The nine justices of the U.S. Supreme Court heard oral arguments from Kansas and Nebraska Tuesday on the 2013 findings of Special Master William Kayatta, Jr.
Kayatta issued the ruling last year in an ongoing dispute dating to 2010 between the two states over Nebraska’s overuse of water in 2006.
Kayatta recommended Nebraska pay Kansas $5.5 million—$3.7 million as the actual damages Kansas suffered by Nebraska’s overuse; and $1.8 million to Kansas for the gain Nebraska received by pumping extra water in 2006.
He also said the accounting methods used to calculate water supplies in the Republican River Basin should be revised.
Two primary issues
Whether Kansas was entitled to a significant disgorgement or damage payment for Nebraska’s compact violation; and
Whether new accounting procedures for measuring imported water supplies into the basin, sought by Nebraska and recommended by Kayatta, should be allowed.
The oral arguments by the states and questioning by the justices Tuesday centered on two main subjects:
Kansas Solicitor General Stephen McCallister was the first to present arguments before the high court and set out by addressing the changes in the compact accounting. He said Kansas does not agree with Nebraska and the special master that the method for calculating imported water supply should be rewritten.
“That agreement itself (2002 settlement) was a complex set of concessions and compromises,” he told the justices.
The water model is an estimation at best of what’s going in the basin, he said. Parties were aware of the imported water phenomenon when the agreement was reached, he added. He said it wasn’t fair the water master focused solely on what Nebraska wanted changed while Kansas had issues that weren’t addressed. Justice Sonia Sotomayor said Kansas was invited to provide a better solution to the accounting issues but did not. McAllister said they were working on one but didn’t have time to develop it.
If contract principles were applied to the disagreement, the remedy would be to rescind the compact settlement.
“And I don’t think you want that,” Sotomayor said. McAllister agreed that none of the states would want that.
So if rescinding the agreement isn’t possible, she said, then it falls back to reforming or revising the contract.
She asked McCallister, “If Kansas couldn’t come up with an alternative, why shouldn’t the court just accept the special master’s recommendation?”
McCallister said Nebraska’s change in accounting procedures came late in the process, as a counterclaim during arbitration.
Justice Ruth Bader Ginsburg asked about the process when the states can’t agree.
McAllister said there’s the option of non-binding arbitration, “which we all love and almost always works out our disputes.”
If that doesn’t work, and the states feel strongly about it, they can request a special master, he said. “But again, I don’t think we’ll get there because the parties can and have negotiated successfully.”
Sotomayor was skeptical of this. “But I thought you had gone through the alternatives,” with no resolution, she said.
He said they brought this case to the high court because Kansas believed there was a compact violation by Nebraska that needed a remedy.
That remedy would be for the justices to grant Kansas a significant disgorgement payment from Nebraska to get their attention, McAllister said.
Disgorgement is defined as the forced giving up of profits obtained by illegal or unethical acts.
Of the $80 million Kansas sought in damages, they designated $60 million as profits or unjust enrichment Nebraska received by their overuse of water.
Justice Antonin Scalia said disgorgement payments aren’t a normal contract remedy and require an intentional violation.
McAllister said if Nebraska only has to pay Kansas $3.7 million, there’s little incentive for compliance, especially if a dispute can drag out eight years before any possibility of recovery.
Justice Samuel Alito, Jr. said Kayatta found Nebraska didn’t intentionally violate the compact agreement.
McAllister said the master did find that Nebraska “knowingly exposed Kansas to a risk of violation.”
While they didn’t purposefully violate, they did violate it, McCallister said. “I think you have to say it’s more than negligent.”
McCallister continued, “Nothing less than a substantial disgorgement award seems to really get their attention. And here it has gotten their attention and it has also gotten Colorado’s attention.”
Justice Dept. sides with Kansas on disgorgement
Ann O’Connell, Assistant to the Solicitor General, U.S. Department of Justice, said disgorgement should be an available remedy when a state violates an interstate water compact.
She said the monetary remedy would “help to stabilize compacts and ensure the states are working vigorously to meet their compact obligations.”
Justice Scalia reiterated the need for intentional violation in contract law and asked O’Connell for cases where the high court imposed disgorgement, even in the case of intentional violation. She could not cite any.
