JAMES A. TEILBORG, Senior District Judge.
Two sophisticated entities, a wastewater discharger and a sanitary sewer service provider, contract for the ongoing treatment of effluent having a known chemical composition. Their comprehensive agreement includes among its provisions a promise by the wastewater discharger that it will conduct its industrial operations in compliance with environmental regulations. Subsequently, the state imposes new environmental regulations upon the sewer provider, which increase the provider's cost of performance under the contract.
Unhappy that the contract does not permit shifting these costs to the wastewater discharger, the sewer provider — who happens also to be the local municipality — enacts its own environmental regulation effectively banning the discharger's effluent from entering its sewer system. The regulation also permits the discharger (or any other industrial business) to create a new contract with the municipality for the acceptance of nonconforming effluent, but only if the discharger bears the cost of treatment.
The issue presented is whether the municipality may unilaterally obtain additional,
Pure Wafer, Inc. ("Pure Wafer") brought this action against the City of Prescott, Arizona (the "City") as well as the City's individual administrators in their official capacities for alleged violations of the federal and State Contract Clauses stemming from the City's enactment of an ordinance impacting a contract between the City and Pure Wafer.
After beginning the hearing on the motion for a preliminary injunction, (Tr. 12/19/13), the Court and the parties agreed that no genuine disputes of fact existed, a speedy resolution was in the best interests of all of the parties, and that the bench trial on the merits could be consolidated with the hearing. (Tr. 12/20/13). The parties subsequently stipulated to (1) consolidating the hearing with the trial on the merits; (2) bifurcating the trial on the merits into a liability phase, to be tried first, and a damages phase, if necessary, with the Court's judgment as to liability in the form of an immediately appealable judgment; (3) not filing any motions for summary judgment as to liability and instead filing post-trial briefing with the Court; (4) holding closing arguments after the completion of the post-trial briefing; and (5) the City agreeing not to enforce the ordinance against Pure Wafer until after the Court's entry of judgment on the merits and, if appealed, after the Ninth Circuit Court of Appeals issued its mandate. (Doc. 60).
The Court approved the stipulation as to each of the points listed above and, pursuant to Federal Rule of Civil Procedure ("Rule") 65(a)(2), advanced the trial on the merits and consolidated it with the hearing on the motion for a preliminary injunction, with the evidence already received at the hearing to be included in the consolidated trial record. (Doc. 61 at 2).
Now, considering the bench trial, (Tr. 12/19/13; Tr. 1/14/14), post-trial briefing, (Docs. 76, 77, 81, 83), and closing arguments (Doc. 84), the Court finds and concludes as follows:
Pure Wafer and its predecessor-in-interest Exsil, Inc. ("Exsil") are and were, respectively, companies engaged in the reclamation of silicon wafers used in the semiconductor industry.
Pure Wafer was willing to incur the substantial initial capital investment to construct a reclaim facility in Prescott only if the City agreed to commit to maintaining water and sewer services to the facility at the specifications Pure Wafer needed to productively operate its facility. (Tr. 12/19/13 at 31:1-13; Tr. 1/14/14 at 76:24-77:5). Pure Wafer's insistence upon these commitments was informed by its experiences with its San Jose facility in the mid to late 1980s. Pure Wafer had not had a development agreement with the City of San Jose; when that city later restricted the fluoride concentration in sewer customers' effluent, Pure Wafer had to incur unexpected expenses in adding treatment infrastructure to its facility. See (Tr. 12/19/13 at 31:16-32:8). Pure Wafer did not want to build a Prescott facility that could be "rendered useless at any time by the City." (Id. at 32:7-8).
During discussions between Pure Wafer and the City, Pure Wafer disclosed to the City the chemical profile of its effluent. (Id. at 31:1-10). Pure Wafer provided the City with a spreadsheet listing effluent quality parameters for its San Jose and Sulphur facilities, which showed that the range of fluoride concentration in the effluent from those facilities was 10 to 150 mg/L, with an average of 40 mg/L. (Ex. 1). Pure Wafer and the City discussed the City's concerns regarding the 150 mg/L maximum fluoride concentration, and Pure Wafer ultimately agreed to design its facility to discharge effluent containing a maximum fluoride concentration of 100 mg/L. (Tr. 12/19/13 at 37:2-38:4). Pure Wafer would not construct the Prescott facility without a commitment from the City that it could discharge up to 100 mg/L of fluoride. (Tr. 1/14/14 at 76:24-77:5). Pure Wafer had considered Flagstaff as a potential location for its facility but Flagstaff would not commit to accept the necessary fluoride concentration levels. (Tr. 12/19/13 at 41:2-7).
On February 11, 1997, Pure Wafer and the City entered into a development agreement (the "Agreement"), the terms of which provided for Pure Wafer to build and operate a reclaim facility in the Prescott Airpark, with the possibility for future expansion. (Ex. 3). The Agreement requires the City to provide Pure Wafer with a water supply of up to 195,000 gallons per day and sewer capacity of up to 195,000 gallons per day. (Id. §§ 4.1, 4.2).
Specifically, section 4.2 of the Agreement states:
(Id. § 4.2).
