Environmental, industrial, and municipal groups challenged a final rule issued by the United States Environmental Protection Agency (EPA) under the Clean Water Act (CWA)[1] in three independent actions in three federal courts of appeals. The actions were consolidated and heard before a Ninth Circuit panel. After the panel issued its opinion,[2] petitioners requested rehearing en banc. The Ninth Circuit panel vacated its previous opinion, replaced it with this opinion, and denied the petition for rehearing with one judge dissenting.

The Texas Cities Coalition on Stormwater and the Texas Counties Stormwater Coalition (collectively municipal petitioners), the Environmental Defense Center and the Natural Resources Defense Council (collectively environmental petitioners), and the American Forest and Paper Association and the National Association of Home Builders (collectively industrial petitioners) challenged EPA's Phase II rule instructing certain small construction sites and small municipal storm sewer systems to comply with the requirements of the CWA's National Pollutant Discharge Elimination System (NPDES).[3] After considering the petitioners' 22 challenges, the Ninth Circuit remanded the rule to EPA to address three parts of the rule relating to issuing notices of intent for general permits and a fourth part of the rule pertaining to forest roads. The court dismissed all other challenges to the rule.

Stormwater runoff is a major source of water pollution in the United States. Stormwater contains contaminants from industrial facilities, construction sites, and urban development, as well as from illicit discharges into sewer systems. The CWA requires any person who discharges pollutants from a "point source" into the nation's waters to obtain an NPDES permit.[4] Point sources include "any discernible, confined and discrete conveyance" such as a pipe, well, or vessel, and include storm sewers.[5] Congress amended the CWA in 1987 to regulate stormwater runoff pollution and require that any person conducting industrial activity and discharging stormwater into medium or large-sized municipal sewer systems obtain an NPDES permit.[6] This legislation was to be implemented in two phases: Phase I, promulgated in 1990, regulates large discharge sources, leaving to Phase II the regulation of sources of discharge not covered under Phase I.[7] EPA's Phase II Rule requires NPDES permits for discharges from small municipal separate storm sewer systems (MS4s) and from small construction sites--those between one and five acres in size.[8] A small MS4 can obtain a permit to discharge by submitting an individual management plan covering six specified categories,[9] by submitting a notice of intent that it will comply with a general permit that already exists,[10] or by seeking a permit that does not require the MS4 to regulate a third party.[11] Small construction sites can apply either for an individual permit or for coverage under an existing general permit.[12] When EPA issued its final Phase II rule in October 1999, various challenges from industries, municipalities, and environmental groups arose, culminating in this appeal.

The Ninth Circuit has jurisdiction to review EPA regulations under section 509 of the CWA.[13] The court began by evaluating the municipal petitioners' challenge that EPA exceeded its statutory and constitutional authority by forcing small MS4s to regulate third parties in order to receive a permit under the Phase II Rule. The municipal petitioners first claimed that EPA exceeded its authority under the CWA because Congress did not explicitly include permitting as an element of the program to regulate small MS4s, and thus intended to exclude permitting from EPA's authorized duties. CWA section 402(p)(6)[14] of the CWA outlines EPA's duty to create a program to regulate the Phase II point sources. The Ninth Circuit stated that although permits were not listed in the statute, the language was nonexclusive and Congress's silence was more reasonably interpreted as giving EPA the flexibility not to use permits, rather than barring EPA from using permits, especially given the temporary moratorium on permits for Phase II dischargers also outlined in the statute.[15] The court also dismissed the municipal petitioners' argument that the structure of the CWA implies that permits are only required for large and medium MS4s. The court stated that the wording of CWA section 402(p)(3)[16] of the CWA could be interpreted as applying the permit requirement to all types of MS4s, and concluded that EPA did not exceed its statutory authority in requiring permits as part of the Phase II Rule.

