ORDER ADOPTING THE MARCH 4, 2013, FINDINGS AND RECOMMENDATIONS (Doc. 27)

ORDER GRANTING MERCED IRRIGATION DISTRICT'S MOTION TO REMAND (Doc. 13)

LAWRENCE J. O'NEILL, District Judge.

I. INTRODUCTION

Plaintiff Merced Irrigation District ("MID") filed a declaratory relief action against the County of Mariposa ("Mariposa") in Merced County Superior Court on September 5, 2012. On October 5, 2012, Mariposa removed Plaintiff's declaratory relief action to this Court. (Doc. 1.) On November 2, 2012, MID filed a motion to remand the action to Merced County Superior Court. (Doc. 13.) Mariposa filed a brief in opposition to MID's motion on December 5, 2012, and MID filed a reply brief on December 12, 2012. On December 18, 2012, U.S. Magistrate Judge Sheila K. Oberto ordered the parties to submit additional briefing. On January 4, 2013, Mariposa filed a supplemental brief and on January 15, 2013, MID filed a supplemental brief. (Docs. 24, 25.)

On March 4, 2013, the Magistrate Judge issued Findings and Recommendations ("F & Rs") recommending that MID's motion to remand be granted. (Doc. 27.) The parties each filed objections to the F & Rs on March 28, 2013 (Docs. 33, 34), and each filed responses to the other's objections on April 11, 2013 (Docs. 36, 37).

In accordance with the provisions of 28 U.S.C. § 636(b)(1)(C), this Court has conducted a de novo review of the case. Having carefully reviewed the entire file, the Court concludes that the Magistrate Judge's F & Rs are supported by the record and proper analysis; for the reasons set forth below, the March 4, 2013, F & Rs are ADOPTED, MID's motion to remand is GRANTED, and the case shall be remanded to the Merced County Superior Court.

II. DISCUSSION1

A. MID's Objections

MID objects to the portions of the F & Rs that determined MID's complaint fairly anticipated state law claims for anticipatory breach and breach of the implied covenant of good faith and fair dealing. MID argues that the only claim anticipated by its complaint is one for breach of contract relevant to the payment provisions under Paragraph 3 of the 1960 Agreement.2 The hypothetical state law causes of action posed by Mariposa "could only arise as a counterclaim or rejoinder by [Mariposa], premised on the affirmative defenses set up by the District's complaint for declaratory relief." (Doc. 33, 2:17-20.) As it pertains to a claim for anticipatory breach of Paragraph 4 of the parties' 1960 Agreement, MID has not opposed any application by Mariposa to the State Water Resources Control Board. Moreover, MID contends that there is no actual repudiation of the parties' contract such that Mariposa has any anticipatory breach claim or implied covenant claim, and none of the allegations in its declaratory relief complaint can themselves give rise to such claims.

Mariposa filed a response to MID's objections, asserting that MID is incorrect in its argument that Mariposa's coercive claims for anticipatory breach and breach of the implied covenant would not arise but for MID's declaratory relief action and would only arise as counterclaims or rejoinders to MID's defenses in the declaratory relief action. Mariposa asserts that MID has made statements publicly before the Fe:deral Energy Regulatory Commission ("FERC") prior to filing its declaratory relief action that due to the National Wild and Scenic Rivers Act ("WSRA") Mariposa "can exercise no more than the 5,000 [acre feet ("AF")] it was separately allocated under the 1990 Agreement for the Saxon Creek Project, and that MID's payment obligations are capped by the cost of that product due solely to the enactment of the WSRA." (Doc. 37, 3:21-23.)3 Thus, the repudiation of Mariposa's water allocation rights did not arise as a result of MID's complaint, and Mariposa's claims in this regard are not simply rejoinders to MID's defenses as stated in its declaratory relief complaint.

MID's objections are not persuasive. Mariposa is correct that its hypothesized claims for anticipatory breach and breach of the implied covenant do not arise but for the filing of MID's complaint, MID's statements to FERC and to Mariposa itself prior to the litigation can be construed as a repudiation of Mariposa's allocation rights under Paragraph 1 of the 1960 Agreement. Mariposa also argues that by entering into Paragraph 4 of the 1960 Agreement, MID impliedly agreed that it would not take a position effectively foreclosing Mariposa's right to apply for a permit from the State Water Resources Control Board ("SWRCB") or any other regulatory agency. As demonstrated in Mariposa's opposition, the documents filed in support of Mariposa's opposition, and Mariposa's brief and materials filed in response to MID's objections, Mariposa's hypothetical state law claims were not precipitated by MID's declaratory relief complaint. Further, the Court does not construe the Magistrate Judge's discussion of the allegations in MID's complaint as a finding that Mariposa's hypothetical claims arose out of or because of the complaint, but reflect consideration of how MID's declaratory relief complaint fairly anticipated such state law claims.

B. Mariposa's Objections

1. Mariposa's Hypothetical Federal Claims

Mariposa argues that it has potential federal claims against federal agencies under Section 7 of the WSRA and the National Environmental Protection Act ("NEPA") pursuant to the Administrative Procedure Act ("APA"). The Magistrate Judge found that Mariposa's hypothetical federal claims could not confer federalquestion jurisdiction:

(Doc. 27, 25:11-17.)

Mariposa objects to each of these findings asserting that (1) its federal claims are fairly anticipated by MID's declaratory relief complaint; (2) MID would most likely assert that it was a necessary party to any action Mariposa brought against a federal agency under the WSRA or NEPA, and, under Federal Rule of Civil Procedure 19, MID would be included as a necessary party; (3) its hypothetical APA claim under the WSRA or NEPA would be ripe under the test applied by the Ninth Circuit in San Luis & Detta-Mendota Water Authority v. Salazar, 638 F.3d 1163, 1173 (9th Cir.2011) ("San Luis"); and (4) its hypothetical challenge to FERC's decision on MID's pending application is required to be heard in a federal court of appeals which underscores the need for federal jurisdiction over MID's state law declaratory judgment complaint.

Whether MID may be a necessary party to any future hypothetical challenge to a federal agency decision under Section 7 of the WSRA or pursuant to NEPA is irrelevant in light of the ripeness and finality issues noted by the Magistrate Judge. Mariposa asserts that its hypothetical APA claim under the WSRA or NEPA is ripe under the test applied by the Ninth Circuit in San Luis, 638 F.3d at 1173. In San Luis, the Ninth Circuit applied the ripeness test articulated by the Supreme Court in Abbott Laboratories v. Gardner, 387 U.S. 136, 149, 87 S.Ct. 1507, 18 L.Ed.2d 681 (1967), which determined ripeness based on the fitness of the issues for judicial decision and the hardship of the parties of withholding court consideration. Mariposa argues that the situation here is identical to that in San Luis because MID's declaratory judgment complaint has interfered with Mariposa's ability to utilize WSRA Section 7. Specifically, Mariposa argues that MID has articulated a concrete plan to use Mariposa's water to expand its power generation capacity and has sought intervention to terminate Mariposa's rights as a matter of federal law.

Even if the Abbott Laboratories ripeness analysis applied in San Luis applies here, the outcome of such an analysis would not favor Mariposa. In San Luis, agricultural interests receiving water from a federal/state water project challenged an Endangered Species Act ("ESA") biological opinion issued to the water project operators. 638 F.3d at 1168. The district court found plaintiffs' challenge under ESA § 7 (the statutory provision requiring issuance of biological opinions) ripe, but dismissed a parallel claim brought under ESA § 9 (which makes it unlawful to "take" listed species without a permit) on the ground that there was no threat that § 9 would be enforced against the plaintiffs. 638 F.3d at 1168-69. The Ninth Circuit reversed as to the § 9 claim, reasoning that the "preenforcement" ripeness analysis should not apply. Rather, applying the Abbott Laboratories test, the Ninth Circuit concluded:

Id. at 1173 (finding the § 9 claim ripe).

Mariposa argues that application of this test favors a finding of ripeness here. But, Mariposa confuses and oversimplifies the relevant inquiry by arguing: "The only issue before the court, whether the WSRA entirely terminates Mariposa's water rights by precluding its ability to obtain a permit, is a pure issue of federal law that MID wants decided before its FERC license renewal." (Doc. 34, 9:12-15). That is not the "issue" to be considered in the Abbott Laboratories inquiry. Here, the hypothetical APA claims would be premised upon a hypothetical refusal of a federal agency to grant Mariposa permission to pursue an entirely hypothetical specific water project. Even assuming the project was defined, there is no way to know on what grounds permission to proceed would be denied. Only if the federal agency outright refused to consider the petition on the ground that no such permission could ever be granted would the question posed by Mariposa be presented to this Court in an APA claim. Further factual development would not only "significantly advance the Court's ability to deal with the legal issues presented," it is absolutely necessary. Mariposa's hypothetical APA claims are not ripe and therefore cannot provide removal jurisdiction.

Additionally, as the Magistrate Judge noted, there is no final agency decision to challenge under the APA with respect to Section 7 proceedings under the WSRA or NEPA because no agency proceedings have been initiated.4 As federal courts are required to strictly construe jurisdictional statutes, and doubt is to be resolved in favor of remand, the Court concludes that there is no APA claim that confers subject matter jurisdiction under these circumstances. Hunter v. Philip Moms USA, 582 F.3cl 1039, 1042 (9th Cir.2009); Gaus v. Miles, Inc., 980 F.2d 564, 566 (9th Cir.1992); see also Durham v. Lockheed Martin Corp., 445 F.3d 1247, 1252 (9th Cir.2006).

With respect to MID's FERC licensing proceedings, Mariposa asserts it may have a future federal claim challenging the FERC determination. Mariposa argues that a state court has no interest, familiarity, or jurisdiction related to FERC, and contract litigation that may affect a FERC determination belongs in federal court. (Doc. 34, 14:2-22.) Despite that a federal district court has no subject matter jurisdiction over challenges to FERC decisions,5 Mariposa argues its hypothetical challenge to a future FERC decision should confer the district court with jurisdiction. The mere fact that the parties' contractual dispute may affect a future FERC determination does not provide this Court with subject matter jurisdiction over the future FERC decision. Mariposa's objection in this regard provides no basis to conclude that the Magistrate Judge erred in finding that a hypothetical FERC challenge could not confer the district court with subject matter jurisdiction.

2. Mariposa's Hypothetical Anticipatory Breach Claim — Paragraph 3

In its opposition, Mariposa claims to have two anticipatory breach claims. The first based on the payment provision in Paragraph 3 of the 1960 Agreement, and a second claim predicated on Mariposa's right to the 70,000 AF of water under Paragraph 1 of the 1960 Agreement (as renegotiated in 1990) in conjunction with MID's obligation under Paragraph 4 not to oppose any application or permit for which Mariposa applies with respect to the water allocation in Paragraph 1. Mariposa objects to the Magistrate Judge's finding that it has an alternative theory of recovery not dependent on federal law as to its first hypothetical claim for anticipatory breach regarding MID's payment obligations under Paragraph 3, arguing that the payment obligations of the 1960 Agreement represent only half of Mariposa's rights" under the contract, with its 70,000 AF water right defined in Paragraph 1 making up the other half. (See Doc. 34, 11:1-2.)

Mariposa's hypothesized anticipatory breach claim with regard to MID's payment obligations under Paragraph 3 is separate from its potential anticipatory breach claim with respect to its water diversion rights under Paragraph 1 and MID's obligations under Paragraph 4. The Magistrate Judge analyzed the claims separately and did not conclude that anticipatory breach claim with respect to the water diversion rights under Paragraph 1 or MID's obligations under Paragraph 4 could be resolved on an alternative theory. Mariposa's objections in this regard are without merit.

3. Mariposa's Hypothetical Anticipatory Breach Claim — Water Allocation under Paragraph 1 and MID's Obligations under Paragraph 4

Mariposa's opposition brief asserts that the element of its hypothetical anticipatory breach claim resulting from MID's interference with a potential attempt by Mariposa to develop a "water resources project" on the South Fork depends on establishing Mariposa's ability to perform under the WSRA. (Doc. 21, 26:14-19 ("Because the element of Mariposa's `ability to perform' in an action for anticipatory breach relating to MID's attempt to prevent Mariposa from utilizing its water allocation for a `water supply project' on the South Fork [of the Merced River] rests on this Court's interpretation of federal law... such a claim would necessarily raise a federal issue that is actually disputed.").)

The Magistrate Judge determined that a claim for anticipatory breach would not require Mariposa to show it could perform under the WSRA. In its objections, Mariposa asserts that it would be required to prove how MID's excuse for non-performance was without legal cause. This does not address the fact that a defendant's excuses for non-performance are affirmative defenses and proof of those issues lie with the defendant — Mariposa's responses to MID's affirmative defenses are simply rejoinders and not a necessary element of Mariposa's claim. While a plaintiff has a duty to plead its own performance or excuse for the failure to perform, it does not have to prove or plead how the defendant's excuse for non-performance was not justified. Transmarine Corp. v. R.W. Kinney Co., 123 Cal.App. 411, 421, 11 P.2d 877 (1932) (A plaintiff need not anticipate or negate any defense or counterclaim on the part of the defendant (citing 21 Cal. Jur. 61-63)).

Mariposa also asserts that it will be required to show causation and establish its damages, which necessarily implicate the WSRA as the statute will govern the amount of water that could be diverted from the South Fork and the calculation of damages. This argument, however, is raised for the first time in the objections and provides no explanation of how damages or causation are necessarily tied to an interpretation of the WSRA. MID's reason for repudiating Mariposa's right to the water allocation under Paragraph 1 or objecting to any application or request by Mariposa to use the water is not an aspect of showing that MID caused Mariposa damage. Further, even if the WSRA were somehow relevant to calculating the amount of Mariposa's damages or the causation analysis, it would be so fact-specific to this dispute that it would not qualify as a substantial federal issued under Grable & Sons Metal Prods, v. Darue Eng'g & Mfg., 545 U.S. 308, 314, 125 S.Ct. 2363, 162 L.Ed.2d 257 (2005).

4. Implied Covenant of Good Faith and Fair Dealing

Mariposa objects to the Magistrate Judge's findings and conclusion that the federal issue arising in a potential breach of the implied covenant claim would not be substantial under Grable. Mariposa argues that the WSRA would be interpreted as a pure question of law in deciding such a claim, and that interpretation would be fully dispositive of MID's bad faith.

Mariposa's theory of MID's alleged breach of the implied covenant is somewhat amorphous. In its opposition, Mariposa explained its potential claim for breach of the implied covenant as predicated "on MID's long-time recognition of Mariposa's right to deplete MID's water allocation (including its formal recognition in the 1990 Agreement), and MID's recent assertion that the [] WSRA prohibits Mariposa's exercise of those rights." (Doc. 21, 24:19-22.) In its response to MID's objections, Mariposa articulates its claim differently, asserting that by entering into Paragraph 4 of the 1960 Agreement, "MID impliedly agreed that it would not take a position effectively foreclosing Mariposa's right to apply for a permit from the SWRCB or any other regulatory agency." (Doc. 37, 6:1-3.)

Mariposa characterizes MID's position as an assertion that the WSRA has no regulatory process for approval of a diversion project on the South Fork, which is an unreasonable interpretation as a matter of law. Mariposa cites Mortis v. Paul Revere Life Ins. Co., 109 Cal.App.4th 966, 973-74, 135 Cal.Rptr.2d 718 (2003), and argues that where the analysis of bad faith turns on the reasonableness of the legal argument advanced, it presents a pure question of law that depends entirely on an analysis of legal precedent and statutory language. Therefore, the only question that would arise in its breach of the implied covenant claim would be a matter of law determination regarding the interpretation of the WSRA and whether any reasonable person could interpret it as MID has done. The issue, therefore, is not fact-specific, and it involves a pure interpretation of law which is dispositive to the claim.

