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Pure Wafer, Inc. v. City of Prescott

United States District Court, D. Arizona

April 17, 2014

Pure Wafer, Inc., Plaintiff,
v.
City of Prescott et al., Defendants

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For Pure Wafer Incorporated, a Delaware corporation and: successor in interest Exsil Incorporated, Plaintiff: K Layne Morrill, Martin A Aronson, Stephanie Lynn Samuelson, LEAD ATTORNEYS, Morrill & Aronson PLC, Phoenix, AZ.

For Prescott, City of, an Arizona municipal corporation, Marlin Kuykendall, in his capacity as Mayor of the City of Prescott, Craig McConnell, in his capacity as City Manager of the City of Prescott, 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: Andrew L Pringle, Kenneth A Hodson, Robert Alan Shull, LEAD ATTORNEYS, Nicole Felker Bergstrom, Dickinson Wright/Mariscal Weeks, Phoenix, AZ.

For Prescott, City of, an Arizona municipal corporation, Steve Blair, in his capacity as a Member of the Prescott City Council, Marlin Kuykendall, in his capacity as Mayor of the City of Prescott, Alan Carlow, in his capacity as a Member of the Prescott City Council, Chris Kuknyo, in his capacity as a Member of the Prescott City Council, Charlie Arnold, in his capacity as a Member of the Prescott City Council, Joel Berman, in his capacity as Utilities Manager of the City of Prescott, Craig McConnell, in his capacity as City Manager of the City of Prescott, Jim Lamerson, 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, Counter Claimants: Andrew L Pringle, Kenneth A Hodson, Robert Alan Shull, LEAD ATTORNEYS, Nicole Felker Bergstrom, Dickinson Wright/Mariscal Weeks, Phoenix, AZ.

For Len Scamardo, in his capacity as a Member of the Prescott City Council, Counter Claimant: Andrew L Pringle, Kenneth A Hodson, Robert Alan Shull, LEAD ATTORNEYS, Dickinson Wright/Mariscal Weeks, Phoenix, AZ.

For Pure Wafer Incorporated, a Delaware corporation and:, Counter Defendant: K Layne Morrill, Martin A Aronson, Stephanie Lynn Samuelson, LEAD ATTORNEYS, Morrill & Aronson PLC, Phoenix, AZ.

OPINION

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James A. Teilborg, Senior United States District Judge.

FINDINGS OF FACT AND CONCLUSIONS OF LAW AND PERMANENT INJUNCTION

Two sophisticated entities, a wastewater discharger and a sanitary sewer service provider, contract for the ongoing treatment of effluent having a known chemical composition. Their comprehensive agreement includes among its provisions a promise by the wastewater discharger tat it will conduct its industrial operations in compliance with environmental regulations. Subsequently, the state imposes new environmental regulations upon the sewer provider, which increase the provider's cost of performance under the contract.

Unhappy that the contract does not permit shifting these costs to the wastewater discharger, the sewer provider--who happens also to be the local municipality--enacts its own environmental regulation effectively banning the discharger's effluent from entering its sewer system. The regulation also permits the discharger (or any other industrial business) to create a new contract with the municipality for the acceptance of nonconforming effluent, but only if the discharger bears the cost of treatment.

The issue presented is whether the municipality may unilaterally obtain additional,

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not-bargained-for contractual benefits under the guise of environmental regulation. For the reasons that follow, the Court concludes that such action violates the United States Constitution and Arizona Constitution's prohibitions on impairment of contract rights.

I. PROCEDURAL HISTORY

Pure Wafer, Inc. (" Pure Wafer" ) brought this action against the City of Prescott, Arizona (the " City" ) as well as the City's individual administrators in their official capacities for alleged violations of the federal and State Contract Clauses stemming from the City's enactment of an ordinance impacting a contract between the City and Pure Wafer.[1] (Doc. 1; Doc. 19). Pure Wafer sought a preliminary injunction enjoining the City from enforcing the ordinance against Pure Wafer until the issuance of a final judgment determining the constitutional claims. (Doc. 22).

After beginning the hearing on the motion for a preliminary injunction, (Tr. 12/19/13), the Court and the parties agreed that no genuine disputes of fact existed, a speedy resolution was in the best interests of all of the parties, and that the bench trial on the merits could be consolidated with the hearing. (Tr. 12/20/13). The parties subsequently stipulated to (1) consolidating the hearing with the trial on the merits; (2) bifurcating the trial on the merits into a liability phase, to be tried first, and a damages phase, if necessary, with the Court's judgment as to liability in the form of an immediately appealable judgment; (3) not filing any motions for summary judgment as to liability and instead filing post-trial briefing with the Court; (4) holding closing arguments after the completion of the post-trial briefing; and (5) the City agreeing not to enforce the ordinance against Pure Wafer until after the Court's entry of judgment on the merits and, if appealed, after the Ninth Circuit Court of Appeals issued its mandate. (Doc. 60).

