Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-14-15940/USCOURTS-ca9-14-15940-0/pdf.json

Nature of Suit Code: 440
Nature of Suit: Other Civil Rights
Cause of Action: 

---

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

PURE WAFER INCORPORATED, a

Delaware corporation, successor in

interest to Exsil, Inc., a Delaware

corporation,

Plaintiff-counter-defendantAppellee,

v.

PRESCOTT, CITY OF, an Arizona

municipal corporation; MARLIN

KUYKENDALL; CRAIG MCCONNELL;

ALAN CARLOW, in his capacity as a

Member of the Prescott City

Council; JIM LAMERSON, in his

capacity as a Member of the

Prescott City Council; STEVE BLAIR,

in his capacity as a Member of the

Prescott City Council; CHARLIE

ARNOLD, in his capacity as a

Member of the Prescott City

Council; CHRIS KUKNYO, in his

capacity as a Member of the

Prescott City Council; LEN

SCAMARDO, in his capacity as a

Member of the Prescott City

Council; MARK NIETUPSKI, in his

capacity as Public Works Director

of the City of Prescott; JOEL

No. 14-15940

D.C. No.

3:13-cv-08236-

JAT

OPINION

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 1 of 58
2 PURE WAFER V. CITY OF PRESCOTT

BERMAN, in his capacity as Utilities

Manager of the City of Prescott,

Defendants-counter-claimantsAppellants.

Appeal from the United States District Court

for the District of Arizona

James A. Teilborg, Senior District Judge, Presiding

Argued and Submitted April 14, 2016

San Francisco, California

Filed January 10, 2017

Before: Diarmuid F. O’Scannlain, Richard R. Clifton,

and N. Randy Smith, Circuit Judges.

Opinion by Judge O’Scannlain;

Partial Concurrence and Partial Dissent by

Judge N.R. Smith

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 2 of 58
PURE WAFER V. CITY OF PRESCOTT 3

SUMMARY*

Contract Clause

The panel affirmed in part and reversed in part the district

court’s permanent injunction in favor of plaintiff, entered

following a bench trial, and remanded in an action brought

under 42 U.S.C. § 1983 alleging that the City of Prescott,

Arizona violated the Contract Clause of the Constitution

when it declared that its sewage treatment plant would no

longer accept wastewater discharged by plaintiff’s metal

refinishing plant.

This controversy centered on the fluoride concentration

in plaintiff’s effluent, and the City’s enactment of an

Ordinance imposing limits on such concentration. Plaintiff

alleged that application of the Ordinance to plaintiff’s

industrial wastewater discharges constituted an

unconstitutional impairment of its contract rights, in violation

of the Contract Clauses of the federal and state constitutions.

Reversing the district court’s judgment on the Contract

Clause claims, the panel held that the City had not impaired

the obligation of its contract with plaintiff, because the

Ordinance has not altered the ordinary state-law remedies to

which plaintiff would otherwise be entitled if it successfully

proved a breach of contract. The panel stated that the City

might very well have breached its contract, but that did not

necessarily mean it has violated the Contract Clauses of the

federal and state constitutions.

* This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 3 of 58
4 PURE WAFER V. CITY OF PRESCOTT

The panel held that the judgment for plaintiff could be

sustained on the alternative ground that the City breached its

contract with plaintiff. The panel held that the City had

previously agreed to accept such effluent as the parties knew

plaintiff would need to discharge in order to maintain a viable

business and that the City agreed to bear the financial risk

that state-initiated regulatorychanges would make complying

with such promise more costly than it was when the parties

entered into an agreement. The panel held that enforcing the

Ordinance against plaintiff would eviscerate the benefit of

plaintiff’s bargain; the City could not do so without putting

itself in breach of the agreement. The panel stated that on

remand the district court should decide the appropriate

remedy. The panel further ordered that the district court’s

injunction forbidding enforcement of the Ordinance against

plaintiff would remain in effect during subsequent stages of

litigation.

