In a water compact between two states, what remedies are available to an injured state if the other state breaches the compact?
The Supreme Court has original jurisdiction over disputes arising between states. In this case, Kansas has revived previous litigation regarding a water compact between itself and Nebraska, seeking damages ranging from monetary relief to contempt of court and injunctive relief. Kansas and Nebraska disagree on what type of relief is proper when a state breaches a compact and how the compact at hand should calculate water usage. The Court’s ruling in this case will impact the remedies available for a state when another state breaches a water rights agreement and could serve as important precedent for water rights cases as the Western United States potentially enters into a period of sustained drought.
Questions as Framed for the Court by the Parties
Should the Court reform the RRCA Accounting Procedures to correct what Nebraska and Colorado contend is a mistake in those procedures? By what amount of water did Nebraska fail to meet the applicable 2006 compliance test? And what is the remedy to which Kansas is entitled as a result? (Report of the Special Master at 14).
On May 3, 2010, Kansas filed a Motion with the Supreme Court of the United States that revived previous litigation between Kansas and Nebraska concerning a water rights dispute. See Report of the Special Master at 9. The dispute reflects ongoing tensions between Kansas and Nebraska concerning a water rights agreement signed in 1943. See id. at 2. The 1943 Republican River Compact agreement (“Compact”) allocates 49 percent of the river’s water to Nebraska, 40 percent to Kansas, and 11 percent to Colorado. See Republican River Compact at Art. 3-4. Notably, the “Compact Clause” of the United States Constitution dictates that Congress must approve any compact—an agreement—between two states. See U.S. Const. Art. 1 § 10 Cl. 3.
Starting in 1999 and continuing through the action at hand, Kansas accuses Nebraska of violating the Compact by allowing farmers to divert more water than they should for private use. See Report of the Special Master at 7. The Compact, however, does not contain clauses for dispute resolution, actual administration of the Compact, or for damages. See id. at 4. Colorado, not accused of wrongdoing itself, is involved as one of the members of the Compact and as a party interested in the outcome of the case. See id. at 22.
In the previous dispute, Kansas alleged that Nebraska’s use of hydraulic wells to drain the Republican River and its tributaries constituted consumption that counted against Nebraska’s allocated share of the water. See Report of the Special Master at 5. The Court decided to exercise original jurisdiction on January 19, 1999. See id. The Court appointed a Special Master (“Master”) to handle proceedings and give findings and suggestions to the Court. See id. Thereafter the parties entered into settlement discussions on how to properly account for water consumption in accordance with the Compact. See id. at 5-6. In 2003, the parties adopted a groundwater agreement known as the Final Settlement Stipulation (“FSS”). See id. at 7.
In 2010, Kansas claimed Nebraska violated the FSS by over-consuming water from the Republican River and that Nebraska’s violation harmed Kansas. See Report of the Special Master 9. Kansas thus requested the Court for various remedies. See id. at 9-10. In April 2011 the Court again appointed a Master to direct the proceedings of the litigation, take evidence, and report to the Court with recommendations. See Report of the Special Master at 1; see also Order in Pending Case at 1.
After taking evidence and hearing the parties’ claims, the Master issued a Special Master’s Report and gave suggestions to the Supreme Court regarding how to settle the dispute. See Report of the Special Master at 1. The Master concluded that Nebraska used more water than it should, and that the Court should use its equitable powers to craft a remedy to suit the situation. See id. at 186. The Master suggested that the parties abide by a new accounting procedure to determine water use. See id. at 187. The Master further concluded that the Court deny Kansas’ request that Nebraska be held in contempt. See id. The Master also recommended that the Court enter judgment in the amount of $5.5 million against Nebraska and in favor of Kansas for Nebraska’s failure to meet the standards set forth in the compact in 2006. See id. Finally, the Master suggested that the Court deny Kansas’ other requests for relief, including requests for injunctive relief, sanctions, and appointment of a river master. See id.
In this case the Supreme Court will decide several technical legal issues regarding Nebraska and Kansas’ varying interpretations of the Compact requirements. See Report of the Special Master at 14.
