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March 4, 2015  |  Written by Richard S. Deitchman

United States Supreme Court Grants Disgorgement and Reformation Remedies in Interstate Water Compact Dispute

On February 24, 2015, the United States Supreme Court provided both disgorgement and reformation remedies in the longstanding interstate water dispute on the Republican River. Kansas v. Nebraska et al., No. 126, 2015 U.S. LEXIS 1501 (Feb. 24, 2015).  Disgorgement requires a party to give up any profits obtained by illegal or unlawful conduct.  Reformation is the change or modification of a legal document by order of a court.  Relying on equitable powers, the Supreme Court’s majority upheld a Special Master’s recommendation for a $5.5 million damages award, including $1.8 million in disgorgement, to Kansas for Nebraska’s failure to provide adequate Republican River water in 2005-2006. The Court also accepted the recommendation to rule for Nebraska on its counterclaim to modify the water accounting procedures established by the States’ 2002 Final Settlement Stipulation (Settlement).

The case involved the interpretation and enforcement of the Settlement relating to the 1943 Republican River Compact (Compact).  The Compact apportions “virgin water supply originating in” the Republican River Basin, with a percentage of that supply apportioned to each of the States.  Kansas filed an action in the United States Supreme Court in 1998 that resulted in the Court’s 2000 decision finding that to the extent groundwater pumping depleted stream flow in the Basin, it counted against each State’s Compact apportionment.  The Settlement attempted to measure each State’s supply and use.

The Supreme Court appointed a Special Master in 2011 to resolve a dispute regarding Nebraska’s alleged overuse of Compact water in 2005-2006, and Nebraska’s counterclaim that the Settlement improperly counted Nebraska’s use of imported water toward its Compact apportionment.  The Special Master found that Nebraska “knowingly failed” to comply with the Compact in 2005-2006 and recommended awarding $3.7 million to Kansas for its loss, $1.8 million to Kansas in partial disgorgement of Nebraska gains, and modification of the accounting procedures in the Settlement so that Nebraska would not be charged for its use of imported water.  The parties filed exceptions to the Special Master’s disgorgement and reformation recommendations.

A 6-3 majority concluded that the Court could order disgorgement of gains to deter future breaches if a State has demonstrated “reckless disregard” for the rights of another.  The Court found that Nebraska recklessly disregarded Kansas’ rights, as its downstream neighbor, with a weak plan to achieve reduction in water use in the 2005-2006 period.  The Special Master recommended $1.8 million in disgorgement, and although the Court acknowledged that the Special Master’s recommendation lacked an exact numerical foundation, it supported $1.8 million because half of Kansas’ actual damages appeared fair and equitable.  The dissent countered that disgorgement is only available in the event of a “deliberate” breach of a compact and the exact disgorgement remedy cannot simply be based on perceived equity.

In sum, the majority found both that the Supreme Court has “broad remedial authority” in interstate water disputes to safeguard Compacts and allowed both disgorgement and reformation.  The decision sets benchmarks for the availability of disgorgement and reformation that will play an important role in future interstate water disputes arising under the Court’s original jurisdiction.

For more information on this case, please contact Rich Deitchman at (916) 446-7979 orrdeitchman@somachlaw.com.

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