Spread of Benefit Corporations

Benefit corporations are structured so that they allow corporate directors and officers to pursue ends other than profit maximization.  The Boston Globe has explained: “The idea of a benefit corporation is to weave some social responsibility into the DNA of the company itself through its charter.”

In the last three years, more than a dozen states have enacted benefit corporation statutes, including economic heavy-hitters like California, New York Pennsylvania and Illinois.  Legislation is currently pending in Florida, North Carolina, Nevada, Colorado and even the great redoubt of corporate law that is Delaware. 

Legislation varies among states but derives from the same DNA: model language drafted by the nonprofit B Lab.  A recent report from the Worldwatch Institute found that about 200 American companies have registered as benefit corporations but that benefit corporation statutes have yet to be subjected to legal challenges or judicial scrutiny.

Benefit corporation legislation generally includes three key features: (1) it establishes that benefit corporations must serve a beneficial purpose; (2) it expands fiduciary duties to require that officers and directors consider nonfinancial interests; and (3) it requires benefit corporations to regularly assess their performance in achieving beneficial purposes.

Challenges of Benefit Corporations

Observers have recognized certain potential downsides to benefit corporations:

Conflicting Purposes:  Benefit corporations could serve any number of purposes; some purposes could conflict with others (i.e., serving the interests of low-income consumers by providing low-cost goods could be inconsistent with serving the interests of low-income workers by providing living wages).

Discretion:  Benefit corporations could give excessive discretion to officers and directors to chart their preferred purposes and to determine the degree to which to pursue those purposes.  Without proper accountability, benefit corporations could end up chasing after shareholder profits like traditional corporations while giving short shrift to stated beneficial purposes.  One potential solution: requiring benefit corporations to hit nonfinancial benchmarks (like creating a certain number of jobs or preserving a certain amount of critical habitat) before disbursing profits.  Such restrictions could complicate financing, however (see below). 

Enforcement:  Benefit corporation legislation creates mechanisms of accountability by allowing officers or shareholders to bring beneficial purpose enforcement actions.  But enforcement actions can provide only so much accountability.  Other stakeholders/beneficiaries – such as employees or local communities – would not have standing (though giving them standing could open the litigation floodgates and cripple benefit corporations). 

Financing: Benefit corporations that regard financial returns as subordinate concerns could struggle to attract equity investors.  Similarly, because they expose lenders to greater risks, benefit corporations could face higher borrowing costs than strictly profit-oriented counterparts.  Socially responsible investors manage significant assets (more than $3 trillion, according to one study) and would presumably show a preference for benefit corporations.  But their funding would probably not be sufficient for benefit corporations to fully overcome the financial disadvantages related to their benefit corporation status.

Reputation: In the marketplace, benefit corporations should ideally enjoy reputational advantages based on their beneficial purposes.  But with traditional profit-oriented corporations promoting the social or environmental virtues of their products, consumers could overlook the dedicated missions of benefit corporations in a whirl of greenwashing. 

Texas Benefit Corporation Legislation 

In Texas, H.B. 2565 attempts to unlock the potential of benefit corporations while addressing the above issues through the deployment of best practices.  The most notable features of the legislation would add the following provisions to the Texas Business Organizations Code:

Corporate Purpose:  Benefit corporations would “have a purpose of creating a general public benefit” in addition to the corporate purposes provided under existing statutes.  “General public benefit” is defined as a “material positive impact on society and the environment, taken as a whole, assessed in accordance with a third-party standard, from the business and operations of a benefit corporation.”  In addition, a benefit corporation may commit itself in its certificate of formation to a “specific public benefit,” which could include:

• Providing low-income or underserved individuals or communities with beneficial products or services;
• Promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business;
• Protecting or restoring the environment;
• Improving human health;
• Promoting the arts, sciences, or advancement of knowledge;
• Increasing the flow of capital to entities with the purpose of benefiting society or the environment; and
• Conferring any other particular benefit on society or the environment.

Director Duties:  The fiduciary duties of directors are expanded to require consideration of the effects of corporate action/inaction on: (1) shareholders; (2) employees of the corporation – and of subsidiaries and supplies; (3) customers; (4) “community and societal factors, including those of each community in which offices or facilities of the benefit corporation or subsidiaries or suppliers are located;” (5) the environment; and (6) the short-term and long-term interests of the corporation.  Except for under Benefit Enforcement Proceeding (see below), directors cannot be held liable for a failure to “pursue or create” a general/specific public benefit.