The most contentious differences between the parties surround the proper procedure for accounting of water usage under the compact, as well as the proper remedy for Nebraska’s compact violations. Cf. Report of the Special Master at 18 (noting that one of the issues is the Compact’s accounting procedure). Nebraska argues that the Compact should be altered to remedy a mistake in water accounting procedures that neither party intended when the Compact was drafted. See id. at 15. Kansas contends that the accounting procedures must remain as they are because Nebraska’s suggested changes inappropriately amend the Compact without the consent of all parties to the Compact. See id.
On the issue of a proper remedy for Nebraska’s Compact violations, Kansas argues that the Court should award damages based on the amount of water Nebraska gained measured against the amount of water Kansas lost. See Report of the Special Master at 130. Nebraska argues that Kansas’ damages should be measured based on the specific value of the water Kansas lost. See id. at 136.
Nebraska seeks a court order to modify the way in which the Compact accounts for water that is imported into the Republican River Basin. See Report of the Special Master at 15. The compact defines the “virgin water supply” of the Basin to be “the water supply within the Basin undepleted by the activities of man.” See id. at 3. Nebraska argues that the current accounting procedures mistakenly treat the consumption of imported water the same way as the virgin water supply, and this treatment is contrary to the intent of the compact. See id. at 22. Colorado agrees with Nebraska’s determination. See id. Kansas, however, asserts that the Court cannot change the previously agreed upon accounting procedures without the consent of all parties and that the changes suggested by Nebraska are wholly inappropriate. See id. at 15. Kansas instead argues that Nebraska bears the burden of proving a particular mistake in the accounting procedures, and that the absence of any testimony by an individual who participated in drafting the accounting procedures for Nebraska in 2002 constitutes a failure of proof. See id. at 27. The Special Master contends that if the Nebraska representative had realized in 2002 that imported water would be treated as the virgin water supply, the representative would have raised the issue to correct it. See id. Additionally, the Special Master maintains that there is no evidence that prior to 2007, either Nebraska or Kansas were aware the accounting procedures would treat imported water as virgin water. See id. at 26.
Relying on § 155 of the Restatement Second of Contracts, Nebraska argues that reforming the Compact’s accounting procedures is a permissible and appropriate remedy because although no party intended for the accounting procedures to treat imported water as virgin water, the accounting procedures continue to have this unintended effect. See Report of the Special Master at 43. Therefore, Nebraska contends that the Compact fails to express the intention of both parties. See id. In opposition, Kansas points to § 154 of the Restatement Second of Contracts to argue that in 2003, Nebraska’s representatives likely knew that the groundwater system contained non-linear characteristics. See id. at 48. Accordingly, Kansas asserts that Nebraska could have discovered that the treated imported water as virgin water in some situations, and thus Nebraska must bear the consequences of the mistake. See id.
Kansas argues that because the FSS, approved by the Court, contains a non-severability clause, the Court cannot now change only a single portion of the FSS. See Report of the Special Master at 51. Nebraska argues that it does not seek to reform the parties’ agreement, but only seeks to reform a mistake in writing that resulted in an outcome the parties did not intend. Id.
In order to remedy the allegedly mistaken accounting procedures, Nebraska suggests that the Court approve their “five-run solution” to remedy the accounting mistake. See Report of the Special Master at 55. Colorado supports this solution. See id. Nebraska asserts that the five-run solution would easily correct the current accounting procedures by assuming that Nebraska does not import water into the Red River Basin at all, and therefore imported water will not be accounted for. See id. at 56. Kansas argues that the five-run solution will lead to unreliable calculations because it uses a baseline that cannot be calibrated with historical data, resulting in miscalculation of each states’ consumption. See id. at 59.