Concurring in part and dissenting in part, Judge N.R.

Smith concurred with the majority’s conclusion that plaintiff

did not have a claim under the Contract Clause of the United

States or Arizona constitutions. Judge Smith dissented from

the majority’s sua sponte decision to reach plaintiff’s

alternative claims that the City breached its agreement. Judge

Smith stated that the circumstances warranted remand to

permit the district court (or an Arizona court) the first

opportunity to address the merits of the breach of contract

claim.

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 4 of 58
PURE WAFER V. CITY OF PRESCOTT 5

COUNSEL

Robert A. Shull (argued), Andrew L. Pringle, Kenneth A.

Hodson, and Nicole F. Bergstrom, Dickinson Wright PLLC,

Phoenix, Arizona, for Defendants-Counter-ClaimantsAppellants.

Jeffrey D. Gross (argued), Scottsdale, Arizona; K. Layne

Morrill and Stephanie L. Samuelson, Morrill & Aronson

PLC, Phoenix, Arizona; for Plaintiff-Counter-DefendantAppellee.

OPINION

O’SCANNLAIN, Circuit Judge:

We must decide whether the City of Prescott, Arizona

violated the Contract Clause of the Constitution when it

declared that its sewage treatment plant would no longer

accept wastewater discharged by one of its customers, a large

metal refinishing plant.

I

This dispute sees the City of Prescott at odds with Pure

Wafer, Inc., a corporate resident of Prescott, over contract

interpretation. Pure Wafer’s grievances run from the

constitutional—the City has violated our nation’s

fundamental charter—to the mundane—the City has betrayed

specific promises the two made to each other during happier

days.

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 5 of 58
6 PURE WAFER V. CITY OF PRESCOTT

A

Pure Wafer runs a facility in Prescott for cleaning silicon

wafers used by clients like IBM, Intel, and Motorola. Called

“test and monitor wafers,” they play a crucial role in the

production processes those companies employ to build

microprocessors and computer chips. Pure Wafer performs

what is called a “reclaim” service: its role is to remove oxide

nitrites from the wafers after they pass through a given phase

of the production process, clean them, polish them, and send

them back to its clients so they can be reused later on. The

wafers range in diameter from four inches to one foot.

Pure Wafer does a large volume of business, running the

36,000-square-foot Prescott facility twenty-four hours a day,

seven days a week, at around ninety-five percent capacity. 

All that reclamation activity generates a lot of

wastewater—up to 195,000 gallons per day, although in

practice it has been less—which Pure Wafer then discharges

into the City’s sewer lines. The sewer lines carry Pure

Wafer’s effluent into the City’s Airport Water Reclamation

Facility (“AWRF”), one of three City-owned wastewater

treatment plants in Prescott that process and treat effluent

from the City’s sewers. The AWRF then discharges treated

effluent either to golf courses or into recharge basins to

replenish the City’s aquifer.

This controversy centers on the fluoride concentration in

Pure Wafer’s effluent, and the City’s recent enactment of an

Ordinance imposing limits on such concentration.

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 6 of 58
PURE WAFER V. CITY OF PRESCOTT 7

B

In 1997 the City entered into a contract, called the

Development Agreement (“the Agreement”), with Pure

Wafer’s predecessor in interest, a company called Exsil. In

2007 Pure Wafer purchased Exsil and acquired all of its rights

and obligations under the Agreement. Like the parties, we

refer to both entities as “Pure Wafer” for simplicity’s sake.

At the time of the Agreement, Pure Wafer owned plants

in Sulphur, Oklahoma and San Jose, California. The

Agreement was a way for the City to entice Pure Wafer to

build its third facility in the Prescott Airpark, which the City

expected would create jobs, stimulate economic activity, spur

infrastructure improvements, and generate tax revenue. In

exchange, the City agreed to provide Pure Wafer with the

sewage infrastructure it needed to conduct its reclamation

business, plus (among other things) tax and zoning breaks to

make it easier for Pure Wafer to expand the facility if it so

desired. Pure Wafer constructed the facility in 1997, and

expanded it in 2002, at a total cost of roughly $35 million.

