Two insurers, Fireman's Fund Insurance Company (Fireman's Fund), and Unigard Insurance and Unigard Security Insurance Companies (Unigard), filed separate lawsuits against the City of Lodi, California (Lodi) and various public officials. The insurance companies claimed that a municipal ordinance, called the Comprehensive Municipal Environmental Response and Liability Ordinance (MERLO), violated the state and federal constitutions. According to the appellants, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA)[1] preempted MERLO, as did various state laws such as the California Carpenter-Presley-Tanner Hazardous Substance Account Act (HSAA).[2] The district court, on motions to dismiss and for summary judgment, found in favor of Lodi on the federal claim, abstained from the state claim in both cases, and dismissed the official capacity claims against the individual defendants due to duplication. The appeal was consolidated, and the Ninth Circuit reversed the district court's abstention and affirmed that MERLO was not preempted in general, but held that particular sections of the ordinance were preempted by state and federal law. In addition, the appeals court reinstated the official capacity claims.

The lawsuit arose when California's Department of Toxic Substances Control (DTSC)[3] investigated and eventually pinpointed four businesses in Lodi, two of which were insured by the insurance companies, as the possible sources of a carcinogen, tetrachloroethylene (PCE), that had contaminated the city's groundwater. The DTSC listed Lodi's groundwater site as a hazardous waste site, which triggered California's HSAA.[4] Subsequently, DTSC began an administrative action against Lodi and other potentially responsible parties (PRPs). Eventually, Lodi and DTSC entered into an agreement to pursue jointly a solution to the contamination. Pursuant to this agreement, Lodi adopted MERLO.

On appeal, the Ninth Circuit reviewed the district court's decision de novo. In reviewing the district court's abstention from deciding the state preemption claims, the Ninth Circuit examined the three factors from Railroad Commission of Texas v. Pullman Co.[5] These factors are 1) whether there is a "'sensitive area of social policy'" best addressed by the state court,[6] 2) whether a decision by the state would prevent the need for a decision on federal constitutional law, and 3) whether it was unclear how the state court would decide the determinative issue.

On the first factor, the Ninth Circuit determined that, despite the seriousness of the issue to the locality, the issue of hazardous waste remediation was not one that the states should address alone. The court pointed to CERLCA's statutory scheme that "envisioned a partnership between various levels of government" to deal with hazardous waste.[7] Then, skipping the second factor, the court found that under the third factor the proper resolution of the issue of preemption in this case was predictable. The court viewed MERLO as being generally consistent with state law, and even if parts of it were inconsistent the remainder would stay in effect. Thus, the federal court's obligation to consider the federal claims would remain. Therefore, the Ninth Circuit held that the district court did not have discretion to abstain from deciding the state constitutional issues.

Next, the Ninth Circuit evaluated the federal and state preemption claims simultaneously. The court considered whether the federal and/or state laws, specifically CERCLA and HSAA, preempted MERLO under three prongs: 1) whether there was field preemption because there were other laws that were supreme in the field of hazardous waste; 2) whether there was conflict preemption because compliance with both laws would have been physically impossible; and 3) under state law, whether MERLO was duplicative.

On the first prong, the field of hazardous waste regulation, the insurance companies argued that, even though the Ninth Circuit had previously held that CERCLA did not foreclose other hazardous waste laws,[8] the combination of CERCLA and HSAA occupied the entire field. The court found this argument contrary to the Supreme Court's decision in Wisconsin Public Intervenor v. Mortier,[9] which held that a state's omission of reference to state subdivisions in assigning regulatory authority did not require preemption of local laws, but instead gave the state "absolute discretion" in assigning power.[10] Therefore, because CERCLA contains savings clauses, which give states the power to enact supplemental legislation, and because the California's constitution and other laws, including HSAA, contemplate the enactment of local environmental laws, the court found that local ordinances were authorized implicitly. In addition, the court found that CERCLA explicitly mentioned local governmental action in other provisions, and therefore, without any stronger indication from Congress, the court held that there was no field preemption.

For the second prong of preemption, conflict preemption, the insurance companies asserted that seven particular sections of MERLO conflicted with either CERCLA or HSAA. These provisions 1) allowed Lodi to be compensated for natural resource damages,[11] 2) established a general liability scheme whereby the PRPs could be found joint and severely liable but could not have a contribution claim against Lodi,[12] 3) created a "clear and convincing" burden of proof for a liability defense,[13] 4) established a different standard for cleanup than in the National Contingency Plan,[14] 5) established the ability for Lodi to recover attorney fees and other costs,[15] 6) authorized information gathering,[16] and 7) permitted Lodi to bring direct actions against insurers.[17] The court found that some of these provisions were preempted by either state or federal law and that some were not.

