Klamath Basin Water Users One Step Closer to Obtaining Compensation for Water Taken to Protect Species under ESA

The Oregon Supreme Court has rejected the federal government’s most recent efforts to block the claims of irrigators and farmers seeking $100 million in compensation for the Bureau of Reclamation’s (“Bureau’s”) “taking” of their water rights in the Klamath Basin in Oregon . The case, Klamath Irr. Dist. v. United States,[1] stems from a 2001 decision by the Bureau to terminate water deliveries to farmers and irrigators (“Klamath Irrigators”) during a drought in order to make the water available for three species of endangered fish. On March 11, 2010, the Oregon Supreme Court issued a decision holding that — as a matter of law — a 1905 Oregon statute “did not preclude” the Klamath Irrigators from asserting, at least in theory, a property claim to the water the Bureau diverted to protect the fish. The Court determined, however, that it could not decide on the record before it whether the Klamath Irrigators own the rights to the water. The United States Court of Appeals for the Federal Circuit (“Federal Circuit”) will, therefore, likely remand the case to the Federal Court of Claims for further development of the factual record.

Background

The Bureau manages the Klamath Project, which stores and supplies water to farmers, irrigation districts, and federal wildlife refuges in the Klamath River Basin. The Basin is a naturally semi-arid region in which the Bureau has constructed and operates extensive water reclamation and irrigation projects pursuant to the Reclamation Act. The Klamath Project, begun in 1905, supplies water to about 240,000 acres of irrigable land, including to agricultural irrigators and two federal wildlife refuges. The Project is vulnerable to droughts because it lacks a major water storage reservoir and the primary storage area, Upper Klamath Lake, is relatively shallow.

The Klamath Irrigators, plaintiffs in the underlying federal litigation, are farmers and irrigation districts that use water from the Klamath Project. As a result of drought conditions in 2001, the Bureau terminated water deliveries to the Klamath Irrigators in order to make water available for three species of endangered fish. Claiming both a constitutionally protected property right and a contractual right to water deliveries, the Klamath Irrigators brought an action in the Court of Federal Claims alleging that the United States had unconstitutionally taken their property and deprived them of their contractual rights.

The Klamath Irrigators initially sued for $1 billion on claims that the taking was permanent. As further discussed below, the suit has since been limited to claims for the 2001 water reductions, amounting to $100 million.

Klamath Irrigators’ Claims at the Court of Federal Claims

Relying on an Oregon statute, the Court of Federal Claims ruled in 2005 that the Klamath Irrigators interests in the use of Klamath Basin water were not cognizable property interests under the takings clause and had no equitable right in the water that they used to irrigate their land.[2] The Court of Federal Claims held that the Klamath Irrigators claims sounded, “if at all in contract.”[3] In a March 2007 opinion, the Court denied these remaining claims, concluding that the sovereign acts doctrine provides the United States with a complete defense to the Irrigators breach of contract claims.[4] Specifically, the Court of Claims found that the irrigation contracts “must be read to imply that the United States reserved its ability to exercise its sovereign powers without the threat of liability for failing to deliver water.”[5] For more on the Court of Federal Claims’ decisions see our earlier article, J. Ferrell Klamath Basin Decisions Leave Irrigators High and Dry, Marten Law News (April 25, 2007).

Water law is a creature of state law. Oregon water law, like most western water law, operates on the “prior appropriation” system. Prior appropriation is based on a “first in time, first in right” policy which means that the first party to put a water quantity to beneficial use has exclusive senior rights to that water and later junior users can only make additional water withdrawals on the condition that the senior user’s rights are met first. Prior appropriation recognizes a right to use water but actual water ownership is generally reserved to the public, through the state.

