Pure Wafer Inc. v. Prescott, City of, an Ariz. Mun. Corp., 14-15940

• Decision Date: 10 January 2017
• Docket Number: No. 14-15940,14-15940
• 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: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

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 FOR THE NINTH CIRCUIT

Argued and Submitted: April 14, 2016
January 10, 2017

FOR PUBLICATION

D.C. No. 3:13-cv-08236-JAT

OPINION

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Appeal from the United States District Court for the District of Arizona
James A. Teilborg, Senior District Judge, Presiding

Argued and Submitted April 14, 2016 San Francisco, California

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

Opinion by Judge O'Scannlain;
Partial Concurrence and Partial Dissent by Judge N.R. Smith

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SUMMARY^*

Contract Clause

The panel affirmed in part and reversed in part the district court's permanent injunction in favor of plaintiff, entered following a bench trial, and remanded in an action brought under 42 U.S.C. § 1983 alleging that 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 plaintiff's metal refinishing plant.

This controversy centered on the fluoride concentration in plaintiff's effluent, and the City's enactment of an Ordinance imposing limits on such concentration. Plaintiff alleged that application of the Ordinance to plaintiff's industrial wastewater discharges constituted an unconstitutional impairment of its contract rights, in violation of the Contract Clauses of the federal and state constitutions.

Reversing the district court's judgment on the Contract Clause claims, the panel held that the City had not impaired the obligation of its contract with plaintiff, because the Ordinance has not altered the ordinary state-law remedies to which plaintiff would otherwise be entitled if it successfully proved a breach of contract. The panel stated that the City might very well have breached its contract, but that did not necessarily mean it has violated the Contract Clauses of the federal and state constitutions.

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The panel held that the judgment for plaintiff could be sustained on the alternative ground that the City breached its contract with plaintiff. The panel held that the City had previously agreed to accept such effluent as the parties knew plaintiff would need to discharge in order to maintain a viable business and that the City agreed to bear the financial risk that state-initiated regulatory changes would make complying with such promise more costly than it was when the parties entered into an agreement. The panel held that enforcing the Ordinance against plaintiff would eviscerate the benefit of plaintiff's bargain; the City could not do so without putting itself in breach of the agreement. The panel stated that on remand the district court should decide the appropriate remedy. The panel further ordered that the district court's injunction forbidding enforcement of the Ordinance against plaintiff would remain in effect during subsequent stages of litigation.

Concurring in part and dissenting in part, Judge N.R. Smith concurred with the majority's conclusion that plaintiff did not have a claim under the Contract Clause of the United States or Arizona constitutions. Judge Smith dissented from the majority's sua sponte decision to reach plaintiff's alternative claims that the City breached its agreement. Judge Smith stated that the circumstances warranted remand to permit the district court (or an Arizona court) the first opportunity to address the merits of the breach of contract claim.

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COUNSEL

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.

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.

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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.

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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

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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

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agreed...