The bad-faith analysis in Morris — the reasonableness of insurer's legal position in erroneously interpreting the policy language — is an unworkable analogy here. Morris involved a matter-of-law coverage determination6 that led to an improper denial of a claim (and, therefore, a breach of the contract). The only question remaining in that case was whether the legal interpretation that led to the breach of the contract could be construed as reasonable — e.g., the law was unsettled and there were competing interpretations of the policy language that supported a "genuine dispute."

Unlike the insurer's legal interpretation of the policy language in Morris, MID's interpretation of the WSRA is not a construction or interpretation of the terms of the parties' contract nor does it establish as a matter of law the nature of the implied duties arising from the contract. In other words, whether MID had an implied duty under the contract, whether that duty was breached by certain conduct, and whether that conduct was objectively unreasonable cannot be determined only by an interpretation of the WSRA.

Further, although Mariposa characterizes MID's interpretation of the WSRA as reading Section 7 out of the statute, it is not clear this is actually MID's position. MID has communicated to Mariposa7 and to FERC8 that the WSRA precludes further water diversions by Mariposa from the Merced River. MID has not pointed to any particular language in the WSRA that requires this as a matter of law, nor has MID claimed that Mariposa cannot seek an exemption under Section 7 of the WSRA. MID's assertion with respect to the WSRA could be construed as an argument that the restrictions imposed by the WSRA, the water acreage at issue in the parties' contract, and the specific conditions on the South Fork of the Merced River make it impossible as a practical matter for Mariposa to build a water resources project on the South Fork, which in turn affects the parties' contract. This is not necessarily an argument that Mariposa cannot seek federal agency approval of a water resources project under Section 7 or that the WSRA precludes every water resource project on a wild-and-scenic river as a matter of law. Testing the objective reasonableness of such a position, even if erroneous, would not be predicated only on a matter-of-law interpretation of the WSRA. Further, determination of the implied duties under the contract as well as any conduct breaching that duty would arguably involve factual issues. The Court agrees with the Magistrate Judge's findings that Mariposa's hypothetical claim for breach of the implied covenant would not be necessarily decided by a matter-of-law interpretation of the WSRA, and the resolution of the claim would be situation specific and fact bound.

Mariposa also contends that the U.S. Supreme Court's recent decision in Gunn v. Minton, ___ U.S. ___, 133 S.Ct. 1059, 185 L.Ed.2d 72 (2013), undercuts the Magistrate Judge's reliance on Empire Healthchoice Assurance v. McVeigh ("Empire"), 547 U.S. 677, 699, 126 S.Ct. 2121, 165 L.Ed.2d 131 (2006), Adventure Outdoors, Inc. v. Bloomberg ("Adventure Outdoors"), 552 F.3d 1290 (11th Cir.2008), and Mikulski v. Centerior Energy Corp., 501 F.3d 555, 570 (6th Cir.2007) (en banc), in finding that the substantiality of the WSRA's application in a claim for breach of the implied covenant did not meet the standard articulated in Grable.

In Gunn, the Court considered whether a state law claim for malpractice as it related to an attorney's conduct in separate patent litigation necessarily raised a disputed and substantial issue of federal patent law such that the federal court had exclusive jurisdiction under 28 U.S.C. § 1338(a). Id. at 1063. In holding that the patent issue presented by the malpractice claim was not substantial under Grable, the Court noted that the Texas Supreme Court, from which certiorari was granted, had erroneously focused on the importance of the issue to the plaintiff's case and the parties before it. Id. at 1066. The Court reasoned that a necessary and disputed federal issue will always be significant and substantial to the particular parties in the immediate suit. Id. The Court emphasized that the Grable analysis, however, requires that the inquiry focus on the importance of the issue to the federal system as a whole, as opposed to merely the importance to the parties in the case. Id.

The substantiality analysis undertaken in the F & Rs specifically examined to what extent an interpretation of the WSRA as applied in a claim for breach of the implied covenant would have importance to the federal system as a whole. The Magistrate Judge noted that no federal agency was involved in this matter nor was a federal agency's actions at issue, there was no authority offered for the proposition that any federal agency would be bound by a court decision on a bad faith contract claim, and the claim determination would be fact-bound and situation specific such that it was unlikely to have broad application to litigants everywhere, all in contrast to Grable. This is precisely the importance-to-the-federal-system analysis that Gunn held Grable's analytical framework requires.

In arguing the importance of an interpretation of the WSRA to the federal system, Mariposa does not establish how a determination of a claim for breach of the implied covenant would have the sweeping impacts Mariposa predicts.9 As already noted, there is no authority offered establishing how a state-court interpretation of the effects of the WSRA on the parties' contract obligations as related to claim for breach of the implied covenant would be binding on any federal agency, or another court interpreting and applying the WSRA, or parties in other cases.

Similarly, Mariposa raises concerns as to what effects would be felt by the federal system if the state court incorrectly, in its view, resolved the issue. Beyond that an interpretation of the WSRA inside a claim for breach of the implied covenant would not have foreseeable binding effects on other litigants, federal courts, or federal agencies, the Gunn decision rejected similar arguments. In Gunn, Minton argued that state courts' answers to hypothetical patent issues could have real-world effects on other patents through issue preclusion. Gunn, 133 S.Ct. at 1067-68. The Court reasoned that it was unclear whether such a preclusive effect could occur, but even to the extent that it did, the result would be limited to the parties and the patents before the state court. Id. The Court concluded that such a fact-bound and situation-specific effect was not sufficient to establish arising under jurisdiction. Id. Here, the Magistrate Judge noted the lack of authority to suggest that a fact-bound claim for breach of the implied covenant, even to the extent it considered MID's interpretation of the WSRA, would have binding and far-reaching effect on litigants elsewhere.

The Court in Gunn also rejected Minton's suggestion that the federal courts had greater familiarity with patent law and an interest in the uniformity of the development of patent law such that the case belonged in federal court. Id. at 1068. The Court noted that state courts could "be expected to hew closely to pertinent federal precedents" in deciding a hypothetical issue of patent law, and that the possibility that the state court would incorrectly resolve the claim was not enough to trigger the federal court's exclusive patent jurisdiction, even to the extent that the error "finds its root in a misunderstanding of patent law." Id. Although the patent law to be decided by the state court in Gunn was a purely hypothetical determination for purposes of the malpractice claim at issue, this reasoning applies here as well. Federal courts do not have exclusive jurisdiction over interpretations of the WSRA, and as the Magistrate Judge noted, state courts are competent to interpret and apply federal law, and would be guided by relevant federal court interpretations of the statute. Id. at 1067 (citing Tafflin v. Levitt, 493 U.S. 455, 465, 110 S.Ct. 792, 107 L.Ed.2d 887 (1990) ("State courts adjudicating civil RICO claims will ... be guided by federal court interpretations of the relevant federal criminal statutes, just as federal courts sitting in diversity are guided by state court interpretations of state law")). The F & Rs consideration of Grable's substantiality prong is fully consistent with the Supreme Court's decision in Gunn.

III. CONCLUSION AND ORDER

Accordingly, IT IS HEREBY ORDERED that:

SO ORDERED.

FINDINGS AND RECOMMENDATIONS THAT PLAINTIFF'S MOTION TO REMAND BE GRANTED

SHEILA K. OBERTO, United States Magistrate Judge.

I. INTRODUCTION

Plaintiff Merced Irrigation District ("MID") filed a declaratory relief action against the County of Mariposa ("Mariposa") in Merced County Superior Court on September 5, 2012. On October 5, 2012, Mariposa removed Plaintiff's declaratory relief action to this Court. (Doc. 1.) On November 2, 2012, MID filed a motion to remand the action to Merced County Superior Court. (Doc. 13.) Mariposa filed a brief in opposition to MID's motion on December 5, 2012, and MID filed a reply brief on December 12, 2012. On December 18, 2012, the Court ordered the parties to submit additional briefing. On January 4, 2013, Mariposa filed a supplemental brief and on January 15, 2013, MID filed a supplemental brief. (Docs. 24, 25.) For the reasons set forth below, the undersigned RECOMMENDS that MID's motion to remand be GRANTED.

II. FACTUAL BACKGROUND1

A. The 1960 Agreement

MID owns and operates the Merced River Hydroelectric Project (the "Project"), located in Mariposa County. (Doc. 1-1 (Cmplt.), ¶ 9.) The Project impounds waters of the Merced River to form Lake McClure behind the New Exchequer Dam, and Lake McSwain behind the McSwain Dam. (Cmplt., ¶ 9.) The Project provides irrigation waters for agricultural farmland in Merced County, Lakes McLure and McSwain provide recreational benefits to the residents of Merced and Mariposa counties, and the Project includes a hydroelectric power generation output capacity of 103 megawatts. (Cmplt., ¶ 9.)

The contract at dispute between the parties in this litigation arises out of the original permitting and construction of the Project. In December 23, 1954, MID filed applications with the California Water Rights Board (now known as the State Water Resources Control Board) for appropriation of water from the Merced River to be diverted for the Project. (Cmplt., ¶ 10.) The first application (No. 16186) sought to appropriate 900,000 acre feet ("AF") of water per year from the Merced River for irrigation and domestic use. (Cmplt., ¶ 11.) The second application (No. 16187) sought a permit to use the same 900,000 AF per year appropriation for power generation. (Cmplt., ¶ 11.) In March 1955, MID filed an application with the Federal Power Commissioner (now known as the Federal Energy Regulatory Commission ("FERC")) for a preliminary permit for development of the hydroelectric generation components of the Project. (Cmplt., ¶ 12.)

Mariposa objected to MID's water applications to the California Water Rights Board and the application for a license from FERC. Mariposa asserted it had a senior right to use the waters of the Merced River that MID was proposing to use for its Project. (Cmplt., ¶¶ 13, 17.) At that time, Mariposa was analyzing its own plans for water diversion projects, which involved diversions of approximately 100,000 AF of water per year from the South Fork of the Merced River. (Cmplt., ¶ 14.)2

MID and Mariposa engaged in extended negotiations, and on March 1, 1960, executed an agreement that Mariposa would withdraw its opposition to MID's applications to the California Water Rights Board and to MID's FERC licensing application (the "1960 Agreement"). (Cmplt., ¶¶ 15-26.) In relevant part, the 1960 Agreement provides:

(Cmplt., Doc. 1-2, Exhibit A.)

To finance the construction of the New Exchequer Dam component of the Project, MID issued bonds from the revenues generated by the sale of hydroelectric power from the New Exchequer Dam. (Cmplt., ¶ 37.) MID's repayment of this indebtedness and retirement of the bonds to finance the Project are expected to be concluded on or about July 1, 2014. (Cmplt., ¶ 37.)

B. The National Wild and Scenic Rivers Act ("WSRA")

In 1968, following the parties' 1960 Agreement, Congress enacted the WSRA, 16 U.S.C. §§ 1271-1287, in an effort to identify and protect certain "rivers which, with their immediate environments, possess outstandingly remarkable scenic, recreation, geologic, fish and wildlife, historic, cultural, or other similar values." 16 U.S.C. § 1271. Section 7 of the WSRA provides that "no department or agency of the United States shall assist by loan, grant, license, or otherwise in the construction of any water resources project that would have a direct and adverse effect on the values for which such river was established, as determined by the Secretary charged with its administration." 16 U.S.C. § 1278(a). Section 7 requires the Secretary of the Interior to evaluate whether a "water resources project ... would have a direct and adverse effect" on the river's values. When a water resources project is found to have a "direct and adverse effect" on a wild and scenic river, the project cannot be authorized or funded absent congressional intervention. Id. "The WSRA also provides that Congress may authorize the Secretary of the Interior or the Secretary of Agriculture to study additional rivers for inclusion in the wild and scenic rivers system [("WSRS") ]. After such a study, the Secretary submits a report, along with comments by other federal agencies and by state governors, to the President, who in turn makes a recommendation to Congress. The Congress then decides whether or not to designate the `study river' as a wild and scenic river." Town of Summersville, W.Va. v. FERC, 780 F.2d 1034 (D.C.Cir.1986) (citing 16 U.S.C. §§ 1275, 1278(a)).

In 1987, the South Fork of the Merced River was designated as "wild and scenic" under the WSRA. Pub. L. No. 100-149, 101 Stat. 879 (Nov. 2, 1987) (codified at 16 U.S.C. § 1274(a)(62)(A) (designating approximately 71 miles of the Merced River's main stem and approximately 43 miles of its south fork as wild and scenic)).5 MID's complaint alleges that the 1987 legislation deferred wild-and-scenic designation as to an eight-mile segment "of the South Fork of the Merced River," from the town of Briceburg to the point of maximum flood control storage at Lake McClure, and designated that segment as a "study river" for a period of three years. (Cmplt., ¶ 30.) According to MID, the study-river designation was requested by the Mariposa County Board of Supervisors and Mariposa County Water Agency to permit Mariposa time to evaluate whether it could identify a water resource project that would enable it to use at least a portion of the water rights development opportunity and the construction funding mechanism provided to it pursuant to Paragraphs 1, 2, and 3 of the 1960 Agreement. (Cmplt., ¶ 31.)

Ultimately, Mariposa developed plans to construct the "Saxon Creek Project," using water from the lower Merced River. According to Mariposa, the U.S. Bureau of Land Management ("BLM") granted Mariposa approval under Section 7 of the WSRA to develop the project. (See Doc. 21-3, Exhibit A.)

C. The 1990 Agreement6

The parties' 1960 Agreement provided that Mariposa would not divert its allocated water acreage under the Agreement during the time the bonds were being repaid by MID (Cmplt, Doc. 1-2, Exh. A, Paragraph 1(a) ("such future appropriations shall not be made in whole or in part within the payout period of the bonds ... unless the person or agency making such future appropriation shall compensate [MID] for the loss of power revenue resulting during said period from said appropriation"). In 1990, the parties modified the 1960 Agreement to secure water rights from the lower Merced River for the Saxon Creek Project. (Doc. 21, 14:23-15:3;7 Doc. 21-1, Exhibit A; 21-7, Exhibit D.) Under the 1990 Agreement, Mariposa accepted a reduction in its future annual depletion rights from 112,000 AF (as set out in Paragraph 1(a) of the 1960 Agreement) to 70,000 AF in return for being permitted to take 5,000 AF per year from the lower Merced River near Saxon Creek. (Doc. 21, 14:23-15:3; Doc. 21-1, Exhibit A, Doc. 21-7, Exhibit D.)

In relevant part, the 1990 Agreement provides the following:

(Doc. 21-7.)

D. 1992 Amendment to the WSRA

On October 23, 1992, Congress amended the WSRA to include as a component the eight-mile segment of the lower Merced River that had been previously designated as a study river. Pub. L. 102-432. The 1992 amendment specified that

MID maintains that the designation of the remaining "eight-mile segment of the South Fork of the Merced River" as wild-and-scenic in 1992, and the creation of the corresponding exemption for the Saxon Creek Project at a maximum water withdrawal of 5,000 AF per year, effectively concluded Mariposa's opportunity to develop a water project to fully exercise and utilize water from the South Fork of the Merced River under the parties' 1960 Agreement. (Cmplt., ¶ 33.)

