In December the Federal Circuit issued its opinion in City of Fresno v. United States, a takings case that attracted two amicus briefs. In this case, the Federal Circuit reviewed a dismissal by the Court of Federal Claims and a grant of summary judgment in favor of the United States. Parties to the California Central Valley Project sued the United States claiming they were entitled to water the United States failed to distribute after a drought in 2014. In an opinion authored by Judge Stark and joined by Chief Judge Moore and Judge Clevenger, the Federal Circuit affirmed the lower court’s dismissal and grant of summary judgment. This is our opinion summary.
Judge Stark began by outlining the procedural and factual background of the case:
The [Central Valley Project (CVP)] aims to ‘reengineer its natural water distribution,’ . . . addressing the mismatch between where water is abundant, but arguably less needed, and where it is scarce, yet could – if diverted – be put to more efficient agricultural benefit. [The United States Bureau of Reclamation’s (Reclamation’s)] role in the CVP includes obtaining rights to water resources in the Central Valley and undertaking commitments to deliver those waters. . . . [T]he ‘Exchange Contractors,’ . . . entered into various agreements with the government. In one such agreement . . . the Exchange Contractors sold the bulk of their rights to San Joaquin River water to the government while at the same time reserving their rights to San Joaquin River water ‘in excess of specified rates of flow’ . . . . The same parties then executed a ‘Contract for the Exchange of Waters’ (the ‘Exchange Contract’), which granted Reclamation authority to ‘store, divert, dispose of and otherwise use’ even these ‘reserved waters’ . . . . [T]he government agreed in the Exchange Contract to provide them with ‘substitute water. . . .’ Article 8 of the Exchange Contract requires that a specified ‘Quantity of Substitute Water’ be delivered to the Exchange Contractors: . . . 840,000 acre-feet . . . . During critical years, . . . the government is required to provide a lesser amount, . . . 650,000 acre-feet. . . . Article 4 describe[s] Reclamation’s obligations when there are certain interruptions to its ability to supply substitute waters to the Exchange Contractors. [With] rights to San Joaquin River water, Reclamation then contracted to deliver water to municipal and private entities within the Friant Division. . . . The Friant Contract requires Reclamation to deliver water, including water from the San Joaquin River, to the Friant Contractors. . . . [T]he government[s] . . . duty is ‘subject to the terms of’ the pre-existing Exchange Contract. . . . [C]rucially to Appellants’ case here, the government also agreed in Article 3(n) that it ‘will not deliver to the Exchange Contractors [under the Exchange Contract] waters of the San Joaquin River unless and until required by the terms of the [Exchange Contract]. . . .’ [U]ntil 2014, Reclamation was able to meet its contractual obligations to supply the Exchange Contractors with substitute water . . . without drawing on water from the San Joaquin River. . . . Reclamation recognized it was not going to be able to meet its combined water delivery obligations for 2014 to the Exchange Contractors and the Friant Contractors. . . . Ultimately, while Reclamation delivered [] ‘health and safety’ waters . . ., what the Friant Contractors received in 2014 was essentially a ‘zero allocation . . . .’ In October 2016, the [Friant Parties] . . . filed suit against the United States in the Court of Federal Claims. The Friant Parties alleged that Reclamation’s actions in 2014, and particularly Reclamation’s diversion of San Joaquin River water to the Exchange Contractors instead of to them, constituted a breach of contract. . . . The Friant Parties further claimed that ‘[t]he water and water rights of the Friant division appropriated by the United States in 2014 were the property of Plaintiffs . . . .’ Thus, the Friant Parties alleged that the government’s actions constituted a takings without just compensation in violation of the Fifth Amendment. The Court of Federal Claims dismissed the Friant Growers’ breach of contract claim because these entities . . . lacked standing. The court also dismissed the Friant Growers’ and the Friant Contractors’ takings claims for lack of standing . . . . The Friant Contractors’ breach of contract claims proceeded and . . . the trial court granted [the United States] motion for summary judgment . . . . These rulings were based on the court’s conclusions that (a) the Friant Contractors’ rights under the Friant Contract were subordinate to the rights of the Exchange Parties under the Exchange Contract; (b) the conditions in 2014 required Reclamation, under the Exchange Contract, to deliver San Joaquin River water to the Exchange Contractors, because San Joaquin River water may be treated as ‘substitute water;’ and (c) the government was, regardless, immunized under the Friant Contract for its water allocation decisions because no reasonable factfinder could find its decisions to have been arbitrary, capricious, or unreasonable.
Judge Stark began his analysis by noting that “[t]he Friant Parties’ appeal presents solely issues of law.” He explained how the Federal Circuit reviews de novo determinations by the Court of Federal Claims to “dismiss a claim for lack of subject matter jurisdiction or failure to state a claim, as well as that court’s interpretation of a contract.” Also, he noted, the Federal Circuit reviews a grant of summary judgment “de novo . . . with justifiable inferences being drawn in favor of the party opposing summary judgment.” Finally, “[f]or Fifth Amendment takings claims,” Judge Stark explained, the Federal Circuit will review “de novo the existence of a compensable property interest.”
Next, Judge Stark outlined each party’s arguments on appeal. Judge Stark explained how the Friant Parties “contend that the [lower court] misinterpreted both the Exchange Contract and the Friant Contract.” In contrast, the government and Exchange Contractors request that the Federal Circuit “endorse the analysis of the Court of Federal Claims,” which, Judge Stark explained, was that “the critical year circumstances Reclamation confronted in 2014, and the government’s competing obligations . . . required Reclamation to source ‘substitute water’ from the San Joaquin River to the Exchange Contracts, and required it to do so in the amounts that Reclamation actually delivered.” Additionally, Judge Stark highlighted, the government contends that it “is immunized from any breach of the Friant Contract as long as the government’s determinations were not arbitrary, capricious, or unreasonable.” Finally, he noted, the government and Exchange Contractors request the Federal Circuit affirm “the trial court’s conclusion that none of the Friant Parties has a property interest in Reclamation water under state or federal law, and, accordingly, there was no Fifth Amendment taking.”
