Reno-Sparks Indian Colony and Great Basin Mine Watch (collectively Reno-Sparks) petitioned the Ninth Circuit for review of the 2002 Nevada Rule[1] promulgated by the Environmental Protection Agency (EPA). Reno-Sparks challenged parts I and II of the 2002 Nevada Rule, which define the terms "rest of state" or "entire state" as comprising multiple baseline areas, as arbitrary, capricious, and not in accordance with the law under the Administrative Procedure Act (APA).[2] The Ninth Circuit held that the 2002 Nevada Rule is not arbitrary or capricious under the APA, and that the 2002 Nevada Rule correctly applied the "rest of state" or "entire state" reference to an area encompassing over 250 baseline areas within Nevada which were established when EPA implicitly accepted the baseline areas proposed by the State of Nevada in 1977.

The 1977 amendments to the Clean Air Act[3] established baseline areas within each state after requesting state proposals for the boundaries of such baseline areas. The baseline date for a given area "is established when a major stationary source or major modification located in that baseline area submits an application for a permit under the appropriate regulations."[4] The Clean Air Act has several sets of standards with respect to air quality, including the Prevention of Significant Deterioration (PSD) program and the National Ambient Air Quality Standards (NAAQS). NAAQS are the standards that are commonly required for compliance with the Clean Air Act. The purpose of the PSD standards is to maintain the air quality in areas that had very clean air at the beginning of the program. Generally, areas designated under the NAAQS program are allowed to have higher levels of pollution than areas designated under the PSD standards. The PSD standards apply only in areas that have been previously classified as attainment or unclassifiable. Until the baseline date has been established, minor sources operating in the baseline area are subject to NAAQS and not the PSD program. The EPA rule listing official designations and baseline areas for Nevada and other states listed nonattainment areas separately, and then lumped together the portion of the state in attainment into a "rest of state" or "whole state" category shown on only one line.

In December 2001, Oil-Dri Corporation proposed mining in Nevada near land belonging to the Reno-Sparks Indian Colony. Because the baseline area around the colony had not been triggered as of the date of the proposal, Oil-Dri was not required to comply with the PSD regulations of the Clean Air Act. Reno-Sparks Indian Colony requested that EPA "subject Oil-Dri to the PSD regulations of the Clean Air Act,"[5] because the terms "rest of state" and "entire state" indicated the baseline area was a large area encompassing almost the entire state, and therefore it had been triggered by previous applications from major sources.

In response to this request, EPA promulgated the 2002 Nevada Rule, which states that the terms "rest of state" and "entire state" refer not just to one large baseline area but to over 250 separate baseline areas.[6] Reno-Sparks then filed this request for review, arguing that the 2002 Nevada Rule was arbitrary and capricious under the APA.

The APA standard of review applicable to the Nevada Rule is that, unless the rule is "arbitrary, capricious, or otherwise not in accordance with the law," it should be upheld.[7] To determine whether Part I of the 2002 Nevada Rule was valid, the Ninth Circuit analyzed "(1) whether Nevada initially proposed the creation of 254 baseline areas in its 1977 submission to the EPA; (2) whether the EPA adopted Nevada's recommendation with respect to baseline areas; and (3) whether any intervening regulatory action by the EPA changed the nature of Nevada's baseline area designations."[8]

Focusing on Nevada's original proposal for baseline areas, the court found support for EPA's interpretation. In 1977, Nevada submitted to EPA a proposal that created baseline areas corresponding with already defined hydrographic areas that called for 254 separate baseline areas. EPA offered an internal memo and statement in its 1979 rule that showed it had adopted the classifications in Nevada's 1977 proposal. In addition, EPA began to use these designations without making any changes to the boundaries of the areas. EPA tables indicating the amount of pollutant in each baseline area for each state use asterisks when EPA changed a state's designation of a baseline area. The "rest of state" or "entire state" designations within the table for Nevada did not contain an asterisk, which indicated EPA had not combined any of the separate baseline areas that Nevada had proposed.[9] Further, the court found that for 254 separate baseline areas in Nevada, EPA had consolidated the classification that applied to most of the baseline areas, and labeled it "rest of state" or "entire state" to avoid having to list 254 separate areas with the same levels of pollutants. EPA used the term "rest of state" or "entire state" only once in each table, indicating that it did not intend "rest of state" or "entire state" to apply to more than one area.

Reno-Sparks contended that a 1991 EPA regulation "stat[ed] that the term 'rest of state' should be 'assumed' to constitute a single baseline area."[10] Specifically, the regulation states that "[w]ith respect to areas identified as 'Rest of State' it should be assumed that such reference comprises a single area designation for PSD baseline area purposes."[11] Although Reno-Sparks argued that this definition of "rest of state" should be applied to the "rest of state" designation for Nevada, the Ninth Circuit ruled that because the 1991 rule was not directed specifically at Nevada, did not purport to change the Nevada regulations, stated an assumption rather than a mandate, and contained no comment regarding its effect upon Nevada (implying that no one at EPA thought this definition of "rest of state" would be applied to Nevada), EPA was reasonable and not arbitrary or capricious in reaching its conclusion that the "rest of state" definition within the 1991 rule did not change the baseline areas in Nevada. Therefore, the Ninth Circuit concluded that Nevada's 1977 submission to EPA did propose the creation of 254 baseline areas, that EPA did adopt the baseline areas that Nevada had recommended, and that EPA had taken no regulatory action that would change the nature of these baseline area designations.

Part II of the Nevada Rule is titled "Clarification of the[particulate matter-10 micrometer (PM-10)] table" and discusses the controversy regarding the meaning of "rest of state" within the table, then states that "the term 'rest of state' refers to the hydrographic areas that had been approved by EPA as [total suspended particulate (TSP)] baseline areas in the State of Nevada."[12] In order to determine the validity of Part II of the 2002 Nevada Rule, the Ninth Circuit considered the regulatory history of PM-10. Originally the Clean Air Act required the measurement of TSP in the air; in 1993 this was changed to PM-10, which is a measure of particulate matter 10 micrometers or less in diameter. At that time EPA decided to use the same baseline areas for PM-10 as were already used for TSP. Although Reno-Sparks argued that a November 13, 2002 rule proposed to "'redesignate the current single unclassifiable area for [PM-10] into numerous individual areas to be consistent with area definitions for other pollutants,'"[13] the Ninth Circuit looked to the commentary surrounding the November 13 Rule. The court found that EPA responded to comments, stating that "'the State's 253 hydrographic areas had already been established as the PSD baseline areas for particulate matter. . . . Today's rule has no effect on the PSD baseline areas for PM-10 in the State.'"[14] Based on this comment, the Ninth Circuit concluded that the baseline areas in Nevada have always been divided in substantially the same way, and that there is not one large "rest of state" baseline area.

Finally, the Ninth Circuit ruled that EPA had not acted in violation of the APA by promulgating the 2002 Nevada Rule without allowing for notice and comment. Since the 2002 Nevada Rule clarified the existing law rather than changing existing law or creating new law, the court held the rule was "interpretive rather than legislative," and that the APA does not require notice or opportunity to comment before the enactment of interpretive rules.[15] Thus, the Ninth Circuit held that EPA's interpretation of the Clean Air Act in Parts I and II of the 2002 Nevada Rule was not arbitrary, capricious, or contrary to the law under the APA and therefore denied Reno-Sparks's petition for review of the 2002 Nevada Rule.