Mariposa contends that the 1987 designation of segments the Merced River as wild and scenic under Public Law 100-149, codified at 16 U.S.C. § 1274(a)(62), included the entirety of the South Fork of the Merced River. The eight-mile study river was located on the Lower Merced River and not on the South Fork.8 According to Mariposa, in 1992, Public Law 102-432 further amended 16 U.S.C. § 1274(a)(62) to designate the eight-mile segment of the Lower Merced River as wild and scenic.9

E. Retirement of MID's Project Bonds and FERC Relicensing

To finance the New Exchequer Dam, which was part of MID's Project, MID issued bonds, which will be retired in approximately July 2014. (Cmplt., ¶ 37.) Mariposa has informed MID that, pursuant to the parties' 1960 Agreement, it expects MID to make payments to Mariposa under the 1960 Agreement beginning July 1, 2015 (one year after retirement of the bonds), and continuing for a period of fifty years. (Cmplt. ¶ 42.)

Although not referenced in MID's complaint, Mariposa asserts that MID is also undergoing a fifty-year relicensing application process with FERC. (See Docs. 21-4, 21-5, Exhibit B.) According to Mariposa, MID's initial license for its Merced River Hydroelectric Project was issued on April 18, 1964, for a term ending February 28, 2014. In its new application with FERC ("Final FERC Application"), MID seeks a new 50-year license on the grounds that it "anticipates incurring major expenses for implementing protection, mitigation, and enhancement measures, including construction and refurbishing recreation facilities during the next license term." (Doc. 21-4, Exh. B, p. 8.) Mariposa contends it is an interested party to these FERC licensing proceedings; Mariposa is also identified in MID's Final FERC Application as a party that "would likely be interested in or affected by this relicensing." (Doc. 21-4, Exh. B, p. 12.)

According to Mariposa, to obtain relicensing under the Federal Power Act, FERC must evaluate, among other things, the various public interest issues to ensure the best comprehensive use of the Merced River, whether MID can operate the Project to provide efficient and reliable service, whether MID will operate and maintain the Project to provide efficient and reliable service, whether MID will operate and maintain the Project in a cost-effective manner, and other beneficial public uses, including irrigation and water supply. However, as part of the Final FERC Application, Mariposa contends that MID has failed to acknowledge its payment obligations to Mariposa under Paragraph 3 of the parties' 1960 Agreement or Mariposa's water allocation rights under Paragraph 1(a), as modified by the 1990 Agreement. (Doc. 21, 21:26-22:8 (citing 16 U.S.C. §§ 797(e), 803, 808(a)(2)(F).) Given these omissions, Mariposa argues it has grounds to object to any FERC determination on MID's application for relicensure, and if necessary, challenge FERC's determination under the Administrative Procedures Act ("APA") or the National Environmental Protection Act ("NEPA").

F. Parties' Contract Dispute

As MID's Project bonds will be fully repaid in approximately July 2014, the parties dispute how the payment provision in Paragraph 3 of the 1960 Agreement should be interpreted and whether the designation of the South Fork of the Merced River as wild and scenic affects the 1960 Agreement. MID contends that it has informed Mariposa that it believes that the designation of the South Fork of the Merced River as a wild-and-scenic river under federal law precludes further development of water diversions from the South Fork of the Merced River by Mariposa; therefore, the Saxon Creek Project constitutes the full exercise and utilization of water from the South Fork of the Merced River which Mariposa can initiate and consummate pursuant to law. (Cmplt., ¶ 38.) MID has also informed Mariposa of its position that the facts and circumstances establish that any obligation of MID to make payments to Mariposa pursuant to Paragraph 3(b) of the Agreement will be discharged in full upon MID's repayment of the outstanding indebtedness associated with Mariposa's Saxon Creek Project. (Cmplt., ¶ 39.)

Mariposa, on the other hand, has informed MID that Mariposa intends to use any payments received from MID under Paragraph 3 of the Agreement for any purpose it chooses, including but not limited to, contributions to Mariposa's General Fund; Mariposa does not intend to restrict the use of such payments to a water resources project. (Cmplt., ¶ 41.) Mariposa has also informed MID that it expects MID to continue making payments for a period of fifty (50) years, notwithstanding Mariposa's alleged inability to construct any project other than the Saxon Creek Project using the waters of the South Fork of the Merced River. (Cmplt., ¶ 43.)

G. MID's Complaint for Declaratory Relief

Based on the parties' dispute over the payment provisions in Paragraph 3(b) of the parties' 1960 Agreement, MID filed a declaratory judgment action pursuant to California Code of Civil Procedure § 1060 in Merced County Superior Court.10 MID asserts that, because the electrical output of the Project is presently committed by contract to be sold by MID to PG & E through June 30, 2014, MID requires a declaration of its rights and obligations under Paragraph 3 of the Agreement to evaluate and determine its future disposition of the electrical capability of the Project following July 1, 2014. (Cmplt. ¶ 44.)

In its first cause of action for declaratory relief construing the obligations of the contract, MID asserts that the primary dispute between MID and Mariposa involves the interpretation of the payment provision set forth in Paragraph 3 of the 1960 Agreement. (Cmplt., ¶ 36.) MID maintains that a controversy has arisen regarding whether MID is obligated to make payments to Mariposa under Paragraph 3(b)(1) of the 1960 Agreement beginning on July 1, 2015, and continuing for fifty (50) years thereafter. MID seeks a declaration that Mariposa's Saxon Creek Project represents the only construction of a project by Mariposa to fully exercise and utilize the water from the South Fork of the Merced River as set forth in Paragraph 1 of the 1960 Agreement that will occur, and that pursuant to Paragraph 3(b)(2) of the Agreement, MID's payment of the costs of financing the Saxon Creek Project will fully and finally discharge any and all obligations of MID under Paragraph 3 of the 1960 Agreement. (Cmplt., ¶ 45.)

In its second cause of action for declaratory relief based on frustration of purpose of contract, MID seeks a declaration that (1) the enactment of the WSRA and the designation of the South Fork of the Merced River as a wild-and-scenic river have precluded Mariposa from constructing or causing to be constructed a project to fully exercise and utilize the water from the South Fork of the Merced River as set forth in Paragraph 1 of the 1960 Agreement, other than the Saxon Creek Project; (2) the purpose of the payments that were to have been made by MID to Mariposa pursuant to Paragraph 3 of the 1960 Agreement have thereby been frustrated; and (3) any and all obligations of MID under Paragraph 3 of the 1960 Agreement have been extinguished as a result. (Cmplt., ¶¶ 46-50.)

In its final and third cause of action for declaratory relief based on impossibility of performance, MID seeks a declaration that (1) the enactment of the WSRA and the designation of the South Fork of the Merced River as a wild-and-scenic river have precluded Mariposa from constructing or causing to be constructed a project to fully exercise and utilize the water from the South Fork of the Merced River as set forth in Paragraph 1 of the 1960 Agreement, other than the Saxon Creek Project; (2) the purpose of the payments that were to have been made by MID to Mariposa pursuant to Paragraph 3 of the 1960 Agreement have thereby been rendered impossible to achieve; and (3) any and all obligations of MID under Paragraph 3 of the 1960 Agreement have been extinguished as a result. (Cmplt., ¶¶ 51-54.)

H. Mariposa's Notice of Removal and MID's Motion to Remand

On October 5, 2012, Mariposa filed a Notice of Removal. (Doc. 1.) In its Notice of Removal, Mariposa asserts that federal subject matter jurisdiction is proper under 28 U.S.C. § 1331 because all of MID's claims really and substantially involve a dispute or controversy respecting the construction and effect of federal law. (Doc. 1, ¶ 4.) Specifically, the Notice of Removal indicates that "[e]ach of [MID's] claims for relief raise substantial federal issues that are actually disputed; the federal interests at issue are substantial and central to the case; and the exercise of federal jurisdiction will not disturb `any congressionally approved balance of federal and state judicial responsibility.'" (Doc. 1, ¶ 4 (quoting Grable & Sons Metal Prods. v. Darue Eng'g & Mfg., 545 U.S. 308, 314, 125 S.Ct. 2363, 162 L.Ed.2d 257 (2005)).)

On November 2, 2012, MID filed a motion to remand, arguing that the declaratory judgment complaint does not anticipate any potential coercive claim by Mariposa that would provide "arising under" jurisdiction pursuant to Section 1331. As such, MID asserts that the Court lacks jurisdiction, and the action should be remanded to the Merced County Superior Court.

III. APPLICABLE LEGAL STANDARDS

A. Removal Jurisdiction Under 28 U.S.C. § 1441

"A defendant may remove an action to federal court based on federal question jurisdiction or diversity jurisdiction." Hunter v. Philip Morris USA, 582 F.3d 1039, 1042 (9th Cir.2009) (citing 28 U.S.C. § 1441). It is presumed, however, "that a cause lies outside [the] limited jurisdiction [of the federal courts] and the burden of establishing the contrary rests upon the party asserting jurisdiction." Id. (internal quotation marks omitted).

"Federal jurisdiction must be rejected if there is any doubt as to the right of removal in the first instance." Gaus v. Miles, Inc., 980 F.2d 564, 566 (9th Cir. 1992) (per curiam). The defendant always bears the burden of establishing that removal is proper, and the court "resolves all ambiguity in favor of remand." Hunter, 582 F.3d at 1042.

The propriety of removal requires the consideration of whether the district court has original jurisdiction of the action, i.e., whether the case could have originally been filed in federal court based on a federal question, diversity of citizenship, or another statutory grant of jurisdiction. See Caterpillar Inc. v. Williams, 482 U.S. 386, 392, 107 S.Ct. 2425, 96 L.Ed.2d 318 (1987). If the case is within the original jurisdiction of the district court, removal is proper so long as the defendant has complied with the procedural requirements set forth in 28 U.S.C. § 1446. If the case is not within the original jurisdiction of the district court, removal is improper. The absence of subject matter jurisdiction is not waivable by the parties. See Am. Fire & Cas. Co. v. Finn, 341 U.S. 6, 71 S.Ct. 534, 95 L.Ed. 702 (1951).

B. Federal Question Jurisdiction Under 28 U.S.C. § 1331

"Except as otherwise expressly provided by Act of Congress, any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or defendants ...." 28 U.S.C. § 1441(a). "The district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States." 28 U.S.C. § 1331. To assess "arising under" jurisdiction pursuant Section 1331, federal courts apply the "well-pleaded complaint" rule under which "federal jurisdiction exists only when a federal question is presented on the face of the plaintiff's properly pleaded complaint." Caterpillar Inc., 482 U.S. at 391-92, 107 S.Ct. 2425. "A defense is not a part of a plaintiffs properly pleaded statement of his or her claim." Rivet v. Regions Bank, 522 U.S. 470, 475, 118 S.Ct. 921, 139 L.Ed.2d 912 (1998).

In determining whether jurisdiction is appropriate under Section 1331, courts consider whether state or federal law creates the cause of action. The majority of cases coming under the auspices of Section 1331 "are those in which federal law creates the cause of action." Merrell Dow Pharm., Inc. v. Thompson ("Merrell Dow"), 478 U.S. 804, 809, 106 S.Ct. 3229, 92 L.Ed.2d 650 (1986). In those cases, federal courts unquestionably have federal subject-matter jurisdiction. Id.

However, there is a second and "less frequently encountered" category of Section 1331 cases that include state law claims that "necessarily raise a stated federal issue, actually disputed and substantial, which a federal forum may entertain without disturbing any congressionally approved balance of federal and state judicial responsibilities." Grable & Sons Metal Prods. v. Darue Eng'g & Mfg. ("Grable"), 545 U.S. 308, 312, 314, 125 S.Ct. 2363, 162 L.Ed.2d 257 (2005); Merrell, 478 U.S. at 808, 106 S.Ct. 3229 ("a case may arise under federal law `where the vindication of a right under state law necessarily turn[s] on some construction of federal law'") (quoting Franchise Tax Bd. v. Constr. Laborers Vacation Trust ("Franchise Tax Board"), 463 U.S. 1, 9, 103 S.Ct. 2841, 77 L.Ed.2d 420 (1983)); see also Nevada v. Bank of Am. Corp., 672 F.3d 661, 674 (9th Cir.2012). This type of federal-question jurisdiction, however, applies to a "special and small category" of cases, Empire Healthchoice Assurance v. McVeigh ("Empire"), 547 U.S. 677, 699, 126 S.Ct. 2121, 165 L.Ed.2d 131 (2006), and the "mere presence of a federal issue in a state cause of action does not automatically confer federal-question jurisdiction," Merrell Dow, 478 U.S. at 813, 106 S.Ct. 3229.

C. Assessing Federal Question Jurisdiction in the Context of a Declaratory Judgment Action Brought Pursuant to State Law

"Where the complaint in an action for declaratory judgment seeks in essence to assert a defense to an impending or threatened state court action, it is the character of the threatened action ... which will determine whether there is a federal-question jurisdiction in the District Court." Public Serv. Comm'n v. Wycoff Co. Inc., 344 U.S. 237, 248, 73 S.Ct. 236, 97 L.Ed. 291 (1952). Therefore, to determine federal-question jurisdiction over declaratory judgment actions, courts essentially "reposition the parties in a declaratory relief action by asking whether [the court] would have jurisdiction had the declaratory relief defendant been a plaintiff seeking a federal remedy." Standard Ins. Co. v. Saklad, 127 F.3d 1179 (9th Cir.1997); see also Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 671-73, 70 S.Ct. 876, 94 L.Ed. 1194 (1950); Franchise Tax Board, 463 U.S. at 19, 103 S.Ct. 2841 ("Federal courts have regularly taken original jurisdiction over declaratory judgment suits in which, if the declaratory judgment defendant brought a coercive action to enforce its rights, that suit would necessarily present a federal question.").

Janakes v. U.S Postal Service, 768 F.2d 1091 (9th Cir.1985) is illustrative of this analytical framework. In Janakes, a U.S. Postal Service ("Service") employee ("Janakes") was injured while delivering the mail. Id. at 1092. He applied for "continuation of pay" ("COP") pursuant to 5 U.S.C. § 8118 of the Federal Employees Compensation Act ("FECA"). Id. The Service paid Janakes COP, but subsequently informed him that he would be required to reimburse the Service if he recovered from a third-party tortfeasor for his injuries. Id. at 1092-93. Janakes filed an action under the Declaratory Judgment Act ("DJA"), 28 U.S.C. § 2201, seeking an interpretation of the FECA provisions defining the government's rights to subrogation and reimbursement. Id. at 1093. Janakes asserted that while 5 U.S.C. § 8132 permitted reimbursement of compensation, that term did not include COP because 5 U.S.C. § 8118(e) excluded COP from the definition of "compensation" as provided in 5 U.S.C. § 8101(12). Id. However, because Janakes' assertion was made in the face of an anticipated Service action to collect its reimbursement, the Ninth Circuit held that it was an assertion of a federal defense, which does not confer subject matter jurisdiction under Section 1331. Id. at 1093 (citing Louisville & Nashville R.R. v. Mottley, 211 U.S. 149, 152, 29 S.Ct. 42, 53 L.Ed. 126 (1908) (assertion of federal defense does not confer subject matter jurisdiction)). Furthermore, the appellate court recognized that the Supreme Court made clear in Franchise Tax Board, Wycoff, and Skelly Oil that the DJA itself does not confer federal question jurisdiction. Id.

Therefore, to assess whether federal subject matter jurisdiction existed, the appellate court focused "on the nature of a well-pleaded complaint that the Service could [have brought] for reimbursement of COP." Id. at 1094 (emphasis added). If the Service had such a complaint under a statute or federal common law, then federal jurisdiction would exist "notwithstanding the declaratory judgment plaintiff's assertion of a federal defense." Id. at 1093 (citing Franchise Tax Board, 463 U.S. at 16-19, 103 S.Ct. 2841). The court concluded that the Service could have asserted a claim for reimbursement under 5 U.S.C. § 8132, conferring the federal court with "arising under" jurisdiction pursuant to Section 1331 over Janakes' complaint for declaratory relief under the DJA. Id. at 1094.