APPRROPRIATE REMEDY FOR NEBRASKA’S COMPACT VIOLATIONS
Kansas argues that the Court should award disgorgement costs to Kansas to take into account Nebraska’s water gains and Kansas’ water loses resulting from Nebraska’s violation of the Compact. See Report of the Special Master at 130. Nebraska argues that a Special Master’s Second Report in a previous dispute between Kansas and Colorado rejected Kansas’ request for disgorgement damages, and measured the damages using expectancy damages. See id. at 135. The current Special Master suggests that because the aim of the Court is to find an equitable remedy consistent with the Compact, measuring loss and gain to calculate damages provides the best process to recognize all the interested parties involved. See id.
The Special Master recommends that in addition to awarding Kansas the suggested $3.7 million representing Kansas’ loss, the Court should provide an additional $1.8 million to Kansas to cover the amount that Nebraska’s gain exceeds Kansas’ loss. See Report of the Special Master at 179. In terms of measuring Kansas’ loss, Kansas seeks to estimate the size of the reduction in harvest, and the resulting loss in state revenues. See id. at 136. On the other hand, Nebraska contends that Kansas’ loss should be measured by the value of the water Kansas lost. See id. Based on its method of calculation, Kansas estimates that in 2005 and 2006, Kansas farms and vendors lost approximately $2.6 million and $2.5 million in each respective year as a result of Nebraska’s Compact violations. See id. at 138. Therefore, Kansas believes Nebraska should pay the total of those two years: over $5.1 million. See id. However, Nebraska argues that based on the price difference between irrigated and non-irrigated land in Kansas in 2005 and 2006, Kansas lost only $3.7 million. See id. at 170-71.
Kansas asserts that Nebraska obtained a net gain of over $61 million resulting from its breach of the compact. See Report of the Special Master at 172. Kansas estimates this gain based on expert calculations of the loss of irrigation water resulting in the reduction of vendor and farm profits. See id. at 173. Nevertheless, Nebraska contends that Kansas’ experts’ faulty use of average participation assumptions, reliance on acreage averages, and reliance on the assumption that all water shortages would be distributed evenly across all crops render Kansas’ damage calculation unreliable. See id. at 175. Nebraska instead suggests that it is more reasonable to calculate Nebraska’s gain by looking at the prices paid for water in Nebraska. See id. at 176.
Nebraska argues that in the future, Nebraska will be in substantial compliance with the Compact based on expert modeling presented on future use projections that suggest Nebraska’s water use will be within the limits of the Compact. See Report of the Special Master at 182-83. Additionally, Nebraska contends that although it may not have been as diligent as necessary in ensuring Compact compliance in dry weather, it never intentionally violated the compact. See id. at 110-11. Notwithstanding these arguments, Kansas counters that injunctive relief is necessary to ensure that Nebraska complies with the Compact in the future despite Nebraska’s current plans for future compliance. See id. at 180-81. Kansas seeks an injunction prohibiting Nebraska from further violating the Compact, requiring Nebraska shutdown 302,000 acres of groundwater pumping to ensure compliance, and the appointment of a river master to impose sanctions. See id. at 180. Kansas argues that the injunction is necessary based on Nebraska’s past history of non-compliance and the complex nature of Nebraska’s governing water regulation structure resulting from no statewide consensus between surface water users and groundwater pumpers. See id. at 183.
The Supreme Court has original jurisdiction over this case through Article III, § 2 of the United States Constitution and 28 U.S.C. § 1251(a). See Brief of Amicus Curiae the United States at 13. This case presents the Supreme Court with the opportunity to settle a dispute between Kansas and Nebraska that may have profound impacts on other agreements concerning interstate rivers and water sources.
Kansas argues that Nebraska violated the Compact and demands that Nebraska pay damages and other remedies. See Report of the Special Master at 2. Nebraska concedes that it overused water during some arid years, but contends that the accounting procedure in the Compact results in Nebraska being improperly charged with consumption of water coming from the South Platte River as if it were from the Republican River. See id. at 15, 23, 112. Writing as amicus curiae and interested in the settlement of the dispute, the United States notes that noncompliance with compact obligations has negative impacts on the interests of the United States. See Brief of Amicus Curiae the United States at 17. At stake are United States revenues derived from water supply contracts, harm to fish and wildlife, and recreation in federal reservoirs. See id. at 17-18.
