On March 18, 2011, the U.S. Court of Appeals for the Federal Circuit issued a decision with far-reaching implications for water rights involving federal reclamation policy and the federal Endangered Species Act — Stockton East Water District, Central San Joaquin Water Conservation District, and the California Water Service Company v. United States.  In this case, the Federal Circuit ruled squarely in favor of protecting the federal reclamation contract rights of the water districts against federal demands to reallocate the district’s water for fish protection purposes.  The Federal Circuit held that by refusing to deliver the water to the water districts as required by the terms of their contracts, the federal government had breached the water delivery contracts and are thus liable for contract damages.

Background: The Central Valley Project

The Stockton East decision, like many other water rights cases, arises in the arid San Joaquin Valley in California, which the Court recognized is home to many water disputes:

In the history of the western United States, the fight for water rights is a central theme.  California, because a goodly part of the state shares the desert-like conditions that lie at the root of the fight, since before its founding has been one of the locales for this battle.  This case is another chapter in that state’s long-running history of water disputes.

The Central Valley Project in California is the largest federal water management project in the United States.  The New Melones Unit of the Central Valley Project was completed in 1979.  In order to fill the reservoir created by the construction of the New Melones Dam, the California State Water Resources Control Board required the federal government to obtain contractual “firm commitments” for the beneficial use of that water.  Enter the water districts in the Stockton East litigation.

The California legislature had authorized the creation of the Central San Joaquin Water Conservation District and the Stockton East Water District in order to stop the relentless draw-down of aquifers by farmers and municipalities in San Joaquin County (south of Sacramento).  In 1983, the Stockton East and Central water districts entered into nearly identical contracts with the Bureau of Reclamation that entitled them to up to 155,000 acre-feet of water a year from the New Melones reservoir.  Most of Stockton East’s water went to the City of Stockton and surrounding towns, while Central’s supply was directed to San Joaquin farmers.

What Led To Stockton East v. United States

As required by their contracts, together the two water districts spent almost $60 million to build infrastructure and facilities, including a three-mile-long tunnel drilled through solid mountain granite, to transport the water from this Sierra foothills reservoir to their customers in the Central Valley.  But then in 1992, just as the tunnel was being completed and the districts readied to receive their water, Congress passed the Central Valley Project Improvement Act, a statute ordering the Bureau of Reclamation to re-allocate 800,000 acre-feet of Central Valley Project water from irrigation to help stem the decline of fish populations in the Sacramento Delta.  Reclamation chose to annually satisfy a large chunk of this reallocation requirement with water in the New Melones Reservoir earmarked (but never delivered to) Central and Stockton, rather than supply it to the districts.

Because this reallocation of water to fish protection left little or no water to satisfy their contracts, the Districts sued the United States asserting breach of their contracts and taking of their water rights.  Following an eight-day trial, the trial court ruled for the Government. The districts appealed.  On September 30, 2009, the Federal Circuit reversed the trial court’s decision and remanded the case for a determination of damages.  But the Government asked the appeals court to rehear its decision.  Finally, on March 18, 2011, the Federal Circuit denied that request, and again remanded the case back to the trial court for a damages determination, “which to the extent feasible should be expedited.”

Fifth Amendment Rights Affirmed and Upheld

In addition to ruling in the water districts’ favor on their contract claims, the Federal Circuit reversed the trial court’s dismissal of the water districts’ Fifth Amendment takings claims for the two years in which they could not recover on their contract claims.  Rejecting the trial court’s holding that the existence of a government contract automatically precludes a taking claim based on the same facts, the court relied on standard rules of alternative pleading:

It cannot be understood as precluding a party from alleging in the same complaint two alternative theories for recovery against the Government, for example, one for breach of contract and one for a taking under the Fifth Amendment to the Constitution. That is expressly permitted by the Federal Rules, and the fact that the theories may be inconsistent is of no moment.

“The federal government was required to obtain firm commitments in order to get authorization from the State of California to fill the New Melones Reservoir with water.  It is only fair that the Government be required to live up to its agreements,” said Nancie G. Marzulla, counsel for the water districts.  “We look forward to the damages proceeding.”