Here, MID's claim seeks declaratory relief under California Code of Civil Procedure § 1060 to construe its payment obligations pursuant to a private contract between MID and Mariposa. As described above, MID asserts that the WSRA has precluded Mariposa's ability to construct a water project, other than the Saxon Creek Project, to fully exercise and utilize the water from the South Fork of the Merced River, and that any payment MID must make to Mariposa under Paragraph 3 of the 1960 Agreement will be fulfilled, satisfied, discharged and extinguished by MID's payment of the remaining outstanding indebtedness associated with Mariposa's construction of the Saxon Creek Project. MID's reliance on the application and interpretation of the WSRA to the parties' 1960 Agreement is a defense to a potential coercive contract action by Mariposa. Janakes, 768 F.2d at 1093. MID's complaint for declaratory relief thus falls into the category of cases that, but for the availability of declaratory judgment, the declaratory judgment plaintiff would be required to wait for the declaratory judgment defendant to bring a coercive suit to enforce its rights. Franchise Tax Board, 463 U.S. at 16-19, 103 S.Ct. 2841.

Accordingly, to assess its subject matter jurisdiction, the Court must determine whether MID's declaratory judgment complaint anticipates potential coercive claims that Mariposa could assert against MID over which this Court would have "arising under" jurisdiction. Id.; Janakes, 768 F.2d at 1093.11 The parties dispute whether Mariposa has any potential coercive claim that is either (1) created by federal law; or (2) created by state law, but necessarily raises an embedded issue of federal law. Mariposa contends it has potential coercive federal claims and state-law claims that necessarily implicate issues of federal law, any of which confer "arising under" jurisdiction pursuant to Section 1331. MID argues Mariposa has neither a potential federal cause of action nor a state-law claim that necessarily raises a federal issue, and maintains that federal jurisdiction is lacking under Section 1331.

IV. DISCUSSION

A. Mariposa's Request for Judicial Notice Should be GRANTED

Mariposa requests judicial notice pursuant to Federal Rule of Evidence 201 as to the following documents:

(Doc. 21-2.) MID has not opposed Mariposa's request for judicial notice.

Federal Rule of Evidence 201 provides that a "court may judicially notice a fact that is not subject to reasonable dispute because it: (1) is generally known within the trial court's territorial jurisdiction; or (2) can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned." Fed.R.Evid. 201(b)(1)-(2). Judicially noticed facts often consist of matters of public record. See, e.g., Barron v. Reich, 13 F.3d 1370, 1377 (9th Cir.1994) (records and reports of administrative bodies subject to judicial notice); Toney v. Burris, 829 F.2d 622, 626-27 (7th Cir.1987) (city charters and city ordinances subject to judicial notice); and Rothman v. Gregor, 220 F.3d 81, 92 (2d Cir.2000) (taking judicial notice of a filed complaint as a public record).

Further, the records and reports of administrative bodies are proper subjects of judicial notice, so long as their authenticity or accuracy is not disputed. See Mack v. South Bay Beer Distributors, Inc., 798 F.2d 1279, 1282 (9th Cir.1986), abrogated on other grounds, Astoria Fed. Savings & Loan Ass'n v. Solimino, 501 U.S. 104, 111 S.Ct. 2166, 115 L.Ed.2d 96 (1991); see also Catholic League for Religious & Civil Rights v. City and Cnty. of S.F., 464 F.Supp.2d 938, 941 (N.D.Cal. 2006) (taking judicial notice of San Francisco Board of Supervisors Resolutions). Exhibits C and E are administrative and public records that are subject to judicial notice as to their content and existence, but not for the truth of the matters stated therein. Lee v. City of L.A., 250 F.3d 668, 688-90 (9th Cir.2001). Exhibit B, MID's final FERC application is a public document filed in association with federal agency proceedings, the content and existence of which is subject to judicial notice. See, e.g., In re Western States Wholesale Natural Gas, No. MDL 1566, 2007 WL 2178054, at *4 (D.Nev. July 27, 2007) (taking judicial notice of FERC order).12 Similarly, Exhibit A, a July 10, 1995, Environmental Assessment for the Saxon Creek Project, is a public record and is subject to judicial notice.

In support of Mariposa's request for judicial notice of Exhibit D, the 1990 Agreement between MID and Mariposa, Mariposa filed a declaration of Rene Laroche, Clerk of the Board of Supervisors of the County of Mariposa. The declaration states that the 1990 agreement is a business record maintained by the County of Mariposa and that the contract submitted is a true and correct copy of the agreement between MID and Mariposa that was signed on August 14, 1990. (Doc. 21-1, ¶¶ 3-4.) Pursuant to California Government Code § 6252, any writing containing information relating to the conduct of the public's business prepared, owned, used, or retained by any state or local agency13 is considered a "public record." As a Mariposa County business record, the 1990 Agreement is a public record and can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned; there is also no dispute as to its authenticity. The existence and content of Exhibit D, a copy of the 1990 Agreement between the parties, is subject to judicial notice pursuant to Federal Rule of Evidence 201. The Court RECOMMENDS that Mariposa's request for judicial notice be GRANTED.

B. Whether Mariposa Has Any Potential Coercive Claims Created by Federal Law that Confer Jurisdiction Under Section 1331

1. The Parties' Arguments

Mariposa contends that MID's complaint seeks to avoid federal regulatory decision-making processes under Section 7 of the WSRA as well as potential proceedings under NEPA and the APA challenging agency decisions. (Doc. 21, 18:25-27.) For example, by seeking a determination that the WSRA precludes further development of water diversions from the South Fork of the Merced River by Mariposa, MID's action is essentially attempting to avoid or precipitate consideration by the Bureau of Land Management or the Forest Service as to whether any future Mariposa water resources project is permitted on the South Fork under Section 7 of the WSRA. (Doc. 21, 20:1-5.) Determinations under Section 7 are reviewable under the APA and are often accompanied by environmental review under NEPA, both of which arise under federal law. (Doc. 21, 20:8-12.)

Additionally, as an interested party to MID's Final FERC Application, Mariposa contends it has the right to submit comments, object to the Project, and petition FERC for a hearing under 18 C.F.R. § 4.34(a), the review of which would be subject to federal jurisdiction. (Doc. 21, 21:3-10.) Mariposa may object to any determination by FERC and/or challenge FERC's decision under the APA or NEPA, both of which are federal claims and provide a basis for federal jurisdiction. Moreover, because MID has failed to acknowledge Mariposa's water allocation rights under Paragraph 1 of the 1960 Agreement or MID's obligation to make payments to Mariposa under Paragraph 3, MID's declaratory judgment complaint is essentially an attempt to adjudicate issues disputed in the FERC proceeding. (Doc. 21, 21:11-22:27.)

MID responds that, as to Mariposa's purported hypothetical coercive federal claims, there is no private right of action under the WSRA or the Federal Power Act ("FPA") under which Mariposa could bring suit against MID. As it pertains to Section 7 exemptions Mariposa could seek under the WSRA for a future water project, Mariposa has not submitted a specific request at this point. (Doc. 22, 4:16-18 ("As a threshold matter, it is a mystery how (if at all) a party not applying for a specific permit could `precipitate consideration by the Bureau of Land Management or the Forest Service' of anything.").)

MID further contends that the potential coercive federal claim that Mariposa asserts arises out of its status as an interested party to MID's FERC licensing proceedings is similar to a claim under the WSRA in that there is no private right of action against MID under the FPA. MID maintains that the FERC relicensing proceedings are not relevant to any issue in any cause of action anticipated by MID's complaint. MID also notes that the FPA provides exclusive jurisdiction for the Courts of Appeals to review and make substantive modifications to FERC licensing orders. (Doc. 22, 5:8-16.)

2. Analysis

As discussed below, Mariposa's assertion that it has potential coercive federal causes of action that would confer federal-question jurisdiction under Section 1331 is unpersuasive.

Mariposa maintains that one of the potential actions the complaint seeks to avoid includes federal regulatory decision-making processes under Section 7, as well as potential proceedings under the APA and NEPA, challenging an agency decision under Section 7. Specifically, Mariposa argues that, even though the complaint asserts that the designation of the Merced River as wild and scenic under the WSRA precludes further development of water diversions from the South Fork of the Merced River by Mariposa, the WSRA does not absolutely preclude development of water resources projects on wild and scenic rivers. Instead, Section 7 provides that federal agencies have the jurisdiction to determine whether a specific water resources project is permissible. Thus, by seeking a determination that the WSRA precludes further water diversions from the South Fork of the Merced River, MID's action is essentially attempting to avoid or precipitate consideration by the Bureau of Land Management or the Forest Service as to whether any future Mariposa water resources project is permitted on the South Fork under the WSRA. Mariposa further argues that MID seeks a determination in state court that Mariposa is prohibited from building a water resources project due to the South Fork's wild and scenic designation, but state courts have no power to review federal agency decisions nor may they dictate a federal agency's decision that has yet to be made. According to Mariposa, such a dispute does not belong in a state court. (Doc. 21, 18:25-20:23.)

This argument, however, fails to establish how Mariposa could file such claims against MID. As MID notes, any Section 7 proceedings that Mariposa may initiate before a federal agency or any subsequent challenge to a final federal agency decision would involve MID only as a potentially interested/intervening party. (Doc. 25, 5:17-19 ("it should be noted that for any challenge to a decision made by federal agencies regarding the FPA, WSRA, or NEPA, [MID] is not a defendant or necessarily even a party to such an action").) The coercive suit Mariposa hypothesizes would thus not be between MID and Mariposa, but rather Mariposa and a federal agency. Mariposa has not shown how MID would be a proper defendant in such a suit. "In the declaratory judgment context, whether a federal question exists is determined by reference to a hypothetical non-declaratory suit (i.e., a suit for coercive relief) between the same parties; if a federal question would appear in the complaint in this hypothetical suit, federal jurisdiction exists over the declaratory-judgment action." See Chase Bank USA, N.A. v. City of Cleveland, 695 F.3d 548, 554 (6th Cir.2012) (emphasis added).

In Allstate Ins. Co. v. Nowakowski, 861 F.Supp.2d 866 (W.D.Mich.2012) the district court determined that, to confer jurisdiction, the potential coercive claim hypothesized by the declaratory judgment defendant must be one that is adverse to the declaratory judgment plaintiff. In that case, the declaratory judgment defendant ("Nowakowski") was involved in an automobile accident; at the time of the accident she was insured under a no-fault automobile insurance policy issued by the declaratory judgment plaintiff ("Allstate"), and she was also an eligible dependent for benefits under a medical plan of Pfizer, Inc. ("Pfizer"). Id. at 868. The Pfizer medical plan expressly provided that it was primary to Nowakowski's coverage under her no-fault automobile insurance policy from Allstate. Id. The Pfizer medical plan also contained a contractual subrogation and/or reimbursement provision permitting recovery from Nowakowski the sums she might receive in a claim against an at-fault driver and/or under an uninsured motorist policy. Id.

Following the accident, Nowakowski sued the at-fault driver for non-economic damages, and the parties ultimately reached a settlement. The Pfizer medical plan, which paid Nowakowski's expenses, asserted a subrogation lien against her to recover those expenses from the proceeds of the tort settlement, and Nowakowski requested that Allstate honor the lien, suggesting that Allstate was obligated to indemnify Nowakowski against the Pfizer medical plan's claim. Id. at 868-69.

Allstate filed a declaratory judgment action against Nowakowski in state court, alleging that Nowakowski was only entitled to excess benefits from Allstate, not indemnification of Pfizer's subrogation claim. Id. at 869. Nowakowski removed the action to federal court, claiming that Allstate's claim was preempted by ERISA and fell within the court's "arising under" jurisdiction. Id.

Allstate filed a motion to remand, contending that its declaratory judgment action made no allegation seeking judgment or relief under ERISA or any federal law and that the complaint had been improperly removed. Id. Nowakowski opposed remand emphasizing that Allstate's declaratory judgment action only arose because of Pfizer's right to reimbursement of benefits paid under ERISA, and any claims by Allstate that were dependent on state law become relevant only as a consequence of the ERISA plan's principal claim. Id. Nowakowski then filed a third-party complaint against Pfizer. Id.

Nowakowski argued that the court should consider whether she could file a coercive action arising under federal law against Pfizer that would confer subject-matter jurisdiction. The court rejected this argument, noting that such a coercive claim was "not between the declaratory judgment parties named in this Notice of Removal. In other words, to find a federal claim upon which original jurisdiction could be predicated, [Nowakowski] would have this Court not only transpose her from declaratory judgment defendant to plaintiff but also name a party other than the declaratory judgment plaintiff as defendant, a proposition for which this Court has not found support in the case law." Id. at 872. The court concluded that there was no coercive action Nowakowski could bring against Allstate arising under federal law; thus, there was no jurisdiction over the action.

Here, Mariposa asserts that it has potential federal claims arising out of MID's FERC relicensing process. Challenges to a FERC relicensing determination, like challenges to agency decisions under NEPA or the WSRA, would not be adverse to MID, even to the extent that Mariposa's challenge to a FERC determination would ultimately be adverse to MID's interests. Rather, such a coercive claim would be stated against the agency rendering the final agency decision. As noted in Nowakowski, there is no authority for the proposition that the Court may consider coercive claims that Mariposa may have against any other entity rather than MID. Id. at 872; see also Collin County v. Homeowners Ass'n for Values Essential to Neighborhoods, 915 F.2d 167, 171 (5th Cir.1990) ("Since it is the underlying cause of action of the defendant against the plaintiff that is actually litigated in a declaratory judgment action, a party bringing a declaratory judgment action must have been a proper party had the defendant brought suit on the underlying cause of action.").

Moreover, district courts do not have original jurisdiction over challenges to FERC licensing decisions; such challenges must be brought directly to the Courts of Appeals. Specifically, the FPA authorizes FERC to issue licenses for the construction and operation of hydroelectric projects. 16 U.S.C. § 797(e). Section 313(b) of the FPA provides, in relevant part:

In California Save Our Streams Council, Inc. v. Yeutter, 887 F.2d 908, 911 (9th Cir.1989), the court held that, "[b]y its express language, the Act provides exclusive jurisdiction of the Courts of Appeals to review and make substantive modifications to FERC licensing orders." Thus, the district court lacked subject-matter jurisdiction to review a FERC order. Id. at 913 ("since the FPA funnels all challenges to the courts of appeals ... the district court lacked jurisdiction to review appellants' claims"). As this Court would not have subject matter jurisdiction over a challenge to a FERC licensing decision under the FPA, such a claim does not confer subject-matter jurisdiction as a potential coercive claim in this context.

Furthermore, potential claims that Mariposa may assert to challenge federal agency decisions are not currently subject to judicial review due to a lack of finality. Because the WSRA,14 NEPA,15 and the FPA (in connection with hydroelectric licensing)16 contain no private right of action, the coercive claims arising under these federal statutes would be limited to judicial review of federal agency action (or inaction or unreasonable delay) under the APA. See 5 U.S.C. § 702 ("A person suffering legal wrong because of agency action, or adversely affected or aggrieved by agency action within the meaning of a relevant statute is entitled to judicial review thereof."). To obtain judicial review under the APA, the claim must challenge a final agency action. Lujan v. Nat'l Wildlife Federation, 497 U.S. 871, 882, 110 S.Ct. 3177, 111 L.Ed.2d 695 (1990); Ukiah Valley Med. Ctr. v. FTC, 911 F.2d 261, 264 n. 1 (9th Cir.1990).

