Citizens for a Better Environment (CBE) brought an action against Union Oil Co. (UNOCAL), claiming UNOCAL had violated Clean Water Act effluent standards and water quality standards. Because UNOCAL had previously made a settlement payment to the State Regional Board to avoid an enforcement action, UNOCAL argued that the citizen suit was precluded under section 309(g)(6)(A) of the Clean Water Act and should also be dismissed for failure to state a claim since the order issued under the settlement effectively extended their compliance deadlines. The Ninth Circuit held UNOCAL had not paid a "penalty," that the order was not issued pursuant to a state law comparable to section 309(g), and the order issued did not modify UNOCAL's permit. Thus, the court did not bar the citizen suit.

UNOCAL, along with six other petroleum refineries in the Bay Area, filed a state suit seeking to set aside the orders imposing final selenium limits by the California Regional Water Quality Control Board (Board) on the ground that the Board's listing of the San Francisco Bay Area as impaired bodies of water violated the Clean Water Act. The refineries and the Board reached a settlement in 1993 whereby the Board issued a cease and desist order (CDO), which extended the refineries' deadline for meeting the selenium limits from 1993 until 1998. In exchange the refineries dismissed their lawsuit and made a $2 million payment to the state, of which UNOCAL contributed $780,000. After this settlement, CBE filed suit against UNOCAL for violating effluent and water quality standards found in its National Pollution Discharge Elimination System (NPDES) permit. UNOCAL then moved to dismiss the action.

In order for UNOCAL's argument under section 309(g)(6)(A)(iii) to prevail, it had to prove 1) that the CDO issued by the Board was "a final order not subject to further review," 2) it had paid a "penalty," and 3) such penalty was "assessed under [subsection 309(g)], or such comparable state law."[1] The court found that the $780,000 payment UNOCAL made was not a penalty, but a settlement payment made to avoid enforcement action by the Board. In its decision the court noted not only did the CDO refer to it as a payment and not a penalty, but also UNOCAL insisted on characterizing it as a payment to avoid any stigma in the public eye.

UNOCAL next argued that even though the CDO was issued under California Water Code (CWC) section 13301, which governs cease and desist orders, and not specifically under CWC section 13385, which gives the Board authority to impose civil penalties, that because section 13301 was in the "same statutory scheme" as section 13385 that a penalty was assessed under "comparable state law." The court rejected this reasoning which UNOCAL had taken from North & S.River Watershed Ass'n v. Scituate.[2] The court reasoned that this interpretation of "comparable state law" would result in state administrative enforcement actions having a broader preclusive effect on citizen suits than EPA administrative actions and concluded that the penalty must be assessed under the specific provision of state law that is comparable to section 309(g) and not merely under the "same statutory scheme."

The court also concluded that section 309(g)(6)(A)(ii) did not apply because the Board's enforcement action had been concluded and, thus, the Board was no longer "diligently prosecuting an action" under comparable state law. UNOCAL's final argument was that the CDO issued by the Board effectively modified UNOCAL's NPDES permit to extend the compliance deadline for the selenium limit until 1998, and, thus, they were not in violation of an effluent standard that CBE could sue to enforce. The court explained that the extension of the compliance deadlines was similar to an exercise of prosecutorial discretion and that this did not suspend the limits of the NPDES permit. The court also pointed out that there were regulations governing the modifications of NPDES permits, and these procedures were not followed. Therefore, the CDO did not modify the terms of UNOCAL's permit, and the court allowed CBE's suit to proceed.