The Endangered Species Act (“ESA”) requires the Secretary of the Interior to determine species whose survival is threatened or endangered through all or a significant part of their range. Based on the best available science, the ESA provides for listing such species and designates their critical habitat. After a species is listed, federal agencies must ensure that any federal and non-federal action they authorize, fund, or carry out is not likely to jeopardize any listed species or harm critical habitat.[6] The ESA also prohibits any person from “tak[ing]” listed species, which includes disturbing habitat.[7] Although Congress amended the ESA in 1982 to expressly provide that state water rights will be given special deference in enforcing the ESA’s mandates, the provision has not routinely been enforced.[8]

Under the ESA, federal resource agencies can potentially require state and other federal government agencies to restrict water rights, regardless of their priority date, in order to protect ESA-listed species. Most courts that have addressed the legal interactions between the ESA and state water rights have held that the ESA provisions trump both federal water contracts and state water rights when they conflict with the Act. For example, in United States v. Glenn-Colusa Irrig. Dist.,[9] the court held that although the ESA requires federal agencies to cooperate with states to resolve water resource issues in concert with endangered species protection, Congress did not intend to suggest that state water rights survive where they conflict with the ESA.[10]

Questions Certified to the Oregon Supreme Court

In July 2008, the Federal Circuit determined that appeals from the Court of Claims decisions presented the question of whether the United States violated an interstate water compact in failing to provide water to the Klamath Irrigators.[11] The U.S. Court of Appeals further determined that “the answer to the takings question depends upon complex issues of Oregon property law.”[12]

As further discussed below, the Federal Circuit therefore certified three state law questions to the Oregon Supreme Court. The Oregon Supreme Court has continuing “discretion to decline to provide an answer to a certified question, or rephrase a question if it turns out, after full briefing, that it is appropriate to do so.”[13] After considering briefs filed by Klamath Irrigation, the Bureau, the Pacific Coast Federation of Fisherman’s Associations, the Natural Resources Defense Council (“NRDC”), and the Oregon Department of Water Resources (as amicus curiae), the Oregon Supreme Court accepted the certified questions. The Court decided to hear the case on grounds that all three questions presented issues of Oregon law that are both preliminary to, and potentially dispositive of, plaintiffs’ federal takings claim.[14]

Oregon Supreme Court’s Decisions on Certified Questions

First Question – 1905 Oregon Statute: The Oregon Supreme Court reframed the Federal Circuit’s first question as:

In providing that the United States could appropriate water rights pursuant to Oregon’s 1905 statute, did the Oregon legislature intend to preclude persons putting the water to beneficial use from acquiring a beneficial or equitable property interest in the water right?[15]

The Court held that the answer to that question is “no.”[16]

The Oregon Supreme Court found that the Oregon legislature enacted the 1905 statute in response to Congress’ passage of the Reclamation Act of 1902, which created a fund derived from the proceeds of the sale of public lands to construct “irrigation works for the storage, diversion, and development of waters for the reclamation of arid and semi-arid lands in the [western states and territories].”[17] Oregon’s 1905 statute created a procedure for the United States to appropriate water for the irrigation works that the Reclamation Act authorized. The Klamath Irrigators use the water the United States appropriates under Oregon’s 1905 statute for irrigation and, therefore, contend that they have a derivative interest in the United States’ rights to that water.

The Oregon Supreme Court concluded that, in authorizing the United States to appropriate water for the construction of irrigation works, “the Oregon legislature authorized the United States to appropriate state water rights pursuant to the 1905 act for the benefit of those persons who the Reclamation Act contemplated would put water to beneficial use.”[18]

The Court’s decision on this issue removes one of the United States’ defenses to the Klamath Irrigators’ takings claims and strengthens the property interests held by water users who receive water from the Bureau.

Second Question – Sufficiency of Beneficial Use: The Oregon Supreme Court reframed the Federal Circuit’s second question as:

Whether beneficial use alone is sufficient to acquire a beneficial or equitable property interest in a water right to which another person holds legal title.