Here, Mariposa has no ripened APA claim to challenge a decision made by a federal agency under Section 7 of the WSRA or under NEPA because such agency proceedings have not even been instituted by Mariposa, let alone culminated in final agency action. While MID's FERC relicensing proceedings have begun, this too has not ripened into a final agency decision that Mariposa could currently challenge. Mariposa has presented no case authority for the proposition that non-final hypothetical claims under the APA that are not currently subject to judicial review are among the types of coercive claims that the Court could consider in determining federal-question jurisdiction.

Mariposa cites First National Bank of Shawnee Mission v. Roeland Park State Bank & Trust ("Shawnee Mission"), 357 F.Supp. 708 (D.Kan.1973) for the proposition that a potential coercive action includes judicial review of agency decisions. Shawnee Mission, which involved the U.S. Department of the Treasury through its independent bureau, the Office of the Comptroller of the Currency ("OCC"), however, underscores the Court's rationale in rejecting Mariposa's argument in this regard. In Shawnee Mission, not only was the OCC a declaratory judgment plaintiff in the case, but the OCC had already issued a decision that was subject to judicial review — a decision that was, in fact, being challenged by the defendants concurrently in the United States District Court for the District of Columbia under 5 U.S.C. § 702. Id. at 710-11. Thus, the coercive action for judicial review in that case was ripe and was adverse to the declaratory judgment plaintiff, the OCC.

Finally, the potential federal claims Mariposa hypothesizes are not within the scope of claims that can be interpreted as anticipated by MID's declaratory judgment complaint. While Mariposa correctly argues that the disputed issues between the parties may be relevant to the FERC relicensing efforts or future agency proceedings under the WSRA, this does not mean that the complaint anticipates or is attempting to precipitate Mariposa's challenge to the FERC proceedings or a claim under the APA such that there is a justiciable case or controversy between Mariposa and MID on those grounds. See generally Spokane Indian Tribe v. United States, 972 F.2d 1090, 1091-92 (9th Cir.1992). Further, Mariposa has not established how MID would be a proper defendant in such an action. See Collin County, 915 F.2d at 170-71 ("It would be anomalous to allow a party who would not be a proper defendant nor able to intervene of right in a NEPA lawsuit to precipitate a judgment in such a suit between others by filing an action pursuant to the [DJA]."). Moreover, even if such claims could be considered to be anticipated by MID's complaint and MID was able to intervene as a matter of right in a suit by Mariposa against a federal agency, the fact remains that there is currently no final agency action to challenge.

3. Conclusion

In sum, hypothetical coercive claims (1) adverse to a federal agency that is not the declaratory judgment plaintiff (MID), (2) challenging a hypothetical federal agency decision where agency proceedings have either not been initiated (e.g., under Section 7 of the WSRA) or have not been completed (e.g., FERC relicensing proceedings17) such that they could be considered final and ripe for purposes of judicial review, and (3) that involve issues that are beyond the scope of what is fairly anticipated by the declaratory judgment complaint, do not confer federal-question jurisdiction on the Court. As such, the Court finds that the allegations in the declaratory judgment complaint do not indicate any potential coercive federal causes of action by Mariposa against MID. The Court next turns to examine whether Mariposa has any coercive state-law claims that implicate a substantial federal issue that confers "arising under" jurisdiction pursuant to Section 1331.

C. Whether Mariposa's Potential Coercive State Law Claims Contain Embedded Federal Issues that Confer Jurisdiction Under Section 1331

In the second, less frequently encountered category of Section 1331 cases, lies the "litigation-provoking problem"18 of state-law claims with embedded federal issues. While state-law claims are not precluded from federal court simply "because they appear[] in state raiment," neither has the presence of a federal issue created a "password opening federal courts to any state action embracing a point of federal law." Grable, 545 U.S. at 314, 125 S.Ct. 2363. Asserting jurisdiction over state-law created causes of action that present a federal issue "calls for a `common-sense accommodation of judgment to [the] kaleidoscopic situations ... in a selective process which picks the substantial causes out of the web and lays the other ones aside.'" Grable, 545 U.S. at 313, 125 S.Ct. 2363 (quoting Gully v. First Nat'l Bank in Meridian, 299 U.S. 109, 117-18, 57 S.Ct. 96, 81 L.Ed. 70 (1936)).

Although the Supreme Court has considered this second type of "arising under" jurisdiction on multiple occasions,19 the "welter of issues regarding the interrelation of federal and state authority and the proper management of the federal judicial system" has "kept [it] from stating a `single, precise, all-embracing' test for jurisdiction over federal issues." Grable, 545 U.S. at 314, 125 S.Ct. 2363 (internal citations omitted). Nevertheless, in treading again to the "outer reaches"20 of Section 1331 in considering federal jurisdiction over a state-law quiet title action in Grable, the Supreme Court articulated an analytical framework necessary for making "careful judgments about the exercise of federal judicial power in an area of uncertain jurisdiction."21

The lawsuit in Grable arose from a dispute over real property in Michigan. 545 U.S. at 310, 125 S.Ct. 2363. The Internal Revenue Service ("IRS") seized property from Grable & Sons Metal Products, Inc. ("Grable") to satisfy a tax delinquency and sold the property to Darue Engineering & Manufacturing ("Darue"). Id. As required by statute, the IRS informed Grable of its intention to sell the property and provided such notice by certified mail, which Grable indisputably received. Although Grable had a statutory right to redeem the property within 180 days of sale, it did not do so, and the IRS issued a quitclaim deed to Darue. Id. Five years after the sale, Grable brought a quiet-title action in Michigan state court, claiming that the IRS notice of the pending sale was technically deficient under the statute. Id. at 311, 125 S.Ct. 2363. The relevant statute required that written notice be "given by the Secretary to the owner of the property [or] left at his usual place of abode or business." Id. Because the IRS had provided notice via mail, and not in the statutorily prescribed manner, Grable argued the sale was invalid. Id.

Darue removed the action to district court, asserting that Grable's state quiet title action posed a significant federal question as to the required form of notice under federal tax regulations. Id. The district court accepted jurisdiction and granted Darue's motion for summary judgment holding that the IRS's substantial compliance with the statute was sufficient. Id. Grable appealed to the Sixth Circuit, which affirmed on the jurisdictional issue, finding that "the title claim raised an issue of federal law that had to be resolved, and implicated a substantial federal interest (in construing federal tax law)." Id.

On a grant of certiorari, the Supreme Court, in examining its substantial-federal-question precedent, balanced the "commonsense notion that a federal court ought to be able to hear claims recognized under state law that nonetheless turn on substantial questions of federal law" with the role that Congress plays in defining the boundaries of federal subject matter jurisdiction. Id. at 312, 125 S.Ct. 2363. In accommodating these concerns, the Court held that a federal issue embedded in a state-law claim may give rise to federal question jurisdiction under Section 1331 if (1) the state-law claim necessarily raises a stated federal issue; (2) the federal issue is "both actually disputed and substantial," and so long as (3) the federal forum may entertain the issue "without disturbing any congressionally approved balance of federal and state judicial responsibilities." Id. at 314, 125 S.Ct. 2363. In applying this newly stated framework to the facts of Grable, the court determined that the federal tax provision was an important issue of federal law that "sensibly belong[ed] in federal court," and the exercise of federal jurisdiction would "portend only a microscopic effect on the federal-state division of labor." Id. at 315, 125 S.Ct. 2363.

On the heels of Grable,22 the Supreme Court granted certiorari in Empire, which also presented an issue of whether "arising under" jurisdiction existed over a state-law claim with an embedded federal issue. The Court determined Empire was "poles apart from Grable" and could not "be squeezed into the slim category Grable exemplifies." Empire, 547 U.S. at 700, 126 S.Ct. 2121. Empire involved a reimbursement claim filed by a health insurance provider (Empire) against the estate of a deceased federal employee to recover $157,309 it had paid out for the decedent's medical care. Id. at 687, 126 S.Ct. 2121. Empire determined that the decedent's estate had settled tort claims for $3,175,000 against a third party who had allegedly caused the injuries leading to the decedent's death. Id. Empire filed suit in district court alleging that the administrator of the decedent's estate was in breach of the reimbursement provision of decedent's health benefits plan. Id. In response to a motion to dismiss, Empire asserted the federal court had jurisdiction because federal common law governed the reimbursement claim, and alternatively, the health plan itself constituted federal law. Id. at 688, 126 S.Ct. 2121. The district court rejected Empire's argument and dismissed the case for lack of subject-matter jurisdiction. Id. On appeal, Empire argued that the contract-derived claims implicated uniquely federal interests because the reimbursement directly affected the United States Treasury and the costs of providing health benefits to federal employees, and Congress had expressed its interest in maintaining uniformity among the States on matters relating to federal health-plan benefits. Id. The Second Circuit affirmed the district court's decision. Id.

The Supreme Court granted certiorari and held that there was neither a federal cause of action that conferred jurisdiction, nor a state-law cause of action implicating a substantial federal issue. In considering the state-law reimbursement claim, the Court noted that the state-law claim in Grable centered on the action of a federal agency and its compatibility with a federal statute; the question qualified as substantial, and its resolution was both dispositive of the case and controlling in numerous other cases. Id. at 700, 126 S.Ct. 2121. In contrast, the reimbursement claim in Empire was not triggered by the action of any federal department, agency, or service, but by the settlement of a personal-injury action launched in state court and the "bottom-line practical issue [wa]s the share of that settlement properly payable to Empire." Id. Additionally, Grable presented a nearly "pure issue of law" that could be settled once and for all and would thereafter govern numerous other tax sale cases while Empire's reimbursement claim was "fact-bound and situation-specific." Id. 700-01, 126 S.Ct. 2121. Thus, while acknowledging that the United States had an "overwhelming interest in attracting able workers to the federal workforce" and "in the health and welfare of the federal workers upon whom it relies to carry out its functions," the Court determined that those interests did not warrant "turning into a discrete and costly `federal case' an insurer's contract-derived claim to be reimbursed from the proceeds of a federal worker's state-court-initiated tort litigation." Id. at 701, 126 S.Ct. 2121.

With Grable and Empire as two guideposts on the substantial federal question jurisdictional continuum, the Court applies the Supreme Court's analytical framework to this case.

1. Whether Any Potential Coercive State Law Claim Necessarily Raises an Issue of Federal Law

Mariposa argues that MID's declaratory judgment complaint anticipates three state-law contract claims that all necessarily raise an issue of federal law, i.e., interpretation of the WSRA: (1) a claim for anticipatory breach based on MID's non-payment under Paragraph 3 of the 1960 Agreement; (2) a claim for anticipatory breach based on Mariposa's water allocation under Paragraph 1 of the 1960 Agreement; and (3) a claim for breach of the implied covenant of good faith and fair dealing.23 The Court first considers whether any of these coercive claims necessarily raises an issue of federal law under the first prong of Grable.

a. Claim for Anticipatory Breach — Payment under Paragraph 3

Pursuant to California law, to state a claim for breach of contract, the plaintiff must allege and establish: (1) the existence of a contract, (2) plaintiff's performance or excuse for nonperformance, (3) defendant's breach, and (4) damages to plaintiff as a result of defendant's breach. Mammoth Lakes Land Acquisition, LLC v. Town of Mammoth Lakes, 191 Cal.App.4th 435, 463, 120 Cal.Rptr.3d 797 (2010). "Anticipatory breach occurs when one of the parties to a bilateral contract repudiates the contract. The repudiation may be express or implied. An express repudiation is a clear, position, unequivocal refusal to perform; an implied repudiation results from conduct where the promissor puts it out of his power to perform so as to make substantial performance of his promise impossible." Id. (internal citations omitted).

(i) The Parties' Arguments

In its motion to remand, MID argues that Mariposa's prospective claim for anticipatory repudiation relates purely to contract construction or interpretation under state law, and none of the elements of such a claim implicates any question of federal law. (Doc. 13-2, 9:3-13.)

Mariposa argues that it has an action for anticipatory breach of contract based on non-payment under the 1960 Agreement and that such a claim necessarily raises an issue of federal law. According to Mariposa, MID ignores the fact that one of the elements of anticipatory breach is an allegation that the plaintiff has the ability to perform. Mariposa asserts that MID defends on grounds that the WSRA precludes Mariposa's performance under the parties' 1960 Agreement. Thus, Mariposa argues that whether it can perform under the WSRA becomes a necessary element of its contract claim. (Doc. 21, 27:7-10 ("Under MID's reading of the 1960 Agreement, to prevail on an anticipatory breach claim, Mariposa would need to show the NWSRA does not bar Mariposa from developing a water resources project on the South Fork.").)

In reply, MID asserts that Mariposa has an alternative theory of recovery predicated entirely on state-law grounds that defeats the necessity of reaching the WSRA with respect to an anticipatory breach claim for non-payment under Paragraph 3 of the parties' 1960 Agreement. Specifically, Mariposa maintains in its counterclaim and in its answer to MID's complaint that, regardless of how the Court interprets the WSRA, Mariposa is entitled to payment under Paragraph 3 of the parties' agreement. MID argues that where a state-law claim is supported by a state law theory of recovery not dependent on federal law, the claim itself does not necessarily arise under federal law. (Doc. 22, 6:10-7:13.)

(ii) Mariposa's Alternative Theory Defeats the Necessity of Reaching the WSRA as to this Claim

To the extent that Mariposa's performance is required to trigger the payment provision under Paragraph 3 and it is Mariposa's performance that is precluded by the WSRA, MID asserts that Mariposa poses an alternative theory of recovery on this claim that is not predicated on federal law. Mariposa maintains that it is entitled to payment whether or not it can construct a water resources project at all, i.e., the contract does not require Mariposa to build a water resources project to be entitled to payments.

Under the first prong of Grable, if a state-law claim is supported by a theory that contains an embedded federal issue, but the claim can nonetheless be decided on an alternative theory that is not predicated on federal law or a federal issue, then the claim itself does not necessarily raise a stated federal issue.

In Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 804-13, 108 S.Ct. 2166, 100 L.Ed.2d 811 (1988), the Supreme Court considered whether the claims at issue stated a cause of action arising under federal patent-law such that the Court of Appeals for the Federal Circuit, rather than the Court of Appeals for the Seventh Circuit, had jurisdiction to decide the appeal. In considering whether there was jurisdiction under Section 1338(a), which confers district courts with original jurisdiction in patent cases, the Court explained that it is not necessarily sufficient that a well-pleaded claim alleges a single theory under which resolution of a patent-law question is essential. Quoting Franchise Tax Board, the court reasoned that, if "on the face of a well-pleaded complaint there are ... reasons completely unrelated to the provisions and purposes of [the patent laws] why the [plaintiff] may or may not be entitled to the relief it seeks, then the claim does not arise under those laws." Id. (quoting Franchise Tax Board, 463 U.S. at 26, 103 S.Ct. 2841). The Court concluded that a claim supported by alternative theories in the complaint may not form the basis for Section 1338(a) jurisdiction unless patent law is essential to each of those theories.

In turning to the claims at issue in the petitioners' complaint,24 the Court noted that the antitrust count could be readily understood to "encompass both a monopolization claim under § 2 of the Sherman Act and a group-boycott claim under § 1. The patent-law issue, while arguably necessary to at least one theory under each claim, [wa]s not necessary to the overall success of either claim." Id. at 810, 108 S.Ct. 2166. The Court explained that "the well-pleaded complaint focuses on claims, not theories[; thus,] just because an element that is essential to a particular theory might be governed by federal patent law does not mean that the entire monopolization claim `arises under' patent law." Id. at 811, 108 S.Ct. 2166. Even assuming that Colt's patents were an essential element of a monopolization theory under § 2, there was another monopolization theory under which the petitioners could prevail that did not invoke patent law. Id. at 811-12, 108 S.Ct. 2166. Therefore, since there were "`reasons completely unrelated to the provisions and purposes' of federal patent law why petitioners `may or may not be entitled to the relief [they] see[k]' under their monopolization claim, ... the claim does not `arise under' federal patent law." Id. at 812, 108 S.Ct. 2166 (quoting Franchise Tax Board, 463 U.S. at 26, 103 S.Ct. 2841).