C

Three provisions of the Agreement have figured centrally

in the parties’ arguments during the course of this litigation.

First, the Agreement’s section 4.2, together with Exhibit

F, provide that the City may not raise Pure Wafer’s “sewer

usage fees” above a certain rate schedule, so long as the

fluoride content in Pure Wafer’s effluent remains at or below

100 mg/L. Exhibit F recites that Pure Wafer’s fluoride

content has a “typical” value of 50 mg/L and a “maximum”

of 100 mg/L. In addition, Section 4.2 obligates the City to

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 7 of 58
8 PURE WAFER V. CITY OF PRESCOTT

provide up to 195,000 gallons of “sewer capacity” per day,

and to bear the cost of “augment[ing] such facilities” as

necessaryto “accept or accommodate” Pure Wafer’s effluent.

Second, section 9.1 provides that Pure Wafer “will

operate the Facility . . . in accordance with all local, state, and

federal environmental regulations.”

Third, section 14.7, an integration clause, states that

“[t]his Agreement and the exhibits hereto constitute the entire

agreement between the parties,” “supersed[ing]” “all prior

and contemporaneous agreements, representations,

negotiations and understandings.”

D

Pure Wafer insists that when it negotiated the Agreement

with the City, its most important objective was to make sure

that its ability to operate the facility would not be thwarted by

future changes in City regulations. As Pure Wafer tells it, it

“didn’t want to . . . build a plant that could be . . . rendered

useless at any time by the City,” and so it took precautions

“to make sure that it had a locked up contract and a position

on water, sewer and effluent requirements.” To that end,

Pure Wafer claims that it “made sure that the City was fully

aware of what [the facility’s] requirements were.”

In particular, Pure Wafer avers that it was anxious to

safeguard its ability to discharge effluent containing up to

100 mg/L of fluoride, and Pure Wafer maintains that the City

represented that discharging fluoride up to that level “would

be acceptable.” In fact, earlier in the negotiations Pure Wafer

had informed the City that its fluoride levels sometimes ran

as high as 150 mg/L, but at the City’s request, Pure Wafer

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 8 of 58
PURE WAFER V. CITY OF PRESCOTT 9

agreed to design the Prescott facility so that its fluoride

contents would not exceed 100 mg/L, a commitment reflected

in the maximum fluoride value listed in the Agreement’s

Exhibit F. In all the years it has run the Prescott facility, Pure

Wafer’s discharges have never exceeded 100 mg/Lin fluoride

concentration, and have averaged about 40 mg/L.

Pure Wafer’s representatives testified that the company’s

concern over the prospect of fluoride regulation stemmed in

part from its experience in San Jose, where it ran a

reclamation facility prior to opening the one in Prescott. In

the 1980s San Jose apparently passed an ordinance “similar”

to the Prescott Ordinance at issue in this case, which required

Pure Wafer to “put a lot of infrastructure in to deal with

fluorides,” the cost of which prevented Pure Wafer from

expanding the facility. The real problem, Pure Wafer

explains, was that it had no Development Agreement with

San Jose; so much the wiser, Pure Wafer continues, it took

steps to “communicate[] [its] needs to the City of Prescott

and . . . actually got it inputted into a Development

Agreement, the contractual obligation.”

For its part, the City also claims that it harbored concerns

about effluent composition in general and fluoride levels in

particular. As noted above, the City had balked at Pure

Wafer’s initial report that its fluoride levels were sometimes

as high as 150 mg/L. In addition, at public hearings prior to

the Agreement’s adoption, City officials stated that Pure

Wafer would be required to comply with City codes

regarding pretreatment of effluent discharge. At that same

meeting, a Pure Wafer representative reassured the public that

the company “did not want to pollute the air, water and

ground, [and] that a system would be designed that would

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 9 of 58
10 PURE WAFER V. CITY OF PRESCOTT

allow discharge from their plant to be pure enough to go into

the city’s wastewater treatment plant.”