Exhibit F to the Agreement is labeled "Typical effluent characteristics/Exsil, Prescott facility" and provides a listing of "typical value[s]" and "maximum[s]" for various chemical characteristics of Pure Wafer's effluent. It specifies for fluoride a typical value of 50 mg/L, with a maximum of 100 mg/L. (Id. Ex. F).
In addition to specifying the terms of water and sewer service, the Agreement contains several other provisions relevant to the present lawsuit. Section 9.1 requires Pure Wafer to comply with all applicable environmental laws:
(Id. § 9.1).
In section 14.14, the City also agreed to exempt Pure Wafer from subsequent changes in certain City laws:
(Id. § 14.14).
Additionally, the parties agreed, for severability purposes, that Pure Wafer's fundamental purpose for entering into the Agreement included the provision of water and sewer services on the terms specified. (Id. § 14.5).
Finally, the Agreement contains a merger clause providing that the Agreement is a complete integration of the parties' agreement and all prior negotiations and agreements are superseded. (Id. § 14.7).
Pure Wafer built its Prescott facility in 1997, and expanded it in 2002. (Tr. 12/19/13 at 23:17-18). The total cost of
Pure Wafer's effluent presently contains a fluoride concentration of approximately 40 mg/L, (Ex. 22), and has never exceeded 100 mg/L in fluoride concentration or 195,000 gallons per day in volume. (Tr. 12/19/13 at 43:18-21, 44:5-17). This effluent is discharged directly into the City's sanitary sewer system and the City delivers it to the City's Airport Water Reclamation Facility ("AWRF") for treatment. (Id. at 142:14-17, 187:21-188:1). Pure Wafer is the only source of fluoride entering the AWRF. (Id. at 142:18-23). The AWRF is a wastewater treatment plant that processes and treats effluent from City sanitary sewer users. (Ex. 37 at 2). Treated effluent from the AWRF is discharged either to golf courses for irrigation purposes or into recharge basins for replenishing the aquifer. (Id. at 136:8-18, 153:5-13).
The recharge basins at issue are adjacent to the AWRF and are "open areas that are bermed that are suitable for containing discharged effluent from the treatment plant for percolation and recharge of the aquifer below." (Id. at 136:15-18; Ex. 48). Treated effluent from the AWRF flows into these basins, where it percolates into the groundwater.
During the 1997 to 1998 timeframe when the City negotiated with Pure Wafer for the development of the reclaim facility, the facility was constructed, and the facility began operations, the City was not required to sample effluent discharged from the AWRF for fluoride. (Id. at 222:14-20). At that time, the City operated the AWRF under a Groundwater Quality Protection Permit from the Arizona Department of Environmental Quality ("ADEQ"). (Id. at 148:13-14, 222:14-20). This permit required the City to sample and test for fluoride only in the aquifer itself, specifically in the AWRF recharge basins, via a series of monitoring wells. (Id. at 183:12-15; Ex. 151 at CITY000880). The monitoring wells are approximately 400 feet deep and immediately adjacent to the recharge basins; they sample the groundwater by pumping it from underneath the basins. (Tr. 1/14/14 at 9:13-18). Under the permit, the fluoride concentration in these samples could not exceed 4.0 mg/L. (Ex. 151 at CITY000882).
Test results from the monitoring wells show that Pure Wafer's effluent has not had any effect upon the fluoride concentration in the aquifer. In October 1997, before Pure Wafer's facility was operational, the monitoring well readings indicated a fluoride concentration in the aquifer of less than 0.4 mg/L. (Ex. 65; Tr. 12/19/13 at 183:16-21). At all times from 1997 through 2013, the monitoring well readings have indicated a fluoride concentration of less than 0.4 mg/L. (Tr. 12/19/13 at 184:1-5, 185:5-10).
As early as 1994, ADEQ informed the City that its Groundwater Quality Protection Permit would no longer be sufficient for the operation of the AWRF. (Ex. 39). As letters from ADEQ to the City indicate, ADEQ required the City to obtain an Aquifer Protection Permit ("APP") for the AWRF's continued operation. See (Ex. 39; Ex. 40). In April 1998, the City applied to ADEQ for an APP, noting that
On January 24, 1999, ADEQ issued an APP to the City and vacated the City's Groundwater Quality Protection Permit. (Ex. 146 at CITY00792-93). The APP, in addition to maintaining the 4.0 mg/L limit for fluoride concentration in the monitoring wells, requires the City to quarterly sample and test for fluoride at the point of effluent discharge from the AWRF into the recharge basins. (Tr. 12/19/13 at 148:20-25, 152:6-14; Tr. 1/14/14 at 10:8-16, 10:23-25; Ex. 146 at CITY000793, -803). The point of discharge fluoride concentration must remain at or below 4.0 mg/L. (Ex. 146 at CITY000803). ADEQ, not the City, controls the sampling locations, and prior to the City being subject to the APP, the City had never sampled for fluoride at the point of discharge. (Tr. 12/19/13 at 152:13-14; Tr. 1/14/14 at 10:20-22).