The Court then examined whether federal patent law was necessarily an issue with respect to every theory of the group-boycott claim under § 1 of the Sherman Act. Id. at 812-13, 108 S.Ct. 2166. The Court noted that, "[w]hether or not the patent-law issue was an `essential' element of [a] group-boycott theory, however, petitioners could have supported their group-boycott claim with any of several theories having nothing to do with the validity of Colt's patents." Id. at 813, 108 S.Ct. 2166. Specifically, the Court found that there was a theory under § 1 that the alleged agreement was unreasonable not because Colt had no trade secrets to protect, but because Colt had authorized the petitioners to use them. Id. The Court concluded that, "[o]nce again, the appearance on the complaint's face of an alternative, non-patent theory compels the conclusion that the group-boycott claim did not `arise under' patent law." Id. at 813, 108 S.Ct. 2166. As there was no claim necessarily arising under Section 1338(a), the Court determined the Federal Circuit had no jurisdiction to review the case, the decision was reversed and remanded with instructions to transfer the case to the Court of Appeals for the Seventh Circuit. Id. at 819, 108 S.Ct. 2166.

The Supreme Court's analysis under Section 1338(a) in Christianson has been routinely applied in determining whether a claim arises under federal law for purposes of Section 1331.25 For example, in Long v. Bando Mfg. of Am., Inc., 201 F.3d 754, 760 (6th Cir.2000), the Sixth Circuit concluded that there was no federal question jurisdiction over a state wrongful-termination claim based on alleged violations of public policy expressed in federal statutes because the complaint also set forth public policy violations based on state statutes. Thus, the court concluded that the resolution of a federal question was not necessary or essential to resolution of the wrongful termination claim. Id. at 759-60 (citing and relying upon Christianson).

Similarly, in Dixon v. Coburg Dairy, Inc., 369 F.3d 811, 818 (4th Cir.2004), the Fourth Circuit concluded that there was no federal jurisdiction over a wrongful termination claim based on alleged violations of the First Amendment of the United States Constitution and laws of South Carolina. The court explained that, while the complaint referenced the First Amendment, none of the causes of action relied exclusively on a First Amendment violation to establish liability. Id. Because the plaintiff could prove that the defendant wrongfully terminated his employment on alternative grounds that did not involve federal law, the claim did not necessarily depend on a question of federal law and "arising under" jurisdiction was lacking. Id. at 817 (citing Christianson).

Thus, if there is an alternative theory of recovery on the claim that does not involve a question or issue of federal law, the claim itself cannot be said to necessarily "arise under" federal law. Christianson, 486 U.S. at 804-13, 108 S.Ct. 2166; Long, 201 F.3d at 760; Dixon, 369 F.3d at 818; see also Mulcahey v. Columbia Organic Chems. Co., Inc., 29 F.3d 148, 153 (4th Cir.1994) ("[I]f a claim is supported not only by a theory establishing federal subject matter jurisdiction but also by an alternative theory which would not establish such jurisdiction, then federal subject matter jurisdiction does not exist.").

Here, Mariposa maintains a theory of recovery under its claim for anticipatory breach as to non-payment that is not predicated on an interpretation or application of the WSRA. In its counterclaim, Mariposa asserts that, even if MID's interpretation of the WSRA were correct, it would still not affect MID's obligation to make payments under paragraph 3(b). Specifically, Mariposa maintains that

(Doc. 4, ¶ 31(h).)

Because Mariposa has advanced an alternative theory of recovery that is not dependent upon an issue of federal law, this hypothetical coercive claim does not necessarily arise under federal law. Mariposa's supplemental brief did not persuasively address MID's argument that Mariposa maintains an alternative theory of recovery for anticipatory breach based on non-payment under Paragraph 3(b). Mariposa argues that MID has invoked the WSRA to defeat the entire contract and that "all claims and counter-claims are inextricably interwoven with the WSRA, APA, NEPA, and the FPA." (Doc. 24, 12:16-17.) However, MID's invocation of the WSRA as a defense to the contract does not confer subject matter jurisdiction. As explained in Franchise Tax Board, "since 1887 it has been settled law that a case may not be removed to federal court on the basis of a federal defense, including the defense of preemption, even if the defense is anticipated in the plaintiff's complaint, and even if both parties admit that the defense is the only question truly at issue in the case." 463 U.S. at 14, 103 S.Ct. 2841. Nor does MID's invocation of the WSRA vitiate Mariposa's alterative non-federal theory of recovery for MID's anticipated non-payment under Paragraph 3(b). Rather, Mariposa reasserts its alternative theory of recovery in its supplemental brief by arguing that MID's payments to Mariposa must begin in 2014 under Paragraph 3(b) "regardless of whether Mariposa constructs a water resources project at a less convenient location (or whether Mariposa constructs a water resources project at all)." (Doc. 24, 13:10-12.) Mariposa is essentially asserting that under its interpretation of the contract, it does not have to build any water resource project to be entitled to payments from MID. Thus, Mariposa's anticipatory breach claim for MID's non-payment under Paragraph 3(b) will not necessarily be predicated on Mariposa's ability to construct a water resources project under the WSRA.

Finally, while Mariposa asserts that federal law is inextricably interwoven into the entire dispute, this does not provide an adequate ground, by itself, to confer jurisdiction. The mere fact that an issue of federal law may (or even probably will) arise during the litigation of Mariposa's claim for anticipatory breach based on non-payment does not confer federal question jurisdiction. Franchise Tax Board, 463 U.S. at 14, 103 S.Ct. 2841. For example, in rejecting jurisdiction over a declaratory relief action brought under California Code of Civil Procedure Section 1060 in Franchise Tax Board, the Supreme Court noted that "[t]he only questions in dispute between the parties in [the] case concern the rights and duties of CLVT and its trustees under ERISA." Franchise Tax Board, 463 U.S. at 14, 103 S.Ct. 2841. Not only did the request for declaratory relief "clearly encompass questions governed by ERISA," the declaratory judgment complaint identified "no other questions as a subject of controversy between the parties." Id. In fact, the Franchise Tax Board was not able to obtain the relief it sought "without a construction of ERISA and/or an adjudication of its preemptive effect and constitutionality — all questions of federal law." Id. Nonetheless, this was not dispositive of federal-question jurisdiction in that case, nor is it in this case. Here, Mariposa has an alternative theory of recovery for MID's anticipated breach for non-payment under Paragraph 3(b) that is not dependent on Mariposa's ability to perform under MID's interpretation of the WSRA. Therefore, Mariposa's claim for anticipatory breach for non-payment does not necessarily raise a federal issue and fails to satisfy the first prong in Grable.

b. Mariposa's Potential Coercive Claim for Anticipatory Breach — Allocation/Diversion Rights to the 70,000 AF of Water

(i) Coercive Claim for Anticipatory Breach Based on Allocation Rights is Fairly Anticipated by MID's Complaint

Mariposa asserts it has a potential coercive action against MID for anticipatory breach of contract based on MID's anticipated refusal to allow Mariposa to deplete 70,000 AF of MID's water allocation under Paragraph 1 of the 1960 Agreement. (Doc. 21, 25:9-12.) Mariposa also notes that Paragraph 4 of the 1960 Agreement specifically requires MID "not to protest or oppose any application for [a] permit or license which may be filed by [Mariposa] in the future for the appropriation of water as set forth and contained in the permit conditions set forth in paragraph 1 hereof." (1960 Agreement; Doc. 21, 25:13-16.) In turn, as renegotiated in 1990, Paragraph 1 provides Mariposa with the right to deplete MID's water allocations for reasonable beneficial use within Mariposa County" in an amount not to exceed 70,000 AF. MID's request for a declaratory judgment that the WSRA precludes further development of water diversions from the South Fork of the Merced River by Mariposa is inconsistent with Mariposa's contractual right to deplete 70,000 AF of water as well as MID's agreement not to protest or to oppose any application for a permit or license which may be filed by Mariposa. Accordingly, MID's complaint anticipates a claim for anticipatory breach resulting from MID's interference with a potential attempt by Mariposa to develop a "water resources project" on the South Fork.

MID argues that its declaratory judgment complaint seeks no determination with respect to its obligations under Paragraph 4 of the Agreement, and MID has posed no question with respect to any future attempts by Mariposa to appropriate water from the South Fork of the Merced River. Therefore, MID asserts there is no controversy involving Paragraph 4 of the Agreement, and Mariposa's "imagined" future claim for anticipatory breach based on Mariposa's diversion rights is not ripe. (Doc. 22, 8:17-24.)

In its supplemental brief, Mariposa responds that MID's complaint posits a much broader, far-reaching judicial declaration than simply MID's payment obligations under Paragraph 3 of the Agreement. Specifically, MID is seeking a declaration concerning MID's obligation to allow Mariposa to deplete MID's water allocation from the South Fork of the Merced River and Mariposa's ability to develop a water resources project on the South Fork of the Merced River. While MID maintains that it poses no question with respect to any future attempts by Mariposa to appropriate water from the South Fork, MID expressly seeks declarations under federal law to terminate Mariposa's right to utilize water from the South Fork. By seeking such declarations that Mariposa cannot deplete water from the South Fork or develop a water resources project on the South Fork, MID has directly repudiated its duties to allow Mariposa to deplete MID's water allocation from the South Fork as well as MID's obligations under Paragraph 4 of the Agreement.

As to the scope of MID's complaint, Mariposa's argument is persuasive. The potential coercive actions of the declaratory judgment defendant (i.e., Mariposa) that are assessed for purposes of jurisdiction are those that are fairly anticipated by the scope of the allegations in the complaint seeking declaratory relief. Therefore, federal-question jurisdiction "exists in a declaratory judgment action if the plaintiff has alleged facts in a well-pleaded complaint which demonstrate that the defendant could file a coercive action under federal law." Household Bank v. JFS Grp., 320 F.3d 1249 1251 (11th Cir. 2003); see also Morongo Band of Mission Indians v. Cal. State Bd., 858 F.2d 1376, 1384 (9th Cir.1988) (quoting Banco de Ponce v. Hinsdale Supermarket Corp., 663 F.Supp. 813, 817 (E.D.N.Y.1987) ("[F]ederal question jurisdiction exists if at least one of the threatened actions fairly alleged in the interpleader complaint arises under federal law.")). In Banco de Ponce, the court noted that, while the complaint did not "detail the threatened claims of defendants," it did recite "facts that implicitly defined [the claims], and the other papers in the case provided further clarification." 663 F.Supp. at 817.

Here, in seeking a declaration that the WSRA precludes further water diversions from the South Fork of the Merced River by Mariposa County, and that the Saxon Creek Project constitutes the full exercise and utilization of water from the South Fork which Mariposa County can initiate and consummate pursuant to law, MID has taken the position that Mariposa's diversion rights under the parties' 1960 agreement are effectively extinguished by operation of the WSRA, and MID would have no duty to recognize or otherwise honor Mariposa's diversion right. This necessarily implicates not only whether or to what extent MID's payment obligations are triggered under Paragraph 3(b), but whether Mariposa's diversion right under Paragraph 1, as renegotiated in 1990, has been effectively extinguished by subsequent law. The facts pled in MID's complaint show that it has taken a position adverse to Mariposa's right to deplete any water reserved to Mariposa under the parties' 1960 Agreement. While MID notes that it has not pled any facts with respect to Paragraph 4 of the 1960 Agreement or placed Mariposa's allocation right under Paragraph 1 directly at issue, MID's complaint (1) implicitly claims that MID's obligation to recognize Mariposa's diversion right has been effectively extinguished by the WSRA, and (2) expressly asserts that there is no diversion of water from the South Fork that could be initiated and consummated pursuant to law by Mariposa. MID's public litigation position is a sufficient repudiation of Mariposa's diversion rights and an implicit expression that MID will take a position adverse to any permits or licenses for diversions of water for which Mariposa applies.

MID's argument that it has not objected to or opposed any application or permit request by Mariposa with respect to the water allocation and therefore such a claim is not ripe is not convincing. A claim for anticipatory breach based on Mariposa's water allocation under the parties' 1960 Agreement is fairly anticipated by MID's declaratory judgment complaint.

(ii) A Well-Pleaded Complaint for Anticipatory Breach Would Not Necessarily Implicate the WSRA

Unlike Mariposa's claim for anticipatory breach with regard to MID's payment obligations under Paragraph 3, there is no alternative state-law theory of recovery for anticipatory breach based on the water allocation rights in Paragraph 1 of the 1960 Agreement. MID notes that Mariposa's answer and counterclaim contend that Mariposa may appropriate water from other points along the Merced River that have not been designated as wild and scenic under the WSRA, and such an assertion is a non-federal alternative theory of relief on Mariposa's anticipatory breach claim based on its water allocation. (Doc. 25, 3:14-4:3). Mariposa contends however, that this is not truly an alternative theory of recovery because the 1960 Agreement expressly entitles Mariposa to deplete water from the South Fork of the Merced River. Whether or not Mariposa will be entitled to appropriate water under California law from another point on the Merced River does not provide Mariposa what it bargained for, i.e., water from the South Fork of the Merced River. (Doc. 24, 6-18.) Thus, California law does not provide Mariposa an alternative theory of recovery on this anticipatory breach claim.

Turning to the potential anticipatory breach claim Mariposa maintains it has, Mariposa asserts that under MID's interpretation of the WSRA, Mariposa's ability to perform under the parties' 1960 Agreement is predicated on Mariposa's ability to develop a water resource project on the South Fork of the Merced River. In any well-pleaded claim for anticipatory breach, Mariposa would have to allege its ability to perform under the WSRA. In turn, the Court would need to determine if Mariposa could in fact perform under the WSRA or whether the WSRA precludes Mariposa's performance in this regard, as MID maintains. According to Mariposa, because an essential element of its anticipatory breach claim, i.e., its ability to perform, is predicated on the Court's interpretation of federal law, such a claim would necessarily raise a federal issue that is actually disputed. (Doc. 21, 25:9-26:19.)

MID argues that the WSRA is not an essential element of Mariposa's anticipatory breach claim and will arise only as a counterclaim or rejoinder to MID's WSRA defense. Rejoinders that invoke federal law, MID claims, do not provide "arising under" jurisdiction. (Doc. 22, 8:25-9:1.)

The Court is not persuaded that the WSRA is a necessary element of Mariposa's anticipatory breach claim with respect to Mariposa's diversion rights under Paragraph 1 the 1960 Agreement, as modified by the 1990 Agreement. In the 1960 Agreement, Mariposa and MID agreed that in exchange for water diversion rights, Mariposa would drop its opposition to MID's permit request and the parties would jointly request the State Water Rights Board to grant and issue permits to MID under application numbers 16186 and 16187 subject to certain conditions. These permits and licenses were to remain subject to depletion of stream flow in the quantities set forth in Paragraph 1(a), (b), and (c) for future appropriations of water for reasonable and beneficial use within Mariposa County, provided such future appropriations were initiated and consummated pursuant to law. (Cmplt., Doc. 1-2, Exh. A.)

