In three consolidated cases, petitioners Texas Cities Coalition on Stormwater and the Texas Counties Stormwater Coalition (Municipal Petitioners), petitioners Environmental Defense Center and petitioner-intervenor Natural Resources Defense Council (Environmental Petitioners), and petitioners American Forest & Paper Association and the National Association of Home Builders (Industrial Petitioners) brought a facial challenge to the validity of the Phase II Rule of the United States Environmental Protection Agency (EPA) on constitutional, statutory, and procedural grounds.
The Phase II Rule mandates that discharges from small municipal separate storm sewer systems (small MS4s) and construction sites between one and five acres are subject to the permitting requirements of the National Pollutant Discharge Elimination System (NPDES) under the Clean Water Act (CWA). Stormwater runoff is subject to regulation under section 402(p) of the CWA, which requires NPDES permits for industrial stormwater discharges and discharges from some municipal storm sewer systems. Section 402(p)(1) prohibits permitting stormwater discharges not listed until EPA completes studies on them as mandated by section 405(p)(5). However, section 402(p)(6) directs EPA to develop a "comprehensive program to regulate such designated sources" and to "protect water quality." EPA promulgated the Phase II Rule pursuant to this congressional mandate.
In an opinion written by Judge Browning, the Ninth Circuit upheld all parts of the Phase II Rule against the parties' constitutional, statutory, and procedural challenges, except for EPA's failure to require review of notices of intent in the General Permit option and failure to provide for public participation in the NPDES permitting process.
The Municipal Petitioners primarily argued that EPA lacked statutory and constitutional authority to regulate small MS4s as proposed in the Phase II Rule. Statutorily, they argued that EPA was not authorized by section 402(p) of the CWA to develop a NPDES permit program for small MS4s because the provision's mandate to "establish a comprehensive program" specifically excluded permits from its list of regulatory methods. Judge Browning refuted this argument, finding the statutory language nonexclusive, and explaining that section 402(p)(1)'s prohibition on permitting until EPA studies were completed would have been superfluous under the Municipal Petitioners' interpretation. The court concluded that under Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., EPA's reasonable interpretation of section 402(p) to include a NPDES permit program was reasonable.
Alternatively, Municipal Petitioners asserted that the Phase II Rule violated the Tenth Amendment because it impermissibly forced municipalities to regulate third parties. Municipal Petitioners protested provisions of the Phase II Rule, "Minimum Measures," that directed MS4s to 1) prohibit non-stormwater discharge to the MS4 and implement enforcement action, 2) implement and enforce a program to reduce pollutants from small construction sites, and 3) enact regulations to control erosion and sedimentation, arguing that the Tenth Amendment prohibits federal law from requiring local entities to enact ordinances or regulatory measures. Under New York v. United States, and subsequent cases, the Tenth Amendment implicitly prohibits the federal government from compelling state and local governments to enact a federal regulatory program or from "'excessively interfer[ing] with the functioning of state governments.'" However, Judge Browning acknowledged permissible cases in which federal laws merely required states to choose between administering the federal program and allowing the federal government to regulate third parties directly.
Judge Browning concluded that the Phase II Rule did not violate the Tenth Amendment, reasoning that the Rule's measures constituted "reasonable steps" to minimize pollution of federal waters. He further explained that because MS4s had the option of not discharging at all, the federal government was constitutionally authorized to require state regulatory action in "exchange" for letting states discharge into the waters of the United States. Similarly, the court considered the "Alternative Permit" option provided by the Phase II Rule--which authorized MS4s to discharge based on the Phase I Rule--to be a constitutionally permissible alternative because the Phase I Rule did not require that MS4s regulate third parties. Judge Browning reiterated that the management programs required by the Phase I Rule, much like the Phase II Rule, were generally applicable and legitimately justified when MS4s discharge into federal waters. Judge Browning further upheld EPA's statutory authority to enact the Minimum Measures as a reasonable interpretation of the CWA under Chevron.
Municipal Petitioners further maintained that the Phase II Rule violated the First Amendment because the public education requirement and Minimum Measures impermissibly compelled municipalities to communicate federally-mandated messages. The court dismissed this argument, reasoning that the rule's broad mandate that MS4s educate the public about the hazards of improper waste disposal did not compel specific speech and was nonideological. Specifically, the court noted that based on the test set out in Glickman v. Wileman Brothers & Elliot, Inc., the Phase II regulations did not restrain the freedom of MS4s to communicate any message to the public. While the regulations did force MS4s to engage in some speech, they did not dictate what that speech actually was, and did not force MS4s to endorse any particular political views.
