Federal Circuit Resurrects Klamath Water Users’ Takings and Contract Claims

By Douglas MacDougal and Jessica Ferrell

May 25, 2011

The U.S. Court of Appeals for the Federal Circuit has written another chapter in the decade-long legal fight between Oregon water users in the Klamath Basin and the United States government. The water users and irrigation districts in the Klamath seek to recover from the United States for their widely-publicized losses caused by the government’s decision in 2001, during a drought, to use the available water for fish listed under the Endangered Species Act (ESA). The plaintiffs’ claims, filed in the United States Court of Federal Claims (Court of Claims), are based on the Fifth Amendment’s Takings Clause, breach of the various contracts with the government, and breach of the Klamath Basin Compact (Compact). The Court of Claims rejected these efforts several years ago by dismissing all of plaintiffs’ claims. Plaintiffs appealed, and the United States Court of Appeals for the Federal Circuit (Court of Appeals) reversed, in an opinion which marks a significant victory for water users. The Court of Appeals issued its mandate last month and its substantive opinion in February 2011. Klamath Irrigation District v. United States, 635 F.3d 505 (Fed. Cir. 2011) (Klamath II).[1] It vacated and remanded the Court of Claims’ judgment based on opinions issued in 2005 and 2007, and resurrected plaintiffs’ takings and breach of contract claims against the government.

The Seeds of the Clash

The legal clash in the Court of Appeals mirrors the physical clash among competing interests in the Klamath Basin. In its simplest terms, the beneficiaries of an earlier congressional purpose, that of bringing water and irrigation to an arid basin, are in conflict with the beneficiaries of another, later congressional purpose: that of protecting and recovering imperiled species under the ESA.

The 1905 federal reclamation project (Klamath Project) established an elaborate system of channels, reservoirs, dikes, and other plumbing for directing water from Upper Klamath Lake to irrigate about 240,000 acres of crop land, and to furnish water to several national wildlife refuges, including Lower Klamath and Tule Lake National Wildlife Refuge. The Bureau of Reclamation (Reclamation) entered into contracts with irrigation districts and water users over the years. Districts and individuals have relied on these contracts and the project water they assure to develop an agricultural economy which has sustained the communities in the basin.

On the other side of the conflict are the species listed under the ESA, including the Coho salmon, the short-nosed suckerfish, and the Lost River suckerfish. The federal management of Upper Klamath Lake by Reclamation primarily for irrigation deliveries was deemed to be in conflict with the federally protected fish species. Then in 2001, severe drought conditions exacerbated this conflict. “Jeopardy” opinions from National Marine Fisheries Service (NMFS) and U.S. Fish and Wildlife Service (USFWS) concluded that the federal project’s proposed operations for 2001 threatened the continued existence of the species. As a result, Reclamation in April 2001 terminated delivery of irrigation water to the Districts. That act precipitated takings, breach of contract, and breach of compact claims filed by the water users in the Court of Claims. The physical competition in the Klamath between water for agriculture (and refuges) and water for fish was now to be played out on a different, more abstract plane, in the courtroom.

The Legal Conflict

In the Court of Claims, the Klamath water users, as beneficiaries of the irrigation purposes of the Klamath Project, were aligned against the United States, which vigorously defended the Treasury against plaintiffs’ claims for compensation. The United States raised a variety of defenses, among them that the districts and their patrons, who were not the original appropriators of the project water, do not have cognizable property rights in the water, and whatever interest they do have is not compensable, under either the Fifth Amendment or the Compact. The United States also asserted that the

sovereign acts doctrine – which immunizes the federal government for any and all acts taken in its sovereign, as opposed to contractor, capacity -- is an absolute bar to breach of contract liability against the government in these circumstances. Thus the stage was set for the Court of Claims opinion to determine whether valid takings and breach of contract claims existed. In two decisions, generally known as the “Takings Decision”[2] and the “Contracts Decision,”[3] the Federal Court of Claims held that the irrigators did not have compensable property interests to support takings claims. In another ruling, the Court of Claims agreed with the government, holding that the breach of contracts claims were completely barred by the sovereign acts doctrine. See J. Ferrell, Klamath Basin Decisions Leave Irrigators High and Dry, Marten Law News (April 25, 2007). The opinions were comprehensive and appeared to have devastated the plaintiffs’ case.

The Court of Appeals Decision

On appeal to the Court of Appeals for the Federal Circuit, the panel was not certain that there was no compensable property interest under Oregon law. It accordingly certified several questions to the Oregon Supreme Court to address whether, under the particular circumstances of the case, the irrigators did or did not have compensable property interests under their various contracts, patents and permits. The Oregon Supreme Court ruled that equitable rights may well have arisen, but that specific contractual terms could have reserved those rights, or otherwise modified or eliminated them, and the outcome could change depending on that inquiry. Klamath Irrigation Dist. v. United States, 348 Or. 15, 227 P.3d 1145 (2010) (en banc) (“Certification Decision”); see also J. Kray, Oregon Supreme Court to Address Right of Klamath Basin Water Users to Compensation for Water Taken to Protect Species under ESA, Marten Law News (March 9, 2009) and Klamath Basin Water Users One Step Closer to Obtaining Compensation for Water Taken to Protect Species under ESA, Marten Law News (March 29, 2010). Thus the ultimate decision on the equitable rights of the districts and irrigators depends upon the nature of their contracts, which would require a hearing to determine. Armed with answers to those certified questions from the Oregon Supreme Court, as well as briefing solicited from the parties on how they thought the court should proceed in light of the Oregon Supreme Court’s decision, the Federal Court of Appeals could then address the questions both of takings and breach of contract.[4] The takings question, as noted, could not be resolved without an analysis of the underlying contracts, which required remand.