Mariposa's consideration for obtaining the diversion rights under Paragraph 1 was predicated on Mariposa's cessation of its opposition to MID's permit applications and joint request that the State Water Rights Board issue MID permits under its applications. Specifically, in its counterclaim, Mariposa alleges that it has "fully performed all its obligations under Paragraph 1 of the 1960 Agreement by jointly requesting, with MID, `the State Water Rights Board to grant and issue permits to [MID] under said Applications No. 16186 and 16187.'" (Doc. 4, ¶ 15.) While consummation and initiation pursuant to law may be a condition on Mariposa's use of any water for which it has a depletion right, Mariposa's entitlement to the water allocation itself is not predicated on any further performance obligations.26 This is particularly evident in light of Mariposa's allegation in its counterclaim that it has "fully performed all of its obligations" under Paragraph 1 of the parties' 1960 Agreement. Moreover, if Mariposa's ability to lawfully consummate and initiate a water project is a part of its performance under the 1960 Agreement, then Mariposa would have the burden to plead and establish how any use of the water could be consummated and initiated under any law.

As MID correctly notes, Mariposa's assertion that it has a further performance obligation to prove its ability to use the water for which it bargained, is essentially converting MID's affirmative defense into a necessary element of Mariposa's claim. (See Doc. 22, 7:4-6 ("This is an apparently attempt to flip MID's WSRA defense and make it an affirmative element of its presumptive breach of contract claim.").) However, Mariposa does not have the burden of disproving MID's defense as an essential element of its anticipatory breach claim. The only allegations essential are those required to state a cause of action. A plaintiff need not anticipate or negate any defense or counterclaim on the part of the defendant and is not bound to show affirmatively in his complaint that the action is not barred, that he was not guilty of contributory negligence, that he did not do prohibited acts, or that he performed conditions subsequent. Transmarine Corp. v. R.W. Kinney Co., 123 Cal.App. 411, 421, 11 P.2d 877 (1932) (citing 21 Cal. Jur. 61-63.) MID's excuses including frustration and impossibility for its nonperformance, i.e., refusal to recognize Mariposa's allocation rights, are affirmative defenses to the 1960 Agreement. See Richter v. Adams, 19 Cal.App.2d 572, 576, 66 P.2d 226 (1937) (waiver or excuse for nonperformance of a contract is affirmative defense that must be pled in the answer); see also State Medical Educ. Bd. v. Roberson, 6 Cal.App.3d 493, 501, 86 Cal.Rptr. 258 (1970) (an excuse for nonperformance must be pled in the defendant's answer).

A well-pleaded complaint for anticipatory breach would not require an allegation that Mariposa could lawfully initiate and consummate any hypothetical water project pursuant to any law, including the WSRA, especially outside the context of any particular proposed water project.27 Pleading an ability to use and deplete the water under the WSRA would simply be an anticipation of MID's defense, and not an element of Mariposa's claim. In this context, the WSRA would only arise as a part of MID's defense to its obligation to recognize, and to not object to, Mariposa's diversion right — which is not an essential element of Mariposa's well-pleaded complaint for anticipatory breach. City of New York v. Verizon New York, 331 F.Supp.2d 222, 227 (S.D.N.Y.2004) (claim that was nothing more than a rejoinder to anticipated defense could not, "anymore than a defense itself, provided the basis for federal question jurisdiction"). In sum, the Court finds that interpretation of the WSRA is not a necessary element of Mariposa's potential coercive claim for anticipatory breach. See Franchise Tax Board, 463 U.S. at 13, 103 S.Ct. 2841.

c. Mariposa's Potential Coercive State Law Claim for Breach of the Implied Covenant of Good Faith and Fair Dealing

Mariposa argues that if MID refuses to allow Mariposa to deplete 70,000 AF of MID's water allocation from the South Fork for the reasonable and beneficial use within Mariposa County or otherwise denies the existence of this right, Mariposa has a claim for breach of the covenant of good faith and fair dealing. Mariposa's claim arises from MID's long-standing recognition of Mariposa's right to deplete MID's water allocation (including its formal recognition in the 1990 Agreement), and MID's recent assertion that the WSRA prohibits Mariposa's exercise of those rights. (Doc. 21, 23:10-25:5.) Mariposa maintains that to determine whether MID impermissibly attempted, in bad faith, to evade the spirit of the bargain, the Court would as a threshold issue first need to determine whether the designation of the South Fork of the Merced River as wild and scenic under the WSRA precludes further development of water diversions from the South Fork of the Merced River by Mariposa County. Thus, because an element of MID's bad faith would rest upon the Court's interpretation of federal law, such a claim would necessarily raise a federal issue. Id.

MID argues that Mariposa's claim for breach of the covenant of good faith and fair dealing is mere speculation that MID might oppose some as-yet unfiled application by Mariposa for appropriation of water, in contravention of Paragraph 4 of the 1960 Agreement. MID maintains that its complaint for declarative relief seeks no determination with respect to Paragraph 4; therefore, Mariposa's claim in this regard is not ripe. Moreover, this hypothesized claim is really a counterclaim or rejoinder to MID's anticipatory defenses and thus does not create federal court jurisdiction. (Doc. 22, 8:17-27.)

(i) MID's Complaint Fairly Anticipates a Claim for Breach of the Implied Covenant of Good Faith and Fair Dealing

As discussed supra, MID's argument that Mariposa's coercive claim for breach of the implied covenant is not ripe because MID has not placed Paragraph 4 at issue in its declaratory relief complaint is not persuasive. In its complaint, MID asserts that the designation of the South Fork of the Merced River as wild and scenic under federal law precludes further development of water diversions from the South Fork of the Merced River by Mariposa. (Cmplt., ¶ 38.) MID seeks a declaration that Mariposa's Saxon Creek Project represents the only construction of a project by Mariposa to fully exercise and utilize the water from the South Fork of the Merced River as set forth in Paragraph 1 of the parties' 1960 Agreement that Mariposa can initiate and consummate pursuant to law. (Cmplt., ¶¶ 38, 45.) Such a declaration certainly implicates Mariposa's ability to use the water for which it bargained under Paragraph 1. Moreover, MID's assertion that Mariposa can initiate no lawful use of South Fork water under the WSRA is a clear and public position that any request for a permit or license that Mariposa might seek with respect to the use of this water would be precluded by the WSRA, and, therefore, unlawful. While MID's declaratory judgment complaint does not reference Paragraph 4 of the parties' 1960 Agreement, the breadth of the declaration sought by MID directly implicates Mariposa's lawful use of the water. In turn, lawful use of the water is predicated on obtaining licenses and permits, which MID implicitly contends Mariposa cannot obtain and seeks a declaration to that effect. MID's entire position in its declaratory judgment action is a clear and unequivocal statement of opposition to Mariposa's diversion of the waters of the South Fork to which Mariposa has a contractual depletion right.

Because the Court finds such a claim is fairly anticipated by the declaratory judgment complaint, the Court turns to whether Mariposa's hypothesized claim for breach of the implied covenant necessarily implicates an issue of federal law under Grable.

(ii) A Coercive Claim for Breach of the Implied Covenant Necessarily Implicates an Issue of Federal Law

Every contract contains an implied-in-law covenant of good faith and fair dealing. Foley v. Interactive Data Corp., 47 Cal.3d 654, 683-84, 254 Cal.Rptr. 211, 765 P.2d 373 (1988). "Simply stated, the burden imposed is that neither party will do anything which will injure the right of the other to receive the benefits of the agreement. Or to put it another way, the implied covenant imposes upon each party the obligation to do everything that the contract presupposes they will do to accomplish its purpose." Careau & Co. v. Sec. Pac. Bus. Credit, Inc., 222 Cal.App.3d 1371, 1393, 272 Cal.Rptr. 387 (1990) (citations and quotation marks omitted).

Under California law, to allege a claim for breach of the covenant of good faith and fair dealing, a plaintiff must allege the following elements: (1) the plaintiff and the defendant entered into a contract; (2) the plaintiff did all or substantively all of the things that the contract required him to do or that he was excused from having to do so; (3) all conditions required for the defendant's performance had occurred; (4) the defendant unfairly interfered with the plaintiff's right to receive the benefits of the contract; and (5) the defendant's conduct harmed the plaintiff. See Judicial Counsel of California Civil Jury Instructions § 325 (2013); see also Reinhardt v. Gemini Motor Transport, 879 F.Supp.2d 1138, 1145 (E.D.Cal.2012).

"[Allegations which assert such a claim must show that the conduct of the defendant, whether or not it also constitutes a breach of a consensual contract term, demonstrates a failure or refusal to discharge contractual responsibilities, prompted not by an honest mistake, bad judgment or negligence but rather by a conscious and deliberate act, which unfairly frustrates the agreed common purposes and disappoints the reasonable expectations of the other party thereby depriving that party of the benefits of the agreement." Careau & Co., 222 Cal.App.3d at 1395, 272 Cal.Rptr. 387. "A party violates the covenant if it subjectively lacks belief in the validity of its act or if its conduct is objectively unreasonable, regardless of the party's motive." Carma Developers, Inc. v. Marathon Development California, Inc., 2 Cal.4th 342, 372, 6 Cal.Rptr.2d 467, 826 P.2d 710 (1992).

Mariposa contends that a potential claim exists for breach of the covenant of good faith and fair dealing based on MID's attempts to frustrate Mariposa's ability to use the water to which it has rights under Paragraph 1 of the parties' 1960 Agreement. Mariposa asserts that whether MID's denial of Mariposa's South Fork depletion right is in bad faith requires application of the WSRA to test whether MID's position represents an impermissible attempt to evade the bargain.

As the Court understands Mariposa's argument, a well-pleaded claim for breach of the covenant would necessarily allege that (1) the parties entered into a contract related to depletion rights under Paragraph 1 of the 1960 Agreement; (2) Mariposa has performed all of its obligations under Paragraph 1 to be entitled to the bargained-for depletion rights to a certain amount of water from the South Fork (see Doc. 4, ¶ 15 ("The County fully performed all its obligations under Paragraph 1 of the 1960 Agreement by jointly requesting, with MID, `the State Water Rights Board to grant and issue permits to [MID] under said Applications No. 16186 and 16187'")); (3) all the conditions for MID's performance have occurred, i.e., MID's obligation to recognize Mariposa's depletion rights and to not oppose any application for a permit or license Mariposa might make with regard to the use of that water; (4) MID's interpretation of the WSRA has unfairly and in bad faith interfered with Mariposa's depletion right; and (5) MID has thereby caused Mariposa to incur damages.

The question is whether, to establish MID's bad faith, Mariposa is necessarily required to show — and, thus, the Court to decide — that MID's interpretation of the WSRA is erroneous, making a federal issue part of an essential element of Mariposa's claim. Neither party has provided any California law relevant to show how bad faith is established by one party's assertion that supervening law has frustrated the purpose of the contract or otherwise obviated or extinguished a party's obligations under the contract.

In Seaman's Direct Buying Service, Inc. v. Standard Oil Company of California ("Seaman's"), 36 Cal.3d 752, 782-83, 206 Cal.Rptr. 354, 686 P.2d 1158 (1984), the California Supreme Court considered whether the denial of the existence of a valid contract could constitute a breach of the implied covenant.28 Seaman's Direct Buying Service, Inc. ("Seaman's") was anticipating operation of a marine fuel dealership and sought to negotiate a lease for a larger marina with the City of Eureka ("City"). Id. at 759, 206 Cal.Rptr. 354, 686 P.2d 1158. To secure the lease, Seaman's was under pressure to show the City that it had a binding agreement with an oil supplier. Id. Seaman's negotiated with Standard Oil of California ("Standard"), and upon reaching a tentative agreement with Standard, Seaman's requested evidence of the agreement to present to the City. Id. at 760, 206 Cal.Rptr. 354, 686 P.2d 1158. In the face of Seaman's requests for evidence of a binding commitment, Standard wrote a letter setting forth the terms of the parties' agreement. Id. The letter was to be acknowledged and signed by Seaman's, and the parties were to then draft the final agreement. Id. The signing by Seaman's of Standard's letter was a momentous occasion, and Standard's representative had exclaimed that it was going to be great doing business with Seaman's and the agreement was a "feather in his cap." Id. Seaman's immediately presented the letter to the City, and thereafter signed a 40-year lease for the entire area it sought in the marina. Id.

Conditions in the oil industry, however, changed and by the end of 1972 what had been a "buyer's market" had become a "seller's market." Id. As a result, Standard adopted a no-new-business policy in January 1973. Id. at 761, 206 Cal.Rptr. 354, 686 P.2d 1158. The formal marine dealership agreement contemplated in Standard's letter was never executed. Id. In November 1973, a federal program mandating the allocation of petroleum products among existing customers went into effect. Id. By letter dated November 20, 1973, Standard informed Seaman's that new federal regulations required suppliers to supply those purchasers to whom they had sold during the base period of 1972. Id. Because Standard's records did not show that it had supplied any diesel fuel to Seaman's in 1972, Standard maintained that it was unable to go forward with the financing that was discussed. Id. In conversations between the parties, Standard indicated that the new federal regulations were the only barrier to the contract. Id. Standard represented that if Seaman's could get the federal government to change the supply order so Standard could supply Seaman's with fuel, Standard would fill the order. Id. Standard even supplied Seaman's with the forms necessary to seek a supply authorization from the federal agency and helped complete them. Id.

As a result of these efforts, a new supply order was issued on February 4, 1974. Id. Standard responded by changing its position contending that no binding agreement with Seaman's had ever been reached. Id. Asserting there was no valid contract, Standard successfully appealed the supply order. Id. Seaman's also appealed, and the decision was reversed. Id. The new decision provided that an order directing Standard to fulfill supply obligations to Seaman's would be issued upon the filing of a copy of a court decree that a valid contract existed between the parties under state law. Id. Seaman's requested that Standard stipulate to the existence of a contract, explaining that it would be unable to continue its operation throughout the course of a trial, but Standard refused. Id. at 761, 206 Cal.Rptr. 354, 686 P.2d 1158. Seaman's discontinued operations in early 1975 and filed suit soon after against Standard alleging breach of contract, fraud, breach of the implied covenant of good faith and fair dealing, and interference with Seaman's contractual relationship with the City. Id. Among other damage awards, the jury returned a verdict for Seaman's for tortious breach of the implied covenant of good faith and fair dealing and awarded compensatory and punitive damages. Id. Standard appealed the verdict. Id.

Standard argued that the jury instruction regarding breach of the implied covenant of good faith and fair dealing erroneously allowed the jury to hold Standard liable if it found Standard denied the existence of a valid contract, regardless of whether the denial was in good or bad faith. Id. at 770, 206 Cal.Rptr. 354, 686 P.2d 1158. The court agreed that the instruction and statements to the jury suggested that Standard could be held liable for breach of the implied covenant for denying the existence of the contract if the denials were subsequently shown to be erroneous, without any finding of bad faith. Id. at 772, 206 Cal.Rptr. 354, 686 P.2d 1158. Thus, an erroneous position with respect to the contract did not, in and of itself, constitute bad faith. Id.

Similarly, in the context of insurance contracts and first-party claims, to establish a breach of the implied covenant, the insurer's position regarding liability under the policy must be both erroneous and unreasonable to amount to bad faith. See Brandt v. Super. Ct., 37 Cal.3d 813, 819, 210 Cal.Rptr. 211, 693 P.2d 796 (1985). However, "where there is a genuine issue as to the insurer's liability under the policy for the claim asserted by the insured, there can be no bad faith liability imposed on the insurer for advancing its side of the dispute." Chateau Chamberay Homeowners Ass'n v. Associated Int'l Ins. Co. ("Chateau"), 90 Cal.App.4th 335, 347, 108 Cal.Rptr.2d 776 (2001). In other words, erroneous interpretation of the contract is not necessarily dispositive of insurer's bad faith, but the insurer's interpretation of the contract term is nonetheless relevant.

