Conservation groups Defenders of Wildlife and Center for Biological Diversity, and concerned citizen Craig Miller (collectively Defenders) petitioned the Ninth Circuit for review of the United States Environmental Protection Agency's (EPA) decision to transfer Clean Water Act (CWA)[1] National Pollution Discharge Elimination System (NPDES)[2] permitting authority within Arizona to the state. The decision was based on a Biological Opinion (BiOp) issued by the United States Fish and Wildlife Service (FWS) premised on EPA lacking authority to consider the impact on endangered and threatened species of eliminating Endangered Species Act (ESA)[3] consultation when transferring authority to the state. The Ninth Circuit held that the ESA required EPA to consider the impact of its decision on endangered and threatened species when deciding to transfer NPDES permitting authority to a state, and that EPA's decision was arbitrary and capricious. The court vacated EPA's decision to grant permitting authority to Arizona and remanded it back to the agency for further consideration.

Under the CWA, a state may apply to EPA to administer the NPDES permitting program within its borders.[4] Section 7 of the ESA requires federal agencies to insure that any action "authorized, funded, or carried out by such agency" will not "jeopardize the continued existence of any endangered species or threatened species or result in the destruction or adverse modification of [critical] habitat of such species."[5] NPDES permits issued by EPA, as federal agency actions, are subject to section 7 consultation [6] but state-issued NPDES permits are not. EPA and FWS have a Memorandum of Agreement under which EPA and FWS communicate federal endangered species concerns to a state regarding NPDES permits once the state has assumed permitting authority. [7] While the agencies can encourage states to "to facilitate the involvement of permittees" in mitigating against harm to threatened or endangered species, states are not required to follow these recommendations.[8]

When Arizona applied to obtain NPDES permitting authority, EPA initiated a section 7 consultation with FWS because the transfer decision was an action which could affect listed species.[9] FWS staff expressed concern that Arizona would issue NPDES permits without requiring mitigating measures to protect critical habitat for endangered species. FWS concluded that the loss of section 7 consultation in NPDES permitting that would result from the transfer of the program from EPA to the state must be accounted for in the BiOp's effects analysis. However, EPA determined it did not have the legal authority to regulate impacts unrelated to water quality. To resolve the difference in agency opinion, EPA and FWS engaged in a national-level consultation. The resulting BiOp recommended EPA approve the transfer of permitting authority to Arizona. While recognizing the decision would result in the discontinuation of section 7 consultation when issuing NPDES permits in Arizona, the BiOp concluded EPA's transfer decision would not result in diminished species protection. The BiOp's recommendation was based on the interpretation of EPA's section 7 consultation consultations in NPDES permitting to have "only an attenuated causal link to the reduction in Federal [ESA] conservation responsibilities,"[10] and on the belief that other federal and state laws provided adequate protection for endangered species.

Defenders filed a petition for review of the decision with the Ninth Circuit alleging EPA failed to consider adequately the impact of the transfer on endangered and threatened species and that EPA's reliance on the BiOp was arbitrary and capricious under the Administrative Procedure Act (APA).[11] Defenders filed an additional suit in federal district court alleging, among other claims, that the BiOp did not comply with ESA standards. The district court ruled the Ninth Circuit had exclusive jurisdiction over the BiOp,[12] severed this claim from the other district court claims, and ordered it consolidated with the suit before the Ninth Circuit challenging the permitting transfer decision.

The Ninth Circuit first determined it had subject-matter jurisdiction to review both the transfer decision and the BiOp. The CWA authorizes any person to seek review of an EPA decision to transfer NPDES permitting authority to a state in the circuit affected by the transfer.[13] Arizona Chamber of Commerce, intervening on behalf of EPA, argued the CWA authorized review of the transfer decision, but not the BiOp which formed the basis for the decision. The Ninth Circuit disagreed, noting that the Supreme Court has determined biological opinions to have a "virtually determinative effect" on agency actions.[14] Because the reasoning found in the BiOp had a profound effect on the agency action under review, the Ninth Circuit determined that its evaluation of a biological opinion's "evidentiary and analytic basis [was] thus integral to reviewing the EPA's final decision."[15]