As to the breach of contracts question, the Court of Appeals clarified the sovereign acts doctrine, emphasizing that the defense involves the following two-part test:

[F]irst [we ask] whether the sovereign act is properly attributable to the Government as contractor. That is, is the act simply one designed to relieve the Government of its contract duties, or is it a genuinely public and general act that only incidentally falls upon the contract? If the answer is that the act is a genuine public and general act, the second part of the test asks whether that act would otherwise release the Government from liability under ordinary principles of contract law. This second question turns on what is known in contract law as the impossibility (sometimes impracticability) defense.[5]

The Court of Appeals agreed with the Court of Claims that the Bureau of Reclamation’s halting of water deliveries in response to biological assessments conducted by NMFS and the USFWS “constituted a genuine public and general act that only incidentally fell upon the contracts at issue.”[6] However, the Court of Appeals found that the lower court failed to undertake the second part of the analysis, which addresses whether a sovereign act taken by the government “would otherwise release the Government from liability under ordinary principles of contract law.”[7] The Court explained that this question implicates the alleged impossibility of performance element, essential to a sovereign acts defense, and held that the United States has the burden of proving that performance under the various contracts was impossible. The impossibility doctrine, in turn, does not require the government to show actual impossibility of performance, but “only a showing of commercial impracticability.”[8] Whether the government made this showing also required remand in order to investigate this question of fact.

The key point made by the Court of Appeals on this issue was that impossibility of performance is a threshold requirement that the government must satisfy before it can successfully assert the sovereign acts doctrine. It also left the door open for the Court of Claims to allow the parties to submit additional evidence, mentioning that it could allow it, or decide upon the existing record whether the government established that “the Bureau lacked alternatives to halting water deliveries in 2001.”[9]

Remand

On remand, the Court of Claims must: 1) consider the takings and Compact claims in light of the Certification Decision; 2) determine whether, for purposes of the breach of contract claims, the government can establish that contract performance was impossible within the meaning of the sovereign acts doctrine; and 3) decide the breach of contract claims as appropriate.

If the Court of Claims finds that the water user contracts and district contracts did not preclude them from having equitable interests in the water, and if the government fails to meet its burden of impossibility of performance under the contracts, then the Court of Claims on remand will have to determine damages. The Court of Appeals noted that, if the Court of Claims “determines that the government is liable for takings or for breach of contract, or both, it will be necessary to address the question of damages. Needless to say, we express no views on whatever issues may arise in the setting of a damages determination.”[10] Plaintiffs have claimed about $100,000,000 in compensation. There is much riding on the Court of Claims’ decision on remand.

Afterword

Of note in the Court of Appeals’ recent opinion was an interesting emphasis on a traditional phrase from the seminal ESA opinion TVA v. Hill. The Court noted that the ESA was enacted to “halt and reverse the trend towards species extinction, whatever the cost.”[11] The emphasis on “whatever the cost” seems to have been intentionally given a slightly new shade of meaning.Water users and others, and indeed action agencies, are used to hearing the phrase as code for often disastrous sacrifice to their projects and water deliveries necessary to avoid jeopardy to listed species. Here, the Court of Appeals seems to be saying that the phrase does not just refer to the affected water user, but rather to the government itself, as well. That is, that mandated compliance with the ESA may come at a cost to the government as claims-payer to those who in good faith followed one Congressional purpose only to become ensnared by the conflicting mandates of another.

For additional information, contact Douglas MacDougal, Jessica Ferrell, or any member of Marten Law’s Water Resources or Natural Resources practice groups.

[1] See also Klamath Irrigation Dist. v. United States , No. 01-00591, Dkt 300, Mandate (Fed. Cir. April 11, 2011).

[2] Klamath Irrigation Dist. v. United States, 67 Fed. Cl. 504 (2005).

[3] Klamath Irrigation Dist. v. United States, 75 Fed. Cl. 677 (2007).

[4] See Klamath Irrigation Dist. v. United States, 635 F.3d 505, 515-16 (Fed. Cir. 2011) (Klamath II).

[5] Id. at 521 (quoting Stockton East Water Dist. v. United States, 583 F.3d 1344, 1366 (Fed.Cir.2009) (internal quotations and citations omitted).

[6] Id.

[7] Id.

[8] Id. at 522 (citing cases).

[9] Id. at 522, n.14.

[10] Id. at 522,

[11] Id. at 508 (citing TVA v. Hill and Klamath Water Users Protective Association v. Patterson, 204 F.3d 1206, 1213 (9th Cir. 1999) (emphasis added by Court of Appeals for the Federal Circuit in Klamath II).

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