Saturday, July 25, 2009

Fifth Circuit reverses preliminary injunction giving water district control of customers under Section 1926(b)

On July 21, 2009, the U.S. Court of Appeals for the Fifth Circuit reversed a preliminary injunction that had ordered a municipality to turn over control of its water customers in a disputed area during the pendency of a lawsuit based on Section 1926(b).

The rural water association sued the municipality in 2008, alleging encroachment in an area that the association claimed was covered by Section 1926(b) monopoly protection. The assocation asked for preliminary injunctive relief in the form of an order requiring that the municipality turn over control of the disputed customers. The trial court granted the preliminary injunction. In reversing the preliminary injunction, the Fifth Circuit held:
There is nothing to suggest that harm suffered between the time of suit and the time of ultimate decision in this case would seriously prejudice Bluefield's opportunity for full recovery, so there is no irreparable injury-in traditional terms of equity, the remedy at law is adequate. That is, any harm is financial, and monetary compensation will make Bluefield whole if Bluefield prevails on the merits. True, courts have granted injunctive relief to protect rural providers' interest in serving their certificated areas, and the grant of relief to allow Bluefield's to serve the eastern service area may ultimately be appropriate here. But at this stage in the proceedings, given the long service by Starkville of these customers with no complaint from Bluefield, and the lack of irreparable harm to Bluefield, granting this preliminary relief was an abuse of discretion.
For those hoping to see clarification of the remedies available on a final finding of Section 1926(b) protection, no such clarification can be seen in this decision. The Fifth Circuit noted that other courts had entered injunctive relief upon final determination of a Section 1926(b) claim, and noted that injunctive relief "may ultimately be appropriate here." But this observation comes in the same paragraph as the Court's observation that "any harm is financial, and monetary compensation will make [the water association] whole if [it] prevails on the merits." Likewise, the Fifth Circuit did not address the issue of calculation of damages -- an issue that remains uncertain in this type of litigation.

Turning to another aspect of the injunctive relief granted by the District Court, the Fifth Circuit affirmed the District Court's injunction requiring the municipality to allow the rural water association to connect to the municipality's water mains. It appears that there is a wholesale water contract in place and that the municipality was resisting the rural water association's effort to expand the scope of the water contract. The Fifth Circuit affirmed the preliminary injunction allowing this expansion of the scope of the water contract at least temporarily during litigation. This result would certainly underscore the risk of selling wholesale water to Section-1926(b) protected entities.

One issue that deserves attention in this case is whether the rural water association had the infrastructure, facilities, and water rights in place to provide water to the disputed area. Its demand for greater access to the municipality's water system might suggest that the rural water association lacked the existing ability to serve the disputed area. But the water contract issues that are involved in the litigation would certainly have a bearing on the issue. We will be watching this case for further developments.