Officer Duties:  Officers must consider the same factors as directors (shareholders, employees, etc.) if the officers have discretion in related matters and “it reasonably appears… that the matter may have a material effect” on the general/specific public benefit.  Like directors, officers are generally shielded from liability for general/specific public benefits. 

Benefit Enforcement Proceedings: A proceeding can be brought to enforce general/specific benefit obligations only by the benefit corporation itself or as a derivative action.  Derivative actions, in turn, can only be brought by shareholders (owning at least two percent of shares in a class/series), directors, persons specified in the certificate of formation, or persons owning at least 5 percent of a parent company of the benefit corporation.  But even if an enforcement proceeding is successful, “[a] benefit corporation is not liable for monetary damages under this subchapter for any failure of the benefit corporation to pursue or create” a general/specific public benefit.

Benefit Directors and Benefit Officers:  Because of the complications involved in identifying, weighing and assessing general/specific public benefits, benefit corporations must designate a benefit director and may designate a benefit officer.  The same person may serve in both roles, which operate as their name implies.  The benefit director (and, if applicable, benefit officer) must prepare an annual benefit report (see below).  In addition, the benefit officer “has the powers and duties relating to the purpose of the corporation to create a general public benefit or specific public benefit provided by the bylaws, or absent a controlling provision in the bylaws, a resolution or order of the board of directors.”     

Benefit Report:  The benefit director (and, if there is one, benefit officer) must prepare an annual benefit report.  The reports must assess how well the benefit corporation is achieving its general/specific public benefit.  The assessment in the report must be conducted in accordance with a “third-party standard.”  A challenge for benefit corporations across the country has been that there is currently an abundance of potential third-party standards; no one standard has emerged as the norm.  But H.B. 2565 tries to mandate some level of objectivity and reliability by imposing certain requirements in its definition of “third-party standard.”  These requirements provide, for instance, that a standard must be developed by a third party that has appropriate expertise and is unrelated to the benefit corporation.  In addition, a standard must make public its criteria and their relative weight. 

PACE is a mechanism that allows property owners to voluntarily subject their properties to tax assessments. The assessments are similar to those historically used to pay for public projects like sidewalks or streetlights but instead finance conservation improvements on privately owned property.

In the late 2000s, PACE appealed to captivated environmental policymakers as a means of promoting the adoption of energy efficiency and on-site renewable energy improvements. Actions by federal mortgage regulators stunted the use of PACE for single-family homes, however, and until relatively recently chilled the growth of PACE programs.

Lately, however, state and local governments have reoriented PACE around commercial real estate and attracted new supporters and capital sources.

Texas passed PACE enabling legislation in 2009, but it never led to the development of an operational PACE program. This legislative session, a bill that is steadily moving through the capitol would correct certain drafting flaws in the original enabling legislation while building upon evolving PACE best practices. In particular, the bill would:

• Refocus PACE around commercial, industrial and multi-family properties;
• Allow counties and coalitions of local governments to launch PACE programs;
• Allow the PACE financing of water conservation improvements
• Permit PACE borrowers to obtain financing from third-party lenders;
• Require existing lenders to consent to PACE liens

For more information, please contact the white paper’s author, Jeremy Brown, at jeremybrown@law.utexas.edu or 512-232-1408.

Working under the name University of Texas Regulatory Oversight Group (UTROG), the students identified several critical flaws in the OSHA’s Voluntary Protection Program (VPP) and petitioned for the agency to address these flaws through a formal rulemaking.

In its response to UTROG, OSHA declined to amend the program due to “current budgetary constraints” but acknowledged VPP’s shortcomings.

“We share your belief that making more information regarding VPP participants available via the OSHA Web site will increase transparency, accountability and accessibility within the program,” wrote Douglas J. Kalinowski, OSHA’s director of cooperative and state programs. “We also agree that increased accessibility of this information will help share VPP participant experiences and best practices … [W]e will definitely explore ways to implement your suggestions as part of a larger effort to improve the program and address the VPP Review Team recommendations.”