The Ninth Circuit next determined Defenders had standing to file its claim against EPA. The court applied a three-part test: 1) personal injury, 2) traceable to allegedly unlawful conduct by the defendant, that may be 3) redressed by the relief requested.[16] Injury in an environmental case may be shown by harm to an individual's aesthetic or recreational interest in a species or place.[17] Defenders' members live in Arizona and regularly photograph and observe endangered species in the state, including in regions where significant real estate development is taking place which requires water pollution permits. In the past, ESA consultations have led to permits being issued contingent on mitigation measures to protect endangered and threatened species. The loss of the consultations and resulting mitigation measures would harm both species and Defenders members' activities involving the harmed species. The alleged injuries are traceable to the removal of protections to species and habitat provided by section 7 when permitting authority was transferred to Arizona. The alleged injuries were redressable by a court order vacating or mitigating the transfer decision and reinstating section 7 consultation in NPDES permitting.

The Ninth Circuit reviewed the EPA decision under the APA's arbitrary and capricious standard of review.[18] An agency action is arbitrary and capricious under the APA if it is "not in accordance with law"[19] or relies on internally inconsistent reasoning.[20] When assessing whether an agency decision was arbitrary and capricious, the court will examine whether the decision was rational, based on the consideration of relevant factors, and within the scope of the agency's statutory authority.[21] Defenders alleged that EPA's decision to rely on the BiOp was arbitrary and capricious, due to the BiOp's flawed reasoning. Thus, the agency failed to satisfy its obligation under the ESA to "insure" its actions were "not likely to jeopardize" endangered species or critical habitat.[22]

The Ninth Circuit held EPA's approval of Arizona's transfer application did not survive arbitrary and capricious review because the agency's decision was not internally consistent and relied on legally contradictory positions. While EPA had consistently considered that its decision to transfer permitting authority to a state may affect listed species and critical habitat and thus required section 7 consultation, the agency in its brief cited American Forest & Paper Association v. U.S. Environmental Protection Agency[23] to support the position that it lacks authority to protect species when it decides to transfer the NPDES program to a state. EPA's obligation to engage in a section 7 consultation in making its transfer decision and the reasons the agency gave in the BiOp to support its conclusion the transfer would not have an effect on species were inconsistent. An agency must undergo section 7 consultation for an action which "may affect" listed species.[24] The agency is obliged to mitigate harm to species if FWS determines the agency's action is "likely to jeopardize" listed species or "adverse[ly] modif[y]" habitat.[25] The BiOp reasoned EPA's action could not effect species because 1) the agency lacked authority to deny transfer applications due to ESA concerns; 2) any impact on species after the transfer would result from "Congress' determination that states have no consultation or mitigation obligations" not the transfer decision; and 3) the future impacts on species would be caused by newly-permitted real estate developments, and the transfer decision was not a cause of the developments.[26] The Ninth Circuit held EPA's belief that it must undergo section 7 consultation for its transfer decision but was not permitted to take the results of that consultation into consideration in making its decision to be contradictory, thus the resulting decision was "not the result of reasoned decisionmaking."[27] In addition, the Ninth Circuit held that the assertion in the BiOp that private development, not EPA's transfer decision, would cause the harm to species disregards the "obvious cause analysis" that the impact of private development will differ depending on whether permits are issued by a federal or state authority and "thus fails the reasoned decisionmaking standard."[28] The court remanded the transfer decision back to the agency for a better explanation of its decision.

The Ninth Circuit next addressed whether EPA had statutory authority to protect species. Under the ESA, federal agencies have a statutory obligation to protect listed species and undergo section 7 consultation if the agency engages in an action it has discretion over and that there is a "nexus" between the action and a direct or indirect impact "likely to jeopardize" any listed species or habitat.[29] An agency will be held accountable for a direct or indirect negative impact on listed species only if the agency has control over the action. If an agency is unable to prevent an effect of its actions because it has limited statutory authority over those actions, "the agency cannot be considered a legally relevant 'cause of the effect."[30] In Tennessee Valley Authority v. Hill,[31] the Supreme Court determined that the legislative history of the ESA supports a reading of the statute which gives agencies additional authority to protect listed species beyond their own governing statutes.[32] An agency's authority to "insure" its actions will not harm species "is an obligation in addition to those created by the agencies' own governing statute."[33] Thus, the ESA vested additional authority in EPA above its own statutory mandate to ensure its actions would not jeopardize species.