E

Subsequent changes in state and federal environmental

regulations set off the chain of events leading to this

litigation. Above all, in 1999 the Arizona Department of

Environmental Quality (“ADEQ”)—the State’s

environmental regulatoryagency—required the City to obtain

an Aquifer Protection Permit (“APP”), which, in turn,

imposed a host of requirements on the City, including the

requirement that any discharge exiting the City’s AWRF

could no longer exceed 4.0 mg/L of fluoride, measured at the

point of discharge from the AWRF.

That was a big change. Prior to the ADEQ-imposed APP

regime, the City operated the AWRF pursuant to a

Groundwater Protection Permit, which only required the City

to sample the groundwater monitoring wells in the recharge

basins in the City’s aquifer, one or more steps downstream

from the AWRF’s point of discharge. Under the

Groundwater Protection Permit, the fluoride concentration in

the recharge basins could not exceed 4.0 mg/L. The

important point is that the impact of Pure Wafer’s effluent on

samples taken from the recharge basins is less pronounced

than it is with respect to samples taken at the AWRF, for at

least two reasons. First, the recharge basins take in effluent

discharged from at least two different sources: not only from

the AWRF, but also from the larger Sundog Wastewater

Treatment Plant. The AWRF’s effluent has a higher fluoride

concentration than Sun Dog’s, but the two streams of effluent

are commingled in the recharge basins, diluting the relative

importance of the AWRF’s fluoride levels. Second, some

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 10 of 58
PURE WAFER V. CITY OF PRESCOTT 11

effluent leaving the AWRF is used to water golf courses and

does not actually enter the recharge basins. Illustrating the

combined importance of these circumstances, it appears that

Pure Wafer’s effluent has basically had no effect on the

fluoride concentration in the aquifer, as from 1997 through

2013, the monitoring well readings consistently reported

fluoride concentrations of less than 0.4 mg/L, or one tenth of

the amount allowed under the Groundwater Protection

Permit.

ADEQ’s decision to shift the monitoring location to the

AWRF’s point of discharge had serious consequences. In

particular, the City represents that the AWRF, “like most

publically owned treatment works, is not designed to remove

fluoride and other types of industrial pollutants” from the

wastewater that flows into it, and that, in turn, it sends along

to the aquifer. The upshot is that, in order for the City to

comply with the APP’s 4.0 mg/L fluoride limit at the

AWRF’s point of discharge, one of two changes had to occur:

either the AWRF must be equipped to remove fluoride from

wastewater that enters it; or the fluoride content of

wastewater must be reduced before it ever enters the AWRF. 

The latter option is known as “pretreatment.”

F

In 2004 ADEQ sent the City a Notice of Violation

alleging seven dates during the previous year on which the

AWRF’s fluoride levels exceeded the maximum allowed

under the City’s APP. The Notice directed the City to

“submit a written response describing the corrective actions

that have been taken to resolve the violations.” In response,

the City in 2005 began to develop a pretreatment program and

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 11 of 58
12 PURE WAFER V. CITY OF PRESCOTT

to explore what local fluoride limits would help ensure that

the City complied with its APP.

Nevertheless, when ADEQ conducted a “pretreatment

compliance audit” of the City in 2007, it concluded that “[t]he

City does not have valid control mechanisms in place to

regulate the discharges” from the City’s two categorical

industrial users, including Pure Wafer. ADEQ declared it

“imperative” that the City “establish an approved

pretreatment program.” Under state law, the City’s APP

violations could result in ADEQ fining the City up to $25,000

per day. A.R.S. § 49-262(C).

In 2012 ADEQ issued another Notice of Violation to the

City, which still had not established a pretreatment program. 