Fluoride concentrations at the AWRF point of discharge almost immediately exceeded the 4.0 mg/L APP limit. In December 1999, ADEQ sent a "Notice of Violation" to the City concerning its fluoride discharge, which had exceeded the APP limit on one occasion during the second quarter of 1999. (Ex. 43 at ADEQ000301). The City notified Pure Wafer of the violation; Pure Wafer assisted the City in lowering the fluoride concentration by adjusting its processes. (Tr. 12/19/13 at 45:13-19, 46:9-14). This Notice of Violation was later closed after the City met the fluoride limit for the fourth quarter of 1999. (Ex.44).
Between 2000 and 2004, there were no issues between the City and Pure Wafer concerning fluoride incidents. (Tr. 12/19/13 at 46:20-23). On June 11, 2004, ADEQ issued the City a Notice of Violation for excessive fluoride concentrations on seven days between September 2003 and May 2004. (Ex. 141 at PW0001). The City's response to ADEQ noted that "The City of Prescott signed an agreement with the Company EXSIL inc. [sic] on 2/11/97 allowing them to discharge [f]luoride between 50 mg/l and 100 mg/l" and that the flows at the AWRF had not been sufficient to dilute this discharge. (Ex. 138 at CITY000727). However, the City sent a letter to Pure Wafer nine days later asserting that Pure Wafer was violating the Agreement as well as various provisions of the Prescott City Code because Pure Wafer's effluent had caused the City to violate its APP. (Ex. 10 at PW0008). Pure Wafer denied violating the Agreement or any environmental regulations, but agreed to voluntarily reduce its fluoride discharge. (Ex. 11 at PW00011). The City subsequently informed ADEQ that it had "taken additional steps to ensure there is an adequate pretreatment program in place to avoid this situation from occurring again." (Ex. 12 at PW00034).
Between 2004 and 2008, fluoride levels were not an issue between the City and Pure Wafer. (Tr. 12/19/13 at 48:1-3). In 2008, ADEQ audited the City's environmental regulations for wastewater treatment; as part of this audit, ADEQ visited Pure Wafer and found no deficiencies in its facility. (Ex. 15 at PW000394). But in October 2009, the fluoride issue returned; in that month, the City informed Pure Wafer that the City had exceeded its fluoride limits at the AWRF point of discharge and had sent a Notice of Exceedance to ADEQ. (Ex. 16). The City threatened that if it were fined by ADEQ (up to $25,000 per day), it would impose those fines on Pure Wafer, and the City requested that Pure Wafer "volunteer" to immediately reduce its fluoride discharge. (Id.)
ADEQ conducted a field inspection of Pure Wafer in March 2012 for the purpose of determining whether Pure Wafer was in compliance with the City's APP.
In July 2012, ADEQ issued the City a Notice of Violation because the AWRF discharge fluoride concentration exceeded the APP limit during the preceding months. (Ex. 114). In response, the City promised ADEQ that it would enact a pretreatment program to ensure compliance with the APP. (Ex. 113). Accordingly, the City informed Pure Wafer in March 2013 that it would enact an ordinance implementing a pretreatment program and that this ordinance would limit Pure Wafer's fluoride discharge to 16.3 mg/L. (Ex. 26 at PW00085, -91).
On May 28, 2013, the City enacted Ordinance No. 4856-1313 (the "Ordinance") implementing the City's pretreatment program. (Ex. 28). The Ordinance imposes new requirements upon sewer users, and establishes local limits for the concentrations of certain chemicals in users' effluent. The Ordinance prohibits Pure Wafer, as a significant industrial user,
In addition to the prohibitions specifically listed under
Prescott, Ariz. City Code § 2-1-44(B) (2014). The Ordinance also makes it unlawful for Pure Wafer to be a cause of the City's APP violations:
Id. § 2-1-39(G).
The Ordinance requires Pure Wafer to provide such pretreatment as necessary to reduce the "objectionable characteristics or constituents" to within these maximum limits and as necessary to comply with any pretreatment requirements. Id. § 2-1-45. Pure Wafer must bear all costs of pretreatment.
Under the Ordinance, sewer users who fail to comply with these requirements are subject to a number of enforcement mechanisms. For a violation of the pretreatment requirements, the City may (1) enter into consent orders; (2) terminate water and sewer service; (3) assess administrative fines of up to $25,000 per violation, per day; (4) impose civil penalties of up to $25,000 per violation, per day, plus any penalties the City pays to ADEQ for the violation, plus attorneys' fees and costs of enforcement; and (5) criminally prosecute the user and assess criminal penalties. Id. §§ 2-1-50-1, 2-1-50-2, 2-1-50-3. These remedies are nonexclusive; the City may assess some or all of them against a noncompliant user. Id. § 2-1-50-2(D).
However, although the Ordinance requires and provides an enforcement mechanism for pretreatment, it also permits the City to contract around the pretreatment requirements if the sewer user bears the cost of pretreatment:
Id. § 2-1-49.
