Oxygenated Fuels Association (OFA) sued former California Governor Gray Davis and Alan C. Lloyd, Chairman of the California Air Resources Board (collectively California), claiming that California's law banning the use of methyl tertiary-butyl ether (MTBE) as an oxygenator in gasoline was preempted by the Clean Air Act (CAA)[1] and should therefore be enjoined. The district court granted California's motion to dismiss the suit for failure to state a claim, finding that California's MTBE ban was expressly exempted from preemption by CAA section 211(c)(4)(A),[2] and that even if it was not exempted, it was not preempted.[3] The Ninth Circuit affirmed the district court decision, finding that although the MTBE ban was not expressly exempted from preemption by the CAA, it did not conflict with the purpose of the CAA, so was not preempted.

Congress enacted the CAA "to protect and enhance the quality of the Nation's air."[4] The CAA relies on reductions in motor vehicle emissions to help achieve this goal. As part of the effort to reduce motor vehicle emissions, the CAA requires gasoline in some parts of the country to contain 2% oxygen by weight.[5] MTBE is one of the two most widely used chemicals added to gasoline to achieve that objective. The California legislature, having determined that MTBE pollutes groundwater, banned its use as a fuel additive in California as of December 31, 2002.[6] OFA, a trade association representing MTBE producers, argued that federal law, rather than state law, governs the regulation of oxygenators, and therefore the California ban was illegal.

The Ninth Circuit reviewed the district court's dismissal for failure to state a claim de novo. To determine preemption, the Ninth Circuit looked for guidance from the United States Supreme Court, which has recognized three situations in which federal law may preempt state law: 1) when Congress states explicitly that it does, 2) in fields that "Congress intended the Federal Government to occupy exclusively," and 3) when the state law "actually conflicts" with the federal law.[7] In addition, federal law does not preempt state law if Congress states explicitly that it does not.

California argued that CAA section 211(c)(4)(B)[8] explicitly exempted the state from CAA preemption. This provision states that California "may at any time prescribe and enforce, for the purpose of motor vehicle emission control, a control or prohibition respecting any fuel or fuel additive."[9] OFA argued that, because MTBE was not banned "for the purpose of motor vehicle emission control," the ban did not fall under the section 211(c)(4)(B) exemption.[10] California responded that the exemption still applied because the MTBE ban was part of its overall regulatory scheme for emissions control. Unlike the district court, the Ninth Circuit agreed with OFA's argument. In reaching this conclusion, the Ninth Circuit looked to Supreme Court analyses in two other preemption cases.[11] It noted that in both cases, the Supreme Court analyzed the purpose of the challenged provisions themselves, rather than the purpose of the overall regulatory scheme. Using this model, the court held that the correct object of preemption analysis in this case was the law banning MTBE itself rather than California's emissions regulatory scheme as a whole. The Ninth Circuit concluded that, because the purpose of the MTBE ban was to protect groundwater, and the exemption only reaches California laws enacted "for the purpose of motor vehicle emission control,"[12] the ban was not covered by the exemption.

OFA next contended that the state MTBE ban was impliedly preempted by the federal CAA because, by "stand[ing] as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress,"[13] it conflicts with the goals of the CAA. OFA presented two arguments in support of this contention: first, that legislative history indicates Congress required the government to remain neutral on the subject of oxygenate additives, thus giving gasoline producers an unrestricted choice of oxygenate fuel additives (the "oxygenate neutrality" argument); second, that Congress "meant to ensure an adequate and reasonably priced supply of oxygenated gasoline,"[14] which the MTBE ban disrupts by increasing the price of gasoline (the "market disruption" argument).

Responding to the "oxygenate neutrality" argument, the court pointed out that the plain language of the CAA gives primary responsibility for the control of air pollution to state and local governments. Finding the text of the CAA "relatively clear" on this point,[15] the court was reluctant to rely on legislative history. The court nonetheless reviewed the legislative history presented by OFA, and found evidence that Congress intended the federal government to remain neutral on the subject of oxygenate additives. The court found no evidence, however, that state governments were required to remain neutral. The court noted, moreover, that both the Ninth Circuit[16] and EPA[17] have ruled that state governments need not remain neutral, and indeed, have the authority to "choose between oxygenates."[18] The court then distinguished the Supreme Court's ruling in Geier v. American Honda Motor Co.[19] Noting that Geier required state law to defer to a federal standard, the Ninth Circuit found that in the present case there was no federal standard to which to defer because EPA had not set a standard requiring the use of MTBE. The court thus rejected the argument that the federal CAA requirement for "oxygenate neutrality" implicitly preempts the state MTBE ban.

In addressing OFA's "market disruption" argument, the Ninth Circuit acknowledged that it was required to determine whether the effects of the state MTBE ban interfere with the goals of the CAA.[20] Pointing out that the main goal of the CAA is to reduce air pollution, the court questioned OFA's assertion that "a smoothly functioning gasoline market and inexpensive gasoline"[21] are also goals of the CAA. The court noted that it had found no reference to such goals in the text of the CAA and that OFA had offered no support for its assertion. The court further noted that it must "presume that Congress did not intend to preempt areas of law that fall within the traditional exercise of the police powers of the states."[22] A court can find preemption in such areas only when it has "clear evidence" that Congress intended to preempt.[23] The Ninth Circuit determined that environmental regulation is an area of traditional state control, and found no clear evidence that Congress intended to preempt the ability of states to adopt environmental measures that may cause higher gasoline prices. Thus, the court rejected OFA's argument, finding that increases in the price of gasoline resulting from California's MTBE ban do not frustrate the goals of the CAA and thus are not implicitly preempted by the CAA.

Having found that California's MTBE ban was not preempted by the federal CAA, the Ninth Circuit affirmed the lower court's ruling granting California's motion to dismiss OFA's suit for failure to state a claim.