Argument Recap

Earlier this month, the Federal Circuit heard oral argument in City of Fresno v. United States. In this case, the Federal Circuit is reviewing a judgment of the Court of Federal Claims, which ruled on cross-motions for summary judgment related to breach of contract and Fifth Amendment takings claims. The plaintiffs argue on appeal that the trial court erred both in concluding that the contractual water rights in question were subordinate to the rights of others during a drought and by dismissing takings claims for lack of standing. Judges Moore, Clevenger, and Stark heard the argument. This is our argument recap. 

Roger J. Marzulla argued for the plaintiffs-appellants. He began by highlighting how, “in May of 2014, there were 279,000-acre feet of San Joaquin River water stored” and “yet Reclamation gave the Friant Contractors no water at all that summer for the city of Fresno or for the 17 water districts that depend on this water supply.”

A judge asked if it was the plaintiffs’ position that the Friant Contractors were entitled under their contract only to leftover water after the government fulfilled its other water delivery obligations. Marzulla answered it was not, but that “that is a fair characterization of the erroneous interpretation given the contract by the trial court.” Instead, he argued, the Friant Contract was “subject to”–not “subordinate to”–the Exchange Contract. The judge sought clarification, asking if, for his clients to prevail, the court must agree that, “under the Exchange Contract, the government was not required to deliver the water to the Exchange Contractors.” Marzulla answered “yes.”

The argument turned to the government’s position that the San Joaquin River water constituted “substitute water.” One judge questioned why San Joaquin River water is not substitute water. Marzulla argued in response that, in the relevant contract, “the Exchange Contractors exchanged the use of their rights in the San Joaquin in return for a substitute water supply from the Sacramento,” and “so long as Reclamation is delivering that substitute water from the Sacramento, then Reclamation has the right to use the San Joaquin River rights for the Friant project.” Another judge questioned whether the relevant contract converted the San Joaquin water into substitute water under specific circumstances. Marzulla agreed that it does, under “some circumstances, and in certain quantities,” allow for its use. But, he argued, the definition of substitute water still does not apply.

Another judge interjected, asking, whether the Exchange Contractors are “entitled to any water that is necessary to meet their contracts.” Marzulla, in response, argued that they are entitled only to San Joaquin water in specific circumstances as outlined in the contract. He further contended that, under the government’s interpretation of the relevant contract, “there is no point in time at which the United States didn’t have the right to divert and store the waters of the San Joaquin and no point at which the Exchange Contractors did have the right to that water.”

Having discussed the interpretations of the relevant contracts, Marzulla then turned the argument to the plaintiffs-appellants’ breach of contract claim. He argued that, even if the court agrees with the government’s interpretation of the relevant contract, the government breached that contract because it “entitled the Exchange Contractors to only 99,000 of the 279,000-acre feet” of water stored for delivery to the Friant Contractors. But he government, he maintained, instead withheld all water for future Exchange Contract allocations. He argued “Reclamation is not required to store water for later delivery to the Exchange Contractors” but nevertheless “voluntarily chose to do so,” violating the Friant Contract. 

One judge asked Marzulla to address the plaintiffs-appellants’ takings claims. He responded that, under the “Reclamation Act, water is to be distributed in accordance with state law” and the “right to the use of water shall be pertinent to the land irrigated.” He asserted the Federal Circuit had previously found water to be a property right in a past case, which, he argued, is “binding authority.”

Matthew Carhart argued for the United States, one of the defendants-appellees. He argued the court should affirm the lower court’s decision, because the trial court correctly granted summary judgment on plaintiffs’ contract claim and dismissed their takings claim.” Carhart first addressed the contract claim. He argued that “the essence” of the relevant bargain was that “the United States, to get access to San Joaquin River water, needed to deliver substitute water in conformity with the contract.” He contended that “the only way” the government could achieve this during the drought “was to deliver San Joaquin River water to the Exchange Contractors.” One judge sought clarification, asking if he was arguing that the government must always satisfy the Exchange Contract first. Carhart responded “yes when compared to these plaintiffs.”

A judge turned the argument to what constitutes “substitute water.”  Carhart argued the relevant contract language, “any source,” was “unambiguous.” He argued the government negotiated a “broad definition” of substitute water, which gave it the “discretion” to “pick the source of the water.”

