Olympic Pipe Line Company, a Delaware Corporation v. City of Seattle, a Washington Municipal Corporation
Docket: 04-35307
Court: Court of Appeals for the Ninth Circuit; February 8, 2006; Federal Appellate Court
The case involves Olympic Pipe Line Company, which operates a hazardous liquid pipeline, and the City of Seattle regarding the enforcement of safety oversight provisions in their franchise agreements. After a catastrophic pipeline explosion in Bellingham, Washington, Seattle refused to renew Olympic's franchise unless the company met specific safety demands. Olympic, arguing that the Pipeline Safety Improvement Act of 2002 (PSA) preempted Seattle's regulatory authority, filed for injunctive and declaratory relief after the City threatened to shut down the pipeline. The district court granted Olympic a preliminary injunction and subsequently ruled in its favor, concluding that Seattle's regulatory efforts were preempted by the PSA. The Ninth Circuit affirmed the district court's decision. The case highlights the tension between local safety regulations and federal preemption in pipeline safety oversight, particularly concerning the Seattle Lateral Line, which runs primarily through residential areas and near schools. The franchise agreement, established in 1966 and renewed in 1991, allowed Olympic to operate the pipeline under certain conditions, including an indemnity clause to protect the City from liability related to Olympic's operations.
On June 10, 1999, an explosion of Olympic's main pipeline in Bellingham, Washington, resulted in the release of approximately 230,000 gallons of unleaded gasoline, leading to three fatalities and significant property and environmental damage. In response, Olympic halted operations on the northern half of its pipeline until February 2001 and incurred substantial costs for environmental remediation and pipeline repairs. Following the incident, Olympic entered into agreements with the City of Bellingham that included safety oversight provisions and commitments to conduct hydrostatic tests on its pipeline, three of which revealed failures along longitudinal seams.
As Olympic's franchise for the Seattle Lateral expired on December 31, 2000, the City of Seattle did not renew it immediately. Instead, Seattle sought safety information from Olympic and regulatory agencies, engaging SECOR International, Inc. for an integrity assessment. SECOR's findings led Seattle to issue thirty-three safety concerns to Olympic, including a request for a hydrostatic test of the Seattle Lateral, which Olympic declined.
In response to Olympic's refusal and its bankruptcy status, Seattle's Director of Transportation issued a letter suspending all pipeline operations pending a new franchise agreement, warning of potential criminal sanctions for non-compliance. The Mayor's letter reiterated that a new franchise would not be granted until Olympic or a successor entity emerged from bankruptcy and offered a path to resume operations contingent upon the completion of safety tests.
Instead of engaging with Seattle, Olympic filed a lawsuit on July 16, 2003, seeking injunctive relief against the City’s order to shut down the Seattle Lateral and asserting that the PSA preempted Seattle's regulatory actions. Olympic also claimed that the termination of its franchise violated the Commerce Clause and that Seattle's franchise fees were unreasonable. On August 21, 2003, the district court granted Olympic a preliminary injunction, preventing Seattle from closing the Seattle Lateral.
Both parties filed motions for summary judgment, leading the district court to partially grant Olympic's motion. The court declared that the Pipeline Safety Act (PSA) preempted the City of Seattle's attempts to regulate the safety and inspection of the Seattle Lateral. It found that Olympic did not waive its right to assert federal preemption and ruled that Seattle, in enforcing safety provisions, was acting in a regulatory capacity, which was preempted. However, the court clarified that its ruling did not prevent Seattle from pursuing other actions that could impact Olympic's operation of the pipeline.
On appeal, Seattle contends that its safety regulation efforts are not preempted by the PSA, arguing the PSA does not fully occupy the field of pipeline safety regulation. Seattle also claims that Olympic waived its preemption defense through agreements entered into with the City and asserts that public policy demands enforcement of these agreements.
The analysis begins with federal preemption under the Supremacy Clause, which allows Congress to override state or local laws. Preemption can occur through express, field, or conflict preemption. The PSA aims to enhance pipeline safety by establishing a national program with uniform standards and regulatory enforcement by the Secretary of Transportation. For interstate pipelines, local authorities generally cannot impose safety standards unless authorized through specific agreements with the Department of Transportation (DOT). The PSA explicitly states that state authorities may not impose safety requirements on interstate hazardous liquid pipelines unless designated by the DOT under certain provisions, reinforcing the federal preemption of safety regulation in this area.