The municipal petitioners also raised two constitutional challenges to the Phase II Rule. They first argued the rule violated the Tenth Amendment by requiring MS4s to regulate third parties. Under the Tenth Amendment, the federal government cannot compel states to implement federal regulatory programs, including compelling states to regulate third parties. The federal government can, however, "encourage [s]tates and municipalities to implement federal regulatory programs."[17] In this case, the Phase II Rule gives a small MS4 three choices by which it can obtain a permit: giving EPA a notice of intent that it will comply with an existing general permit, applying for an individual permit, or applying for an individualized permit under the program for large and medium-sized MS4s. The first two options require the MS4 to implement six "Minimum Measures," which include eliminating illicit discharges and reducing pollution from construction sites and development activities.[18] The municipal petitioners contended that these requirements unconstitutionally forced them to regulate third parties. However, the Ninth Circuit held that because MS4s could choose to apply for a permit under Phase I without implementing the Minimum Measures, the permit system did not "compel" the state and thus did not violate the Tenth Amendment.[19]

The Ninth Circuit also rejected the municipal petitioners' argument that the Phase II Rule violated the First Amendment[20] because one of the Minimum Measures required small MS4s to educate the community about the impacts of stormwater pollution on water bodies.[21] They claimed that EPA's regulation forced them to deliver messages they might not want to deliver. The Ninth Circuit characterized the permit requirements as a regulatory scheme, distinguishable from protected speech. Relying on three characteristics outlined in Glickman v. Wileman Brothers and Elliott, Inc.,[22] the court held that the Phase II Rule did not violate the First Amendment. First, the court found that the Phase II Rule did not restrain the MS4s' freedom to communicate a message to an audience. In addition, the rule did not force the MS4s to endorse any political or ideological positions. Finally, while the regulation may require some type of speech, it did not compel the MS4s to engage in any particular speech.

The municipal petitioners' final argument was that EPA did not follow the notice and comment procedures of informal rule-making under the Administrative Procedure Act (APA).[23] The APA requires the agency give notice of a proposed rule,[24] which the court has interpreted to mean that a final rule be anticipated from reading the proposed rule.[25] The municipal petitioners claimed that the Phase II Rule was not a "logical outgrowth" of EPA's proposed rule because the proposed rule did not contain the alternative of obtaining a permit under the Phase I permitting scheme.[26] The Ninth Circuit held that the alternative permitting option contained elements that were all described within the proposed rule, and that the municipal petitioners had the opportunity to object to aspects of the Phase II Rule during the notice and comment period.

After reviewing the municipal petitioners' arguments, the court next turned its attention to the environmental petitioners' arguments. The environmental petitioners argued that the permit system allowed municipalities to obtain permits in a way that creates "an impermissible self-regulatory system" because it lacked proper agency and public oversight.[27] The Phase II Rule allowed dischargers to obtain permission to discharge under an existing general permit by filing a notice of intent (NOI) and addressing the Minimum Measures.[28] The NOIs, which are not reviewed by EPA prior to discharge, contain a pollution control program to "reduc[e] pollutants to the 'maximum extent practicable.'"[29] The environmental petitioners claimed that granting permits based on these unreviewed NOIs violated the CWA because EPA failed to assure that the dischargers are actually reducing pollution to "the maximum extent practicable."[30]

The court agreed with the environmental petitioners, finding that the Phase II Rule was contrary to congressional intent. The court applied the test from Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc.[31] to determine whether Congress's intent was unambiguously expressed in the CWA, and if that intent was not clear, whether EPA's interpretation of the CWA was reasonable.[32] The Ninth Circuit found that Congress's intent was clear in the language of the CWA and that EPA could not issue discharge permits unless the permits contained controls that would "reduce the discharge of pollutants to the maximum extent practicable."[33] The permits for small MS4s under the Phase II Rule did not contain these controls because there was no review to determine whether the measures a small MS4 implemented would actually reduce discharges appropriately. The Ninth Circuit rejected this portion of the Phase II Rule because it was in opposition to Congress's intent.

The court then addressed the environmental petitioners' argument that the Phase II Rule did not give the public notice or opportunity to be heard regarding the NOIs. The CWA requires that permit applications and permits issued under the NPDES permit system be available to the public[34] and that there must be a public hearing before permit approval.[35] The Ninth Circuit noted that Congress clearly required the CWA's public notice and hearing provisions to apply to NOIs because NOIs function as permit applications, subject to these requirements. The court then considered whether the NOIs were actually available to the public and found that they were not. Although one of the Minimum Measures addressed public participation, dischargers were only required to design a program that complies with state, tribal, and local constraints. The Ninth Circuit also found the existence of the Freedom of Information Act[36] was not enough to satisfy the public availability requirement because that Act only applies to documents in EPA's possession, not those in the possession of state, tribal, or local authorities. Likewise, the court found the availability of NOIs under state freedom of information acts insufficient to comply with the CWA because states varied in their public records laws. Holding that certain and uniform availability of NOIs under the Phase II Rule was lacking, the court vacated the part of the Phase II Rule applicable to issuing NOIs under the general permit option.