THE PROPER REMEDY FOR VIOLATING A WATER RIGHTS COMPACT
The Court must consider what remedy, if any, is available to Kansas. See Report of the Special Master at 18. Nebraska concedes that it used more than its allotted share of the “virgin” water supply of the Republican River Basin, and the Master requested that the Court enter judgment against Nebraska to pay monetary damages to Kansas. See id. at 9, 187. In the Compact, the parties define “virgin” water as water originating in the Republican River Basin. See id. at 23. In this case, the Court will likely consider the following types of relief: monetary damages, amending the Compact, appointing a “river master,” an equitable injunction, and sanctions. See id. at 187.
Kansas maintains that the Court must financially augment the Master’s remedies for what Kansas argues are Nebraska’s ongoing violations of the compact because the Master’s recommendations are inadequate to ensure Nebraska’s future compliance. See Exceptions by State of Kansas to the Report of the Special Master and Brief in Support of Exceptions at ¶2. Nebraska in turn argues against the Master’s suggestion that the Court award Kansas $1.8 million, an amount that Nebraska believes is “over and above” Kansas’ actual loss but that the Master characterizes as disgorgement of Nebraska’s profit. See Exceptions by State of Nebraska to the Report of the Special Master and Brief in Support of Exceptions at ¶1. Colorado agrees with Nebraska in this regard. See Exception by Colorado to the Report of the Special Master and Brief in Support of Exception.
AMENDING A COMPACT
The Master notes that the Court may craft an equitable remedy, but in doing so it must take care as Congress must authorize a compact and the Court cannot legislate from the bench. See Report of the Special Master at 2, 38. The Master acknowledges that a compact is more than a simple contract insofar as it requires Congressional approval and becomes a law of the United States. See id. at 38.
Furthermore, the Master recalls Texas v. New Mexico, where the Court altered an undesirable impact of a compact not through express reformation but by interpreting away the term the Court desired to alter. See 462 U.S. 554 (1983); Report of the Special Master at 40. The Master reads Texas v. New Mexico for the proposition that the Court should balance against rewriting a compact to correct an error, but simultaneously for the precedent stating that the Court may apply its interpretive power in a robust manner to create an identical effect. See Report of the Special Master at 40. However, the Master notes that what is really at dispute is the FSS between the parties, which was a private settlement that did not require Congressional approval at all. See id. Thus, the Master would have the Court amend the FSS, avoiding concerns over the separation of powers. See id. at 40-41.
APPOINTING A RIVER MASTER
Kansas requests that the Court appoint a river master to oversee and ensure implementation of a future compliance with the Compact. See Report of the Special Master at 18. However, the Master counsels the Court against appointing a river master because ongoing disputes between the two states may require the Court to craft “discretionary, policy-oriented” decisions directly related to significant legal issues that only a Court sitting in equity, and not a river master, may resolve. See id. at 186 (quoting Kansas v. Colorado, 543 U.S. 86, 92 (2004)).
OTHER FORMS OF RELIEF
Kansas also requests that the Court place an injunction on what Kansas argues is Nebraska’s ongoing violation of the Compact. See Report of the Special Master at 18. The Master counsels against injunctive relief. See id. at 186. The Master believes that Kansas has not carried its burden in establishing that an injunction is necessary. See id. at 182. However, the Master does note Kansas’ concern that absent strict penalties, Nebraska’s noncompliance may continue undeterred. See id. at 116-17.
This case centers on the determination of the appropriate remedy for Nebraska’s Compact breach, and the Supreme Court will likely outline the appropriate remedy for a Compact breach between two sovereign states. Additionally, the outcome of this case will give guidance on whether the Supreme Court can revise a compact between states to reflect the meaning the states originally intended. The decision in this case will also likely exhibit reflect the Court’s view on the best ways to achieve enforceable and manageable water rights compacts between states.
Steve Eder: Kansas vs. Nebraska Heads Back to Court, The Wall Street Journal (Aug. 13, 2012).