As part of its pretreatment program, the City also adopted in May 2013 an Enforcement Response Plan that established the "enforcement procedures used for wastewater discharge violations." (Ex. 29 at PW000281). Contemporaneously, the City entered into a consent order with ADEQ in which the City submitted its pretreatment program for ADEQ's review and promised to within a year "perform the actions reasonably necessary to address the fluoride exceedances in the effluent at the [AWRF], including the implementation of any pretreatment activities." (Ex. 30 at 4). After that year, the City is required to document four consecutive quarters of
While the ADEQ review was pending, the City notified Pure Wafer that the new pretreatment program required Pure Wafer to apply for an Industrial Wastewater Discharge Permit ("IWDP") by August 11, 2013 or Pure Wafer would face enforcement actions under the Enforcement Response Plan. (Ex. 108). Pure Wafer applied for an IWDP, reserving its rights to challenge the constitutionality of the Ordinance. (Ex. 31, 107). ADEQ approved the City's pretreatment program on October 1, 2013. (Ex. 34 at 5).
The City has to date not terminated Pure Wafer's water or sewer services pursuant to the Ordinance. (Tr. 12/19/13 at 43:4-9, 43:18-21). Pure Wafer estimates the cost of complying with the Ordinance as approximately $1 million and $4 million in capital costs and $360,000 to $720,000 in annual operating costs, but these figures are preliminary and the company has not conducted a study. (Id. at 65:21-66:8). The City has commissioned a study on pretreatment options, with that report concluding a net present cost of $112 million for pretreatment over 20 years. (Id. at 65:12-17). The City estimates $2.7 million in capital costs and $8.5 million in annual operating costs. (Id. at 65:1-11). Pure Wafer believes it likely would close the facility if required to pay such costs, partly because they would not be economically feasible, and partly because such an investment would be unsound as the City could at any time further restrict fluoride concentrations and force the facility to close. (Id. at 66:21-67:7).
The resolution of the issues in this case hinges on the nature and extent of the City's obligations to accept Pure Wafer's effluent under the terms of the Agreement. Accordingly, the Court will first determine whether the Agreement obligates the City to accept Pure Wafer's effluent containing up to 100 mg/L of fluoride, as Pure Wafer contends it does.
Pure Wafer contends the Agreement granted it the contractual right to discharge effluent with a fluoride concentration not exceeding 100 mg/L. (Doc. 77 at 16-19). In interpreting a contract, a court is to "ascertain and give effect to the intention of the parties at the time the contract was made if at all possible." Taylor v. State Farm Mut. Auto. Ins. Co., 175 Ariz. 148, 854 P.2d 1134, 1138 (1993) (quoting Polk v. Koerner, 111 Ariz. 493, 533 P.2d 660, 662 (1975)). The contract must be construed such that "every part is given effect, and each section of an agreement must be read in relation to each other to bring harmony, if possible, between all parts of the writing." Chandler Med. Bldg. Partners v. Chandler Dental Grp., 175 Ariz. 273, 855 P.2d 787, 791 (Ariz.Ct. App.1993). Although extrinsic evidence may not be offered to contradict or vary the terms of a contract, it may be admissible "to determine the meaning intended by the parties" if the court finds "that the contract language is `reasonably susceptible' to the interpretation asserted by its proponent." Taylor, 854 P.2d at 1140.
There is no language in the Agreement that limits Pure Wafer's right to discharge effluent to a particular maximum fluoride concentration. Section 4.2 of the Agreement governs the City's obligation to provide sewer services, but it speaks only as to volume and rates. Nor does any other section of the Agreement
Although Exhibit F provides maximum values for a number of chemical characteristics, including fluoride, of Pure Wafer's effluent, it is descriptive, not prescriptive. The only reference to Exhibit F in the Agreement is contained within section 4.2, and that section incorporates Exhibit F only to define conditions triggering an increase in the sewer rates charged to Pure Wafer:
Nonetheless, Pure Wafer, apparently afraid that the absence of a fluoride limit undermines the existence of its contractual right, has devoted a substantial portion of its briefing and oral argument to attempting to prove the existence of a particular limit, namely 100 mg/L. See, e.g., (Doc. 77 at 16-19; Doc. 83 at 3-7). Pure Wafer argues extrinsic evidence shows the parties intended to limit the effluent to 100 mg/L of fluoride, and, by establishing such limit, to grant Pure Wafer the contractual right to discharge up to that limit. See id. Pure Wafer argues that the negotiation discussions leading up to the execution of the Agreement as well as the City's own statements in the years following its execution evince the parties' agreement to a 100 mg/L limit. (Doc. 77 at 17). The City responds that extrinsic evidence cannot be used to interpret a completely integrated contract such as the Agreement. (Doc. 76 at 8). But although extrinsic evidence cannot vary a term in an integrated contract, it may always be used to aid in interpreting contract language. See Taylor, 854 P.2d at 1140.
Nevertheless, Pure Wafer's argument fails because the Agreement is not "reasonably susceptible" of Pure Wafer's proffered interpretation. See id. There is no term in the Agreement limiting the fluoride concentration of Pure Wafer's effluent; therefore, there is no term for which extrinsic evidence could aid in its interpretation. Moreover, section 4.2 and Exhibit F undermine Pure Wafer's supposed 100 mg/L limit because they expressly contemplate effluent exceeding 100 mg/L in fluoride concentration. Accordingly, the Agreement does not obligate the City to accept Pure Wafer's effluent subject only to the condition that the effluent remain within the limits of Exhibit F, namely 100 mg/L.
