The United States, as represented by several officers and agencies, and intervening offshore oil lessees, appealed a district court's summary judgment decision. The district court had ruled in favor of the State of California, represented by officers and agencies, ten environmental groups, and two intervening counties, enjoining thirty-six offshore oil suspensions pending 1) consistency review by California under the federal Coastal Zone Management Act (CZMA),[1] and 2) an explanation of applicability of the United States's categorical exclusion of the lease suspensions under the National Environmental Policy Act (NEPA).[2] The lease suspension given by the United States allowed oil companies to keep production rights despite the fact that they "had not begun production in paying quantities."[3] The Ninth Circuit affirmed both of the district court's decisions.

First, the Ninth Circuit affirmed consistency review under section 1456(c)(1) of the CZMA which provides for review of federal agency activity affecting the coastal zone.[4] The United States argued that requiring consistency review under the CZMA would be duplicative of other consistency reviews of the required exploration plans and development and production plans.[5] In addition, the United States claimed that Congress had denied consistency review of the subsidiary licenses and permits necessary to carry out the plans[6] and that consistency review was therefore limited to the plans. The Ninth Circuit refuted that argument by examining the legislative history of the 1990 amendments to section 1456(c)(1)[7] that explicitly made clear that lease sales[8] were subject to consistency review. Based upon this examination, the Ninth Circuit found that "Congress ha[d] made it clear that the statute does not prohibit consistency review of federal agency activities that are not subsidiary to exploration and development and production plans."[9] In addition, the court pointed out that the sale of the leases in the case had never been reviewed because they were issued prior to the 1990 amendments. Finally, the Ninth Circuit mentioned the need to review the leases for consistency with the numerous policies and laws that California and the intervening counties have enacted since the sale of the leases.[10] Therefore, the court affirmed the district court's decision to enjoin the lease suspensions pending consistency review.

In addition to looking at CZMA section 1456(c)(1), the court evaluated whether CZMA section 1456(c)(3), which provides for consistency review of applications for permits that allow activity affecting the coastal zone,[11] would have allowed the State to review lease suspensions for consistency with California's coastal management programs. However, CZMA subsections 1456(c)(1) and 1456(c)(3) are mutually exclusive,[12] and the court found that a lease sale, which is definitely covered by section (c)(1), is more like a lease suspension than one of the "highly specific activities reviewed under section 1456(c)(3)."[13]

Second, the Ninth Circuit affirmed the district court's requirement that the United States explain its categorical exclusion of the suspensions from NEPA's requirements.[14] The United States simply argued that, on the record, the lease suspensions were part of a "category of actions which do not individually or cumulatively have a significant effect on the human environment"[15] and that the suspensions did not fall into one of the ten exceptions to the categorical exclusion.[16] However, the court noted that the United States did not identify any evidence in the record that demonstrated it had considered the exclusion at the time it approved the suspension,
thereby thwarting an arbitrary and capricious review[17] and bypassing the "hard look" required by NEPA.[18]

In addition, the Ninth Circuit pointed to the "substantial evidence in the record that exceptions to the categorical exclusion may apply,"[19] and therefore determined that the United States at least needed to explain why the exclusion was applicable.[20] In particular the court examined exception 2.2, which forbids the exclusion if there may be negative effects on "ecologically significant or critical areas," exception 2.3, which forbids exclusion if the action may have "highly controversial environmental effects," and exception 2.8, which forbids exclusion if the action may have effects on "listed or proposed . . . Endangered or Threatened Species, or have effects on designated Critical Habitat for these species."[21] Because of the impact to Monterey Bay and Channel Islands National Marine Sanctuaries, the scientific and public controversy surrounding the suspensions, and the concern over the threatened sea otter (Enhydra lutris nereis), the court affirmed the district court's requirement that the United States explain the categorical exclusion of the suspensions.