In 1943, the states of Kansas, Nebraska, and Colorado (the “States”) formed the Republican River Compact (“Compact”). Pursuant to its obligation under article 1, section 2 of the United States Constitution, Congress reviewed and approved the Compact. To administer the Compact, the States established the Republican River Compact Administration (“RRCA”). Since 1999, Kansas has not been happy with Nebraska’s excessive water consumption. After years of litigation, the dispute is back before the Supreme Court of the United States (“Court”). Kansas seeks money damages and other relief from Nebraska for breaching the Compact, and Nebraska wants different accounting methods. Nebraska concedes it breached the Compact by using more than its contractual entitlement of water. The Compact, however, contains no remedial provisions for what should take place in the event of breach. The parties argued the case before the Court on October 14, 2014. The Court must now decide what remedies are available when a state breaches an interstate water compact.
In 1998, Kansas filed an action with the Court alleging that Nebraska was pumping too much groundwater and unlawfully depleting the Republican River. Pursuant to the Compact, Kansas receives forty percent (40%) of the water from the Republican River, while Nebraska receives forty-nine percent (49%), and Colorado receives eleven percent (11%). The Court has original jurisdiction over suits involving interstate compacts, but appointed a special master to take evidence, make findings, and recommend a resolution. The parties negotiated a settlement as to how each would account for “Virgin Water Supply, Computed Water Supply, Allocations, Imported Water Supply Credit, Augmentation Credit and Computed Beneficial Consumptive Use.” This agreement is known as the Final Settlement Stipulation (“FSS”); the methodology for computing water supply, allocations, and water use (the “Accounting Procedures”) are found in Appendix C to the FSS. The Court expressly approved the FSS in 2003, five years after Kansas initiated the suit.
In 2010, Kansas filed the instant action with the Court, claiming that Nebraska was still consuming too much water and was in breach of the FSS. Kansas relied upon the calculations required under the current Accounting Procedures to support its claim. According to Kansas, each of the States fully understood the formulas being used, the variables in play, and the possible outcomes, including those about which Nebraska now complains. None of the States was mistaken about these issues, Kansas argued. Nebraska, on the other hand, claims the States were mistaken as to whether “imported” water would be counted as “virgin” water. Nebraska argued that this mistake resulted in the charge that Nebraska was using more than its allotted share of water. In response to Kansas’s suit, Nebraska counterclaimed and proposed a solution to what it perceived as a problem with the Accounting Procedures. Nebraska termed its solution the “5-Run Proposal.” The Court appointed another special master (“Master”) to address these claims.
On November 15, 2013, the Master issued a 188-page Special Master’s Report (“Report”). In his first recommendation to the Court, to cure what he deemed a “technical, mutual mistake,” the Master recommended reforming the RRCA Accounting Procedures “so that Nebraska is not charged with the consumption of Imported Water Supply as if it were Virgin Water Supply.” The Master further found that Nebraska acted as a “conscious wrongdoer” and substantially exceeded its allocation of water under the Compact. The Master recommended judgment in Kansas’s favor in the amount of $3.7 million to compensate for its loss of water and $1.8 million to account for Nebraska’s wrongdoing. Finally, the Master recommended denying all other requested relief, specifically including Kansas’s requests for injunctive relief, sanctions, and appointment of a river master.
Both Kansas and Nebraska filed exceptions to the Report. The United States appeared in the proceeding as amicus curiae. The Master’s findings and recommendation are subject to de novo review by the Court. In other words, while it has received assistance, the Court is the final arbiter of this dispute.
Kansas wants the water “to which it is entitled year in and year out, including especially when water is scarce.” Nebraska conceded that it violated the Compact by consuming more than its allotment of water but blamed its violation on “the driest condition now of record in the basin.” However, since 2006, Nebraska contends that it has implemented additional tools to ensure compliance with the Compact in future dry years. Hence, Nebraska appears willing to give Kansas all the water to which it is entitled under the Compact. The question is thus presented: Do the States abide by their settlement agreement, even if perhaps not equitable, or should the Court use its equitable powers to create a more fair apportionment of the water? This is the question with which the Court is now grappling.
Is it a contract or “something else”?
Of initial concern to the Court during oral argument was whether the FSS is a “simple” contract to which ordinary contract principals would apply, or whether it is “something else entirely,” as pondered by Justice Kagan, “because public rights and public interests are affected here.” If the FSS is something other than a simple contract, how can the Court construct a remedy?
Kansas argued the FSS represents the mere contractual settlement of a dispute to which ordinary contract principals should apply. The States knew exactly what formulas they put in place to measure the consumption of specific types of water, Kansas argued, but nobody really knew what the final numbers would look like until the rules were put into practice. This distinction, however, did not equate to any mistake, it argued. There are many variables when predicting water availability and consumption. Kansas argued it made a deal and Nebraska should be forced to stick to it.
Nebraska argued the FSS is a contract with regard to issues of mutual mistake, but its relationship to the Compact opens wide the doors of equity. Stated differently, the FSS and the Accounting Procedures are contractual rules that serve the purpose of the Compact—rules to which the parties agreed and the Court approved. Congress, however, approved the Compact. Nebraska relied upon this nexus to argue that the FSS and the Accounting Principles represent more than a mere contract, thus inviting the Court to apply equitable, and not just legal, remedies.
The State of Nebraska was mistaken. Really?