Instead, the plain language of section 4.2 of the Agreement obligates the City to accept Pure Wafer's effluent regardless of
During closing arguments, the City argued that the Agreement grants Pure Wafer the right to discharge effluent containing an unlimited concentration of fluoride, subject only to Pure Wafer's obligation to comply with environmental laws. This is a correct statement of the Agreement's terms. However, the City also asserts that section 9.1 of the Agreement, in which Pure Wafer promised to operate its facility "in accordance with all applicable local, state, and federal environmental regulations," permits the City to at any time enact any self-described "environmental" regulations that limit the fluoride concentrations of Pure Wafer's effluent. (Doc. 76 at 9-10). This interpretation is incorrect because the portion of the Ordinance at issue is not an environmental regulation.
The City's claim that the Ordinance is an environmental regulation is nothing more than a red herring in an attempt to induce the Court to improperly interpret section 9.1. Because section 9.1 narrows the scope of Pure Wafer's rights (and narrows the City's corresponding obligation to Pure Wafer), the effect of the City's position would be to rewrite the contractual terms in favor of the City and deprive Pure Wafer of the benefit of its bargain. Pure Wafer agreed to comply with legitimate environmental regulations; it did not agree to comply with cost-shifting regulations passed under the guise of environmental regulations. Pure Wafer's promise to comply with local environmental regulations reserved a measure of discretion to the City to enact, as is its power to do so, environmental regulations necessary for the protection of the public interest. The City was obligated to exercise such discretion in good faith.
"Arizona law implies a covenant of good faith and fair dealing in every contract." Bike Fashion Corp. v. Kramer, 202 Ariz. 420, 46 P.3d 431, 434 ¶ 13 (Ariz. Ct.App.2002) (internal quotation marks omitted). The purpose of this covenant is so "neither party will act to impair the right of the other to receive the benefits which flow from their agreement or contractual relationship." Id. (internal quotation marks omitted) (quoting Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565, 569-70 (1986)). This covenant "guarantees the
Pure Wafer reasonably expected section 9.1 to encompass only those regulations actually environmental in character. The portion of the Ordinance that allegedly impairs the City's obligations under the Agreement is not an environmental regulation, and the City cannot in good faith label it as such. The Ordinance reveals by its own terms that it is a cost-shifting regulation:
Prescott, Ariz.Code § 2-1-49 (2014). Thus, although the balance of the Ordinance requires Pure Wafer to conduct at its own expense pretreatment necessary to reduce its effluent's fluoride concentration to 16.3 mg/L, this provision clearly establishes that the City has reserved to itself the discretion to nonetheless accept effluent in excess of that limit "subject to payment for the cost of such treatment by [Pure Wafer]." Id. (emphasis added). This fact alone mandates that the Court consider the Ordinance to not be an environmental regulation but rather a cost-shifting one.
Moreover, it is undisputed that Pure Wafer's effluent is lawful under state and federal environmental regulations. If Pure Wafer's elevated fluoride concentrations were an independent violation of a state or federal environmental law, then the City could argue that the Ordinance was properly an environmental regulation because it would proscribe such unlawful activity. But this is not the case. Although the City is obligated under state and federal environmental regulations to supplement the AWRF with pretreatment as necessary so as to prevent violations of its APP, the City points to no environmental regulation requiring the sewer user to conduct the pretreatment or to bear the expense of pretreatment. Indeed, as the Court has explained, the Ordinance itself contemplates the City agreeing to conduct pretreatment in exchange for payment.
For these reasons, the Ordinance is not an environmental regulation and thus does not restrict Pure Wafer's contractual right to discharge, and the City's contractual obligation to accept, its effluent into the City's sanitary sewer system.
The City argues that the Agreement is void in violation of the reserved-powers doctrine. (Doc. 29 at 11; Doc. 76 at 16). Because a state has no obligations under a void contract, the Court addresses this issue before reaching its Contract Clause analysis. See Matsuda v. City & Cnty. of Honolulu, 512 F.3d 1148, 1152 (9th Cir. 2008).
The reserved-powers doctrine defines the "essential attributes of sovereign power" that states reserve to "safeguard the welfare of their citizens" and which cannot be limited by contract. U.S. Trust Co. of N.Y. v. New Jersey, 431 U.S. 1, 21, 97 S.Ct. 1505, 52 L.Ed.2d 92 (1977). "[T]he scope of the State's reserved power depends on the nature of the contractual relationship with which the challenged law conflicts." Id. at 21-22, 97 S.Ct. 1505. Thus, the basis for this doctrine differs when a state impairs the "obligation of its own contract" from when a state's "general regulatory measures" impair private contracts to which the state is not a party. Id. at 22-23, 97 S.Ct. 1505 (emphasis added).
The basis of the reserved-powers doctrine with respect to the state's impairment of its own contractual obligations is the ability of a legislature to "enter into an agreement that limits its power to act in the future." 431 U.S. at 23, 97 S.Ct. 1505.
Id. (citation omitted); see also Matsuda, 512 F.3d at 1153. Accordingly, when a state has allegedly impaired its own contractual obligations, the proper inquiry is whether it had the power "to create irrevocable contract rights in the first place." U.S. Trust, 431 U.S. at 23, 97 S.Ct. 1505.
