Wednesday’s Argument in Orff v. United States

What do you get when you mix trillions of gallons of water, a group of angry farmers, and an almost-endangered fish? A circuit split and a ticket to the United States Supreme Court, of course! In Orff v. United States, a group of California farmers claim that the United States Bureau of Reclamation breached a water-service contract with the Westlands Water District, which encompasses the farmers’ property. The farmers allege that the Bureau violated its duties under the contract by lowering water allocations and raising fees for the Westlands District.

The question presented in this case is whether the farmers can sue for breach of contract as “intended” third-party beneficiaries, or whether the farmers are merely “incidental” third-party beneficiaries, and thus barred from suit because of federal sovereign immunity.

The water-service contract at issue in Orff was formed pursuant to the Central Valley Project (CVP), which is the nation’s largest federal water management program, and which includes, among other things, dams, reservoirs, canals, and hydroelectric power stations. Members of the Westlands Water District, which was created by farmers in the San Joaquin Valley in 1952, wanted to use the CVP’s water. Therefore, in 1963, Westlands contracted with the Bureau to receive at least 900,000 acre-feet of water per year at a price not to exceed $7.50 per acre-foot. (For you water law newbies out there, an acre-foot is the amount of water needed to cover one acre of land at a depth of one foot, and it is equivalent to about 325,900 gallons.) Both parties honored the contract until 1978, when the Bureau tried to raise Westlands’ rates above the $7.50 limit to pay for irrigational infrastructure expenses. This attempt ultimately failed, and a California District Court entered a stipulated judgment in 1986 requiring the parties to honor the terms of the original 1963 contract.

Alas, the tranquil waters could not endure. In 1992, Congress passed a statute requiring the Bureau to conserve water in the CVP for environmental restoration purposes. In response, the Bureau cut the Westlands’ water supply by 50% to protect a threatened species of salmon, and it began assessing certain payments. Westlands initiated this suit in federal district court, and a group of farmers within the District intervened, with both parties claiming, inter alia, that the water reduction violated the 1963 contract. Although Westlands settled its claims in 1994 and dismissed its complaint without prejudice in 1995, the farmers continued on with their lawsuit.

Before the district court could reach the farmers’ claims, however, the Ninth Circuit decided in Klamath Water Users Protective Ass’n v. Patterson that farmers were “incidental” rather than “intended” third-party beneficiaries for the purposes of these types of contracts. Accordingly, in 2000, the district court held that federal sovereign immunity had not been waived with respect to the California farmers’ claims, and they were dismissed. The farmers appealed to the Ninth Circuit, and Westlands reentered the suit as an intervenor, this time arguing against the farmers’ position. The Ninth Circuit affirmed the lower court decision, agreeing that the farmers were merely incidental third-party beneficiaries, and that sovereign immunity had not been waived for them.

In their brief on the merits before the Supreme Court, the California farmers present a number of arguments as to why the lower courts were wrong. First, they argue that the Federal Circuit’s decision in H.F. Allen Orchards v. U.S. more properly reflects what the law should be on this issue. In that case, the court held that farmers were the intended third-party beneficiaries of a contract between an irrigation district and the Bureau because they ultimately paid for the water and were its beneficial users. Interestingly, the Ninth Circuit noted the apparent conflict between Klamath and H.F. Allen Orchards and almost seemed to invite Supreme Court review: “To the extent that the Federal Circuit employs a different approach and reaches a different result, we respectfully disagree.”

The farmers also rely on the contract itself, arguing that because it provides them with water usage rights, it implies that they have enforcement rights. The farmers further assert that the contract supports their ability to sue because it incorporates various federal and state laws that establish beneficial use as the measure of water rights. Additionally, the farmers identify four “circumstances” pertaining to the contract that they claim indicate that they are the intended beneficiaries: 1) they perfected, own, use, and preserve the water rights; 2) they pay for the water rights; 3) they reasonably relied on Westlands’ and the Bureau’s intent to benefit them; and 4) the district is their surrogate, in fact and in law. Finally, the farmers assert that the 1986 stipulated judgment establishes that the farmers are the intended third-party beneficiaries of the contract, and that it precludes the Bureau from challenging this issue.

In its brief, the United States provides three principal arguments against the farmers’ claims. First, the government asserts that Congress never authorized the Secretary of the Interior or the courts to grant third-party rights to farmers for water-service contracts. Rather, it contends that Congress limited such contracts to irrigation districts, and waived sovereign immunity only for these districts, in order to create a centralized contracting scheme. Second, the government argues that the contract on its terms did not create a third-party right in the farmers. It asserts that the parties never expressed their intention to confer this right, and that the farmers have already conceded this issue by agreeing that the contract does not provide them with an express right to sue. Finally, the government argues that the farmers’ interpretations of particular contractual terms, as well as of the nature and preclusive effect of the 1986 judgment, are incorrect.

Westlands also has filed a brief opposing the farmers. It contends that the Ninth Circuit has made this case more difficult than it really is by only focusing on the four corners of the contract instead of also considering other factors that indicate that the farmers are not intended third-party beneficiaries. In particular, Westlands asserts that Congress’s insistence on dealing with water districts as opposed to individual farmers in its reclamation statute, the actual legal ownership rights in the 1963 contract, and the governmental powers and purposes of Westlands provide even stronger support for the government’s position. Westlands finally argues that even if the farmers were the intended third-party beneficiaries, the applicable waiver of sovereign immunity would not reach them because they were not the contracting entity in 1963.

Additionally, some third parties have filed amicus briefs, most of which support the government’s position. The State of California, through the California State Water Resources Control Board, asserts that under California law, the farmers do not have a property right in receiving water from the Bureau. On the other hand, the Central San Joaquin Conservation District contends that the farmers enjoy this property interest.

The parties’ briefs are available here.

William Smiland will argue on behalf of the farmers; Assistant to the Solicitor General Jeffrey Minear will argue on the U.S.’s behalf, while Stuart Somach will argue on behalf of Westlands.