First, the court found that MERLO's provision authorizing Lodi to recover for natural damages[18] was not preempted because neither CERCLA nor HSAA abrogated Lodi's proprietary interest in natural resources or its ability to protect these resources by recovering damages.

Second, the Ninth Circuit held that the scheme allowing for recovery of cleanup costs and the possible imposition of joint and several liability on PRPs without the ability to likewise impose liability upon the City to pay its fair costs[19] was preempted in part if Lodi was also a PRP. After looking at CERCLA and HSAA, which both allow contribution claims, the Ninth Circuit found that if the district court on remand found that Lodi was a PRP, then the provisions of MERLO preventing contribution claims against the city would be preempted. Thus, the insurance companies could sue the city for contribution. Also, under CERCLA's statutory scheme, one PRP cannot bring a cost recovery action that would impose joint and several liability against another PRP. Therefore, the Ninth Circuit held that if Lodi were a PRP, then MERLO's scheme would be preempted to the extent that it protects Lodi from liability, but if Lodi were not found to be a PRP then MERLO would not be preempted.

Third, under MERLO the PRP's burden of proof to demonstrate that the harm is divisible is by clear and convincing evidence,[20] while under CERCLA and HSAA the burden is only by a preponderance of evidence.[21] The Ninth Circuit held that MERLO's burden of proof provision was preempted by the state and federal laws, because allowing cities to create their own more burdensome standards "would foster uncertainty and discourage site cleanup," thereby undermining the goals Congress set forth in CERCLA.[22]

Fourth, the court addressed the argument that MERLO's cleanup standard provision[23] was preempted because it allowed Lodi to have the presumption of consistency when trying to prove that its cleanup process was consistent with the National Contingency Plan (NCP) of CERCLA or HSAA,[24] a presumption usually reserved for federal, state, or tribal governments. The court rejected this argument, holding that MERLO's provision was not preempted because Lodi was acting according to its agreement with DTSC, a state agency that received the presumption of consistency, and that agreement provided for DTSC oversight. In addition, the insurance companies argued that Lodi could have required remediation that was more or less strict than the NCP, and therefore MERLO's provision was preempted. The Ninth Circuit found that MERLO's provision was not, in fact, less strict than the NCP with regard to the Lodi site and was not in conflict with CERCLA or HSAA. But, the court found that MERLO's provision was preempted to the extent that it allowed Lodi to be stricter than the NCP because of the uncertainty and discouragement that would result.

Fifth, the court held that if Lodi was a PRP, then it could not receive attorney fees because Lodi cannot "legislate for itself a litigation advantage."[25] Thus, the MERLO attorney fee provision[26] would be preempted. However, if Lodi was not a PRP then it could provide for attorney fees in its municipal laws. Nevertheless, Lodi did not receive authority from CERCLA to receive "all costs,"[27] as states do, because of its agreement with DTSC, a state agency. The Ninth Circuit remanded to the district court to decide if Lodi was a PRP, and if so what costs would be allowed nonstate litigants under CERCLA's "necessary costs" provision [28] If the court determined that Lodi was not a PRP, it would need to determine which standard to use in deciding costs.

Sixth, the Ninth Circuit held that Lodi had "independent authority to promulgate information-gathering legislation pursuant to its traditional police powers" and that these powers did not conflict with CERCLA or HSAA.[29] Therefore MERLO's information gathering provision[30] was not preempted.

Seventh, the court found that MERLO's provision that allowed Lodi to initiate a direct action against a PRP insurer before receiving a final judgment against the insured PRP[31] was preempted by California insurance law.[32] While the plain language of the law did not require final judgment against the insured, the court was convinced by applicable case law[33] that direct action had to be delayed until final judgment.

The third prong of preemption, duplication, is based on state law and applied only to penal ordinances. In addition, duplication is only found when the ordinance is "coextensive with state law." [34] The court held that MERLO covered the same subject matter as HSAA, but was not coextensive. Therefore, MERLO was not preempted on the basis of duplication.

Finally, the court reversed the district court's decision to dismiss Fireman's Fund's claims against three individuals in their official capacities. The court agreed with Fireman's Fund that the officers were "'classic Ex parte Young defendants'" and that the claims were necessary to stop any Eleventh Amendment defense by Lodi.[35]