The state cannot create irrevocable contract rights that restrict its exercise of its police power. Matsuda, 512 F.3d at 1153; RUI One Corp. v. City of Berkeley, 371 F.3d 1137, 1149 (9th Cir. 2004). Because the police power includes "regulations designed to promote the public health, the public morals, or the public safety," Chicago, B. & Q. Ry. Co. v. People of State of Ill., 200 U.S. 561, 592, 26 S.Ct. 341, 50 L.Ed. 596 (1906), which necessarily includes environmental protection, it follows that the state cannot create contract rights that restrict its power to impose environmental regulations.
On the other hand, although "[a]ny financial obligation could be regarded in theory as a relinquishment of the State's spending power, since money spent to repay debts is not available for other purposes," the Supreme Court has held that financial obligations do not automatically "fall within the reserved powers that cannot be contracted away." U.S. Trust,
The City's obligations under the Agreement do not fall under the purview of the police power, and therefore do not implicate the reserved-powers doctrine, because the Agreement does not purport to exempt Pure Wafer from any environmental regulations. To the contrary, the Agreement expressly subjects Pure Wafer to "all applicable local, state, and federal environmental regulations." The Ordinance is not an environmental regulation but rather a cost-shifting regulation, and the Agreement reflects the City's bargain for sewer rates-not a bargaining away of its police power.
The City misses the point when it argues that it "retained the power to establish limits on the concentration of constituents in wastewater discharged into its sewer system and to require pretreatment of wastewater from industrial users prior to discharge into the City's sewer system." (Doc. 76 at 17). Both of these statements are correct. What the City is attempting to do, however, and what it cannot do, is force Pure Wafer to pay for pretreatment when the City has contractually agreed to not pass along such costs. The City must accept Pure Wafer's effluent as-is and pretreat it at the City's own expense.
Additionally, the authorities the City cites in support of its reserved-powers argument are unhelpful. Under Arizona law, development agreements permit municipalities to create the irrevocable contract rights that U.S. Trust requires. See A.R.S. §§ 9-500.05, 9-500.11.
Pure Wafer and the City entered into a development agreement for the provision and payment of sewer services; nothing in the Agreement suggests they contracted to bind the City's future exercise of its police power to impose environmental regulations. For this reason, the remainder of the City's cited cases are distinguishable.
The Agreement does not violate the reserved-powers doctrine.
The federal Contract Clause
As the Court has already concluded, a contractual relationship exists between the City and Pure Wafer granting Pure Wafer the right to discharge up to 195,000 gallons per day of effluent of any fluoride concentration into the City's sanitary sewer system. The Agreement also provides that the City may not assess sewer charges against Pure Wafer other than those listed in the Agreement: "No up-front or other fees or costs shall be imposed on Developer with respect to the Sewer Capacity provided for herein, except as provided in Section 4.5."
Consequently, the contractual right at issue is Pure Wafer's right to discharge its effluent, regardless of fluoride concentration, into the City's sanitary sewer system under the terms specified in the Agreement. The Court thus turns to the second inquiry under the Contract Clause: whether the City's enactment of the ordinance impaired its obligations to Pure Wafer under the Agreement.
When the state is a party to the contract alleged to be impaired, the question of impairment "turns on whether the State has used its law-making powers not merely to breach its contractual obligations, but to create a defense to the breach that prevents the recovery of damages." See Univ. of Hawai'i Prof'l Assembly v. Cayetano, 183 F.3d 1096, 1102 (9th Cir.1999). Thus, an ordinary breach of contract is not an impairment; the government impairs its contractual obligations only when it uses the legislative power to relieve itself of those obligations, which prevents the other party from seeking remedies for what would otherwise be a breach of contract.
The Ordinance impairs the City's obligations under the Agreement because it permits the City to reject Pure Wafer's effluent if it exceeds 16.3 mg/L of fluoride despite the City having the contractual obligation to accept that effluent. According to the City's logic, this violation of the Agreement is not a breach of contract because Pure Wafer agreed to not discharge effluent in violation of local environmental regulations. But Pure Wafer neither anticipated nor agreed that it would comply with cost-shifting regulations cloaked as environmental regulations. Cf. Seven Up Pete Venture v. State, 327 Mont. 306, 114 P.3d 1009, 1021-22 (2005) (finding an impairment of contractual obligations when the state enacted environmental laws that "banned the future use of the very method of mining upon which the
"An impairment of a public contract is substantial if it deprives a private party of an important right, thwarts performance of an essential term, defeats the expectations of the parties, or alters a financial term." S. Cal. Gas Co. v. City of Santa Ana, 336 F.3d 885, 890 (9th Cir. 2003) (citations omitted). Incredibly, the City argues that even if it has impaired its contractual obligations, any such impairment is not substantial because Pure Wafer should have anticipated environmental regulations limiting its fluoride discharge. (Doc. 76 at 21-22). The City claims that because ADEQ regulates Pure Wafer directly, "changes from time to time" in environmental regulations "are simply a fact of life for businesses." (Id.) But Pure Wafer complies with all ADEQ requirements and is not subject to any ADEQ regulation as to its fluoride discharge levels. It is disingenuous to contend that Pure Wafer had no substantial interest in its rights under the Agreement merely because it is subject to some environmental regulation.