These cases illustrate that establishing breach of the implied covenant requires more than showing a party has advanced an erroneous interpretation of a contract term or an erroneous position with respect to the validity of, or the parties' obligations under, the contract. Here, whether MID's interpretation of the WSRA is erroneous is not dispositive of whether MID acted in bad faith, but it is an essential component of showing bad faith.29 Establishing that MID's interpretation of the WSRA is erroneous is a necessary element of Mariposa's hypothesized claim for breach of the implied covenant, thereby necessarily raising an issue of federal law under the first prong of Grable. Accordingly, the Court next considers whether the remainder of the Grable factors are satisfied.

2. Whether the Federal Issue is Actually Disputed and Substantial

An essential element of Mariposa's coercive claim for breach of the implied covenant of good faith and fair dealing will necessarily raise the issue of MID's interpretation of the WSRA. Further, MID's interpretation of the restrictions imposed by the WSRA and its effect on the parties' agreement is actually disputed by the parties. This does not, however, end the analysis under Grable.

The Supreme Court has cautioned that the "mere presence of a federal issue in a state cause of action does not automatically confer federal-question jurisdiction," Merrell Dow, 478 U.S. at 813, 106 S.Ct. 3229; rather, courts are instructed to consider whether the federal issue is a substantial one, indicating a serious federal interest in claiming the advantages thought to be inherent in a federal forum, Grable, 545 U.S. at 313, 125 S.Ct. 2363.

In considering substantiality under Grable, in Adventure Outdoors, Inc. v. Bloomberg ("Adventure Outdoors"), 552 F.3d 1290 (11th Cir.2008) the Eleventh Circuit analyzed the distinctions between Grable and Empire in the context of a state-law claim for defamation. The lawsuit between the parties stemmed from an investigation of firearms dealers conducted by New York City officials regarding the use of illegally purchase firearms in New York. Id. at 1293. Believing that gun dealers were permitting illegal straw purchase transactions, the officials used private investigators to stage straw purchases.30 Id. Two of the private investigators entered Adventure Outdoors, a Georgia firearms dealer, and initiated a straw purchase. Id. The first investigator selected the firearm, while the second investigator, who had not participated in the selection of the firearm, filled out the paperwork to purchase the gun. Id. The store ran a background check on the purchasing investigator (rather than the investigator who selected the firearm). Id. Following the investigation, New York City officials held a press conference to announce the filing of civil actions against numerous gun dealers, including Adventure Outdoors. Id. At the press conference, the officials accused the gun dealers of violating federal law. Id. Adventure Outdoors filed suit in a Georgia state court against New York City and others alleging a claim for, inter alia, defamation. Id. at 1294. The defendants removed the action to federal district court where they sought to have the action dismissed. Id. The plaintiffs filed a motion to remand and opposed defendants' motion to dismiss. Id. The district court found that federal jurisdiction was proper, dismissed the plaintiffs' negligence-related claims, denied dismissal on the claims for tortious interference with business relations and defamation, and declined defendants' motion to transfer. The appellate court granted the defendants' request for an interlocutory appeal. Id.

In considering its subject-matter jurisdiction on appeal, the court determined that the plaintiffs' defamation claims raised a disputed federal issue. Id. at 1298. Plaintiffs alleged that the defendants' statements accusing the plaintiffs of violating federal gun laws constituted defamation. Id. The defendants argued that under both federal constitutional law and Georgia law, plaintiffs must prove the falsity of the allegedly defamatory statements to prevail on their claim. The court agreed with the defendants' argument, and concluded that the defamation claim necessarily raised an actually disputed federal issue.

The court reasoned, however, that the nature of the dispute between the parties did not meet Grable's substantiality requirement. Id. at 1299-1302. The court noted that the interpretation of whether federal law prohibited the plaintiffs' actions would not resolve the defamation claim. Specifically, the plaintiffs contested the defendants' version of the straw transaction, claiming that the videotape of the transaction did not document all the relevant conduct and that the investigators fraudulently induced the salesperson to make the sale. The plaintiffs essentially asserted that they had no knowledge they were participating in a straw purchase, simulated or otherwise. Accordingly, whether federal law precluded simulated straw purchases was not necessarily dispositive to the claims — the claims would turn on an evaluation of the plaintiffs' factual argument. Id. at 1300. Further, even if the trial court ruled that participation in simulated straw purchases was illegal under federal law, the plaintiffs were still free to argue, as a factual matter, that they believed the second investigator posing as the straw purchaser was the actual purchaser of the firearm. Id. at 1301. Alternatively, if the trial court concluded that federal law did not prohibit participation in simulated straw purchases, the plaintiffs would still be required to show that the defendants' statements were not privileged under Georgia state law. Id. Thus, while the jury would have to apply federal law to determine the falsity of the defendants' statements, it was not dispositive of the claim, and the need to apply federal law in the context of a state law claim did not suffice to open the "arising under" door. Id. at 1300. The court was not persuaded that the relevant federal law regarding straw purchases was unclear, as the defendants maintained, and determined that a state court making the decision would have clear guidance on the federal law issue. Id. at 1300-01.

The court next considered the government's interest in the disputed federal law and the ability of a federal agency to vindicate its action in federal court. The court reasoned that the federal government has a limited interest in a private tort action over private duties tangentially related to federal gun laws, and the federal government would be able to continue to enforce federal gun control laws and regulations without concern for the outcome of the lawsuit. Further, because the Bureau of Alcohol, Tobacco, Firearms and Explosives ("ATF"), the agency charged with enforcing gun laws, was not a party to the suit, the outcome would not have any res judicata effect that would apply to ATF or any other arm of federal law enforcement. Id. at 1301. The court concluded that, while the case raised an important federal issue, it did not implicate in a significant way the concerns that supported the exercise of federal jurisdiction over the state-law claim in Grable. Id. at 1301-02.

The Sixth Circuit has similarly analyzed the substantiality prong of Grable, noting that the distinctions between Grable and Empire implicate the following four factors in considering the substantiality of the federal interest in the case: (1) whether the case includes a federal agency, and particularly, whether that agency's compliance with the federal statute is in dispute; (2) whether the federal question is important (i.e., not trivial); (3) whether a decision on the federal question will resolve the case; and (4) whether a decision as to the federal question will control numerous other cases (i.e., the issue is not anomalous or isolated). Mikulski v. Centerior Energy Corp., 501 F.3d 555, 570 (6th Cir.2007) (en banc).

On balance, Mariposa's coercive claim for breach of the implied covenant raises a federal issue more closely analogous to those considered in Empire, Adventure Outdoors, and Mikulski than that considered in Grable. Whether MID is erroneous in its interpretation of how the WSRA affects the parties' contract is not dispositive of Mariposa's breach of the implied covenant claim. A breach of the implied covenant requires more than MID's error in interpreting the contract or the WSRA. Even if MID's interpretation of the WSRA is incorrect, Mariposa will still have to establish that MID's actions in taking such a position were unreasonable. Mariposa articulates this well in describing the nature of its claim for implied breach of the covenant. Mariposa asserts that until early 2010, MID staff recognized that MID was obligated to make payments to Mariposa and MID never asserted that it believed Mariposa's right to deplete 70,000 AF of MID's water allocation had been abrogated by the WSRA. Specifically, in 1990, three years after Congress passed Public Law 100-149 which designated the entire South Fork of the Merced River as "wild and scenic," MID entered into the 1990 Agreement with Mariposa, reaffirming Mariposa's right to deplete MID's water allocation from the South Fork. Mariposa argues that recently, however, MID began suggesting that the "wild and scenic" designation precluded a Mariposa water supply project on the South Fork.

Mariposa's allegations in this regard are similar to those asserted by Seaman's against Standard. In that case, the legal accuracy of Standard's position with regard to the validity of the contract was not necessarily dispositive of whether its position was advanced in bad faith. Here, it is MID's alleged actions in changing its position and whether its conduct was reasonable or taken in bad-faith that will need to be evaluated — not simply whether MID is incorrect in its interpretation of how the WSRA affects the parties' obligations under the contract. Thus, whether or how the WSRA affects the parties' contract will not necessarily be dispostive of the claim in the manner that the federal issue was dispositive in Grable. See Mikulski, 501 F.3d at 571 (conformity with 26 U.S.C. § 312(n)(1) may, but will not necessarily, conclude the action, thus federal question is necessarily not dispositive of the action).

Similarly, establishing that MID acted in bad faith in asserting that the WSRA precludes any further lawful diversions of water from the South Fork will be fact-bound and situation-specific and does not involve a pure issue of law that will be resolved for all time, which also sets it apart from Grable. See Chateau, 90 Cal.App.4th at 346, 108 Cal.Rptr.2d 776 (whether particular conduct constitutes bad faith is determined on a case-by-case basis and depends on the contractual purposes and reasonably justified expectations of the parties). This distinguishes this case from Grable in an important way — the WSRA's application to this particular contract dispute is unlikely to have broad application to litigants everywhere whereas Grable involved a discrete and pure question of law that affected how a federal agency could satisfy a notice provision provided by federal law. In sum, the fact that Mariposa's claim may involve an interpretation of federal law does not mean the federal issue is substantial under the Grable and Empire framework. See Adventure Outdoors, 552 F.3d at 1301-02 (despite involving an interpretation of federal law, federal issue did not implicate in a significant way the concerns that support the exercise of jurisdiction over a state-law claim like the issue presented in Grable).

Mariposa asserts that MID's action seeks to usurp the role of a federal agency in evaluating a future water resources project. Mariposa has supplied no authority for the proposition that a federal agency would be bound by a decision as to how the WSRA affects a contract between private parties in the context of a fact-bound claim for breach of the implied covenant of good faith and fair dealing. Mariposa's claim for breach of the implied covenant does not challenge any federal agency action under the WSRA or a federal agency's compliance with the statute. Nothing in deciding Mariposa's claim will preclude a federal agency from administering management of WSRS areas or otherwise fulfilling its statutory role in deciding whether any particular water resource project would have a direct and adverse effect on a wild-and-scenic river. See 16 U.S.C. § 1278(a).

Mariposa argues that a dispositive state court interpretation of the WSRA would directly implicate the jurisdictional balance of the state and federal governments over protected rivers. (Doc. 21, 29:11-12.) The WSRA was not intended to affect state jurisdiction over included streams except "to the extent that such jurisdiction may be exercised without impairing the purpose [of NWSRA] or its administration." (Doc. 21, 29:13-15 (quoting 16 U.S.C. § 1284(d).) In drafting Section 1284(d), Congress carefully balanced the respective jurisdictions of the state and federal governments over WSRA waters, and "federal courts have a compelling interest in determining exactly where that jurisdictional balance lies in a consistent and uniform manner." (Doc. 21, 29:15-19.) Further, although Mariposa contends that precisely what constitutes "impairing the purpose" of the WSRA or its administration is an important question of federal law, and is neither delegated nor reserved to the State," it has provided no authority establishing how a determination of whether MID's interpretation of the WSRA is correct for purposes of deciding a claim for breach of the implied covenant will be binding on any federal agency tasked with making decisions under the WSRA and managing WSRS areas. Moreover, while uniformity of decisions on issues of federal law is an important interest, the court's discussion in Mikulski is instructive:

Mikulski, 501 F.3d at 570.

In balancing the relevant factors, the Court finds that this case is not "substantial" as that term has been defined under the prevailing Supreme Court precedent. Mikulski, 501 F.3d at 572. To the extent that this case may touch and concern federal law, state courts are competent to interpret and apply it.

3. Whether A Federal Forum May Entertain the Issue Without Disturbing Any Congressionally Approved Balance of Federal and State Judicial Responsibilities

"Even where a state law claim does necessarily turn on a substantial and disputed question of federal law, removal is subject to a `possible veto' where exercising federal jurisdiction is not `consistent with congressional judgment about the sound division of labor between state and federal courts governing the application of § 1331.'" Nevada v. Bank of Am. Corp., 672 F.3d 661, 675 (9th Cir.2012) (quoting Grable, 545 U.S. at 313, 125 S.Ct. 2363).

Although the absence of a private federal right of action is no longer dispositive after Grable, it remains relevant to an assessment of the "sensitive judgments about congressional intent that § 1331 requires." Grable, 545 U.S. at 319, 125 S.Ct. 2363; see also, Shanks v. Dressel, 540 F.3d 1082, 1093 (9th Cir.2008). The absence of a private right of action may constitute a "missing welcome mat, required in the circumstances," if it would result in a rule whereby federal jurisdiction would arise wherever a plaintiff sues on a state law that refers to a concept defined by federal law. See Grable, 545 at 318, 125 S.Ct. 2363.

Here, the WSRA itself provides no private right of action. By authorizing the exercise of federal jurisdiction in this case, the Court would necessarily be finding that jurisdiction was appropriate over any private contract actions affected by or involving the WSRA. While this may not create a flood of federal litigation that would overwhelm the court, it would place a jurisdictional welcome mat at the feet of more than just a single, solitary case. Mikulski, 501 F.3d at 573 ("we have not succumbed to some eschatological trembling... [but] we are left with the conclusion that finding a substantial federal question in the case we decide today would open the door of the federal courts to significantly more than the solitary case asserting a constitutional challenge, as in Smith, 255 U.S. at 214, 41 S.Ct. 243, or the "microscopic effect" portended by the quiet title action in Grable, 545 U.S. at 315, 125 S.Ct. 2363.").

4. Conclusion

To the extent that federal law would arise as a necessary element of Mariposa's potential coercive claim for breach of the implied covenant of good faith and fair dealing, the federal issue raised is not "substantial" as defined by the Supreme Court nor does the Court find that a federal forum could entertain Mariposa's hypothetical breach of the implied covenant claim without upsetting the balance of federal and state judicial responsibilities. The Court finds that none of Mariposa's hypothetical coercive actions necessarily implicate a substantial issue of federal law that could confer "arising under" jurisdiction.

In making this finding, the Court is mindful that "[a]ny notion that the jurisdictional net should be broadly cast by the courts is at odds with the constitutional establishment of a federal government of limited powers." Palkow v. CSX Transp., Inc., 431 F.3d 543, 554 (6th Cir.2005). The Supreme Court's command that courts exercise jurisdictional restraint is "perhaps even more compelling in the context of removal than in the context of original jurisdiction." Id. As the Court finds there is no subject matter jurisdiction over this action, the Court recommends that the case be remanded to the Merced County Superior Court pursuant to 28 U.S.C. § 1447(c) for lack of subject matter jurisdiction.

V. CONCLUSION AND RECOMMENDATION

For all of the reasons stated above, the Court RECOMMENDS that Merced Irrigation District's Motion to Remand BE GRANTED and the case be remanded to the Merced County Superior Court.

These findings and recommendations are submitted to the district judge assigned to this action, pursuant to 28 U.S.C. § 636(b)(1)(B) and this Court's Local Rule 304. Within fourteen (14) days of service of this recommendation, any party may file written objections to these findings and recommendations with the Court and serve a copy on all parties. Such a document should be captioned "Objections to Magistrate Judge's Findings and Recommendations," and shall not exceed twenty (20) pages; any response to the Objections shall also be limited to twenty (20) pages.

The district judge will review the magistrate judge's findings and recommendations pursuant to 28 U.S.C. § 636(b)(1)(C). The parties are advised that failure to file objections within the specified time may waive the right to appeal the district judge's order. Martinez v. Ylst, 951 F.2d 1153 (9th Cir.1991).

IT IS SO ORDERED.

March 4, 2013