Pure Wafer Inc. v. City of Prescott
2017 U.S. App. LEXIS 417
9th Cir.2017Background
- Pure Wafer operated a high-volume metal/silicon wafer reclamation facility in Prescott that discharged wastewater containing fluoride (typical ~40 mg/L, contract-maximum 100 mg/L) into the City’s Airport Water Reclamation Facility (AWRF).
- In 1997 the City and Exsil (later Pure Wafer) signed a Development Agreement: the City agreed to provide up to 195,000 gallons/day of sewer capacity, keep certain sewer usage fees fixed so long as fluoride ≤100 mg/L (Exhibit F), and to augment facilities as needed; Pure Wafer agreed to operate in compliance with environmental laws (§9.1). The Agreement contains an integration clause.
- State regulator (ADEQ) later required the City to meet a 4.0 mg/L fluoride limit measured at the AWRF discharge point (Aquifer Protection Permit), prompting the City to adopt a pretreatment ordinance (2013) limiting industrial dischargers to 16.3 mg/L fluoride and to require pretreatment permits and costs to be borne by industrial users.
- Pure Wafer sued under 42 U.S.C. §1983 alleging the Ordinance violated the federal and Arizona Contract Clause (impairment) and alternatively alleged breach of contract and breach of the covenant of good faith and fair dealing; district court issued a permanent injunction for Pure Wafer on Contract Clause grounds and left alternative claims adjudicable later.
- On appeal the Ninth Circuit held (majority) that the City did not violate the federal Contract Clause because it never attempted to extinguish contractual remedies (damages/equitable relief remain available) and had repeatedly represented the Ordinance would not absolve it of contractual liability; but the court affirmed liability on Pure Wafer’s alternative breach-of-contract theory—interpreting the Agreement as a regulatory-style contract under which the City assumed the risk of later regulatory changes and therefore must bear pretreatment costs.
- Judge N.R. Smith concurred in part (rejecting Contract Clause claim) but dissented from deciding the breach claim on appeal, arguing the district court should first decide whether to exercise supplemental jurisdiction and make fact findings under Arizona law before the appellate court resolves the breach claim.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the City's Ordinance impairs the obligation of the Development Agreement in violation of the federal Contract Clause | Pure Wafer: Ordinance effectively extinguishes its contractual right to discharge up to 100 mg/L fluoride and shifts pretreatment costs to Pure Wafer — a substantial impairment | City: This is a garden-variety contract dispute; the Ordinance is an environmental regulation that Pure Wafer agreed to follow (§9.1); remedies remain available so no Contract Clause violation | Reversed: No Contract Clause violation — state action did not eliminate Pure Wafer’s judicial remedies; the City represented it would not rely on the Ordinance to extinguish contractual liability (majority) |
| Whether the Development Agreement obligated the City to bear costs triggered by later regulatory changes (i.e., is this a regulatory contract) | Pure Wafer: The Agreement (esp. §4.2 & Exhibit F and negotiation context) guaranteed the ability to discharge up to 100 mg/L and allocated the risk of future regulatory change to the City | City: §9.1 requires compliance with environmental laws; §4.2 only guarantees sewer capacity and addresses physical augmentation, not purification costs | Affirmed in part: Appellate majority sustains district court’s alternative ruling that the City breached the Agreement by attempting to impose pretreatment cost-shifting; City must bear cost or otherwise remedy the breach; remanded to district court for appropriate remedy |
| Whether Exhibit F’s fluoride numbers create a contractual cap/right to discharge up to 100 mg/L | Pure Wafer: Exhibit F reflects negotiated ‘‘typical’’ (50 mg/L) and ‘‘maximum’’ (100 mg/L) fluoride and was central to the deal | City: Exhibit F pertains to sewer usage fee schedule and not a binding discharge cap; §9.1 contemplates regulatory compliance | Majority: Reads extrinsic evidence and finds Exhibit F and negotiation context support Pure Wafer’s interpretation as creating the bargained-for expectation; dissent argues Exhibit F does not plainly create a discharge right and that factual development is required |
| Whether the appellate court should resolve state-law breach claims or remand for district court to consider supplemental jurisdiction and factfinding | Pure Wafer: Supports alternative breach ruling on present record | City: Argues record/factual findings insufficient and district court should revisit jurisdiction or make findings | Dissent (N.R. Smith): Would remand for district court to decide §1367(c) and to make detailed findings; majority declines and decides breach issue on existing record, remanding only for remedy |
Key Cases Cited
- Fletcher v. Peck, 10 U.S. (6 Cranch) 87 (early principle that Contract Clause applies to states) (establishes Contract Clause application to state action)
- St. Paul Gaslight Co. v. City of St. Paul, 181 U.S. 142 (municipal ordinances can implicate Contract Clause; not every municipal contract dispute is a federal question)
- General Motors Corp. v. Romein, 503 U.S. 181 (Contract Clause focuses on whether state action alters enforceability or remedies under contract)
- United States Trust Co. of New York v. New Jersey, 431 U.S. 1 (States may abrogate contract rights for public purpose with just compensation; contract rights are property)
- Winstar Corp. v. United States, 518 U.S. 839 (plurality) (recognizing “regulatory contract” theory: government can assume risk of future regulatory change and be liable for resulting losses)
- W.B. Worthen Co. v. Kavanaugh, 295 U.S. 56 (noting obscurity of line between remedial changes and impairment under Contract Clause)
- Univ. of Haw. Prof’l Assembly v. Cayetano, 183 F.3d 1096 (9th Cir.) (substantial-impairment test hinges on whether law creates a defense that prevents recovery of damages)
- Horwitz-Matthews, Inc. v. City of Chicago, 78 F.3d 1248 (7th Cir.) (distinguishing breaches of contract from Contract Clause violations; not every breach is constitutional)