State authorities can impose additional safety standards on intrastate pipelines only if they are compatible with federal standards and the authority has been certified by the DOT through an annual process. The Washington Utilities and Transportation Commission (WUTC) is the designated authority in Washington, established following the 1999 Bellingham accident, to enforce state-specific pipeline safety regulations and seek federal delegation for compliance with federal requirements. The WUTC has a formal agreement with the DOT, granting it jurisdiction over intrastate operators and the authority to oversee various pipeline safety activities. Seattle's attempt to impose its own safety standards on Olympic is asserted to be preempted by the Pipeline Safety Act (PSA), as the city did not obtain the necessary federal agreements or delegation of authority from the DOT, which is held by the WUTC instead.
Precedent indicates that the Hazardous Liquid Pipeline Safety Act (HLPSA) does not preempt Santa Monica from imposing safety standards in a franchise agreement for operating an intrastate oil pipeline. The HLPSA forbids states from enforcing additional safety standards on interstate pipelines but allows state agencies to regulate intrastate pipelines, provided the standards align with federal regulations. The term "State agency" includes municipalities, which means Santa Monica can impose its safety standards.
When the HLPSA was recodified in 1992 as part of the Pipeline Safety Act (PSA), Congress limited the definition of "State agency" to certified agencies, aligning with the court's conclusion that the PSA preempts Seattle's safety regulation of the Seattle Lateral. However, Seattle can require safety tests from Olympic under a franchise agreement if acting as a municipal proprietor rather than a regulator. The distinction between proprietary and regulatory actions hinges on whether the government entity's actions reflect its own interests in procuring services efficiently, similar to private sector behavior, rather than promoting a broad policy.
The district court affirmed that Seattle acted as a regulator, not as a municipal proprietor, when imposing safety demands on Olympic Pipe Line, emphasizing that Seattle's interest lies in maintaining its transportation system rather than participating in the pipeline market. Seattle owns the streets under which the Seattle Lateral runs in its sovereign capacity, similar to the ruling in Shell Oil that a city's regulation does not equate to market participation. The city's safety demands were motivated by a duty to protect public health and safety, particularly in light of past pipeline accidents, and were articulated through official communications invoking regulatory powers.
Seattle argued that even if the Pipeline Safety Act (PSA) preempts its regulations, compliance should still be required of Olympic for two reasons: Olympic allegedly waived its right to contest the preemption by entering into the Franchise and Indemnity Agreements, and failing to enforce compliance could lead to further unenforceable contractual agreements in the industry. However, the court rejected the waiver argument, clarifying that federal preemption, grounded in the Supremacy Clause, cannot be waived by a private entity like Olympic, as it pertains to the allocation of power between federal and local governments. Thus, Olympic could not waive a right it did not possess.
Seattle's reliance on various cases to support its argument that Olympic waived its rights to challenge the city's safety regulations is misplaced. The cited cases involve waivers of individual constitutional or statutory rights, such as due process or rights under the National Labor Relations Act, which are not applicable here. The excerpt clarifies that federal preemption, as established by the Pipeline Safety Act (PSA), does not equate to an individual constitutional right and does not grant Olympic a statutory right to contest Seattle's regulations. Consequently, Seattle's assertion that Olympic waived its right to assert preemption is rejected.
Seattle further contends that deeming its pipeline safety demands unenforceable will lead to future contractual agreements that pipeline companies do not intend to uphold. The city argues that enforcing compliance with its safety regulations is necessary to prevent such conduct. However, the court disagrees, emphasizing that it is not responsible for shaping public policy, which has already been determined by Congress through the PSA's express preemption provision. The need for national uniformity in hazardous liquid pipeline safety regulations outweighs local policy concerns. The excerpt references a prior case highlighting that allowing individual landowners to impose their own safety standards would undermine the Congressional goal of maintaining a consistent national regulatory framework for hazardous liquid pipelines. The court ultimately affirms the decision, rejecting Seattle's public policy argument.
The ordinance in question became effective on January 1, 1991, was passed by the Seattle City Council on September 8, 1992, and approved by the Mayor on September 11, 1992. On March 27, 2003, Olympic Pipe Line Co. filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Western District of Washington. Seattle subsequently sought relief from the automatic stay, claiming Olympic failed to prove adequate insurance coverage, but the bankruptcy judge denied this motion, determining that Seattle, as a governmental unit, could exercise police power concerning the Seattle Lateral despite the bankruptcy filing.
Olympic is owned by ARCO MidCon and Shell Pipeline Company LP. On July 9, 2003, the Office of Pipeline Safety informed Seattle that a hydrostatic test of the Seattle Lateral was unnecessary for safe operation and that the pipeline complied with federal standards. The City of Federal Way was initially a defendant but was dismissed without prejudice. The court also annulled the automatic reference to the bankruptcy court. The court ruled that Seattle's demand for liability insurance did not constitute a safety requirement preempted by federal law, and denied Olympic's request for a declaration that any franchise termination or denial violated the Commerce Clause, as well as claims that Seattle's franchise fees were arbitrary and unreasonable; these issues were not appealed.