Climactic Conditions

• Future Conditions Likely to be Drier:  Modeling suggests the West could be moving toward a more arid average climate, similar to what prevailed in precolonial North America.  (Decades-long mega-droughts occurred between 900 and 1300.)  “The prospect of extended droughts and more arid baseline conditions in parts of the United States could suggest new challenges to federal programs and water projects, which were conceived or constructed largely on the basis of 20^th century climate conditions.”

• But Some Areas May be Wetter:  North America as a whole could become less dry.  “Some regions of the world have experienced trends towards more intense and longer droughts, such as southern Europe and West Africa. But in other regions, such as central North America and northwestern Australia, droughts have become less frequent, less intense, or shorter.”

• Greenhouse Gases and Other Causes: Human influences such as greenhouse gas emissions may contribute to regional aridity and drought severity.  But other factors may be to blame: “Long-term precipitation patterns in Texas are influenced by a configuration of sea surface temperatures known as the Pacific Decadal Oscillation (PDO). Similar conditions also prevailed from the 1940s through the 1960s, encompassing the Texas drought of record (1950-1957).”

• No Near-Term Relief for Texas: “This year, 2013, is likely to be another exceptional year in terms of the breadth of drought conditions throughout the country, particularly in the Great Plains and eastern portions of the Midwest. The severe to exceptional drought conditions throughout the central and western parts of the United States appear to be persisting during spring 2013.”

Risks

• Texas Electric Generation is Vulnerable:  The report summarized a 2011 Argonne National Laboratory study finding that, in the West, two regions – Texas and the Pacific Northwest – have electric generation systems vulnerable to drought.  In the Northwest, that was because of hydropower.  In Texas, that was because of “heavy dependence on thermoelectric generation that relied on surface water for cooling and the region’s high drought climate hazard.”

• There Will Probably Be More Resource Management Fights:  “In the future, the United States might face severe and sustained periods of drought not experienced in the 20^th century. If so, disputes over federal infrastructure management like those in California, the ACF basin, and Klamath River basin may increasingly determine short-term actions by Reclamation and the Corps, and result in long-term consequences for congressional oversight and funding.”  (Though not mentioned in the report, Texas is currently in the midst of a similar dispute over whooping cranes and environmental flows in the San Antonio and Guadalupe River.)

Policy Responses

• Disaster Declarations:  Governors, the USDA and the president can declare disasters because of water shortages.  Each declaration triggers different types of aid.  But the possibility of a presidential declaration may exist only on paper: the last one was in 1980, for New Jersey.

• No Comprehensive Policy:  Multiple federal programs address different aspects of drought but “no single agency leads or coordinates drought programs.”  To further complicate, state and federal actors share responsibility.  And droughts are slow to develop yet difficult to forecast.   “The currently fragmented approach can be costly to national taxpayers; however, it is not certain that increased federal investment (especially vis-à-vis the potential for tailored local and state investment) in drought preparation, mitigation, and improved coordination would produce more economically efficient outcomes.”

• Assessing Drought Impacts is Difficult: “The overall costs to the federal government and the nation as a result of extreme drought, apart from relief to the agricultural sector, are difficult to assess in part because of the broad nature of drought’s impacts. Drought can result in water restrictions affecting municipal and industrial users, decreased hydropower generation and power plant cooling efficiency, navigation limitations and disruptions, harm to drought-sensitive species (benefits to other species), and increased fire risk, among other effects.”

• New Infrastructure, Better Conservation Could Help: “Given the daunting task of managing drought, Congress also may consider proposals to manage drought impacts, such as assisting localities, industries, and agriculture with developing or augmenting water supplies. This could take multiple forms: construction or permitting of reservoirs, the reallocation of water supplies at existing facilities, promotion of alternative water sources (e.g., reuse, desalination), or water conservation and efficiency. Congress also may move to examine how the two major federal water management agencies, the Corps and Reclamation, plan for and respond to severe drought and account for its impacts.”

The Supreme Court press corps has dubbed the arguments inconclusive.  And the justices at times seemed sort of befuddled.  (Kagan: “You read this brief that you submitted, it gives you kind of a headache.”)