She did cite a case between Texas and New Mexico where disgorgement could be a possible remedy. She continued, “It certainly left that door open.”
“For an intentional violation?” Scalia questioned. “Yes,” she replied.
“But we’ve never done it, have we?” Scalia asked. “No. And this is a novel . . .” she said before Scalia cut her off.
At the end of her argument, O’Connell did go on record that the Justice Department does support the special master’s recommendation to revisit the compact accounting methods.
Nebraska wants accounting change, not high damages
Nebraska’s Chief Deputy Attorney General, David Cookson, was the final lawyer to present arguments. He stated the compact settlement specifically says the accounting will not count imported Republican River water and requested the court approve Kayatta’s recommendation for the accounting change.
Scalia challenged him, saying the settlement included how such a water supply be determined—by a formula—and that was agreed to.
Cookson countered, saying the deal Nebraska agreed to was not the formula.
“The deal we made was not to count imported water,” he said.
He said the final settlement made it clear that accounting procedures could be modified at any time through the appropriate process.
Cookson said Nebraska followed that process, by going to the three-state compact administration. After Kansas objected, non-binding arbitration was sought.
“The master agreed the mistake occurred, sent it back to the RRCA (Republican River Compact Administration) to develop a solution. This was all presented to Kansas in 2007,” Cookson told the justices.
He said the accounting procedures are a technical appendix to the settlement and were not part of the settlement agreement.
Scalia asked if the final settlement could be amended by mutual agreement.
Cookson said no, because the three states, in the final settlement, put in a non-severability clause that they couldn’t change it. Cookson made the distinction that the accounting procedures could be changed and cited case law where the court allowed appendixes to state settlements to be changed. In addition, he said the accounting procedures appendix was not included as part of the compact settlement when it was approved by Congress.
Chief Justice John G. Roberts, Jr., said the settlement is an agreement between two sovereign states.
“The idea of a special master or this court changing the nature of that agreement is a pretty radical one,” he said.
Cookson responded, “But we’re not changing that agreement. The agreement in the final settlement stipulation is do not count imported Platte River water.”
When negotiating the settlement, Cookson asserted the parties knew the accounting procedures would change as things moved forward. He cited roughly 14 changes that have already been made and approved by the compact administrators. He said Kayatta’s recommendation doesn’t reform the compact settlement, just the technical appendix
on accounting procedures.
Disgorgement not justified
On the issue of disgorgement, Cookson said Nebraska took exception to the award because the state did not deliberately violate the compact.
Justice Elena Kagan said the special master and Justice Department Solicitor General characterized Nebraska as “a conscious wrong-doer, that you failed to act, refused to act in the face of known risk.”
Cookson took exception, noting that Nebraska took control of consumptive use in 2002, while the settlement was still being negotiated. In addition, through 2006, the state reduced its pumping by 500,000 acre-feet, a 35 percent reduction. He said it was not possible for Nebraska to foresee its allocations would fall even below the record lows that occurred during the Dust Bowl of the 1930s. He urged justices to understand that allocations in the settlement were based on a 10-year period of the Dust Bowl. He said it was reasonable for Nebraska to believe allocations would never go below those of the Dust Bowl.
“And yet in ‘05 and ‘06, our allocations significantly fell below the Dust Bowl,” he told the justices.
He said Nebraska conceded it fell short of compliance in 2006 and offered to pay Kansas its actual damages.
Since then, Cookson said Nebraska has remained in compliance “even in the driest condition now of record in the basin.”
For these reasons, he said Kansas’ claim of unjust enrichment “as a means of disgorging gain to Nebraska” is not appropriate.
In rebuttal to Cookson’s arguments, McAllister said the court should give Nebraska this answer on changing the accounting method: “Sorry; you made the deal, and just because you now think you have a better way of doing it, doesn’t mean we should rewrite the contract.”
Nebraska delegation attends
A Nebraska delegation including representatives from the Department of Natural Resources, the Attorney General’s office and attorneys and natural resource district officials closely associated with the case attended the oral arguments. Those attending from the Upper Republican NRD included Manager Jasper Fanning, Assistant Manager Nate Jenkins and Board Member Jason Kunkel.
The justices will now review the case and render a decision which could occur sometime before the end of the year but no later than the end of June 2015.