San Diego County Water Authority v. Metropolitan Water District

Breach of Contract

1st District Court of Appeal

Associate Justice Stuart R. Pollak

Appellant’s Lawyers: Kathleen M. Sullivan, Valerie Roddy, Quinn Emanuel Urquhart & Sullivan LLP

Appellee’s Lawyers: John W. Keker, Daniel Purcell, Dan Jackson, Warren A. Braunig, Keker, Van Nest & Peters LLP

“We showed that it made sense to treat all of the infrastructure Metropolitan uses to transport water — including the State Water Project infrastructure — as one integrated system.”

Kathleen M. Sullivan, Quinn Emanuel Urquhart & Sullivan LLP

The Metropolitan Water District of Southern California secured the overturning of a $235 million trial court judgment against it in a lawsuit brought by the San Diego County Water Authority.

The original ruling was issued by San Francisco County Superior Court Judge Curtis E.A. Karnow, who found that the rates Metropolitan charged the San Diego utility for water transportation were unlawful.

But a 1st District Court of Appeal panel reversed the largest monetary part of the judgment last June in a unanimous decision written by Justice Stuart R. Pollak, and the state Supreme Court later denied review. San Diego County Water Authority v. Metropolitan Water District of Southern California et al., A146901 (Cal. App. 1st Dist., filed Dec. 4, 2015); A148266 (Cal. App. 1st Dist., filed May 12, 2016).

A team of attorneys from Quinn Emanuel Urquhart & Sullivan LLP represented Metropolitan, which would have lost a lot more than $235 million in the long run if the judgment concerning its rates had been upheld.

Kathleen M. Sullivan, a New York-based partner who argued the appeal, said one key to victory was getting the court to give the water agency the proper level of deference.

“The issue was whether Metropolitan acted reasonably in charging all of its customers for the costs Metropolitan pays for its access to the State Water Project infrastructure, running from Northern to Southern California,” said Sullivan, chair of the firm’s national appellate practice. “We showed that it made sense to treat all of the infrastructure Metropolitan uses to transport water — including the State Water Project infrastructure — as one integrated system.”

Valerie Roddy, a Quinn Emanuel partner in Los Angeles who worked on the appeal with Sullivan, said the appellate ruling will also likely have broader implications. She cited Proposition 26, which requires a two-thirds vote for new government taxes and fees.

“Although the appellate court did not rule whether Prop. 26 applies to our client’s rates, it found our client complied, and in doing so we have now shown that Prop. 26 challenges do not require agencies to show customer-specific proportionality of charges when their rate-setting decisions as a whole are reasonable,” Roddy said. “This is a major decision for water rate-setting, but also for a variety of other public services.”

The San Diego agency was represented by Keker, Van Nest & Peters LLP in San Francisco.

Top officials at the water authority said that though the large judgment was overturned, the agency prevailed in other respects in the appellate ruling. One example they gave was being granted an estimated 100,000 acre-feet more water per year under the preferential rights formula.

The San Diego authority also said the court found that Metropolitan collected millions of dollars in illegal charges to fund local supply and conservation projects. Damages related to that issue will be taken up when the case returns to the trial court, as will other matters.

“This is not ‘it is all over and this is the result,’” said Mark J. Hattam, the San Diego authority’s general counsel. “There are a number of significant issues that still have to be litigated.”

— Lyle Moran