But according to the standard signifiers of high court leanings – interruptions, types of questions and points made – the OWRB (represented by UT law grad Lisa Blatt) owned the day.  (Alito: “When you say Texas has the right to go into Oklahoma, just – just think about that phrase … I mean, it  sounds like they are going to send in the National Guard or the Texas Rangers.”)

A quick parsing of the tea leaves:

Support for Texas:

• River Access:  The justices were sympathetic to Tarrant’s argument that the portion of the river at issue (Reach 2, Subbasin 5) lies entirely within Oklahoma’s jurisdiction (which extends to the vegetative line of the southern bank) and that the compacting states never would have allocated water to Texas that it could not access.  In its argument, the OWRB countered that Texas “can and does” take water directly from the main stem but admitted upon questioning from Kennedy that Texas has access to a portion that is only half a mile to three-quarters of a mile long.  Kennedy repeated Tarrant’s claims that the water along that section was too saline.  OWRB:  “They think all the water that their residents drink is salty, but they still are drinking it… Their water planning documents, say this is a – quite a – a drinkable source of water.”  Breyer later raised the issue again and said that, when the Compact was being negotiated, “they all knew this and so they meant there must be some way for Texas to get the extra; otherwise, why were they saying 25 percent for Texas?”  OWRB: “34 percent of the watershed is in Texas, so there is no reason to think anyone thought Texas couldn’t get its share …  There’s no — because there’s no evidence there was any discussion about any State and whether — Texas never complained. No one ever said Texas couldn’t get its water.”  OWRB then dismissed Tarrant’s computations finding that Texas could not access its full 25 percent within its own borders.  Sotomayor: “I understand your point to the Chief that there’s been no proof that Texas doesn’t get its 25 percent or that it couldn’t get it from the main stem or somewhere. I accept that.”

• 25 Percent:  Tarrant’s argument as to the meaning of particular Compact phrasing (“no state is entitled to more than 25 percent,” combined with a separate clause providing signatory states with “equal rights,”  establishes an entitlement) gained some traction – but probably not any more than Oklahoma’s argument (“25 percent” merely sets an upper limit).  Ginsberg: “This clause, the one that you rely on, is kind of sketchy, isn’t it?  Doesn’t say how they’re going to get it, if they’re going to pay for it.  There’s a lot to be filled in.”  Breyer:  “I mean that language doesn’t say what happens if in fact there’s a State that because of cliffs or something can’t get the 25 percent to which it is entitled. It just doesn’t say anything about it.”

Support for Oklahoma

• Attempted In-State Diversions:  The Solicitor General tried to strike a middle ground argument.  It argued the Compact allows signatory states to import water but only if they cannot divert from their own soil.  Roberts asked what would happen if a state could technically divert in-state but only at much greater cost than diverting out-of-state.  The Solicitor General conceded that, in that situation, the protectionist Oklahoma permitting process would not be preempted.  (Roberts:  “It seems to me that you like some provisions of State law, but not others.”   

• Priority of Out-of-State Diversions:  The justices pressed the Tarrant and the Solicitor General for clarification on the relationship between the Compact and Oklahoma’s permitting process.  Both counsel explained that, under the Oklahoma permitting regime, Texas sub-jurisdictions have to apply to the OWRB for appropriations permits just as any prospective Oklahoma appropriator would.  Multiple times, Kagan tried to make sense of how priority would be determined: would the Texas sub-jurisdictions appropriations take higher priority (to satisfy the 25 percent allocation) or would the appropriations depend only upon the time the respective sub-jurisdictions submitted their applications?  OWRB said priority would be based on the seniority of permit applications: “And so, not surprisingly, it’s open season for Oklahoma water, all of north Texas has come in and sought a permit and there’s priority.”

• Eminent Domain:  Ginsburg asked who would erect the infrastructure to divert and convey the water from Oklahoma.  Tarrant said it probably would, through eminent domain.  That piqued Alito: “You were saying that Oklahoma – that Texas has the right to force Oklahoma to take private property in Oklahoma by eminent domain if necessary.”  Tarrant explained that an Oklahoma statute authorizes a permittee – irrespective of state residency – to exercise eminent domain to obtain water.  The OWRB later pounced on the issue: “Eminent domain law in Oklahoma proceeds on the assumption that those are Oklahomans who got the permit, and thus can exercise a core sovereign power, and Tarrant, not surprisingly, would like to come in and do that.  And none of this is happening with the normal political checks in Oklahoma.  Oklahoma can’t vote out of office the Tarrant officials.  IT cannot vote out of office the Upper Trinity or the North Texas Municipal Water District.”