The Municipal Petitioners contended that EPA violated the Administrative Procedure Act (APA) in promulgating the Phase II Rule because the Alternative Permit option did not undergo notice and comment required for informal rulemaking. However, Judge Browning determined that the final Phase II Rule was a "logical outgrowth" of the proposed rule, and should be upheld because the premise of the Alternative Permit option was evident in the proposed rule, merely in a different form. 
The Ninth Circuit upheld the Environmental Petitioners'
challenge to the Phase II Rule because the General Permit option failed to
satisfy the CWA's mandate that permits call for controls to reduce pollutants
"'to the maximum extent practicable,'" and
failed to expressly require public participation in the NPDES permitting
process. Under the Phase II Rule, each notice of intent (NOI) to comply with a
general permit contains specific pollution control information, and the NOI
constitutes compliance with the
requirement that MS4s reduce pollutants to the "maximum extent practicable."
Environmental Petitioners claimed that the regulation violated the CWA because it failed to require that the permitting authority review the NOI to ensure that the facility is in fact reducing pollutants to the maximum extent practicable. MS4s could therefore impermissibly self-regulate. The court concluded that unreviewed NOIs were impermissible because the clear mandate of the CWA required meaningful review to ensure that each MS4 actually reduces pollutants to the maximum extent practicable. The court further ruled that the CWA clearly required that NOIs be subject to public review and hearings because, under the Phase II rule, NOIs contain substantive requirements and are the functional equivalent of permit applications. Thus, the court remanded the rule for further development in these areas.
The court rejected the Environmental Petitioners' challenge to the Phase II rule's failure to regulate "Group A" industrial sources and forest roads. With respect to Group A sources, Environmental Petitioners argued that EPA's exclusion of approximately 100,000 facilities was arbitrary because the agency did not provide individualized analyses of specific source categories within Group A, when EPA could have used information from Phase I permit applications to do so. EPA claimed that it did not have enough data regarding these sources to designate them for group and Phase II regulation. Judge Browning concluded that EPA's decision was not arbitrary because under Motor Vehicle Manufacturers Ass'n v. State Farm Mutual Automobile Insurance Co., EPA did not rely on factors Congress did not intend the agency to consider, fail to consider an important aspect of the problem, or put forth an implausible rationale.
Similarly, Environmental Petitioners alleged that EPA's decision not to regulate forest roads was arbitrary because the agency was aware, and had concluded, that erosion from forest roads was a primary cause of water pollution. Judge Browning declined to find the regulation arbitrary, however, because Congress intended the Phase II Rule to regulate stormwater pollution from industrial and municipal sources, not from agriculture or silviculture. The court upheld this distinction by deferring to EPA's interpretation of the CWA.
Judge Browning dismissed the American Forestry and Paper Association's (AFPA) claim for standing, ruling that the association was not imminently or actually threatened by any potential result in the case, as required by the Supreme Court's decisions in Lujan v. Defenders of Wildlife and Friends of the Earth, Inc. v. Laidlaw Environmental Services. The court ruled that AFPA did not have a legally cognizable injury based on the possibility that it might become subject to regulation under the Phase II Rule at a future time.
The Ninth Circuit then addressed Industrial Petitioners' remaining challenges to the Phase II Rule, rejecting their argument that EPA failed to consult with state and local officials when promulgating the Phase II rule, as required by section 402(p)(5). Judge Browning concluded that EPA satisfied section 402(p)(5)'s requirements because the agency circulated a draft of the Phase II rule to states, EPA regional offices, and the Association of State and Interstate Water Pollution Control Administration in November 1993; received their comments; and based the final version of the rule on these comments. The court found that EPA demonstrated evidence that it "extensive[ly] consult[ed]" with local officials.
