Pure Wafer Inc. v. City of Prescott

• Decision Date: 10 January 2017
• Docket Number: No. 14-15940,14-15940
• Citation: 845 F.3d 943
• Parties: PURE WAFER INCORPORATED, a Delaware corporation, successor in interest to Exsil, Inc., a Delaware corporation, Plaintiff-counter-defendant-Appellee, v. PRESCOTT, CITY OF, 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.
• Court: U.S. Court of Appeals — Ninth Circuit

845 F.3d 943

PURE WAFER INCORPORATED, a Delaware corporation, successor in interest to Exsil, Inc., a Delaware corporation, Plaintiff-counter-defendant-Appellee,

v.PRESCOTT, CITY OF, 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.

No. 14-15940

United States Court of Appeals, Ninth Circuit.

Argued and Submitted April 14, 2016 San Francisco, California

Filed January 10, 2017

Robert A. Shull (argued), Andrew L. Pringle, Kenneth A. Hodson, and Nicole F. Bergstrom, Dickinson Wright PLLC, Phoenix, Arizona, for Defendants-Counter-Claimants-Appellants.

Jeffrey D. Gross (argued), Scottsdale, Arizona; K. Layne Morrill and Stephanie L. Samuelson, Morrill & Aronson PLC, Phoenix, Arizona; for Plaintiff-Counter-Defendant-Appellee.

Before: Diarmuid F. O'Scannlain, Richard R. Clifton, and N. Randy Smith, Circuit Judges.

Partial Concurrence and Partial Dissent by Judge N.R. Smith

OPINION

O'SCANNLAIN, Circuit Judge:

We must decide whether the City of Prescott, Arizona violated the Contract Clause of the Constitution when it declared that its sewage treatment plant would no longer accept wastewater discharged by one of its customers, a large metal refinishing plant.

I

This dispute sees the City of Prescott at odds with Pure Wafer, Inc., a corporate resident of Prescott, over contract interpretation. Pure Wafer's grievances run from the constitutional—the City has violated our nation's fundamental charter—to the mundane—the City has betrayed specific promises the two made to each other during happier days.

A

Pure Wafer runs a facility in Prescott for cleaning silicon wafers used by clients like IBM, Intel, and Motorola. Called "test and monitor wafers," they play a crucial role in the production processes those companies employ to build microprocessors and computer chips. Pure Wafer performs what is called a "reclaim" service: its role is to remove oxide nitrites from the wafers after they pass through a given phase of the production process, clean them, polish them, and send them back to its clients so they can be reused later on. The wafers range in diameter from four inches to one foot.

Pure Wafer does a large volume of business, running the 36,000-square-foot Prescott facility twenty-four hours a day, seven days a week, at around ninety-five percent capacity. All that reclamation activity generates a lot of wastewater—up to 195,000 gallons per day, although in practice it has been less—which Pure Wafer then discharges into the City's sewer lines. The sewer lines carry Pure Wafer's effluent into the City's Airport Water Reclamation Facility ("AWRF"), one of three City-owned wastewater treatment plants in Prescott that process and treat effluent from the City's sewers. The AWRF then discharges treated effluent either to golf courses or into recharge basins to replenish the City's aquifer.

This controversy centers on the fluoride concentration in Pure Wafer's effluent, and the City's recent enactment of an Ordinance imposing limits on such concentration.

B

In 1997 the City entered into a contract, called the Development Agreement ("the Agreement"), with Pure Wafer's predecessor in interest, a company called Exsil. In 2007 Pure Wafer purchased Exsil and acquired all of its rights and obligations under the Agreement. Like the parties, we refer to both entities as "Pure Wafer" for simplicity's sake.

At the time of the Agreement, Pure Wafer owned plants in Sulphur, Oklahoma and San Jose, California. The Agreement was a way for the City to entice Pure Wafer to build its third facility in the Prescott Airpark, which the City expected would create jobs, stimulate economic activity, spur infrastructure improvements, and generate tax revenue. In exchange, the City agreed to provide Pure Wafer with the sewage infrastructure it needed to conduct its reclamation business, plus (among other things) tax and zoning breaks to make it easier for Pure Wafer to expand the facility if it so desired. Pure Wafer constructed the facility in 1997, and expanded it in 2002, at a total cost of roughly $35 million.

C

Three provisions of the Agreement have figured centrally in the parties' arguments during the course of this litigation.

