On February 11, 2011, the U.S. Court of Appeals for the Federal Circuit reversed and remanded (pdf) the decision of a lower court, finding that the U.S. Bureau of Reclamation’s implementation of a reasonable and prudent alternative may have resulted in a taking requiring just compensation under the Fifth Amendment to the U.S. Constitution.

Pursuant to congressional authorization issued in 1902 and 1905, the Bureau of Reclamation (Bureau) manages and operates the Klamath Irrigation Project (Klamath Project), which provides water to approximately 240,000 acres of irrigable crop land, as well as to several national wildlife refuges in southern Oregon and Northern California.

Although the Bureau had executed a number of contracts with various water users for the delivery of Klamath Project water through the years, in 1999, the U.S. Court of Appeals for the Ninth Circuit held that the interests of water users were subservient to the interests established by the federal Endangered Species Act (ESA), and therefore the Bureau was obligated to manage and operate the Klamath Project in a manner that complied with the ESA.  Shortly thereafter, the Bureau initiated consultations with the National Marine Fisheries Service and U.S. Fish and Wildlife Service (collectively, the "Wildlife Agencies") on the proposed 2001 operations of the Klamath Project.  As a result of these consultations, the Wildlife Agencies issued two biological opinions concluding that the proposed 2001 operations of the Klamath Project would threaten the continued existence of three federally protected species, and reasonable and prudent alternatives that would avoid jeopardizing the species.  The reasonable and prudent alternatives included the reduction of water flows when flows fell below certain levels.

In 2001, consistent with the reasonable and prudent alternatives issued by the Wildlife Agencies, the Bureau ceased water deliveries for a period of time when the water flows fell below the specified levels.  Subsequently, plaintiffs, all of whom did not receive their total allocable share of water from the Klamath Project as a result of the reduction in deliveries, filed suit in the Federal Court of Claims alleging that the Bureau’s conduct resulted in a taking and breach of contract.  The Court of Federal Claims dismissed the plaintiffs’ takings claims, finding that under Oregon state law the plaintiffs did not have a compensable property interest for the purposes of the Fifth Amendment.

On Appeal, the Federal Circuit certified three questions to the Oregon Supreme Court.  Guided by the Oregon Supreme Court’s response, the Federal Circuit found that it was possible for the plaintiffs to have a compensable property interest under state law, and therefore remanded the matter back to the lower court for further proceedings consistent with the analysis set forth in the Oregon Supreme Court’s response.

The Federal Circuit also reversed the lower court’s dismissal of the breach of contract claim, finding that in order for the Bureau to rely on the sovereign acts doctrine, which if properly invoked would absolve the Bureau of all contract-liability, it had to demonstrate that it was impossible to perform under the contract and comply with the ESA.