The Master concluded the parties made a “mutual mistake” with respect to the Accounting Procedures and how water levels, consumptions, and imports would be calculated. Applying ordinary contract principals, a court may reform a contract that is based upon a mutual mistake to reflect the parties’ original intentions. A unilateral mistake by one party is not sufficient; all parties to a contract must be mistaken as to a material term for a “mutual mistake” to be reformed. Here, the Master recommended amending the RRCA Accounting Procedures to reflect the 5-Run Proposal asserted by Nebraska, a change that Kansas vehemently opposed. Justice Sotomayor called it “a reformation that’s one-sided.”
The parties clearly disagreed on whether there was a mutual mistake, and on this issue Kansas was quite vocal during oral argument. Kansas argued Nebraska had not shown a mistake by clear and convincing evidence because neither party to the FSS was mistaken. Kansas contends the States “were aware of the very phenomenon” that the Master and Nebraska deemed a mutual mistake. According to Kansas, “It wasn’t a mistake. They just think they’ve got a better way to do it now.” Further, Kansas referred to the 5-Run Proposal as one of Nebraska’s many “maneuvers over the years as it sought to relax its compliance burden by rewriting the formulas used for the Compact accounting.” Kansas contended the parties should be left to make any accounting changes pursuant to the procedures already established by RRCA. Nebraska, on the other hand, was simply “seek[ing] vindication of its rights to correct what everyone agrees is a mistake.” Simple, yet Nebraska did not seem to argue from a strong position on this issue.
The Court took an interesting approach in analyzing the issue of mutual mistake. Justice Breyer likened the situation to an agreement to buy seventeen cows from a barn only to learn there were only horses in the barn. “So we’re under a mutual mistake,” he said. Justice Scalia summed up Kansas’s position as Nebraska having bought “whatever animals are in the barn,” but later in the argument came up with his own analogy. Justice Scalia suggested that one person offered an antique dealer $200 for a piece of furniture. Neither knew that the piece was actually worth much more. Justice Scalia said buying and selling antiques is “a game of rolling the dice,” and “that’s the same risk here.” Justice Breyer took Justice Scalia’s example farther and made a closer analogy to this case. In Justice Breyer’s example, the antique dealer and buyer agree to buy all Ming vases, and they will use a technical method to identify the Mings (i.e., Republican River water). However, pursuant to the method, Tang vases are thrown into the mix (i.e., imported water) and nobody thinks the buyer should get the Tangs. One can only wonder what the Justices discussed in conference after this argument.
Perhaps most foretelling of the Court’s direction here on the mistake and reformation issues were comments made by Chief Justice Roberts and Justice Sotomayor. Justice Sotomayor asked Nebraska’s counsel: “What gives . . . the special master or anyone, under reformation principles[, the right] to create a new procedure because the 5-run protocol is a new procedure that [Kansas] never agreed to[?]” Justice Roberts was more pointed: “I think, putting aside what contract principles may provide as a general matter, that the idea of a special master or this Court changing the nature of [the FSS] is a pretty radical one.” We shall await the Court’s opinion to see just how “radical” it gets.
Should Nebraska be disgorged of its “massive gain”?
On the issue of disgorgement, Kansas contended Nebraska should be disgorged of the “massive gain” resulting from its four-year long breach. Kansas argued that “disgorgement can be justified by more than contract principles,” including the simple fact that Congress approved the Compact. Nebraska argued that the unusual remedy of disgorgement required a finding of an intentional act under ordinary contract principals. The United States supported Kansas on this issue, although it conceded the Master’s calculation of $1.8 million as the amount to be disgorged was “pretty much unexplained.” The Court will have to decide whether being a “conscious wrongdoer” is enough to support disgorgement or whether a court acting in equity must find an intentional violation. However, because this is a de novo proceeding, the Court could also find that Nebraska acted intentionally, thus avoiding the issue entirely.
The Court seemed burdened by this long-running spat. Justice Breyer, trying not to cast aspersions upon the other justices, admitted to Nebraska’s counsel that he knew nothing about computing water consumption, yet he and the other justices are “supposed to decide whether some system here is going to work or not.” Justice Breyer voiced concern for farmers and other water users who might be harmed “when another five years goes by without anybody understanding what the procedure is.” Here, Justice Breyer was referencing the apparent five-year cycle between the States’ disputes and their resolutions, and the years that, unless something changes, will continue to roll by without anyone having any real understanding of what’s occurring in the Compact. Ultimately, Justice Breyer asked, “Is there any chance that you all could work this out?” Perhaps they will. Just perhaps, the states of Kansas and Nebraska will present the Court with a nice holiday gift: another settlement agreement. Maybe this time, each of these great states will understand the terms.
Which state did Colorado side with, you ask? Limiting its argument to the disgorgement theory, Colorado argued on behalf of Nebraska, on brief only. According to Kansas, Colorado “made a deal with Nebraska to the 5-run.” That’s one way of looking at it, but one might also argue that Colorado stayed out of the courts, reduced its attorneys’ fees, and kept water flowing into the Centennial State exactly as derived from the Compact, with the possibility of improving its position if the Court adopts the 5-Run Proposal.
How the Court ultimately decides this case is anybody’s guess. Meanwhile, as we await the Court’s decision, check out “Puppy Justice,” which is a video of puppies mimicking the Supreme Court Justices synchronized with the actual oral argument audio recording, as seen on Last Week Tonight by John Oliver. You can listen to snippets of the argument and laugh at the parody of what is otherwise a very serious situation: the sharing of a scarce resource in the West.
The title image features the Republican River. The image has been released into the public domain.