The Court held that the answer to that question is also “no,” because beneficial use is a necessary but not a sufficient condition to acquire a beneficial or equitable property interest in a water right.[19]

Central to the Klamath Basin issues before the Oregon Supreme Court is Section 8 of the Reclamation Act of 1902 (“Reclamation Act”). Congress passed the Reclamation Act to provide for the “construction and maintenance of irrigation works … for the reclamation of arid and semiarid lands in the western states and territories.”[20] Section 8 provides that the Act does not affect state laws “relating to the control appropriation, use, or distribution of water used in irrigation, or any vested right thereunder, and the Secretary of the Interior  … shall proceed in conformity with such laws.”[21] The Klamath Irrigators argue that the United States acquired Oregon water rights under Section 8 to which the Irrigators obtained, at minimum, an equitable interest and even perhaps a property interest when they put to beneficial use the water that they received from the Bureau.

Under Oregon law, whether plaintiffs acquired an equitable or beneficial property interest in the water right turns on three factors: whether plaintiffs put the water to beneficial use with the result that it became appurtenant to their land, whether the United States acquired the water right for plaintiffs’ use and benefit, and, if it did, whether the contractual agreements between the United States and plaintiffs somehow have altered that relationship.[22] The Court held that the first two factors “suggest that plaintiffs acquired a beneficial or equitable property interest in the water right to which the United States claims legal title.” The Court found that “the relationship between the United States and plaintiffs is similar to that of a trustee and a beneficiary.”

Even though the Court concluded that, in appropriating the right to use the waters in the Klamath Basin, the United States did so for the benefit of the Klamath Irrigators, the United States and plaintiffs “remained free within statutory and constitutional limits to enter into agreements that clarified, redefined, or even altered that relationship.”[23] Although the Federal Circuit summarized the types of agreements between the parties and quoted portions of those agreements, all the agreements are not before the Oregon Supreme Court. The Court held, therefore, that as to the third factor it “cannot provide a definitive answer” to the Federal Circuit’s second question whether, as a matter of state law, the various contractual agreements between the United States and the Klamath Irrigators support or defeat plaintiffs’ claim. As a result, the Federal Circuit is likely to remand the case back to the Court of Claims to resolve that outstanding issue.

Third Question – Applicability of Klamath Basin Adjudication: The third question certified to the Oregon Supreme Court involved the United States’ defense that the Klamath Irrigators’ property interests – if any – in the water are subject to adjudication in Oregon’s ongoing Klamath Basin Adjudication and lost if a claim has not been filed. This issue asks whether:

Oregon State law recognizes any property interest – legal or equitable – in the use of Klamath Basin water that is not subject to adjudication in the Klamath Basin Adjudication?

Applying Oregon statutes and case law, the Court held the answer to the Federal Circuit’s third question is “yes.”[24] A person or party asserting only a beneficial or equitable property interest in a water right is not a “claimant” who must appear in the Klamath Basin Adjudication and file a claim to determine that interest.[25] The Court’s decision on this issue removed an additional defense on which the United States had relied.

Conclusion

The Oregon Supreme Court’s decision strengthens water users’ property interests in federally delivered water nationwide because it partially removes the United States’ potential defenses to takings claims associated with curtailed water deliveries and moves the Klamath Irrigators and others using water under contracts with the Bureau closer to a decision that they hold state property rights to the water. Ten million acres of farmland are irrigated by water provided by the Bureau.[26] One in five western farmers, over 140,000 farmers in total, receives water from the Bureau.[27] The Oregon Supreme Court’s decision is not, however, the final word on the Klamath Irrigators claims. The Federal Circuit will very likely remand the case to the Court of Claims to address whether the various contractual agreements between the United States and the Klamath Irrigators support or defeat the Klamath Irrigators claims. If those claims ultimately succeed, then it will be significantly more difficult for the Bureau to curtail water deliveries without compensating Reclamation Act water users.

For more information on Marten Law’s water and wetlands practice, please contact Jeff Kray.