Moreover, the court refuted Industrial Petitioners' assertion that EPA violated the CWA by considering public comment and additional research in developing the Phase II Rule, rather than relying solely on section 402(p)(5) studies. The court determined that Industrial Petitioners had standing to raise this procedural challenge based on established Ninth Circuit precedent that an agency's procedural violation is sufficient to establish a plaintiff's injury and because the causal connection between EPA's alleged failure to restrict its scope to section 402(p)(5) studies and Industrial Petitioners' injury was sufficiently "probable." Nonetheless, the court concluded that Congress unambiguously expressed its intent in the CWA that EPA base the Phase II Rule on the section 402(p)(5) studies and in consultation with state and local officials, and found that the APA required EPA to provide the public notice and an opportunity to comment on the proposed rule.
Judge Browning also concluded that EPA did not act arbitrarily and capriciously in designating small MS4s for Phase II regulation based upon Census Bureau-defined population densities because the statute only directed EPA to designate additional stormwater discharges "to protect water quality." Affording EPA "great deference," Judge Browning reasoned that because perfect documentation was not required in an area of agency technical expertise, the agency's reliance on census data that demonstrated a "high correlation" between urbanization and water pollution was sufficient.
Moreover, Judge Browning upheld the Phase II Rule's inclusion of small construction sites as a reasonable decision, refuting the Municipal and Industrial Petitioners' claims that the rule 1) arbitrarily ignored the variability of water quality nationwide, 2) relied on data from large construction sites in establishing a one-acre standard for small construction sites, and 3) distinguished between construction sites and other stormwater runoff sources. The court concluded that EPA sufficiently supported the link between data concerning water quality problems at large and small construction sites, and reiterated that EPA was not required to develop "perfect" data. The court further supported the Phase II Rule's rebuttable presumption of water quality impacts from small construction sites--evident in the rule's use of waivers for small construction sites not likely to harm water quality--as reasonable.
Finally, the Ninth Circuit upheld the Phase II Rule's retention of EPA authority to designate additional sources of stormwater pollution--"residual" designation authority. Under the rule, a permitting authority may require a permit from any stormwater discharger at any time in the future. The court reasoned that EPA reasonably interpreted section 402(p)(6) to authorize the agency to designate a separate category of dischargers, despite insufficient evidence to establish a nationwide category, because specific data at the local level may support a designation. Because EPA reasonably determined that these potential sources may contribute to impaired water quality, the court upheld the Phase II Rule's residual designation authority provision.
Judge Browning concluded that the residual designation authority did not violate the nondelegation doctrine because section 402(p) essentially directed EPA to effectuate the central purpose of the CWA, to "restore and maintain the chemical, physical, and biological integrity of the Nation's waters," and therefore articulated a determinant criterion sufficient under Supreme Court guidance. Moreover, the court rejected the Industrial Petitioners' argument that EPA failed to satisfy notice and comment requirements of the APA, reasoning that the Phase II Rule was a logical outgrowth of the proposed rule because the agency explained in the proposed rule that it would consider designating sources on the basis of categories rather than on an individual basis. Finally, the court concluded that EPA complied with the Regulatory Flexibility Act (RFA) in certifying that the Phase II Rule would not impose substantial compliance costs on Industrial Petitioners.
Judge Tallman concurred in part and dissented in part, finding that the Phase II Rule impermissibly infringed on state sovereignty in violation of the Tenth Amendment. Judge Tallman took issue with the majority's conclusion that states had two alternatives to administering the federal regulatory program, concluding that states do not have an option not to discharge into U.S. waters, but must regulate their citizens to satisfy the requirements of the CWA. The dissent disagreed that the Phase II Rule offered any choice to states, arguing that to satisfy the court's guidance in Hodel v. Virginia Surface Mining & Reclamation Ass'n, the Phase II Rule must give states the option to adopt the regulatory program or allow EPA to regulate directly. Moreover, Judge Tallman argued that the Phase II Rule impermissibly forced states to regulate their own citizens, because states had no option to refuse illicit discharges or runoff from construction sites. The dissent found the Alternative Permit option "qualitatively indistinguishable."
Second, Judge Tallman disagreed with the majority that the Phase II Rule's general permitting system impermissibly relied on NOIs, finding the permitting system a reasonable interpretation of the CWA. The dissent maintained that the CWA did not address whether NOIs should be considered permits, and--finding EPA's general permit system reasonable--believed that the system should be upheld under Chevron. Judge Tallman emphasized that the issue required a "complicated weighing of policies," in which the court should not engage under the Chevron test.