• Precedential Cross-Border Divisions:  In response to a Roberts’ query on why the case implicated state sovereignty concerns, OWRB said: “There has never been a cross-border diversion without an explicit statement.”  The cross-border diversions that have occurred have been premised on “explicit statements and then the essential bells and whistles as to eminent domain, points of diversion, and which choice of law.” 

In 1978, Texas and Oklahoma entered into a compact specifying how the states would share water in the Red River, which forms their border before winding into Arkansas and then Louisiana.  Across the West, such compacts are common, governing the apportionment of major rivers like the Klamath and the Colorado.

The Red River Compact entitles signatory states to divert specific quantities of water from the river.  It also includes language that Oklahoma believes authorizes it to prohibit other states from diverting Red River water from within Oklahoma.

Oklahoma’s protectionism poses a problem because water providers in the booming Dallas-Fort Worth area badly need to obtain more supplies to satisfy long-term demand.  Official projections call for demand to increase from 1.75 million acre feet annually today to 2.4 million in 2030 and 3.3 million in 2060.  (The accuracy of these projections is open to debate.  North Texas has been a poster child for water waste.  It could do much to improve its conservation and, if it reduced its per capita usage to El Paso or San Antonio levels, its long-term shortfall would be a lot less dire.) 

To secure supplies, Dallas Fort-Worth area providers have sought to access water Texas owns under the Red River Compact.  Oklahoma has blocked this effort, as it has similar moves to purchase Red River water from Oklahoma rights holders who want to sell their surplus to Texas buyers for a profit.

In response, the Tarrant Regional Water District filed a lawsuit that has now found its way to the high court.  The district accuses Oklahoma of violating the compact and the Commerce Clause.  In its defense, Oklahoma cites to the compact’s boilerplate terms that, for instance, provide that “each state may freely administer water rights and uses in accordance with the laws of that state.”

Most interstate water apportionment compacts feature substantially similar language.  If the court rules in favor of Oklahoma, as the Tenth Circuit did, other states will have free reign to enact laws that undermine compacts and allocate water on the basis of political boundaries rather than economic, environmental or social needs.

Oklahoma is not unusual in wanting to secure sufficient water supplies for its residents.  But its protectionist policies promote a Balkanized approach to managing essential natural resources and discourage the collaborative vision needed to overcome scarcity issues that are becoming increasingly severe.

The country is in midst the most extensive drought in more than 50 years. The National Oceanic and Atmospheric Administration reported in February that two-thirds of the continental United States was experiencing drought or abnormally dry conditions and that the 2012-2013 drought could cost $35 billion in economic losses.  Climatologists have observed unsettling parallels to the Dust Bowl.

The drought has demonstrated the pain that water shortages can inflict.  In the years ahead, even after the current drought lifts, population increases and climate change will strain water supplies that much further, particularly in rapidly growing states in the South and Southwest.

While drought impacts can never be fully mitigated, water markets could help by allocating water to its highest-value uses, rewarding conservation and reducing economic losses.  But protectionist statutes like those in Oklahoma could stunt the development of interstate markets and even slow the growth intrastate markets.

Water transfers do raise legal, environmental and cultural issues.  Embargoes do not address these issues, however.  They respect political boundaries above all else and give short shrift to ecological systems and economic linkages.

The Oklahoma statutes, for instance, discriminate against Dallas-Fort Worth – a region that extends nearly to the Oklahoma border and, with a gross metropolitan product of more than $370 billion, channels significant benefits toward southern Oklahoma.

The Supreme Court has repeatedly held that parochial politics should not be allowed to sabotage national and regional interests.  Unfortunately, that is exactly what the Oklahoma statutes and others that could follow its example do.

Dallas City Councilmember Dwaine Caraway recently introduced a proposed ban that, if adopted, it would become the fifth local ban in Texas, after Austin, Brownsville, Fort Stockton and South Padre Island.  Numerous other cities have considered them, including Arlington, Corpus Christi, Dallas, El Paso, Laredo and Houston.