Judge Stark summarized the court’s conclusions relating to the party’s arguments. First, he highlighted, “the Exchange Contract broadly defines ‘substitute water’ and expressly contemplates that Reclamation may be required, under certain circumstances, to deliver water originating in the San Joaquin River to the Exchange Contractors as ‘substitute water.'” Second, he continued, “nothing about this interpretation of the Exchange Contractors’ rights and Reclamation’s obligations contradicts or renders meaningless Article 4 of the Exchange Contract. Third, Judge Stark emphasized, even if a breach of contract occurred, “Reclamation enjoyed immunity from liability because its action could not be found to be arbitrary, capricious, or unreasonable.” Lastly, he found no problem with “the Court of Federal Claims’ dismissal of the takings claims.”
Turning to the breach of contract claim, Judge Stark explained that “whether the government breached the Friant Contract” turned on whether the government was “required to act by the Exchange Contract,” which turned on the proper meaning of “substitute water.” In this regard, Judge Stark explained, “the Exchange Contract’s definition of ‘substitute water’ plainly does not exclude San Joaquin River water.” He further explained that “[t]he Friant Contract restricts the Government’s authority” to supply San Joaquin River water “as substitute water to the Exchange Contractors” when “the government is required to use San Joaquin River water to meet its obligations under the Exchange Contract.” He noted two realities “reflected in the contracts.” First, he identified that San Joaquin River water “initially belonged to the predecessors of the Exchange Contractors, and they only relinquished those rights subject to the Government’s commitment to provide them (and their successors) with substitute water, with no limitation on the location from which that water may be sourced.” Second, he emphasized, “the Friant Contract expressly makes ‘[t]he rights of the [Friant] Contractor[s],’ including the Friant Contractors’ rights to government delivery of water, ‘subject to the terms‘ of the Exchange Contract.” As a result of this analysis, Judge Stark concluded, “San Joaquin River water may be used by Reclamation as ‘substitute water’ when such water is required by the Exchange Contract to be used as ‘substitute water,’ such as when the government cannot otherwise meet its obligations to the Exchange Contractors.”
Next, Judge Stark rejected the argument that the “Court of Federal Claims’ interpretation of Article 4(a) improperly renders Article 4(b) and 4(c) of the Exchange Contract” nullities because “those [were] the only sections that require Reclamation to provide the Exchange Contractors with San Joaquin River water.” Instead, he highlighted, “Article 4(a) makes the government’s ability to provide San Joaquin River water to ‘others,’ including the Friant Contractors, dependent on the government’s simultaneous ability . . . to provide substitute water to the Exchange Contractors.” He explained that Article 4(b) “addresses specific circumstances in which the government is wholly unable to provide the Exchange Contractors with substitute water from anywhere other than the San Joaquin River.” But here, he highlighted, “it [was] undisputed that in 2014” the government “was able to–and did–deliver non-San Joaquin River water to the Exchange Contractors throughout that year.” As a result, he concluded, “the situation here was not governed by Article 4(b) of the Exchange Contract,” but rather, he reasoned, its obligation under Article 8 of the contract.
Judge Stark addressed the government’s contractual immunity claims next, explaining that, “[e]ven if the Friant Contractors could, contrary to [the Court’s] analysis above,” establish a breach occurred, the Federal Circuit would affirm the lower court’s judgment. He reasoned that, when “[r]ead together,” different parts of the Friant Contract “prevent[s] liability from accruing against the United States during periods of drought so long as the contracting officer does not” act unreasonably. Applying these provisions, Judge Stark reasoned, “Reclamation [was] confronted with insufficient water from non-San Joaquin River sources” and was “required under the Exchange Contract to supply San Joaquin River water to the Exchange Contractors.” In particular, he highlighted, “[t]he record is devoid of evidence that the government’s actions were anything other than a good faith, reasonable effort to address a challenging circumstance in a manner that officials believed was compliant with the government’s contractual obligations.” As a result, he concluded, the lower court “was right to grant summary judgment to the government on the Friant Contractors’ breach of contract claim, as the government could not be found liable based on its actions, which” were not unreasonable.
Finally, Judge Stark addressed the plaintiffs’ takings claims, “reach[ing] the same conclusion as the [lower court], which dismissed these claims based on the lack of a protected property interest.” Unlike the lower court, however, which “based its dismissal decision on the Friant Parties’ lack of standing,” Judge Stark explained the Federal Circuit dismissed based on “RCFC 12(b)(6).” Judge Stark determined the issue under this Rule turned on “whether Appellants stated a takings claim upon which relief may be granted.” Thus, he continued, the analysis turned on “whether the [Friant Parties] possess property rights under California law.” In this regard, he rejected the arguments of the Friant Parties, instead finding that “Appellants [did] not have any water rights” because the California State Water Resource Control Board had previously held that it “is Reclamation that ‘has appropriative water rights in the Central Valley Project.” He highlighted how Reclamation was undertaking “exactly the type of action” the appropriation doctrine is meant to reward. He explained that “California law does not assign property rights in water based on the uses put to it by end users.”
As a result of Judge Stark’s analysis, the panel affirmed the judgment of the Court of Federal Claims.