Supreme Court Clarifies Standing For Regulatory Challenges In Diamond Alternative Energy v. EPA

Highlights

• The U.S. Supreme Court on June 20, 2025, issued a 7-2 decision in Diamond Alternative Energy, LLC v. EPA, clarifying when stakeholders have standing to challenge an agency action based on market effects rather than direct government regulation.
• In an opinion heavy on economic theory, the Supreme Court held that courts may make "predictable, commonsense inferences" about regulated entities' behavior when assessing whether unregulated parties have Article III standing.
• This Holland & Knight alert discusses the context, the Supreme Court's opinion, implications and next steps.

The U.S. Supreme Court on June 20, 2025, issued a 7-2 decision in Diamond Alternative Energy, LLC v. EPA, clarifying when stakeholders have standing to challenge an agency action based on market effects rather than direct government regulation. In an opinion heavy on economic theory, the Supreme Court held that courts may make "predictable, commonsense inferences" about regulated entities' behavior when assessing whether unregulated parties have Article III standing.

The merits of the case, which were not before the Supreme Court, concerned the U.S. Environmental Protection Agency's (EPA) 2022 reinstatement of the Clean Air Act (CAA) waiver granted to California for the state's Advanced Clean Cars (ACC) Program. The CAA mostly preempts states from adopting or enforcing their own vehicle emission rules – except for California, which may request waivers from federal preemption under CAA Section 209(b) to establish its own, more stringent vehicle emissions standards. (For more on this process and recent congressional action on other California waivers, see Holland & Knight's previous alert, "Up in the Air: Congress Nullifies Clean Air Act Waivers for California," May 23, 2025.)

The waiver in Diamond Alternative Energy has a ping-ponging history: In 2013, the EPA under the Obama Administration granted California a waiver for its ACC Program, which included greenhouse gas standards. The EPA under the first Trump Administration partially withdrew this waiver in 2019, and the EPA under the Biden Administration reinstated it in 2022. Fuel producers and several states challenged the 2022 reinstatement, giving rise to the instant case. Meanwhile, the second Trump Administration has said it is now reassessing the basis for the 2022 waiver.

In 2024, the U.S. Court of Appeals for the District of Columbia Circuit dismissed the fuel producers' challenge for lack of standing. The fuel producers claimed economic injuries that would result from less liquid fuel sales due to the change in vehicle sales brought about by the ACC rule. In the D.C. Circuit's view, however, vacating the waiver (and thereby invalidating the rule) would not necessarily redress the fuel producers' economic injuries: Automakers might stay the course and make and sell fewer liquid-fueled vehicles even if the California standards disappeared, and the fuel producers also had not provided any affidavits or other evidence on likely automaker behavior.

Supreme Court's Opinion

In a 7-2 opinion authored by Justice Brett Kavanaugh, the Supreme Court reversed the D.C. Circuit, holding that petitioners had "readily established standing" by reference to "commonsense economic principles." Specifically, the California rules "force" automakers to produce "a fleet of vehicles that, as a whole, uses significantly less gasoline and other liquid fuels." Accordingly, the rule will cause "predictable" injuries on fuel producers and, "by the same token," it can fairly be expected that eliminating the rule would redress those injuries.

The Supreme Court also pointed to several pieces of record evidence to substantiate its analysis, including declarations that prior California rules had substantially harmed fuel producers, statements from EPA and California that the rule would likely decrease fuel use, and affidavits by automakers who intervened in support of the rule on the grounds that it ensured a level playing field (presumably because otherwise competitors would produce fewer electric vehicles). The Supreme Court also emphasized that the fuel producers did not have to produce expert economic evidence on market behavior if (as here) they can "simply show a predictable chain of events" between judicial relief and redress of their injuries.

Implications and Next Steps

The Supreme Court's decision will make it easier for parties to challenge regulations based on predictable market effects. By allowing "predictable, commonsense inferences" about market behavior – even in the absence of affidavits or direct evidence – the ruling creates a more accessible pathway for businesses to challenge regulations indirectly affecting them. This will be particularly important for businesses operating in closely intertwined markets where regulations on one industry predictably affect others, including possibly for competitors disadvantaged by regulatory schemes.

For the California waiver program, the decision also has several important implications. Most importantly, the ruling paves the way (at least in theory) for the D.C. Circuit to consider substantive arguments against EPA's 2022 waiver reinstatement. This is potentially important because multiple rounds of litigation regarding long-standing questions on the scope of CAA Section 209(b) have been put off as EPA's waiver decisions ping-pong back and forth between administrations.

However, the second Trump Administration has indicated that it will reassess the waiver through a new regulatory process, creating the prospect of yet another reversal of a waiver granted in 2013, withdrawn in 2019, reinstated in 2022 and potentially withdrawn again.

In the background of the regulatory back-and-forth, there are a number of unresolved questions about California waivers, including whether EPA has authority to withdraw (or reinstate) waivers once they are granted, the extent to which California waivers can relate to greenhouse gas standards at all, or how administrative law developments since the 2022 reinstatement (such as West Virginia v. EPA and Loper Bright) might affect the waiver process.

Additional uncertainty arises because of congressional action in May 2025 to nullify a separate set of California CAA waivers using the Congressional Review Act (CRA). That development is relevant to other California waivers because the CRA has a provision prohibiting agencies from issuing future "rules" that are "substantially the same" as the disapproved ones. California and other states have filed a lawsuit challenging the legality of CRA efforts.