Summary judgment grants are reviewed de novo, considering the facts favorably for the nonmoving party and assessing if any genuine material fact issue exists while ensuring the law was correctly applied. Olympic's assertion that the preliminary injunction's review should be for abuse of discretion is incorrect; the appeal is based on the summary judgment order, as there was no interlocutory appeal. The review of preemption and federal statute interpretation is also conducted de novo. Express preemption occurs with explicit congressional demand to displace state law, while field preemption applies when federal regulation is comprehensive, leaving no room for state regulation. Conflict preemption arises when simultaneous compliance with both federal and state regulations is impossible or when state law obstructs congressional objectives.
The PSA, enacted in 1992, consolidated the regulatory framework for pipeline safety that was previously governed by two statutes: the Natural Gas Pipeline Safety Act of 1968 (NGPSA) and the Hazardous Liquid Pipeline Safety Act of 1979 (HLPSA). The NGPSA empowered the DOT to regulate the transportation of natural gas and liquefied natural gas, while the HLPSA, modeled after the NGPSA, provided similar authority for hazardous liquids. The PSA recodified these statutes under 49 U.S.C. 60101 et seq.
Definitions within the PSA include "interstate hazardous liquid pipeline facility," which pertains to pipelines transporting hazardous liquids in interstate or foreign commerce, and "intrastate hazardous liquid pipeline facility," which does not. A "hazardous liquid pipeline facility" encompasses all related infrastructure used for transporting hazardous liquids. Federal regulations under the HLPSA exclusively govern interstate pipeline facilities.
At the state level, the Washington Utilities and Transportation Commission (WUTC) has established its own regulations for pipeline safety, which adopt DOT regulations by reference and cover various operational aspects. Safety provisions in the Franchise Agreement stipulate that pipeline construction and repairs must be overseen and approved by the Director, who may mandate necessary actions at the Permittee's expense. Additionally, the Indemnity Agreement requires Olympic Pipe Line to conduct weekly visual inspections and annual pressure tests of the pipeline.
The PSA allows municipalities to obtain certification or enter into agreements with the DOT for intrastate gas pipeline transportation, but it distinguishes hazardous liquids from gases. The extent of the City of Seattle's involvement in WUTC's regulatory processes remains open to interpretation, although the City is afforded opportunities to express its views through state agency mechanisms.
The City's regulatory actions regarding the Seattle Lateral pipeline are preempted by the Pipeline Safety Act (PSA), regardless of whether the pipeline is classified as interstate or intrastate. Consequently, the court does not address Seattle's argument that the PSA does not fully occupy the field of pipeline safety regulation. Previous cases, such as Kinley Corp. v. Iowa Utils. Bd., Natural Gas Pipeline Co. of Am. v. R.R. Comm'n, and Williams Pipe Line Co. v. City of Mounds View, reinforce the conclusion that the PSA explicitly preempts state regulations concerning pipeline safety. The bankruptcy court upheld this view, indicating that Seattle exercised its regulatory authority over the Seattle Lateral. Seattle contends that its regulatory actions were constrained by the bankruptcy court’s automatic stay but could pursue contract claims against Olympic only after the district court lifted the stay. Despite this procedural nuance, the court maintains that Seattle acted as a regulator, not as a market participant. Additionally, Olympic argues that the Franchise Agreement expired on December 31, 2000, prior to Seattle's request for safety compliance. However, the Franchise Agreement stipulates that Olympic remains obligated under it until the pipeline is removed, which has not occurred. Consequently, Olympic is still bound by both the Franchise Agreement and the Indemnity Agreement, which survives the expiration of the Permit and any renewals or extensions.
Seattle claims that without enforcing its safety regulations on Olympic, companies will contractually agree to unenforceable terms. Seattle argues that Olympic believed the Seattle Lateral was an interstate pipeline when it entered into the Franchise and Indemnity Agreements, which included the City’s safety regulations. Seattle contends that by entering these agreements, Olympic consented to the regulations and waived its right to challenge their preemption by the Pipeline Safety Act (PSA).
However, it is asserted that Olympic did not waive its right to contest preemption since federal preemption is a matter of governmental authority, not an individual right that can be waived. The Supremacy Clause mandates that state laws conflicting with federal laws must yield, meaning Olympic could not forfeit a right it did not possess. Seattle’s cited cases, which involve waiving individual constitutional or statutory rights, do not apply here as federal preemption is not an individual right.
Seattle also argues that deeming the City's pipeline safety demands unenforceable will lead to future contracts with insincere safety provisions. The City believes enforcing its regulations would deter such behavior. However, the response emphasizes that establishing public policy is not the court's role; Congress has already defined the relevant public policy through the PSA, which explicitly preempts Seattle's regulation authority over Olympic. Thus, the court does not see merit in Seattle’s argument regarding the supposed necessity of compliance with its safety regulations.
