Quadvest, L.P. v. San Jacinto River Auth.

7 F.4th 337

QUADVEST, L.P.; Woodland Oaks Utility, L.P., Plaintiffs—Appellees,

v.SAN JACINTO RIVER AUTHORITY, Defendant—Appellant.

No. 20-20447

United States Court of Appeals, Fifth Circuit.

FILED August 3, 2021

J. David Rowe, Curran Walker, Attorney, DuBois, Bryant & Campbell, L.L.P., Kurt Howard Kuhn, Kuhn Hobbs, P.L.L.C., Austin, TX, for Plaintiffs—Appellees.

James E. Zucker, Constance Hankins Pfeiffer, Esq., Reagan William Simpson, Esq., Yetter Coleman, L.L.P., Houston, TX,

Before Wiener, Elrod, and Higginson, Circuit Judges.

Stephen A. Higginson, Circuit Judge:

Plaintiffs-Appellees Quadvest and Woodland Oaks Utility, investor-owned water utilities, sued Defendant-Appellant San Jacinto River Authority ("SJRA"), a state entity, alleging that SJRA violated Section 1 of the Sherman Act when it entered into and enforced contracts relating to the purchase of wholesale water in Montgomery County, Texas. SJRA asserted its entitlement to state-action antitrust immunity in a motion to dismiss, which the district court denied. We AFFIRM.

I.

Quadvest and Woodland Oaks Utility ("Plaintiffs") entered into contracts with SJRA governing Plaintiffs’ purchase and use of water. Plaintiffs now challenge those contracts as anticompetitive in violation of Sherman Act Section 1. The instant interlocutory appeal asserts that SJRA is entitled to state-action immunity from Plaintiffs’ lawsuit because the contracts were entered into and are enforced pursuant to a clearly articulated and affirmatively expressed state policy to replace competition with regulation. See Cal. Retail Liquor Dealers Ass'n v. Midcal Aluminum, Inc. , 445 U.S. 97, 105, 100 S.Ct. 937, 63 L.Ed.2d 233 (1980). We first discuss SJRA's creation and its enabling statute.

A. Creation of SJRA and Enabling Statute

SJRA is a political subdivision of the State of Texas, created in 1937 by the Texas Legislature to conserve, control, and utilize the storm and flood waters of the San Jacinto River and its tributary streams. According to Plaintiffs’ First Amended Complaint ("FAC"), SJRA owns one-third of the water rights to the surface water in Lake Conroe in addition to groundwater-producing wells. Plaintiffs assert that SJRA is both a water wholesaler and retailer, (1) wholesaling raw and treated surface water to utilities that re-sell the water to their end-user customers, (2) wholesaling raw groundwater to municipal utility districts that serve The Woodlands, and (3) retailing raw surface water to its own end-user customers.¹

SJRA's Enabling Statute, as amended,² vests SJRA with the authority to:

• "store, control and conserve the storm and flood waters of the watershed of the San Jacinto River and its tributaries," (§ 3(i));

• "provide water for domestic, municipal, commercial, industrial and mining purposes ... including water supplies for cities, towns and industries, and in connection therewith to construct or otherwise acquire water transportation, treatment and distribution facilities and supplemental sources of supply," (§ 3(v));

• "enter into any and all necessary and proper contracts ... necessary or useful in the furtherance of any power granted by law to [SJRA]," (§ 3(xv)); and

• "enter into such contracts ... with municipalities or other corporate bodies or persons, public or private, for the purpose of establishing and collecting ... rates and other charges for the sale or use of water, water transmission, treatment or connection facilities ... and any other services sold, furnished or supplied by [SJRA]," (§ 3(xviii)).

B. The Lone Star District Regulatory Plan

In June 2006, the Texas Water Development Board, in association with SJRA and Lone Star Groundwater Conservation District (a state entity charged with regulating groundwater use in Montgomery County), commissioned a study to assess the County's long-term groundwater supply needs. According to the FAC, groundwater has historically been less expensive, and thus more widely used, than surface water in Montgomery County. The study determined that, based on projections of future water needs, potable water demand would eventually exceed the estimated sustainable recharge rate of the Gulf Coast Aquifer (Montgomery County's source of groundwater), necessitating the use of surface water. The report further concluded that new surface water treatment facilities would need to be constructed to meet the projected need for potable surface water.

Citing the recommendations of the report, SJRA and Lone Star executed a Memorandum of Understanding ("MOU") by which the parties agreed to "pursue a cooperative implementation strategy ... to finance and provide wholesale surface water to converting [groundwater] users," "to spread financing costs ... in an equitable manner to all permitted users of water throughout [Montgomery] County, regardless of which particular users actually convert from groundwater to surface water," and to assess water use fees to "equalize the cost of groundwater and surface water."