Pure Wafer presented undisputed evidence that its operations require the discharge of effluent with a fluoride concentration above 16.3 mg/L, that it expected at the time of the Agreement to be able to discharge at concentrations of up to 100 mg/L, that this right was critical to its negotiations based on its past experiences with its San Jose facility, and that the financial viability of the Prescott facility is threatened if it must bear the pretreatment costs. The impairment is substantial.
Because the Court concludes that the City substantially impaired its obligations under the Agreement, the burden shifts to the City to prove that the impairment was "both reasonable and necessary to fulfill an important public purpose." Cayetano, 183 F.3d at 1106 (citation and internal quotation marks omitted); see also Energy Reserves Grp., 459 U.S. at 411-12, 103 S.Ct. 697. Because when the State is a party to the contract, its "self-interest is at stake," "complete deference to a legislative assessment of reasonableness and necessity is not appropriate."
In determining whether a substantial impairment is reasonable, the Court considers "the extent of the impairment as well as the public purpose to be served." S. Cal. Gas, 336 F.3d at 894-95 (quoting Cayetano, 183 F.3d at 1107). "[A]n impairment is not a reasonable one if the problem sought to be resolved by an impairment of the contract existed at the time the contractual obligation was incurred." Id. at 895 (quoting Cayetano, 183 F.3d at 1107). "Changed circumstances and important government goals do not make an impairment reasonable if the changed circumstances are `of degree and not kind.'" Id. (quoting U.S. Trust, 431 U.S. at 32, 97 S.Ct. 1505). "On the other hand, if a statute causes unforeseen and unintended consequences such that private parties would obtain windfalls they never expected, later amendment to realign a statute with the parties' expected bargain may be reasonable." Id. at 895.
In Southern California Gas, the plaintiff utility had contracted with the city to provide gas service. 336 F.3d at 887. The contract obligated the utility to obtain permits to trench or excavate streets and also to promptly repair "any portion of any street" damaged at its own expense. Id. at 887-88. It also subjected the utility's rights to "all of the ordinances, rules and regulations heretofore or hereafter adopted by the [city] in the exercise of its police powers." Id. at 888. The city subsequently enacted an ordinance requiring advance payment for trenching and excavation of city streets. Id. The Court of Appeals concluded that the substantial impairment was unreasonable because the city's initial miscalculation of the "degree of harm to city streets from trench cuts" did not permit the city to alter the contract "whenever later studies reveal the extent of damage from trenching is greater than anticipated." Id. at 896. The court held that "to the extent [the city] seeks to charge the Gas Company for harms admittedly known in 1938, the trench cut ordinance is unreasonable." Id.
In this case, at the time the parties entered into the Agreement, the City was not subject to fluoride testing and had not yet been confronted with ADEQ violations concerning the AWRF's fluoride levels. But the evidence shows the City knew of the potential for excessively high concentrations-it discussed various fluoride limits with Pure Wafer, including 150 mg/L and 100 mg/L. Clearly, the City was aware at the time it entered into the Agreement that there existed some level of fluoride concentration that would require treatment prior to its ultimate discharge. That the City inaccurately estimated the particular fluoride concentration above which treatment (or pretreatment) is required does not make the impairment reasonable. The City's compliance with its APP is an important governmental goal, but the changed circumstances caused by the APP obligations are "of degree" and not of "kind." See S. Cal. Gas, 336 F.3d at 895. The City has not proven the impairment to be reasonable.
The City argues that the Ordinance serves a legitimate public purpose because it conforms with state and federal environmental regulations and "protects the integrity
Because the City fails to prove that the Ordinance was reasonable, the Court need not consider whether the Ordinance was necessary. Nevertheless, the Court finds that the City has not proven necessity. An ordinance "is not necessary if more moderate alternatives would serve [the city's] purposes equally well without impairing [the contract]." Id. at 896. "When a state or city impairs its own agreements by imposing additional financial burdens on a private party, obvious more moderate alternatives include raising revenues through higher taxes or preserving funds through budget restrictions." Id. (citing Cayetano, 183 F.3d at 1107). The City's Ordinance may be useful for the City's coffers, but imposing an additional financial burden on Pure Wafer is not necessary for reducing the AWRF fluoride concentration levels. See id.
Furthermore, the Ordinance itself completely undermines the City's argument as to necessity. Restricting the fluoride concentration in accepted effluent to 16.3 mg/L cannot be necessary when the Ordinance also permits the City to contract for acceptance of effluent in excess of that limit. See Prescott, Ariz. City Code § 2-1-49 (2014). The only difference between the Agreement and contracts permitted under the Ordinance is which party bears the treatment costs. The City noted as much when it remarked that "ultimately the only question is who should pay the cost of bringing the Facility into compliance with the amended City Code." (Doc. 29 at 15-16). Reducing the City's expenditures is not a justification for impairing the City's obligations.