In late February, just as the Austin ban was about to take effect, the Texas Retailers Association (TRA) brought a legal challenge.  Then State Rep. Drew Springer filed the so-called “Shopping Bag Freedom Act,” which would have prohibited local jurisdictions from banning single-use plastic bags.  Springer told the Dallas Morning News that the Austin act was “just the latest example of government elites trying to step between the business and consumer in an attempt to push forward a misguided nanny-state agenda.”

The TRA lawsuit is likely to fail, for reasons explained below, and Springer’s bill appears destined to die to in committee.  And it is fair to assume that some of the cities that have entertained bag bans (or that, like Fort Worth, have merely researched them) will move forward with ordinances that draw from the experiences of early adopters such as Brownsville and Austin.

All of this means there are betting odds that by the time the legislature convenes again – in the distant year of 2015 – more cities will have enacted bans.  While the regulations may share similarities, it is inevitable that local politics, shifting behavioral norms and evolving policy debates will breed variations.

The table below compares the Brownsville ban (the first in the state) with Austin’s (the most high-profile) and Dallas’ proposed ban (on track to become the newest).  There are subtle and not-so-subtle differences.

For carry-out foods, for instance, Brownsville requires paper bags (that are not necessarily recyclable), Austin requires recyclable bags (that are not necessarily made of recycled paper).  Dallas would allow recyclable bags (that are, again, not necessarily made of recycled paper) and even single-use plastic bags if needed “to prevent moisture damage.”

Likewise, the bans all allow retailers to dispense paper bags – but different kinds of paper bags.  In Brownsville, the bags must have a 65# weight.  In Austin, they must be recyclable (but need not be made from recyclable materials).  In Dallas, the bags would have to be made from recyclable materials (but not recyclable themselves).

On one hand, these quirks reflect the virtues of a federal system that allows for a certain level of responsiveness to local concerns.  On the other hand, it is enough to give businesses that operate in those and other jurisdictions whiplash.

In California, where bag bans originally took root, there are at least 51 local ordinances.  The California Grocers Association came out in support of the proposed state ban this week.  The LA Times reported: ‘Ron Fong, president of the California Grocers Assn., said his 400 members back Padilla’s bill because it provides “consistency and predictability for consumers.’ Complying with dozens of slightly different city and county laws is complicated and expensive, he said.”

In Texas, bills have been introduced in each of the last three legislative sessions that would have established statewide parameters for local bans.  In 2009, state Rep. Rafael Anchia sponsored a bill that would have imposed a seven-cent fee on each disposable plastic bag.  That same session, state Sen. Leticia Van de Putte backed a bill (and state Rep. Ana Hernandez Luna authored a companion bill) that would have required large retailers to operate bag recycling programs and offer reusable bags for sale at checkout.  That bill would have expressly preempted conflicting local ordinances, which could have been interpreted to encompass ordinances that banned or restricted single-use plastic bags.

In 2011, state Sen. Troy Fraser and then-state Rep. Kelly Hancock sponsored similar legislation.  Fraser explained to the Texas Tribune that his bill was intended to ease the “transition” from widespread usage of plastic bags to an eventual ban: “We’ve got plastic bags in the system and we’re moving toward trying to eliminate them.”

As with the Van de Putte/ Hernandez Luna bill, there was a concern that a statewide regulation would preempt local regulations.  For that reason, environmentalists (who have generally supported bag bans) opposed the legislation.  And interests that would be burdened by local bans may have taken comfort.

This session, the only bag legislation on the table is the Springer bill, which has attracted considerable popular attention but was probably doomed from the start since it impinged on the rights of local governments and ran against heavy policy headwinds.

Although critics have questioned the environmental merits of bag bans, and even supporters have recognized their limits, the march of tighter single-use bag restrictions seems unstoppable.  More than 20 countries have passed national bans (starting with Bangladesh in 2002 and including China since 2008), as have cities large (Rio de Janeiro, Delhi) and relatively small (Fairbanks, Tucson).  And the trendsetter in Texas bag policy – Brownsville – is not a city with resources to throw after pet environmental causes.  (For an incredible overview of jurisdictions with bans, see this article from the founder of Plasticbaglaws.org.)