Lone Star subsequently adopted a District Regulatory Plan (the "Lone Star Plan") to regulate groundwater production in Montgomery County, consistent with the MOU. Among other requirements, the Lone Star Plan mandated that all "large volume groundwater users" ("LVGUs")³ reduce their groundwater consumption to either (a) 70% of the volume they were permitted to produce in 2009 or (b) 10 million gallons (the "Groundwater Reduction Rule"). Alternatively, LVGUs could satisfy the Lone Star Plan by participating in a "joint groundwater reduction plan" ("Joint GRP") with one or more additional LVGUs, pursuant to which the LVGUs could achieve 30% groundwater use reduction on aggregate, rather than individually.

C. SJRA's Groundwater Reduction Plan Contracts with Plaintiffs

In March 2011, SJRA (itself an LVGU subject to the Lone Star Plan) finalized a Joint GRP to allow participating LVGUs to collectively achieve compliance with Lone Star's Groundwater Reduction Rule. Under SJRA's Joint GRP, some LVGUs would "over convert" to surface water (i.e., reduce their groundwater consumption by greater than 30%), thereby allowing other LVGUs to continue to use more groundwater than would otherwise be permitted. According to an exhibit to the FAC, 140 of the 202 LVGUs in Montgomery County had joined the Joint GRP by executing contracts with SJRA as of February 8, 2011. Plaintiffs are each party to such a contract with SJRA (together, the "GRP Contracts").

The GRP Contracts require Plaintiffs to pay SJRA a volume-based fee for pumping groundwater, regardless of the source (the "Groundwater Pumpage Fee"). SJRA would use the Groundwater Pumpage Fee proceeds to develop a surface water treatment facility and transmission system. Plaintiffs allege that the Groundwater Pumpage Fee is calculated to equalize the costs of groundwater and surface water. Upon completion of the surface water treatment facility, the GRP Contracts allow SJRA to (1) require Plaintiffs to connect to SJRA's transmission system and (2) dictate how much surface water each Plaintiff must buy from SJRA (the "Surface Water Put Option"). The GRP Contracts also allow SJRA to charge a volume-based fee on any water imported from a non-Joint GRP participant (the "Water Importation Fee").

D. Montgomery County Water Utilities’ Lawsuit Against Lone Star

In 2015, Plaintiffs and other Montgomery County LVGUs sued Lone Star, alleging that it lacked statutory authority for the Groundwater Reduction Rule. After an initial state trial court ruling declaring the Rule void ab initio and an interlocutory appeal, the parties filed motions for partial non-suit following Lone Star's withdrawal of its appeal. The trial court thus entered a final judgment in May 2019 declaring that the Groundwater Reduction Rule had been adopted without legal authority and was thereby void.

E. Procedural History

Plaintiffs in the instant lawsuit are investor-owned water utilities that sell drinking water to retail consumers in Montgomery County and were subject to Lone Star's Groundwater Reduction Rule before it was invalidated. They aver that they rely exclusively on groundwater and do not buy surface water from SJRA.

Plaintiffs filed this lawsuit against SJRA on November 15, 2019, and amended their complaint on February 3, 2020. The FAC alleges that the GRP Contracts constitute continuing violations of Sherman Act Section 1, which declares that "[e]very contract ... in restraint of trade or commerce among the several States ... is ... illegal." 15 U.S.C. § 1. Specifically, Plaintiffs assert that the Groundwater Pumpage Fee provision "constitute[s] [a] horizontal agreement[ ] between SJRA and each Plaintiff to fix the price of wholesale raw water in Montgomery County by assessing pumpage fees to LVGU participants so as to equalize the wholesale price of raw groundwater with the wholesale price of raw surface water." They further allege that the Surface Water Put Option and Water Importation Fee provisions are unreasonable restraints of trade. Plaintiffs request a declaratory judgment that the GRP Contracts are illegal and unenforceable and an injunction prohibiting SJRA from enforcing the GRP Contracts or taking any other acts to enforce the Joint GRP.

SJRA moved to dismiss the FAC pursuant to Federal Rule of Civil Procedure 12(b)(6), asserting that the action was barred by the statute of limitations and laches, that SJRA was entitled to state-action immunity, and that the FAC failed to state a Sherman Act claim.

On August 14, 2020, the district court entered an order denying SJRA's motion to dismiss. Relevant to the instant interlocutory appeal, the district court concluded that SJRA had failed to demonstrate its entitlement to state-action immunity.

SJRA filed a notice of interlocutory appeal on August 21, 2020, appealing the district court's order denying its state-action immunity defense.

II.

We must first examine the basis of our jurisdiction, a question we review de novo. Mosley v. Cozby , 813 F.2d 659, 660 (5th Cir. 1987) ; ...