First, the Agreement's section 4.2, together with Exhibit F, provide that the City may not raise Pure Wafer's "sewer usage fees" above a certain rate schedule, so long as the fluoride content in Pure Wafer's effluent remains at or below 100 mg/L. Exhibit F recites that Pure Wafer's fluoride content has a "typical" value of 50 mg/L and a "maximum" of 100 mg/L. In addition, Section 4.2 obligates the City to provide up to 195,000 gallons of "sewer capacity" per day, and to bear the cost of "augment[ing] such facilities" as necessary to "accept or accommodate" Pure Wafer's effluent.

Second, section 9.1 provides that Pure Wafer "will operate the Facility ... in accordance with all local, state, and federal environmental regulations."

Third, section 14.7, an integration clause, states that "[t]his Agreement and the exhibits hereto constitute the entire agreement between the parties," "supersed[ing]" "all prior and contemporaneous agreements, representations, negotiations and understandings."

D

Pure Wafer insists that when it negotiated the Agreement with the City, its most important objective was to make sure that its ability to operate the facility would not be thwarted by future changes in City regulations. As Pure Wafer tells it, it "didn't want to ... build a plant that could be ... rendered useless at any time by the City," and so it took precautions "to make sure that it had a locked up contract and a position on water, sewer and effluent requirements." To that end, Pure Wafer claims that it "made sure that the City was fully aware of what [the facility's] requirements were."

In particular, Pure Wafer avers that it was anxious to safeguard its ability to discharge effluent containing up to 100 mg/L of fluoride, and Pure Wafer maintains that the City represented that discharging fluoride up to that level "would be acceptable." In fact, earlier in the negotiations Pure Wafer had informed the City that its fluoride levels sometimes ran as high as 150 mg/L, but at the City's request, Pure Wafer agreed to design the Prescott facility so that its fluoride contents would not exceed 100 mg/L, a commitment reflected in the maximum fluoride value listed in the Agreement's Exhibit F. In all the years it has run the Prescott facility, Pure Wafer's discharges have never exceeded 100 mg/L in fluoride concentration, and have averaged about 40 mg/L.

Pure Wafer's representatives testified that the company's concern over the prospect of fluoride regulation stemmed in part from its experience in San Jose, where it ran a reclamation facility prior to opening the one in Prescott. In the 1980s San Jose apparently passed an ordinance "similar" to the Prescott Ordinance at issue in this case, which required Pure Wafer to "put a lot of infrastructure in to deal with fluorides," the cost of which prevented Pure Wafer from expanding the facility. The real problem, Pure Wafer explains, was that it had no Development Agreement with San Jose; so much the wiser, Pure Wafer continues, it took steps to "communicate[ ] [its] needs to the City of Prescott and ... actually got it inputted into a Development Agreement, the contractual obligation."

For its part, the City also claims that it harbored concerns about effluent composition in general and fluoride levels in particular. As noted above, the City had balked at Pure Wafer's initial report that its fluoride levels were sometimes as high as 150 mg/L. In addition, at public hearings prior to the Agreement's adoption, City officials stated that Pure Wafer would be required to comply with City codes regarding pretreatment of effluent discharge. At that same meeting, a Pure Wafer representative reassured the public that the company "did not want to pollute the air, water and ground, [and] that a system would be designed that would allow discharge from their plant to be pure enough to go into the city's wastewater treatment plant."

E

Subsequent changes in state and federal environmental regulations set off the chain of events leading to this litigation. Above all, in 1999 the Arizona Department of Environmental Quality ("ADEQ")—the State's environmental regulatory agency—required the City to obtain an Aquifer Protection Permit ("APP"), which, in turn, imposed a host of requirements on the City, including the requirement that any discharge exiting the City's AWRF could no longer exceed 4.0 mg/L of fluoride, measured at the point of discharge from the AWRF.

That was a big change. Prior to the ADEQ-imposed APP regime, the City operated the AWRF pursuant to a Groundwater Protection Permit, which only required the City to sample the groundwater monitoring wells in the recharge basins in the City's aquifer, one or more steps downstream from the AWRF's point of discharge. Under the Groundwater Protection Permit, the fluoride concentration in the recharge basins could not exceed 4.0 mg/L. The important point is that the impact of Pure Wafer's effluent on samples taken from the recharge basins is less pronounced than it is with respect to samples taken at the AWRF, for at least two reasons. First, the recharge basins take in effluent discharged from at least two different sources: not only from the AWRF, but...