Because section 7 applies to discretionary agency actions, the court addressed whether EPA's decision to transfer permitting authority to Arizona was discretionary. The ESA requires agencies to undergo section 7 consultation for any action in which the agency has discretion, defined as those actions authorized, funded, or carried out by that agency.[34] Intervening parties on behalf of EPA argued that because the CWA specifies the EPA "shall approve" state applications for NPDES permitting that meet the statutory requirements,[35] there is no exercise of agency discretion in the transfer decision. The Ninth Circuit rejected this argument because 1) EPA did not itself interpret its regulations to mean that its transfer decision was not discretionary, and 2) the challenged action was exclusively within EPA's decision-making authority. The Ninth Circuit determined that because EPA's permit transfer decision fell within the "authorized, funded, or carried out" criteria in section 7(a)(2),[36] thus rendering the BiOp's reasoning inconsistent with the statute.

The Ninth Circuit noted that this was the first case in which it addressed whether section 7 gave agencies additional authority beyond their governing statutes, and noted that there is a split in the circuits on this issue. Both the First Circuit and the Eighth Circuit have held that section 7 gave federal agencies additional authority to protect species. Under this reasoning, when agencies act under different statutes, they must also comply with the ESA.[37] However, the D.C. Circuit and the Fifth Circuit have held that the ESA does not confer additional authority on agencies.[38] The Ninth Circuit declined to follow the D.C. Circuit 's reasoning because it failed to recognized the distinction between the protective nature of section 7(a)(1) and the no-harm mandate under section 7(a)(2). Instead, the D.C. Circuit relied on section 7(a)(1) its Platte River opinion, which instructs agencies to affirmatively "utilize their authorities" to protect species, rather than section 7(a)(2), which directs agencies to "insure" their actions do not harm species.[39] The D.C. Circuit also failed to discuss both the 1978 amendment to the ESA creating exemptions to section 7(a)(2)[40] and legislative history indicating Congress rejected attempts to otherwise limit section 7. The Ninth Circuit declined to follow the Fifth Circuit because its reasoning was based on the rejected Platte River reasoning. In addition, the Fifth Circuit did not consider EPA to have sufficient authority to take action pursuant to the results of a section 7 consultation. The court found this reading of section 7(a)(2) be flawed because the ESA specifically gives an agency the authority to both consult and "insure" its actions will not harm species. It interpreted the statute to require an agency undertaking a discretionary action both consult with the FWA and "insure" that its actions will not jeopardize an endangered species.

After concluding EPA based its transfer decision on a flawed BiOp, the court next considered whether other analysis EPA relied upon could justify the transfer decision. It examined other analysis in the BiOp, EPA oversight of the Arizona Department of Environmental Quality (ADEQ) pursuant to the Memorandum of Agreement between EPA and FWS, the anti-take provisions of the ESA, and Arizona state law. Biological opinions are required to contain a detailed consideration of the likely impact of an agency action on listed species.[41] The BiOp EPA relied upon to make its transfer decision failed to include this detailed analysis. The Ninth Circuit found that the BiOp did not analyze the likely effect of future NPDES permits on specific species, despite the requirement that a BiOp must discuss the action's direct and indirect effects, as well as the "effects of other activities that are interrelated or interdependent with that action."[42] Although FWS staff expressed concern the loss of section 7 consultation in NPDES permits would have an adverse impact on individual species, the BiOp did not detail these concerns. The Ninth Circuit determined that the failure to consider the impact of the transfer decision on the specific species FWS expressed concern over was a failure to consider an important aspect of the decision.