The Court approved the stipulation as to each of the points listed above and, pursuant to Federal Rule of Civil Procedure (" Rule" ) 65(a)(2), advanced the trial on the merits and consolidated it with the hearing on the motion for a preliminary injunction, with the evidence already received at the hearing to be included in the consolidated trial record. (Doc. 61 at 2).

Now, considering the bench trial, (Tr. 12/19/13; Tr. 1/14/14), post-trial briefing, (Docs. 76, 77, 81, 83), and closing arguments (Doc. 84), the Court finds and concludes as follows:

II. BACKGROUND & FINDINGS OF FACT

A. The Parties' Negotiations

Pure Wafer and its predecessor-in-interest Exsil, Inc. (" Exsil" ) are and were, respectively, companies engaged in the reclamation of silicon wafers used in the semiconductor industry.[2] (Tr. 12/19/13 at 108; Ex. 5). By 1996, Pure Wafer operated two " reclaim" facilities [3] in San Jose, California and Sulphur, Oklahoma. (Tr. 12/19/13 at 29:7-15). The City recruited Pure Wafer to locate its next facility in

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Prescott, and offered Pure Wafer water and sewer rights as incentives to locate in the Prescott Airpark. ( Id. at 40:9-13; Tr. 1/14/14 at 78:18-23).

Pure Wafer was willing to incur the substantial initial capital investment to construct a reclaim facility in Prescott only if the City agreed to commit to maintaining water and sewer services to the facility at the specifications Pure Wafer needed to productively operate its facility. (Tr. 12/19/13 at 31:1-13; Tr. 1/14/14 at 76:24-77:5). Pure Wafer's insistence upon these commitments was informed by its experiences with its San Jose facility in the mid to late 1980s. Pure Wafer had not had a development agreement with the City of San Jose; when that city later restricted the fluoride concentration in sewer customers' effluent, Pure Wafer had to incur unexpected expenses in adding treatment infrastructure to its facility. See (Tr. 12/19/13 at 31:16-32:8). Pure Wafer did not want to build a Prescott facility that could be " rendered useless at any time by the City." ( Id. at 32:7-8).

During discussions between Pure Wafer and the City, Pure Wafer disclosed to the City the chemical profile of its effluent. ( Id. at 31:1-10). Pure Wafer provided the City with a spreadsheet listing effluent quality parameters for its San Jose and Sulphur facilities, which showed that the range of fluoride concentration in the effluent from those facilities was 10 to 150 mg/L, with an average of 40 mg/L. (Ex. 1). Pure Wafer and the City discussed the City's concerns regarding the 150 mg/L maximum fluoride concentration, and Pure Wafer ultimately agreed to design its facility to discharge effluent containing a maximum fluoride concentration of 100 mg/L. (Tr. 12/19/13 at 37:2-38:4). Pure Wafer would not construct the Prescott facility without a commitment from the City that it could discharge up to 100 mg/L of fluoride. (Tr. 1/14/14 at 76:24-77:5). Pure Wafer had considered Flagstaff as a potential location for its facility but Flagstaff would not commit to accept the necessary fluoride concentration levels. (Tr. 12/19/13 at 41:2-7).

B. The Agreement

On February 11, 1997, Pure Wafer and the City entered into a development agreement (the " Agreement" ), the terms of which provided for Pure Wafer to build and operate a reclaim facility in the Prescott Airpark, with the possibility for future expansion. (Ex. 3). The Agreement requires the City to provide Pure Wafer with a water supply of up to 195,000 gallons per day and sewer capacity of up to 195,000 gallons per day. ( Id. § § 4.1, 4.2).

Specifically, section 4.2 of the Agreement states:

City shall provide Developer initially with a one hundred forty-five thousand (145,000) gallon per day sewer capacity (the " Initial Sewer Capacity" ) and, if the Expansion is constructed, with an additional fifty thousand (50,000) gallon per day sewer capacity (the " Additional Sewer Capacity" ) (the Initial Sewer Capacity and the Additional Sewer Capacity are hereinafter collectively referred to as the " Sewer Capacity" ). The Sewer Capacity shall be used on an ongoing and consistent basis each day the Facility or Expansion is in operation . . . . City shall reserve in its sewer disposal system at all times . . . the amount of capacity required to deliver the Sewer Capacity described in the first sentence of this section 4.2. . . . City shall be obligated to augment such facilities if they prove to be inadequate, by constructing at no cost to Developer, all mains, lines, and other facilities necessary to accept or accommodate the additional sewer flow or effluent from the Facility and

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the Expansion. No up-front or other fees or costs shall be imposed on Developer with respect to the Sewer Capacity provided for herein, except as provided in Section 4.5. . . . The Sewer Capacity shall be at no cost to Developer except the payments for normal sewer usage fees as hereinafter provided. For all periods during which Developer's effluent meets the applicable quality standards for the Average Residential Classification, Developer shall pay for such effluent at the rates set forth on Exhibit E hereto . . . . In no event, however, shall the rate charged to Developer be less favorable than the rates then being charged by City to any other Average Residential Classification users, unless the Facility is reclassified as permitted in the following sentence. City shall not reclassify the effluent from the Facility or the Expansion into any classification other than the Average Residential Classification unless there is a material change in the waste water quality from the specifications attached hereto as Exhibit F, which by this reference is incorporated herein. . . .