The environmental petitioners also challenged EPA's failure to designate particular industrial sources of stormwater pollution (Group A sources) and forest roads as major sources of stormwater pollution as arbitrary and capricious. The arbitrary and capricious standard[37] requires the agency to articulate "a rational connection between the facts found and the conclusions made."[38] When evaluating the possible targets of the Phase II Rule, EPA considered additional categories of dischargers other than small MS4s and construction sites. Group A facilities were not regulated under Phase I for administrative reasons, but were very similar to facilities that were regulated under Phase I.[39] The environmental petitioners claimed the Group A facilities should have been included under the Phase II Rule because their stormwater discharges are the same as facilities regulated in Phase I, and thus EPA's decision not to regulate those facilities was arbitrary and capricious. The court found that EPA had provided rational reasons for deciding not to regulate Group A facilities under Phase II but instead decided to allow local and regional authorities to regulate those dischargers. The court was "troubled" that EPA made this decision on an administrative basis,[40] but deferred to EPA's regulation because the CWA does not require EPA to regulate Group A sources under the Phase II Rule.

The Ninth Circuit next addressed the environmental petitioners' claim that EPA's decision not to regulate forest roads under the Phase II Rule was arbitrary and capricious. The petitioners claimed the decision was contrary to the evidence EPA had collected showing that forest roads are a serious source of erosion. EPA claimed that the Ninth Circuit did not have jurisdiction to consider this claim because the environmental petitioners' suit was not timely under the CWA,[41] and the environmental petitioners did not comment on this issue extensively enough during notice and comment to confer jurisdiction.[42] EPA pointed to the sivicultural regulations it established in 1976 that defined road runoff as nonpoint sources to support the agency's claim that the suit was untimely. The court, however, noted that the challenge was not to the 1976 regulations, but to the Phase II Rule, and that the challenge was timely. The court also found that the comments during the rulemaking period were substantive, giving the court jurisdiction, in addition to EPA's knowledge about the problem of forest road erosion when it conducted its rulemaking. The court remanded this issue to EPA to allow the agency to make a decision about the forest roads and provide support for its decision.

The court then turned to the industry petitioners' arguments. As a preliminary matter, the Ninth Circuit examined whether one of the petitioners, the American Forestry and Paper Association (AFPA), had standing to bring its claims. The court held that AFPA did not have standing because it could not prove that it had suffered a cognizable injury. Although AFPA demonstrated an interest in forest roads, EPA had not yet regulated those roads and thus AFPA had not been injured. The court proceeded to consider claims of the National Association of Home Builders, which did have standing.

The Ninth Circuit first addressed the industry petitioners' argument that the CWA required EPA to consult with states on the Phase II Rule,[43] and EPA had not done so. The industry petitioners claimed that, although EPA circulated drafts of the rule to the states, this action did not meet the consultation requirement for four reasons: 1) the drafts were circulated too far in advance of the rulemaking, 2) EPA based its rulemaking on information from sources other than the states, 3) the consultation should have gone beyond notice and comment because Congress intended to add extra requirements with the consultation requirement, and 4) consultation on the Phase II Rule after it was promulgated was ineffective. The court concluded that EPA did fulfill the consultation requirement because it submitted a draft of the first report on the rule to the states and other stakeholders and revised the Phase II Rule with the comments it received from that process. EPA also established a committee--comprised of representatives from the National Association of Home Builders, the states, industry groups, and environmental groups--which provided comments on the creation of the Phase II Rule. The court held that this exhibited substantial consultation and fulfilled the requirements of the CWA.