Under the Memorandum of Agreement, EPA would use its CWA authority to review NPDES permits issued by ADEQ and identify those which raised issues regarding listed species. However, the Ninth Circuit determined that this was an inadequate substitute for section 7 consultation. In contrast to the ESA mandate that an agency take into account the effect of its actions on species, EPA does not have authority to consider the effects of NPDES permitting decisions on listed species in its oversight of state permits under the CWA.[43] Additionally, neither EPA nor FWS have statutory authority to require a state to revise problematic permits for species concerns; the agencies may only recommend a state revise its permit. While the court noted that state voluntary compliance with FWS recommendations to the same extent EPA must comply "might substitute for section 7 coverage," EPA did not have the basis to make that conclusion in its Arizona transfer decision without further analysis.[44]

The Ninth Circuit next determined that the ESA's anti-take provisions do not provide an adequate substitute for section 7 consultation. Section 9 of the ESA makes it a crime for anyone to "take" any listed species by killing or injuring the species,[45] while section 10 establishes an "incidental take" permit program, under which federal permits may be issued for activities which may result in the inadvertent taking of species, so long as there are sufficient mitigation measures.[46] These sections of the ESA apply to NPDES permit applicants regardless of whether the permit is issued by the federal or state government. However, the court reasoned that because the take provision only becomes relevant once a species has been killed, and incidental take permits are generally only applied for if there is a relatively certain threat a species will be killed by an activity, these are enforcement provisions and "after-the-fact enforcement cannot prevent threats to listed species the way section 7 can."[47] Thus, the take and incidental take provisions of the ESA are not adequate substitutes for section 7 consultation in the permitting process.

The Ninth Circuit found EPA's arbitrary and capricious reliance on the flawed BiOp to be a violation of its duty under section 7(a)(2) to "insure" its permit transfer decision would not jeopardize species. While an agency may satisfy arbitrary and capricious review for factual objections to an "admittedly weak" BiOp if the agency considered all available information and acted in reliance on the expert agency,[48] the BiOp at issue here involved legal flaws that do not require technical or scientific expertise. EPA's decision to transfer permitting authority to Arizona despite legal flaws in the BiOp was arbitrary and capricious because the BiOp was based on reasoning "not in accordance with the law."[49] EPA argued that evidence it relied on beyond the BiOp should be considered in the court's arbitrary and capricious review. First, the agency argued that its own Biological Evaluation took note of the loss of section 7 consultations in permitting decisions, and mentioned species protections available under the Memorandum of Agreement, section 9, EPA oversight of state permits, and the Arizona native plant laws. However, the court found the Biological Evaluation did not add anything to the BiOp because it was primarily focused on CWA requirements, and failed either to discuss the limitations of the section 7 alternatives, or to consider both the impact of the loss of section 7 consultation on species and potential mitigation. Second, the agency relied on a document issued by the Arizona Game and Fish Department assuring species would not be harmed by the loss of section 7 consultations. The court finds this evidence to be inadequate because it neither indicated how the state would be bound by the letter, nor did it explain the authority under which the state had authority to issue protections as broad as those available under the ESA. The Ninth Circuit found both pieces of evidence offered by EPA failed to sufficiently supplement the BiOp.

Finally, the court assessed whether there are adequate protections for species under Arizona state law to compensate for the loss of section 7 consultation. One Arizona law, noted in the BiOp, prohibits the taking of native plants from state land without complying with certain procedures.[50] The Ninth Circuit did not find this law to be an adequate substitute for section 7 because it neither prohibited the taking of plant species, nor did it apply to animal species at all.

In conclusion, the Ninth Circuit vacated EPA's decision to approve transfer of NPDES permitting authority to Arizona on the grounds that the decision was arbitrary and capricious. It held EPA failed to recognize its own authority to deny a NPDES transfer application because of its responsibilities under section 7(a)(2) to act on behalf of endangered species, and failed to discuss the effects of its decision to approve the transfer on listed species in Arizona. It remanded the transfer decision back to EPA for further consideration. The court transferred the challenge to the BiOp's validity back to the district court for proceedings consistent with the Ninth Circuit's holding that the BiOp was inadequate and legally flawed.

Judge Thompson dissented because he disagreed with the majority's conclusion that EPA had the authority to consider the impact of its transfer decision on endangered species. He believed that the majority applied a too-expansive interpretation of what constitutes a discretionary agency action. Specifically, he interpreted the CWA to permit EPA to consider only the nine factors listed in the statute when deciding to transfer NPDES permitting authority to a state. He concluded that if a state meets those factors, EPA has no discretion under the CWA to deny the transfer.[51] Because the transfer decision was not discretionary under this analysis, section 7 consultation would not apply to the decision.