The basis of the violation was again excessive fluoride

concentration in effluent discharged from the AWRF. This

time the City and ADEQ entered into a Consent Order, which

mandated that within thirty days the City “shall adopt and

submit for ADEQ’s review and approval the Pre-Treatment

Program.”

G

In due course, the City passed Ordinance No. 4856-1313

in 2013.1 As relevant here, the Ordinance imposes limits on

the pollutants that industrial users, like Pure Wafer, are

permitted to discharge into the City’s sewer system. Most

important for this case, the Ordinance declares that

Significant Industrial Users (of which Pure Wafer is one)

1 Pure Wafer has not questioned the City’s authority to enact the

Ordinance. The City relies on a state statute, see Ariz. Rev. Stat. § 49-

391, as well as Article I, Section 3 of its own Charter.

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 12 of 58
PURE WAFER V. CITY OF PRESCOTT 13

“shall not discharge or cause to be discharged at any entry

point” to a publically owned treatment works, including the

AWRF, “any wastewater containing in excess of” 16.3 mg/L

of fluoride.2 The Ordinance also requires industrial users like

Pure Wafer to get a permit from the City and, to the extent

necessary, to “pretreat” their wastewater prior to

discharge—that is, to ensure, at their own expense, that their

wastewater complies with the 16.3 mg/L limit on fluoride

concentration. The Ordinance threatens those who violate it

with injunctive action, civil penalties, and criminal

prosecution. ADEQ approved the City’s pretreatment

program as established by the Ordinance.

The City estimates that if it were required to pretreat

wastewater entering the AWRF so that it complies with the

APP’s fluoride limitations, it would cost the City $2.7 million

in capital outlay and $8.5 million annually. Pure Wafer has

not yet conducted a study, but its preliminary estimate

suggested that pretreatment of its own effluent would require

the company to spend $1 million to $4 million in capital

outlay and $360,000 to $720,000 annually.

H

Not surprisingly, Pure Wafer was not pleased with such

developments. Claiming that it will likely close the facility

if forced to comply with the Ordinance, Pure Wafer brought

this lawsuit against the City (and certain of its officers in their

official capacities) under 42 U.S.C. § 1983, seeking

declaratory and injunctive relief, or in the alternative,

2

It appears that there were or are at least six Significant Industrial

Users in Prescott, including Pure Wafer. Each received an identical letter

from the City directing them to comply with the Ordinance.

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 13 of 58
14 PURE WAFER V. CITY OF PRESCOTT

damages. Pure Wafer alleged that by enacting the Ordinance

the City had “impair[ed] the obligation” of its contract with

Pure Wafer, in violation of Article I, section 10 of the federal

Constitution, as well as the analogous Contract Clause of the

Arizona Constitution; and that the City, by enacting the

Ordinance, had committed at least two different breaches of

contract, as well as a breach of the implied covenant of good

faith and fair dealing. The City counterclaimed for a

declaratory judgment that the Agreement in fact obligated

Pure Wafer to comply with the Ordinance.

1

The district court held a hearing on Pure Wafer’s motion

for a preliminary injunction, which by consent of the parties

the court converted into a trial on the merits, to be bifurcated

into a liability phase and a damages phase. The parties also

agreed that the City would not enforce the Ordinance against

Pure Wafer during the pendency of this litigation, including

any appeal.

2

After trial on the merits, the district court entered

judgment for Pure Wafer, refusing to accept the City’s

contention that the pretreatment ordinance is an

environmental regulation of the sort Pure Wafer agreed to

obey. Instead, believing the Ordinance to be a thinly veiled

“cost-shifting regulation,” the district court held that the City,

through the Ordinance, had impaired the obligation of its

contract with Pure Wafer, in violation of the Contract Clauses

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 14 of 58
PURE WAFER V. CITY OF PRESCOTT 15

of the federal and state constitutions.3 The district court

awarded Pure Wafer a permanent injunction. The court

declined to rule on Pure Wafer’s alternative claims for breach

of contract and breach of the implied covenant of good faith

and fair dealing, and deemed it unnecessary to proceed to the

damages phase of the trial. In addition, the district court held

that Pure Wafer was entitled to attorneys’ fees, but did not set

an amount until several months later. The court denied the

City’s counterclaim.