Given this, it seems that even with all the hoopla around the Springer bill, legislation like that currently winding through the California legislature is more likely to pass in Texas – and probably will pass in a coming session, if not in 2015, then perhaps in 2017 or 2019.

TRA Litigation

Lawmakers will have added impetus to pass such a bill – and no doubt be lobbied heavily to do so – in the unlikely event that the TRA litigation succeeds.

In the late 2000s, as California cities implemented bag bans, industry opponents filed lawsuits accusing local governments of violating a state law that requires agencies to consider the environmental impacts of their actions.  That is to say, an environmental law was being aggressively used to undermine environmental ordinances.

In a similar twist of irony, the TRA has sought a declaratory judgment order from the Travis County District Court invalidating the Austin ban (a waste-reduction ordinance) on the grounds that it violates the Solid Waste Disposal Act (a law intended in part to reduce solid waste streams).  Specifically, the TRA argues the ordinance conflicts with Texas Health and Safety Code § 361.0961(a): “A local government or other political subdivision may not adopt an ordinance, rule, or regulation to: (1) prohibit or restrict, for solid waste management purposes, the sale or use of a container or package in a manner not authorized by state law.”

The TRA contends that a single-use plastic bag is a “container” within the meaning of the statute and that the ordinance was enacted for a “solid waste purpose” – as evidenced by the city’s finding that a ban would reduce the “solid waste stream.  TRA argues it was not “able to discover a single state law authorizing the banning of bags in any manner, let alone in the manner adopted by the City.”

The city answers that Section 361.0961(a) is an “obscure provision of the Solid Waste Disposal Act (SWDA) under a Chapter related to the permitting of solid waste facilities and hazardous waste facilities.”  According to the city, TRA is ignoring more relevant provisions of and the waste reduction purposes of the act.

No published opinions have interpreted the scope of § 361.0961.  In cases that have been decided on standing rather than substantive grounds, however, New Braunfels business owners have invoked the section in a similarly novel way, to challenge the validity of anti-litter ordinances that restrict the use of coolers on the Comal and Guadalupe rivers.  Coolers, in this line of attack, would constitute “containers.”

These arguments, like the ones that TRA makes, seem dubious.  Texas law accords great deference to home rule cities to manage local affairs.  Courts have found that state law will not preempt home rule regulations “if any other reasonable construction leaving both in effect can be reached.” City of Beaumont v. Fall, 116 Tex. 314, 291 S.W. 202, 206 (1927).  The legislature can only limit home-rule powers when it demonstrates its intent to do so with “unmistakable clarity.”  Proctor v. Andrews, 972 S.W.2d 729, 733 (Tex. 1998)

But Section 361.0961 does not reveal with “unmistakable clarity” an intention to preempt single-use bag regulations.  The legislature adopted Section § 361.0961 in 1993, when it amended the Solid Waste Disposal Act by passing SB 963.  There was a concern, according to a legislative analysis, that the state would eventually exceed its federally permissible landfill capacity unless it reduced its solid waste streams.  The purpose of bill was not all that different from Austin’s bag ban.

In fact, the bill included several findings encouraging entrepreneurial waste-reduction policies like the bag ban.  The legislature found, for instance, that “flexible and effective means of implementing and enforcing municipal solid waste laws should be provided” and “the actual cost of municipal solid waste disposal should be imposed by municipalities on those that place municipal solid waste in the solid waste stream in order to pay for infrastructure development and to encourage waste reduction from landfill.”

A related section of the Solid Waste Disposal Act – the Texas Health and Safety Code § 391.096 – provides that “[e]xcept as specifically provided by this chapter, this subchapter does not limit the powers and duties of a local government or other political subdivision of the state as conferred by this or other law.”  The act does not specifically restrict cities from regulating plastic bags, certainly not to the degree required in a space such as waste management where cities have traditionally shouldered much responsibility.

Of course, the words of Section 361.0961 could be clumsily shoehorned onto bag bans, as the TRA has attempted.  But the applicability of that section toward bans is so unclear and imperfect that none of the interest groups opposed to bag restrictions raised it in the half-decade over which local bag policies took form in this state.

