Kern-Tulare Water Dist. v. City of Bakersfield, CV-F-84-324 REC.

• Decision Date: 31 March 1986
• Docket Number: No. CV-F-84-324 REC.,CV-F-84-324 REC.
• Citation: 634 F. Supp. 656
• Parties: KERN-TULARE WATER DISTRICT, Plaintiff, v. The CITY OF BAKERSFIELD, Defendant.
• Court: U.S. District Court — Eastern District of California

634 F. Supp. 656

KERN-TULARE WATER DISTRICT, Plaintiff, v. The CITY OF BAKERSFIELD, Defendant.

No. CV-F-84-324 REC.

United States District Court, E.D. California.

March 31, 1986.

Thomas J. Anton, Anderson & Anton, Bakersfield, Cal., for plaintiff.

Richard Oberholzer, City Atty., Bakersfield, Cal., and Richard R. Terzian, Burke, Williams & Sorensen, Los Angeles, Cal., for defendant.

DECISION AND ORDERS

COYLE, District Judge.

I. INTRODUCTION

Plaintiff's First Amended Complaint ("Complaint"), filed September 20, 1984, alleges Sherman Act violations, breach of contract, and unfair competition arising out of a contract to purchase water from defendant. This court has jurisdiction pursuant to 15 U.S.C. § 15, which creates federal jurisdiction for claims arising under the Sherman Act, and under pendent jurisdiction.

Defendant moves for summary judgment on the ground that it is immune from liability under the federal antitrust laws under the doctrine of state action immunity. In the alternative, defendant requests this court's abstention. Defendant also moves to dismiss the pendent claims. Defendant further moves the court to reconsider its order of March 26, 1985 regarding the applicability of the Local Government Anti-Trust Act of 1984, 15 U.S.C. section 34 et seq., and to certify that order, as well as this order for interlocutory appeal in the event the court denies its motion for summary judgment. The court heard oral argument on these motions on December 16, 1985, following which the court placed the matters under submission. After a thorough review of the written and oral arguments of the parties, the court now enters its orders denying the motion for summary judgment, the motion for abstention, and the motion for reconsideration. The court will certify this order, as well as the order of March 26, 1985, however, for interlocutory appeal to the Ninth Circuit.

II. FACTS

In 1976, defendant acquired all of Tenneco West Inc.'s Kern River water rights and related facilities in Kern County. Thereupon, defendant and plaintiff entered into a long-term contract ("contract"), which is exhibit one to the complaint. The contract has a term of thirty-five years, and in essence requires the plaintiff to pay the defendant $40,000 annually for 20,000 acre-feet of water per year.

In 1983 plaintiff desired to sell the bulk of its 1983 entitlement to other water districts. The City refused to permit the sale, invoking Clause 7.1 of the contract, which conditions and limits plaintiff's use of water purchased from defendant. See Agreement No. 76-61, Exhibit 1 to Complaint, page 28-29. As a result of defendant's refusal to consent, plaintiff claims it lost sales of the 1983 entitlement, thereby allegedly damaging plaintiff in the sum of $340,000.

Based upon these factual allegations, the complaint sets forth four different legal theories for relief in four counts. Count One alleges that the City's refusal to consent is a violation of Section 1 of the Sherman Act, 15 U.S.C. § 1 constituting a restraint of trade. In Count Two, plaintiff alleges that defendant violated section 2 of the Sherman Act, 15 U.S.C. § 2, by engaging in certain specified "monopolistic" activities in the market for uncommitted irrigation water in Kern County. Count Three is a pendent state law claim for breach of contract, and Count Four is a pendent claim for unfair competition under California Business and Professions Code § 17200.

III. MOTION FOR SUMMARY JUDGMENT

Defendant's motion for summary judgment presents the court with one issue: Whether defendant, a municipality, is protected under the doctrine of "state action immunity" from liability under the federal antitrust laws.

A. State Action Immunity Doctrine.

The state action immunity doctrine, first articulated in Parker v. Brown, 317 U.S. 341, 63 S.Ct. 307, 87 L.Ed. 315 (1943), exempts a municipality from federal antitrust liability for its anti-competitive acts when the municipality acts pursuant to a state policy to displace competition with regulation. City of Lafayette v. Louisiana Power & Light Co., 435 U.S. 389, 413, 98 S.Ct. 1123, 1136, 55 L.Ed.2d 364 (1978). The policy must be clearly articulated and affirmatively expressed. Community Communications Co., Inc. v. City of Boulder, 455 U.S. 40, 102 S.Ct. 835, 70 L.Ed.2d 810 (1982). The Ninth Circuit has adopted a two-part test for assessing the availability of municipal state action immunity:

To prove that a policy is clearly articulated and affirmatively expressed, the City must demonstrate not only the existence of a state policy to displace competition with regulation, but also that the legislature contemplated the kind of actions alleged to be anti-competitive.