3

The City timely appealed the district court’s judgment. 

The district court had jurisdiction under 28 U.S.C. §§ 1331,

1343, and 1367,4and we have jurisdiction under 28 U.S.C.

§ 1291.

II

The City first argues that the district court erred in

holding that the City, by enacting the Ordinance, had violated

the Contract Clause. The Contract Clause of the Constitution

declares that “No State shall . . . pass any . . . Law impairing

the Obligation of Contracts.” U.S. Const. art. I, § 10, cl. 1. 

3 The district court and both parties treat the Contract Clause of the

Arizona Constitution, Ariz. Const. art. II, § 25, as identical in scope to its

federal counterpart. Accordingly, like them, we confine our discussion to

the federal Contract Clause.

4 Our Circuit has previously held that § 1983 provides individuals

with a cause of action to assert violations of the Contract Clause. S. Cal.

Gas Co. v. City of Santa Ana, 336 F.3d 885, 887 (9th Cir. 2003) (per

curiam). We note an apparent split of authority on the question. See, e.g.,

Crosby v. City of Gastonia, 635 F.3d 634, 640–41 (4th Cir. 2011).

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 15 of 58
16 PURE WAFER V. CITY OF PRESCOTT

The Contract Clause applies to contracts entered into by a

State, Fletcher v. Peck, 10 U.S. (6 Cranch) 87, 135–39

(1810), as well as by municipalities, and such contracts may

be “impaired” within the meaning of the Clause by municipal

ordinances as well as by state legislation, St. Paul Gaslight

Co. v. City of St. Paul, 181 U.S. 142, 148 (1901).

In order to decide whether the City can prevail over the

district court’s judgment under the Contract Clause, it is

necessary first to set forth the differences between a city or

State’s breach of a contract, on the one hand, and a city or

State’s impairment of such contract’s obligation, on the other.

A

The Agreement is a contract between a municipality and

a private party. In disputes involving government contracts,

it can sometimes be hard to tell whether the governmental

entity has “impaired the obligation” of its contract or has

simply breached its contract with the private party. But the

distinction is crucial, not least because conflating the two

concepts would risk making a federal constitutional case out

of even the most garden variety public contract dispute,

transforming the Contract Clause into a font of state contract

law. See Horwitz-Matthews, Inc. v. City of Chicago, 78 F.3d

1248, 1250 (7th Cir. 1996) (“It would be absurd to turn every

breach of contract by a state or municipality into a violation

of the federal Constitution.”). In fact, the Supreme Court

long ago rejected “the proposition that wherever it is asserted

on the one hand that a municipality is bound by a contract to

perform a particular act and the municipality denies that it is

liable under the contract to do so, thereby an impairment of

the obligations of the contract arises in violation of the

Constitution of the United States.” St. Paul Gaslight Co.,

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 16 of 58
PURE WAFER V. CITY OF PRESCOTT 17

181 U.S. at 149. Such proposition, the Court explained,

“amounts only to the contention that every case involving a

controversyconcerning a municipal contract is one of Federal

cognizance, determinable ultimately in this court. Thus, to

reduce the proposition to its ultimate conception is to

demonstrate its error.” Id.

So how do we tell the difference between a government’s

impairing the obligation of its contract and simply breaching

it? At the most basic level, it cannot be said to have

“impaired” the obligation of its contract if such “obligation”

remains in full force and effect. And our cases establish that

the “obligation” of a contract is the judicially enforceable

duty it imposes upon each party either to perform or else to

submit to the courts’ remedial powers, which will often take

the form of an order to pay damages, but may encompass

other remedies as well (and thus Holmes may have been too

hasty in proclaiming that “[t]he duty to keep a contract at

common law means a prediction that you must pay damages

if you do not keep it, — and nothing else.” Oliver Wendell

Holmes, Jr., The Path of the Law, 10 Harv. L. Rev. 457, 462

(1897)).