( Id. § 4.2).[4]

Exhibit F to the Agreement is labeled " Typical effluent characteristics / Exsil, Prescott facility" and provides a listing of " typical value[s]" and " maximum[s]" for various chemical characteristics of Pure Wafer's effluent. It specifies for fluoride a typical value of 50 mg/L, with a maximum of 100 mg/L. ( Id. Ex. F).

In addition to specifying the terms of water and sewer service, the Agreement contains several other provisions relevant to the present lawsuit. Section 9.1 requires Pure Wafer to comply with all applicable environmental laws:

Developer represents and warrants that . . . Developer will operate the Facility and the Expansion (if constructed), in accordance with all applicable local, state, and federal environmental regulations.

( Id. § 9.1).

In section 14.14, the City also agreed to exempt Pure Wafer from subsequent changes in certain City laws:

City agrees that in the event it adopts any ordinance, regulation, or policy imposing a moratorium on issuance of building permits, water hookups, sewer hookups, or any other matter than [sic] would otherwise prevent Developer from realizing the benefits of this Development Agreement for either the Facility or the Expansion, as permitted by A.R.S. § 9-463.06(D) . . . City shall include in any such ordinance, regulation, or policy an exception of the Facility and the Expansion from such moratorium.

( Id. § 14.14).

Additionally, the parties agreed, for severability purposes, that Pure Wafer's fundamental purpose for entering into the Agreement included the provision of water and sewer services on the terms specified. ( Id. § 14.5).

Finally, the Agreement contains a merger clause providing that the Agreement is a complete integration of the parties' agreement and all prior negotiations and agreements are superseded. ( Id. § 14.7).

C. The Facility's Operations and Effluent

Pure Wafer built its Prescott facility in 1997, and expanded it in 2002. (Tr. 12/19/13 at 23:17-18). The total cost of

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construction and expansion was approximately $35 million. ( Id. at 24:5-8). The facility has operated continuously since 1998, and employs approximately 100 people. ( Id. at 21:15-16, 187:21-188:1). The City has to date supplied Pure Wafer with all of the water required under the Agreement and has accepted all of Pure Wafer's effluent. ( Id. at 43:4-9, 43:18-21).

Pure Wafer's effluent presently contains a fluoride concentration of approximately 40 mg/L, (Ex. 22), and has never exceeded 100 mg/L in fluoride concentration or 195,000 gallons per day in volume. (Tr. 12/19/13 at 43:18-21, 44:5-17). This effluent is discharged directly into the City's sanitary sewer system and the City delivers it to the City's Airport Water Reclamation Facility (" AWRF" ) for treatment. ( Id. at 142:14-17, 187:21-188:1). Pure Wafer is the only source of fluoride entering the AWRF. ( Id. at 142:18-23). The AWRF is a wastewater treatment plant that processes and treats effluent from City sanitary sewer users. (Ex. 37 at 2). Treated effluent from the AWRF is discharged either to golf courses for irrigation purposes or into recharge basins for replenishing the aquifer. ( Id. at 136:8-18, 153:5-13).

The recharge basins at issue are adjacent to the AWRF and are " open areas that are bermed that are suitable for containing discharged effluent from the treatment plant for percolation and recharge of the aquifer below." ( Id. at 136:15-18; Ex. 48). Treated effluent from the AWRF flows into these basins, where it percolates into the groundwater.

D. State Regulation of the AWRF

1. The Groundwater Protection Permit

During the 1997 to 1998 timeframe when the City negotiated with Pure Wafer for the development of the reclaim facility, the facility was constructed, and the facility began operations, the City was not required to sample effluent discharged from the AWRF for fluoride. ( Id. at 222:14-20). At that time, the City operated the AWRF under a Groundwater Quality Protection Permit from the Arizona Department of Environmental Quality (" ADEQ" ). ( Id. at 148:13-14, 222:14-20). This permit required the City to sample and test for fluoride only in the aquifer itself, specifically in the AWRF recharge basins, via a series of monitoring wells. ( Id. at 183:12-15; Ex. 151 at CITY000880). The monitoring wells are approximately 400 feet deep and immediately adjacent to the recharge basins; they sample the groundwater by pumping it from underneath the basins. (Tr. 1/14/14 at 9:13-18). Under the permit, the fluoride concentration in these samples could not exceed 4.0 mg/L. (Ex. 151 at CITY000882).

Test results from the monitoring wells show that Pure Wafer's effluent has not had any effect upon the fluoride concentration in the aquifer. In October 1997, before Pure Wafer's facility was operational, the monitoring well readings indicated a fluoride concentration in the aquifer of less than 0.4 mg/L. (Ex. 65; Tr. 12/19/13 at 183:16-21). At all times from 1997 through 2013, the monitoring well ...


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