One judge asked if “the Sacramento River dumped into the San Joaquin River at some point.” Carhart answered “no.” The judge then asked if the basic assumption was that the government would get water through a unrelated canal. Carhart responded by arguing that, while that was the basic premise, the relevant “definition is broad enough to encompass situations like 2014 where there wasn’t enough water in the canal to meet the Exchange Contractor’s needs.” He asserted that the “heart” of the government’s argument is that “the United States did deliver substitute water from the Delta throughout 2014.” He stated that, under the relevant contract, if the government cannot meet its commitment to the Exchange Contractors, its obligations are temporarily “suspended.” The government, however, still must do its “due diligence to comply with those obligations.” Carhart argued the government delivered Delta and San Joaquin water to meet its due diligence requirement.

A judge asked in what situations is the government entitled to use San Joaquin River water, and whether an “interruption” triggered its permissive use. Another judge asked if it was correct that the government stopped water delivery to the Friant Contractors early on as a “prediction” regarding both the ability to deliver water and the drought, rather than due to an interruption. Carhart confirmed that, in the government’s view, was correct.

Finally, a judge prompted Carhart to address the takings claim and the irrigators’ property rights. In response, Carhart argued “there is no water right under California law.” A judge asked if this position is part of the government’s argument for lack of standing. Carhart responded that, yes, the government focuses on the “lack of property interest.” Another judge mentioned that the plaintiffs-appellants may be relying on a federal right, not a state right. In response, Carhart argued that if the court agreed with this position it would be “contrary to the Supreme Court’s precedent,” which held that “the Reclamation Act was not intended to create two systems of water rights” but, instead, was intended to be “consistent with state water rights.” Additionally, he argued, if the plaintiffs-appellants’ argument is correct, the irrigators would have property interests that extend beyond the contractual rights of the water districts.

Daniel J. O’Hanlon argued for the San Luis & Delta-Mendota Water Authority, another of the defendants-appellees. He addressed the plaintiffs’ takings claim, stating that he agrees with the government with respect to its interpretation of both the Exchange and Friant Contracts. O’Hanlon went on to explain that, while the oral argument suggested plaintiffs-appellants are asserting “a federal right,” he explained “that is not what they said in their brief.” O’Hanlon argued that “United States’ water rights are determined in accordance with state law” and that “the irrigators here don’t hold water rights under California law.” He explained, instead, that they have a right to “water service,” meaning a “right to an equitable allocation of the supply,” which is not a specific quantity. 

A judge asked if it was his clients’ position that allocation is “not a property right, it’s basically a gift,” because the contract is with the water district. O’Hanlon responded by pointing out that, while irrigators “don’t have a right to a specific amount each year . . . [t]hey do have a right to an equitable share of the entire supply available to the district as landowners in the district.” He argued, though, that under California law this is “not a water right.” A judge questioned whether these rights “are by contract.” O’Hanlon responded that they are in this case. 

In his rebuttal, Marzulla first argued the government’s interpretation of the contracts was “utterly inconsistent with the whole purpose of the exchange.” Moreover, he pointed out, if the government may always treat San Joaquin River water as “substitute water,” there is no reason for the contract to allow for its delivery when substitute water is not available. 

One judge suggested the phrase “any source” is modified by a section of the relevant contract allowing the government to use water allocated for Friant to fulfill the Exchange contract when substitute water is not available. This judge noted, however, that the contract references a memo stating that this exception applies to “mechanical failures.” Marzulla responded by arguing the plaintiffs-appellants “objected to that memo” because it was unauthenticated, and they were unaware of who the author was. The judge followed up, asking if this memo “created nonetheless a purpose” for the exception, which differs from the plaintiffs-appellants’ argument. Marzulla responded that he was “happy to read it that way,” but pointed out the government reads the memo to “allow the government to use San Joaquin River water anytime.” He asserted it means “when, as in 2014,” the government “runs short of Sacramento River water,” and it is “unable to deliver the substitute water,” then the government augments that distribution with water from the San Joaquin River. 

We will continue monitoring this case and report on developments.