The court next addressed a series of challenges to the designation of small MS4s and construction sites subject to the Phase II Rule. The industry petitioners, joined by the municipal petitioners, argued that the EPA improperly designated small MS4s and construction sites for regulation under the Phase II Rule by basing its determination on factors other than those uncovered by the studies conducted pursuant to CWA section 402(p)(5).[44] The industry petitioners claimed that EPA based its decision on public comments received after a court invalidated the original size of construction sites covered in the Phase I Rule, as well as extra research discussed in the final Phase II Rule, both factors not derived from section 402(p)(5) studies. EPA countered that the CWA did not limit it to relying only on the section 402(p)(5) studies and that the agency reinforced those studies with other information. In analyzing this claim, the Ninth Circuit addressed the preliminary challenge to the standing of the industry petitioners raised by the Natural Resources Defense Council (NRDC). NRDC argued that the industry petitioners did not have standing because the petitioners could not prove that they would be regulated as a result of the procedural injury they claimed. The court held that while industry petitioners could not prove that they would have avoided regulation if EPA had followed the proper procedure, the potential of that outcome established procedural injury sufficient to give them standing. Turning to the merits of the industry petitioners' claim, the court then held that Congress did not intend to limit EPA to only the section 402(p)(5) studies, and affirmed the Phase II Rule on this claim.

The municipal petitioners also argued that EPA's decision to use the Census Bureau's definitions of urbanized areas to designate small MS4s for regulation under the Phase II Rule was arbitrary and capricious. The petitioners claimed that EPA did not demonstrate a quantified basis for its choice and that the agency did not have evidence that urbanized areas, which are areas of high population density, should be regulated under the Phase II Rule. The agency's decision was based on a record showing a connection between urban stormwater runoff and water pollution. The court found that absolute accuracy about the population of an area regulated under Phase II was not necessary. The court treated EPA's decision with "great deference" because it was based on a technical analysis, and held that the agency's decision was proper.[45]

The industry and municipal petitioners both argued that EPA's application of the Phase II Rule to construction sites between one and five acres was arbitrary and capricious. In an earlier case, the Ninth Circuit remanded EPA's decision to regulate construction sites of at least five acres.[46] The petitioners claimed that the new Phase II Rule definition was a reaction to the earlier remand decision and was not supported by scientific data. The petitioners claimed that the uncompromising inclusion of all small construction sites was arbitrary because EPA did not take the frequency of harmful impacts into account, consider that the harm small construction sites cause is in the aggregate, or address the wide variation in impact from construction sites. EPA countered that the evidence unequivocally showed that small construction sites have negative impacts on water quality and defended its use of studies on large construction sites to extrapolate to small construction sites. The Ninth Circuit applied the substantial evidence standard to determine whether EPA showed enough evidence that a reasonable person could accept the evidence as supporting EPA's conclusion. The court found EPA's explanations for its decision consistent with the evidence and held that the decision was not arbitrary or capricious.

The court then considered the industry petitioners' argument that EPA impermissibly supplemented the permit regulations by allowing waivers for small construction sites that are unlikely to have negative impacts on water quality. The petitioners claimed that this program shifted the burden to operators of construction sites to prove they will not negatively impact water quality, and that this shift was unreasonable given that EPA had not established that specific sites would have negative impacts. The court reviewed this claim under the arbitrary and capricious standard and found the waiver system reasonable.

The court likewise held that EPA's decision to regulate all small construction sites was reasonable. The industry petitioners claimed that EPA's regulation of all small construction sites was impermissible because the agency had declined to regulate other potential sources of stormwater discharge due to insufficient information on them, but then decided to regulate small construction sites based on no more information than it had for other sources. The petitioners argued that this decision was arbitrary and capricious because EPA used a different standard for regulating construction sites than it did for other sources. Again the court deferred to EPA's decision, noting that the industry petitioners had no evidence that pollution from sources EPA decided not to regulate was similar to pollution from small construction sites.

The court next addressed a challenge to EPA's authority to add new sources of pollution to Phase II regulation in the future. The industry petitioners objected to EPA's ability to retain authority to regulate stormwater dischargers not regulated under the Phase II Rule in the future,[47] claiming that CWA section 402(p)(6) of the CWA did not authorize a case-by-case determination of regulatory authority or allow EPA to have continuing authority to regulate new sources. Furthermore, petitioners noted that the Phase II Rule allows EPA to add future designations without consulting with states and without reliance on the section 402(p)(5) studies. The court accorded Chevron deference to EPA's decision, finding that section 402(p)(6) broadly authorizes EPA to protect against water pollution and that section 402(p)(2)(5) allows EPA to conduct a case-by-case analysis of polluters. The court found that the plain language of the statute supports EPA's interpretation because section 402(p)(2)(5) states that EPA has continuing authority to designate dischargers to regulate. The court also found the industry petitioners' claim was not ripe because EPA had not yet designated a source under this authority.

