Home » Case Summaries » 2017 » Pure Wafer Inc. v. City of Prescott, 845 F.3d 943 (9th Cir. 2017).

 
 

Pure Wafer Inc. v. City of Prescott, 845 F.3d 943 (9th Cir. 2017).

 

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Pure Wafer Incorporated[1] (Wafer) brought suit against the city and officials[2] of Prescott, Arizona (Prescott), claiming the city’s 2013 ordinance[3] limiting discharge of fluoride and requiring Wafer to pretreat wastewater violated the contracts clause of both the federal and state constitutions.[4] In the alternative, Wafer alleged that Prescott breached its contract with Wafer in violation of an implied covenant of good faith and fair dealing. On this point, Prescott counterclaimed seeking declaratory judgment that the ordinance was an environmental regulation of the sort that Wafer had expressly agreed to in its contract with Prescott. The United States District Court for the District of Arizona found the ordinance unconstitutional and therefore declined to rule on the contracts claims.[5] On appeal, the United States Court of Appeals for the Ninth Circuit affirmed in part and reversed in part. Reviewing de novo, the Ninth Circuit found that the ordinance did not violate the Contract Clause but sustained judgment on the grounds that Prescott had breached its contract with Wafer.

The controversy between Wafer and Prescott involves interpretation of a contract called the Development Agreement (Agreement). In 1997, Wafer agreed to build a facility for cleaning silicon wafers in Prescott, bringing with it jobs, economic growth, and tax revenue. In exchange, Prescott agreed to provide Wafer with the sewage infrastructure needed to carry its large volumes of effluent to the city’s Airport Water Reclamation Facility (AWRF), one of the cities three wastewater treatment plants. Wafer’s reclaiming service removes oxide nitrates from the wafers before cleaning them for reuse, a process that generates up to 195,000 gallons per day of effluent. AWRF treats that wastewater before discharging either to golf courses downstream or to the recharge basins that replenish Prescott’s aquifer. The controversy centers on the fluoride concentrations in Wafer’s effluent and the challenged city ordinance that imposes limits on water pollutants including fluoride. The ordinance caps fluoride releases at 16.3 mg/L, and requires industrial users to obtain a permit from Prescott for any pretreatment waste water with a fluoride concentration in excess of 16.3 mg/L.

The central issue in this case is driven by three contract provisions in the agreement between Prescott and Wafer. The first provision states that Prescott will provide 19,000 gallons of sewer capacity per day, Prescott may not raise Wafer’s sewer usage fees as long as the fluoride concentration in its effluent remains at or below 100mg/L, and Prescott will bear the costs of “augmenting such facilities as necessary to accept or accommodate Pure Wafer’s effluent.”[6] The second provides that Pure Wafer will operate the facility in accordance with all local, state, and federal environmental regulations. The third is an integration clause.

The Ninth Circuit first considered the constitutional claims together. As a threshold issue, the court set out the differences between a breach of contract and impairment of a contract’s obligation. Under both state and federal law, the critical difference turns on whether a court-ordered remedy remains available if either party fails to perform as promised. “If the offended party retains the right to recover damages for the breach, the Contracts Clause is not implicated; if, on the other hand, the repudiation goes so far as to extinguish the state’s duty to pay damages, it may be said to have impaired the obligation of contract.”[7] Arguing against a claim under the Contracts Clauses, Prescott represented that the ordinance does not dissolve its binding obligation, and if Wafer prevailed on its contract claims then Prescott would pay money damages. Persuaded that Prescott had not rendered Wafer’s rights to recovery unenforceable, the court held that the district court’s judgment could not stand because Wafer had no claim under the Contract Clauses.

The court then considered the breach claims, deciding first the threshold issue of jurisdiction. Although the district court had not ruled on the breach claims, the Ninth Circuit reasoned that because the lower court had thoroughly discussed the Agreement, considered extensive testimony, and made findings of fact and conclusions of law sufficient to resolve the issue, the court proceeded to the merits.[8] Wafer insisted that its most important objective during negotiations was to contractually protect the company from being thwarted by future changes in city regulations. Wafer offered testimony that after a prior experience requiring expensive infrastructure retrofits to accommodate an ordinance passed after opening a facility in San Jose, Wafer clearly communicated its needs which were inputted into the contract. Wafer asserted that Prescott promised to accept its effluent so long as the fluoride concentration remained below 100mg/L and to bear the cost of conforming to any future regulations. Wafer described the contract as a “regulatory contract,” under which the government must pay damages if it breaches its promise to maintain regulatory stability. Prescott counterclaimed that the ordinance was an environmental regulation of the sort Wafer had promised to obey when it expressly agreed to obey all local, state, and federal environmental regulations. Prescott further asserted that the reserved powers doctrine required the city adopt regulations necessary to protect public safety; the city could not promise that it would refrain from adopting such regulations.

The court concluded that Prescott had breached the contract. The court reasoned that under governing Arizona law, which enforces a contract according to parties’ intent, the evidence supported that both parties intended that Wafer was allowed to discharge up to 100 mg/L. The court agreed with the district court that it would have been “madness” for Wafer to have agreed to terms that would have put its business in jeopardy the moment the contract was signed. In response to the reserved doctrine argument, the court explained that giving a contractual remedy for breach did not abrogate the City’s police power.

In sum, the court held that Wafer did not have a claim under the Contract Clauses because Prescott had not impaired Wafer’s right to recovery. However, the court sustained the district court’s judgment because it found Prescott had breached its contract with Wafer. Accordingly, the Ninth Circuit remanded the case to the district court to decide the appropriate remedy.

 

Footnotes    (↵ returns to text)

  1. Pure Wafer, Incorporated, a Delaware corporation, successor in interest to Exsil, Inc., a Delaware corporation.
  2. City of Prescott, an Arizona municipal corporation; Marlin Kuykendall; Craig McConnell; Alan Carlow, in his capacity as a Member of the Prescott City Council; Jim Lamerson, in his capacity as a Member of the Prescott City Council; Steve Blair, in his capacity as a Member of the Prescott City Council; Charlie Arnold, in his capacity as a Member of the Prescott City Council; Chris Kuknyo, in his capacity as a Member of the Prescott City Council; Len Scamardo, in his capacity as a Member of the Prescott City Council; Mark Nietupski, in his capacity as Public Works Director of the City of Prescott; Joel Berman, in his capacity as Utilities Manager of the City of Prescott, Defendants-counter-claimants-Appellants.
  3. See Prescott, Ariz. City Code § 2-1-9 (2014); Pure Wafer, Inc. v. City of Prescott, 14 F. Supp. 3d 1279, 1289–90 (D. Ariz. 2014).
  4. U.S. Const. art. I, § 10, cl. 1; Ariz. Const. art. II, § 25.
  5. Pure Wafer Inc., 14 F. Supp. 3d at 1302.
  6. See Exhibit A at 5, Pure Wafer Inc., 14 F. Supp. 3d 1279 (D. Ariz. 2014) (No. 3:13-cv-08236-JAT).
  7. Horwitz-Matthews v. City of Chicago, 78 F.3d 1248, 1251 (7th Cir. 1996).
  8. The dissent wrote that the Ninth Circuit should have remanded to the district court to decide whether to exercise supplemental jurisdiction and to make factual findings on the breach claim. He reasoned that because the district court had dismissed the breach claim as moot, the Ninth Circuit must allow the lower court the opportunity to make factual determinations.
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