from federal preemption. Indeed, the Court of Appeal‘s interpretation would lead to the anomaly that the scope of the federal enactment‘s preemption would turn on the litigation strategy of individual states. It seems unlikely that the ICCTA‘s purpose contemplated preempting local law in one state but not preempting an identical statute in another state, based merely on the state‘s appearance or nonappearance in litigation. 66 Nor would the market participant doctrine apply to prevent preemption. Even if the state is a participant in the railroad market, when the state uses enforcement mechanisms that would not be available to a private party, this ordinarily constitutes regulation. The mechanism sought to be used here — public entity proceedings on a project pursuant to CEQA — is not a mechanism that private market actors could create and require of others. That is, although a private actor, by contract, could condition performance on compliance with specified environmental norms, that private actor would be unable, even by contract, to create and implement a system of government proceedings. Only the government can create and administer such a system. In this way, application of CEQA to enjoin NWPCo from operating rail service pending NCRA‘s CEQA compliance would run afoul of the teaching of American Trucking. This, like the possibility of criminal sanctions in that case, is not a tool ―that the owner of an ordinary commercial enterprise could mimic.‖ (American Trucking, supra, ___ U.S. at p. ___ [133 S.Ct. at p. 2103].) Nor does plaintiffs‘ reliance on the Engine Manufacturers decision assist them, since that decision permitted state control over the state‘s own internal purchasing decisions, but did not extend to permitting regulation of private third parties. (Engine Manufacturers, supra, 498 F.3d at pp. 1045-1046, 1048.) Thus it appears that plaintiffs cannot rely upon CEQA as a basis for an injunction directed at NWPCo to halt its operations. Whether NWPCo would be able to carry on with service despite the application of CEQA to NCRA is a question that is beyond the scope of this case. We also agree with the Court of Appeal that in the current litigation, plaintiffs did not preserve any contract claim. At the same time, the conclusion that a CEQA cause of action cannot be the basis for an order halting NWPCo‘s operations does not require us to conclude CEQA is also preempted as applied to NCRA in this case. Even if CEQA is preempted as applied to halt NWPCo‘s freight operations because in that context CEQA is essentially regulatory, the application of CEQA, as a matter of self-governance, to the state‘s own railroad 67 project is not. This result is evident as a matter of legislative intent, since CEQA contains a severability clause that is written in broad terms: ―If any provision of this division or the application thereof to any person or circumstances is held invalid, such invalidity shall not affect other provisions or applications of this division which can be given effect without the invalid provision or application thereof, and to this end the provisions of this division are severable.‖ (Pub. Resources Code, § 21173, italics added; cf. NFIB v. Sebelius (2012) 567 U.S. 519 [giving effect to a similarly worded severability provision].) The severability clause establishes a presumption that the Legislature intended that the invalid (here, the preempted) applications be severed from the valid (nonpreempted) ones. Insofar as CEQA governs projects ―directly undertaken‖ by public entities (Pub. Resources Code, § 21065, subd. (a)), its provisions appear to be capable of operating independently. And to sever the preempted applications of CEQA from the nonpreempted applications is consistent with our repeated recognition that ―CEQA is to be interpreted ‗to afford the fullest possible protection to the environment within the reasonable scope of the statutory language.‘ ‖ (Mountain Lion Foundation, supra, 16 Cal.4th at p. 112.) Applying CEQA and its remedies to NCRA (but not to NWPCo) may have some impact on the private party, but this is merely derivative of the state‘s efforts at selfgovernance in this marketplace. We see the two entities as distinct for the purposes of preemption, at least in circumstances where the ICCTA leaves a regulatory hole which owners are free to exploit to their own advantage. 68