The City fails to prove that its impairment of its obligations is reasonable, most succinctly because the Ordinance's cost-shifting provisions have no legitimate public purpose. Even if the City could prove the impairment is reasonable, it has also failed to prove the impairment was necessary. Because the Ordinance substantially impairs the City's obligations under the Agreement and the City has not shown that the impairment is reasonable and necessary to fulfill an important public purpose, the City's enactment of the Ordinance violates Pure Wafer's constitutional rights under the Contract Clause.
Because the Court finds in favor of Pure Wafer on its Contract Clause claims, the Court need not reach Pure Wafer's alternative claims for breach of contract and the implied covenant of good faith and fair dealing. See (Doc. 77 at 25).
Pure Wafer seeks a permanent injunction enjoining the City from enforcing the Ordinance. A plaintiff seeking a permanent injunction must demonstrate: "(1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction." eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 391, 126 S.Ct. 1837, 164 L.Ed.2d 641 (2006). However, "[w]hen an alleged deprivation of a constitutional right is involved, most courts hold that no further showing of irreparable [harm] is necessary." Nat'l Solid Wastes Mgmt. Ass'n v. City of Dallas, 903 F.Supp.2d 446, 470 (N.D.Tex.2012). "Additionally, irreparable harm may result if enforcement of an ordinance would yield fines and criminal penalties." Id. at 470-71.
The City has not only violated Pure Wafer's constitutional rights, but Pure Wafer also faces both immediate fines and criminal penalties for noncompliance with the Ordinance. The City may fine Pure Wafer up to $25,000 per violation per day in administrative fines, up to $25,000 per violation per day in civil penalties, and criminal penalties including fines and imprisonment. If the Ordinance is enforced against Pure Wafer, Pure Wafer will be forced to choose between asserting its valid rights under the Agreement and facing fines and criminal prosecution for noncompliance with the Ordinance. Pure Wafer has shown that enforcement of the Ordinance will cause irreparable harm for which no amount of monetary damages can adequately compensate. See id. at 471.
Additionally, the balance of the hardships between the City and Pure Wafer favors Pure Wafer. If the Ordinance is enforced against Pure Wafer, Pure Wafer faces irreparable harm, while if the City is enjoined from enforcing the Ordinance against Pure Wafer, the City merely must construct a pretreatment facility at its own expense. The City has not alleged that the expense of pretreating Pure Wafer's effluent threatens its continued operation, but the evidence shows that Pure Wafer may be forced to shut down its facility if the Ordinance is enforced. Equity favors Pure Wafer.
For these reasons, the Court concludes that a permanent injunction is an appropriate remedy. The City argues that any injunction should issue against only the City because the individual defendants were named only in their official capacities and Pure Wafer has not presented evidence that any particular City employee committed an unlawful act. (Doc. 76 at 29). The Court agrees. Any injunction against the City will necessarily bind City "officers, agents, servants, employees, and attorneys." See Fed.R.Civ.P. 65(d)(2)(B).
The parties stipulated, and the Court agreed, to bifurcate the trial on the merits into a liability phase and damages phase. (Doc. 60). The parties agree that a ruling in favor of Pure Wafer on its Contract Clause claims and awarding declaratory and injunctive relief obviates any need to determine damages. (Doc. 76 at 30; Doc. 77 at 25). Therefore, this Order resolves all pending issues and there will be no damages phase of the trial.
Both sides have requested costs and attorneys' fees. Pure Wafer requests fees pursuant to 42 U.S.C. § 1988, A.R.S. § 12-341.01, and section 14.16 of the Agreement. (Doc. 19 at 23). Because Pure Wafer has prevailed on a matter arising out of contract (specifically, the Agreement) and the Ordinance deprives Pure Wafer of its constitutional rights, all three of these authorities support a fee award. See S. Cal. Gas, 336 F.3d at 886-87 (holding that a Contract Clause violation gives rise to a 42 U.S.C. § 1983 claim and a corresponding award of attorneys' fees under section 1988); A.R.S. § 12-341.01 ("In any contested action arising out of a contract, express or implied, the court may award the successful party reasonable attorney fees."); (Ex. 3 § 14.16) ("In ... any action in any court ... to enforce any covenant or any of such party's rights or remedies under this Agreement, including any action for declaratory or equitable relief, the prevailing party shall be entitled to reasonable attorneys' fees and all reasonable costs, expenses and disbursements in connection with such action."). Thus, Pure Wafer is entitled to its reasonable attorneys' fees and costs.
For the foregoing reasons,
The City's argument fails because the City could have satisfied its obligations under the Agreement by not enacting the cost-shifting regulation. There is no requirement that the City enact an ordinance specifically listing Pure Wafer as exempt. For example, if a city contracted with a widget manufacturer to buy a thousand widgets and the city was to pay the freight costs, and the city subsequently enacted an ordinance requiring all city suppliers to bear freight costs, the city could not avoid the ramifications of its ordinance by now claiming that the widget manufacturer is demanding a special law.
The Court also notes that the Agreement entitles Pure Wafer to pay residential sewer rates for its industrial effluent, yet the City is not contending that this aspect of the Agreement is also a special law. Clearly, every bargained for benefit vis-à-vis a municipality is not a special law.