Grason Electric Company v. Sacramento Municipal Utility District, 770 F.2d 833, 835-836 (9th Cir.1985); Preferred Communications, Inc. v. City of Los Angeles, 754 F.2d 1396, 1412 (9th Cir.1985); Lorrie's Travel and Tours, Inc. v. SFO Airporter, Inc., 753 F.2d 790, 792 (9th Cir.1985); Tom Hudson & Associates, Inc. v. City of Chula Vista, 746 F.2d 1370, 1373 (9th Cir.1984), cert. denied, ___ U.S. ___, 105 S.Ct. 3503, 87 L.Ed.2d 634 (1985). Accord Town of Hallie v. City of Eau Claire, ___ U.S. ___, 105 S.Ct. 1713, 85 L.Ed.2d 24 (1985). The clearly articulated state policy need not compel the anticompetitive conduct, and the state policy may be inferred from the "broad authority to regulate." Town of Hallie v. City of Eau Claire, ___ U.S. at ___, 105 S.Ct. at 1718, 85 L.Ed.2d at 31. See also Grason Electric Company v. Sacramento Utility District, 770 F.2d at 836-837.

Thus, in determining whether defendant here is protected by the state action immunity, the enquiry is whether defendant's alleged anti-competitive conduct was pursuant to a clearly articulated and affirmatively expressed state policy to displace competition with regulation or monopoly in the provision of water resources, and whether the legislature contemplated the kind of actions alleged to be anti-competitive.¹ Town of Hallie v. City of Eau Claire, ___ U.S. at ___, 105 S.Ct. at 1718, 85 L.Ed.2d at 34.

B. State Policy.

There is probably no subject which has been the source of more legislation, or litigation in California than the storage, use, and distribution of water resources. Plaintiff and defendant have divergent views as to what the state water policy is, and each points to specific statutory provisions supporting its view. In essence, defendant argues that the "elaborate web of state regulation, storage, sale and use of water" shows that "the state has substituted a controlled market for a free market in the acquisition, storage, sale and use of water." Defendant's Reply Brief, pages 11 and 16. On the other hand, plaintiff contends that water legislation enunciates a policy encouraging beneficial use and free transfer of water rights; thus, defendant's acts "constitute an attempt to monopolize and destroy competition and are totally in contravention of what the state seeks to do pursuant to its enunciated policy." Plaintiff's Brief, page 33.

Although the court is unconvinced that the sheer bulk of state water regulation evidences a state policy to substitute monopoly for competition, the court agrees with defendant that municipalities are authorized to acquire water rights and contract to supply water. This authorization is found in the state constitution:

A municipal corporation may establish, purchase, and operate public works to furnish its inhabitants with light, water, power, heat, transportation, or means of communication. It may furnish those services outside its boundaries, except within another municipal corporation which furnishes the same service and does not consent.

Cal. Const. Art. XI, § 9(a) (added June 2, 1970). Pursuant thereto, section 38742 of the California Government Code empowers a city to enter contracts for supplying its inhabitants with water:

The legislative body of any city may:

(a) Contract for supplying the city with water for municipal purposes.

(b) Acquire, construct, repair, and manage pumps, aqueducts, reservoirs, or other works necessary or proper for supplying water for the use of the city or its inhabitants or for irrigating purposes in the city.

. . . . .

Cal.Govt.Code § 38742 (a) and (b) (West 1971). Section 38730 of the California Government Code further empowers a city to acquire by purchase or condemnation water, water rights, and related facilities "to supply water for the use of the city and its inhabitants." Cal.Govt.Code § 38730 (West 1971). The right of a municipality to acquire and hold water rights is also protected by section 106.5 of the California Water Code, which declares that "It is ... the established policy of this state that the right of a municipality to acquire and hold rights to the use of water should be protected to the fullest extent necessary for existing and future uses...." Cal.Water Code § 106.5 (West 1971). See also Cal. Water Code § 1005 (Water Commission Act of 1914 does not deprive municipalities of right to appropriate water); Cal.Water Code § 1006 (Water Commission Act of 1914 does not affect municipalities' pre-1914 water appropriations).

These state statutes appear to represent at least as broad a grant of authority to regulate as those involved in Grason Electric v. Sacramento Municipal Utility District, 770 F.2d at 833. There, the Ninth Circuit found sufficiently clear articulation in a statutory scheme authorizing municipalities to provide utility services. The constitutional authorization for regulation, the court found, stemmed from the California Constitution, article XI, section 9, which also authorizes municipalities to purchase water rights and supply water to their inhabitants. California law clearly authorizes and envisions municipalities such as defendant to acquire water rights and supply water to its inhabitants. Thus, the court believes that California has enacted a statutory scheme that vests...