The Ninth Circuit’s May 26 decision to send the City of Oakland’s climate-change lawsuit against oil companies back to the lower court overshadowed another important Ninth Circuit ruling involving Oakland and fossil fuels. Released the same day, OBOT v. City of Oakland affirmed a lower court decision featured on this blog nearly two years ago. The divided Ninth Circuit panel’s opinion is significant not only because it puts Oakland back in play for exporting coal to Asia, but also because of its take on the applicable standard of judicial review.
In 2013, Oakland Bulk & Oversized Terminal (OBOT) contracted with Oakland to build a rail-to-ship terminal on a closed army base. The agreement placed no limit on what could be shipped from the terminal. Oakland also agreed that only regulations in force at the time of the agreement would apply to the project, with one exception. The project would have to comply with a new regulation if, based on substantial evidence, Oakland’s failure to apply that regulation would pose a “substantial danger” to the health and safety of Oakland’s residents.
As the Ninth Circuit opinion notes, Oakland officials “had some indication that coal was one of the potential commodities” the completed terminal would handle. Once that possibility became public knowledge, activists pressured the city to bar all “bulk materials facilities in Oakland” from handling coal.
OBOT sued Oakland for breach of contract. The district court held a bench trial and concluded that the city failed to show that without the ordinance, Oakland’s citizens would face substantial danger to their health. Our prior post discusses the court’s reasoning in detail.
On appeal, the Ninth Circuit affirmed.
Ninth Circuit Opinion
The appeal’s outcome hinged on the standard of review: “Should this court review this case as a breach of contract dispute in which we must give deference to the trial court’s factual findings—or as an administrative law proceeding in which the City’s health and safety findings are afforded deference?”
In other words, is OBOT v. City of Oakland just a run-of-the-mill contract dispute, or is it more of an administrative-law case because OBOT challenges an administrative decision? The distinction is critical.
Oakland first argued that the court should interpret the term “substantial evidence” in the ordinance to mean “substantial evidence review”—the standard of review courts should use. The court not only found this argument directly at odds with the plain language of the ordinance, but also explained that “contracting parties cannot dictate to a federal court the standard of review that governs a case.”
The city also argued that California law requires that an administrative-law “substantial evidence” review standard apply to a breach-of-contract action involving an administrative decision. Because the California Supreme Court has not ruled on that specific question, the appellate court evaluated state case law and predicted that the high court would grant deference to the trial court’s findings, not to the government’s rationale.
The court thus reviewed the district court’s factual findings for clear error and its legal conclusions de novo. After a meticulous analysis of the district court’s factual findings, the Ninth Circuit held the findings were not clearly erroneous. The court affirmed the trial judge’s legal conclusion that Oakland lacked substantial evidence to support its ordinance.
Getting the Deference Question Right
The OBOT court’s rejection of an ideologically motivated city ordinance that blocked coal exports merits far more attention than it’s received. As noted in our commentary on the district court’s opinion, West Coast environmental activists have been drawing a “thin green line” of impediments against the export of fossil fuels to Asia. The Ninth Circuit affirmed that Oakland erected its part of the barrier unlawfully.
Perhaps even more notable, however, was the OBOT court’s holding on the standard of review for breach-of-contract disputes against a government entity that involve an administrative decision. A contrary holding, one that would require judicial deference to a government agency’s findings in a contract dispute, would mean certain defeat for any private plaintiff. Judge Kenneth K. Lee, who authored the majority opinion, firmly made that very point:
“[D]eferring to a government agency’s findings would effectively create an escape hatch for government to walk away from contractual obligations if political winds shift or if it faces public backlash against a deal negotiated with a private party. Through self-serving regulatory findings insulated by judicial deference, the government would stack the odds in its favor in any ensuing litigation. The house (of government) would always win, the private parties would always be left to the whims of a regulatory roulette.”
Also published by Forbes.com on WLF’s contributor page.