In its petition, the TRA confesses that Section 361.0961 – which, if construed as the TRA wishes, could become a powerful restriction on the ability of local governments to pursue waste control strategies – was “unknown to the City and the [TRA] when the Ordinance was enacted.”  This late-blooming discovery further suggests that Section 361.0961 does not clearly or specifically preempt and that any ambiguity should be resolved in favor of Austin.

The Texas Civil Practice and Remedies Code requires, in Section 37.006, that in a proceeding that alleges a municipal ordinance is unconstitutional, the state attorney general must be given the option of participating as a party.  The attorney general declined to join in the New Braunfels cases.  How it engages the TRA case would influence the case and more broadly could send a signal about the authority that local governments are believed to have to manage their waste reduction efforts.

Spence writes: “States are better equipped than the federal government to regulate most of those risks.  Why? Because both the benefits and the costs of fracking fall mostly on states and local communities. States gain the most from added jobs and tax revenue; they face the truck traffic, noise, pollution risks and rapid industrial growth. Consequently, states are in the best position to figure out how best to balance fracking’s costs and benefits.”

“You shouldn’t regulate unless there’s a need,” Civins cautioned. “Before we spend a lot of time legislating, we ought to take a look and see if there’s a problem that requires legislation. … That gets to the whole [problem] with fracking, where people are concerned about it without looking at what actually is involved.”

Civins is an adjunct professor at the University of Texas School of Law, where he has taught an environmental litigation course since 1992, and a co-editor of the Thomson West Texas Practice 2-volume treatise on Texas Environmental Law.

Its Monterey Shale formation is estimated to contain more than 15 billion barrels of oil – about 64 percent of national shale oil reserves and enough to inspire some optimists to speculate about a new gold rush.

Compared to other oil-producing states like Texas and North Dakota, however, California has a conflicted relationship with fossil fuels and their production.  And as the state circulates a discussion draft of proposed fracking regulations, a federal magistrate judge in San Jose has decided one of the first of what will probably become an endless stream of National Environmental Policy Act (NEPA) challenges to unconventional drilling.

In a lawsuit brought by the Center for Biological Diversity and Sierra Club, the judge found that the Bureau of Land Management (BLM) had failed to consider the environmental impacts of mineral leases when it relied upon a years-old programmatic environmental impact study (EIS) that predated innovations in fracking and horizontal drilling.

As the court explained, the BLM follows a three-step decision-making process when it grants access to public lands for oil and gas development.  First, it must prepare a Resource Management Plan (RMP) for the general area.  Second, it leases specific parcels.  Third, lessees submit applications for permits to drill.

In 2007, BLM adopted an RMP/EIS for an area spread across twelve counties in central California.  The RMP/EIS projected that no more than 15 wills would be drilled within the next 15 to 20 years.  It based the projection on historical drilling activities and concluded “[t]his trend is not likely to change much.”

In 2011, BLM decided to sell oil and gas leases on a 2,700-acre portion of the RMP/EIS area and conducted an Environmental Assessment (EA).  The EA assumed no more than one exploratory well would actually be drilled under the leases.  This assumption was grounded in the half-decade old RMP/EIS – which was completed before the Fracking Revolution made extracting shale reserves economically feasible.

From the EA, the BLM concluded that selling leases would not have significant environmental impacts and issued a Finding of No Significant Impact (FONSI) rather than a new lease-specific EIS.

The plaintiff environmental nonprofits argued that the EA was insufficient and that the agency should have conducted an EIS that took into account the potential impacts of fracking.  BLM countered that, under the leases, it reserved certain rights to deny drilling permit applications.

The court concluded that the reserved rights were not absolute and that the plaintiffs were correct: the agency should have considered the potentially significant environmental impacts of selling the leases.

And while NEPA typically allows an agency to tier off of a higher-level programmatic EIS, the RMP/EIS in this particular instance was inadequate because it did not reckon with the reasonably foreseeable consequences of fracking.

“[E]vidence shows that in just the past few years fracking has been combined with horizontal drilling and other modern technologies to provide access to previously unattainable shale oil such as that in the four parcels of Monterey shale at issue… Certainly, there was significant increased interest in oil and gas drilling in the Monterey shale, which is what lead to the 2012 sale.”

While the decision does not mark the first time that fracking has implicated NEPA, it could serve as a precedent as fracking expands into states like California and Alaska with substantial federally held lands and as the BLM promulgates new fracking regulations.