A sound public policy typically discourages companies from making unenforceable contracts, but this concern is outweighed by the federal interest in maintaining uniform hazardous liquid pipeline safety regulations. The court referenced Williams Pipe Line Co. v. City of Mounds View, highlighting that hazardous liquid pipelines traverse multiple states and land owned by numerous individuals. Allowing individual landowners to impose their own safety standards would undermine Congress's aim for a national safety standard. Consequently, the City's public policy argument was deemed unpersuasive, leading to an affirmation of prior rulings.
Additional notes detail that demands included completing a hydrostatic test, which involves purging and pressurizing the pipeline. The Seattle Lateral, primarily transporting gasoline but also jet fuel and high sulfur fuel, operates in a designated high consequence area due to sensitive geography. The Seattle City Council enacted an ordinance with an effective date of January 1, 1991. Olympic Pipe Line Co. filed for Chapter 11 bankruptcy in 2003, with Seattle seeking relief from the automatic stay due to alleged insurance coverage failures; however, the bankruptcy court denied this motion. The Office of Pipeline Safety later stated that a hydrostatic test was unnecessary for safe pipeline operation and that the pipeline complied with federal standards. The City of Federal Way was initially a defendant but was dismissed. The court also ruled that Seattle's demand for liability insurance was not preempted by federal law.
The court rejected Olympic's claims that any termination or denial of a franchise infringed upon the Commerce Clause and that the franchise fees from Seattle were arbitrary and unreasonable, noting these issues were not subject to appeal. The appellate review of the district court's summary judgment is conducted de novo, which entails evaluating the facts favorably towards the nonmoving party and assessing whether a genuine material fact issue exists and if the law was applied correctly. Olympic's assertion that the review of a granted preliminary injunction should be for abuse of discretion is incorrect, as the appeal pertains solely to the summary judgment order without an interlocutory appeal of the injunction. The court emphasized that both preemption and federal statute interpretations are also reviewed de novo. Express preemption occurs when Congress explicitly displaces state law, while field preemption arises when federal regulation is comprehensive enough to imply no room for state regulation. Conflict preemption is identified when it is impossible to comply with both federal and state regulations or when state law obstructs federal objectives. Prior to the Pipeline Safety Act (PSA) of 1992, the regulation of pipeline safety was governed by the Natural Gas Pipeline Safety Act of 1968 and the Hazardous Liquid Pipeline Safety Act of 1979, which were subsequently combined into the PSA at 49 U.S.C. 60101 et seq. Definitions are provided for interstate and intrastate hazardous liquid pipeline facilities, with the Department of Transportation (DOT) retaining exclusive regulatory authority over interstate pipeline facilities.
The Washington Utilities and Transportation Commission (WUTC) has established regulations for the pipeline transportation of hazardous liquids that align with or exceed federal Department of Transportation (DOT) standards, specifically adopting relevant sections of the Code of Federal Regulations (CFR). The Franchise Agreement mandates that any construction or repair of the pipeline system must receive prior approval from the Director, who can also order necessary repairs at the Permittee's expense due to safety concerns. Additionally, the Indemnity Agreement requires Olympic Pipe Line to conduct weekly visual inspections and annual pressure tests of the pipeline.
The Pipeline Safety Act (PSA) distinguishes between hazardous liquids and gases, with specific provisions for municipalities to engage in safety agreements regarding intrastate gas pipelines, but not regarding hazardous liquids. The text notes that the City of Seattle's regulatory actions may be limited if the pipeline is classified as either interstate or intrastate, and while the city may participate in WUTC oversight, it cannot impose its own safety regulations on Olympic's operations without being preempted by the PSA. Historical case law indicates that the PSA explicitly preempts state and local regulations concerning hazardous liquid pipeline safety, confirming that Congress intended to centralize safety regulation at the federal level.
The bankruptcy court denied Seattle's motion for relief from the automatic stay, affirming that the City acted in its regulatory capacity regarding the Seattle Lateral. Seattle limited its actions to regulatory matters due to the constraints of the bankruptcy court's stay, allowing it to pursue contract claims against Olympic only after the district court lifted the automatic reference. Olympic contended that the Franchise Agreement expired on December 31, 2000, prior to Seattle's request for Olympic to address thirty-three safety concerns. However, the Franchise Agreement stipulates that Olympic remains obligated under the ordinance as long as the pipeline is within Seattle's city limits, despite any termination or expiration. Additionally, the Indemnity Agreement's provisions survive the expiration of the Permit and its renewals, further binding Olympic to its obligations as the pipeline remains in place.