Industry petitioners alternatively argued that EPA's retention of future designation authority violates the nondelegation doctrine. The petitioners argued that if the CWA did actually authorize EPA to regulate dischargers in the future, then Congress unconstitutionally gave EPA its legislative power. The petitioners relied on American Trucking Ass'ns v. United States Environmental Protection Agency (American Trucking)[48] where the D.C. Circuit held an EPA regulation invalid because although EPA had a reasonable basis for establishing the standards it did, had "articulated no 'intelligible principle' to channel its application of these factors," therefore violating the nondelegation doctrine.[49] The Ninth Circuit held that the industry petitioners' argument failed because American Trucking was reversed by the Supreme Court in Whitman v. American Trucking Ass'ns.[50] The Supreme Court rejected the concept that an agency can make a statute a constitutional delegation through its interpretation. Therefore, the question is not whether EPA unconstitutionally interpreted the relevant portion of the CWA, but whether section 402(p)(2)(5) itself is unconstitutional. Even though the industry petitioners did not raise this question of constitutionality, the court held that the CWA is a constitutional delegation.

Industry petitioners then argued that the retained authority violated the APA, claiming that EPA did not provide the notice required of it before promulgating the rule.[51] The petitioners point to the discrepancy between the proposed rule, which would have allowed EPA to designate targets of regulation on a case-by-case basis where the discharge played a role in a violation, and the final rule, which allowed EPA to designate targets of regulation on a case-by-case basis where "the discharge, or category of discharges within a geographic area" played a role in a violation.[52] The court again applied the logical outgrowth standard and determined that EPA gave notice that it was considering future designations based on geographic area and the petitioners had an opportunity to comment on this.

Finally, the court addressed the industry petitioners' argument that EPA failed to fulfill the requirements of the Regulatory Flexibility Act (RFA).[53] The RFA compels federal agencies to conduct an analysis of the effects a proposed rule would have on small business entities, unless the rule will not have "a significant economic impact on a substantial number of small entities."[54] The agency must have a factual basis for claiming that the rule will not have this effect. EPA made that claim in this case but voluntarily complied with the RFA. The industry petitioners claimed the Phase II Rule would result in significant costs and EPA failed to consider the effect of the rule on all small entities affected. EPA and intervenor NRDC argued that the industry petitioners considered the total costs of the rule, not only the costs small entities would bear, and that EPA only had to comply with the RFA if it found that the Phase II Rule would affect a substantial number of small entities. The Ninth Circuit agreed with EPA and held that it was not required to conduct an analysis under the RFA. The court also stated that even if EPA was required to the conduct the analysis, it substantially assessed the rule's impacts on small entities. Any noncompliance with the RFA would have been harmless error.

In summary, the Ninth Circuit remanded four aspects of the Phase II Rule to EPA: 1) EPA's failure to make review of NOIs mandatory under the general permit option, 2) EPA's failure to make the NOIs public, 3) EPA's failure to subject NOIs to public hearing, and 4) EPA's failure to include forest roads in the Phase II Rule. The court dismissed the petitioners' other arguments.

Judge Tallman concurred with the majority's opinion with the exception of the court's decisions that the general permit system of the Phase II Rule was arbitrary and capricious. Judge Tallman viewed EPA's general permit system with NOIs as a reasonable interpretation of its authority under the CWA. He first determined that the CWA does not clearly show Congress's intent regarding a general permit system or how to treat NOIs. In light of unclear congressional intent, he argued, the court should defer to EPA's expertise on the subject. Judge Tallman pointed out that a general permit system had been approved by the D.C. Circuit and, if the general permit system was allowed, the public hearings for NOIs were not necessary. Under the general permit system, EPA is not required to review every NOI because the general permit is the source of the dischargers' obligations. Judge Tallman objected to the majority's failure to defer to EPA's decision and claimed that the court was making policy rather than ruling on a dispute.