Given that principle, state action cannot be said to

“impair” the obligation of a contract so long as it leaves both

parties free to obtain a court-ordered remedy (typically

damages) in the event that either of them fails to perform as

promised. And that principle holds true whether state action

affects a contract between private parties or, as here, a

contract to which the State itself is a party. See, e.g., Univ. of

Haw. Prof’l Assembly v. Cayetano, 183 F.3d 1096, 1102 (9th

Cir. 1999) (“[T]he substantial impairment test turns on

whether the State has used its law-making powers not merely

to breach its contractual obligations, but to create a defense

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 17 of 58
18 PURE WAFER V. CITY OF PRESCOTT

to the breach that prevents the recovery of damages.”);

Crosby, 635 F.3d at 642 n.7 (“If the offended party retains the

right to recover damages for the breach, the Contracts Clause

is not implicated; if, on the other hand, the repudiation goes

so far as to extinguish the state’s duty to pay damages, it may

be said to have impaired the obligation of contract.”);

Horwitz-Matthews, 78 F.3d at 1251 (“The essence . . . of a

breach of contract is that it triggers a duty to pay damages for

the reasonably foreseeable consequences of the breach. If the

duty is unimpaired, the obligation of the contract cannot be

said to have been impaired.”).

The Supreme Court’s Contract Clause cases likewise

reflect the deep connection between obligation and remedy,

the upshot being that a State does not “impair the obligation”

of a contract so long as it leaves contracting parties free to

pursue the ordinary state-law remedies in the event of breach. 

As the Court explained in General Motors Corp. v. Romein,

“[t]he obligation of a contract consists in its binding force on

the party who makes it.” 503 U.S. 181, 189 (1992) (quoting

McCracken v. Hayward, 43 U.S. (2 How.) 608, 612 (1844)). 

Thus, a State may “trigger Contract Clause scrutiny” if it

enacts “changes in the laws that make a contract legally

enforceable,” for example, byeroding “the remedies available

under a contract” in a way that “convert[s] an agreement

enforceable at law into a mere promise.” Id. But by contrast,

a State does not violate the Contract Clause if its challenged

action does “not change the legal enforceability of the . . .

contracts,” id. at 190, a condition a State satisfies so long as

it does not purport to relieve a party—including, most

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 18 of 58
PURE WAFER V. CITY OF PRESCOTT 19

especially, itself—of its duty either to perform or to submit to

a court-ordered remedy.

5

In a similar vein, United States Trust Co. of New York v.

New Jersey explained that “[c]ontract rights are a form of

property and as such may be taken for a public purpose

provided that just compensation is paid,” and thus “[t]he

States remain free to . . . abrogate such contractual rights,

upon payment of just compensation.” 431 U.S. 1, 19 n.16, 29

n.27 (1977).

B

In light of the principles outlined above, it is clear to us

that the City has not impaired the obligation of its contract

with Pure Wafer, because the Ordinance has not altered the

ordinary state-law remedies to which Pure Wafer would

otherwise be entitled if it successfully proves a breach of

contract. The City might very well have breached its

contract—a question we discuss later in this opinion—but

that does not necessarily mean it has violated the Contract

Clause of the federal Constitution.

5 To be sure, the Contract Clause does not automatically approve state

action that merely alters the remedies available on a contract but stops

short of wiping them out entirely; as Justice Cardozo observed (with some

understatement), the “dividing line” between obligation and remedy “is at

times obscure,” and some purely remedial changes may be too “oppressive

and unnecessary” to pass muster under the Contract Clause. W.B.

Worthen Co. v. Kavanaugh, 295 U.S. 56, 60, 62 (1935). We need not

linger over such difficulties, however, because as we explain, here the

City has not attempted to tinker at all with the remedies Pure Wafer would

be entitled to obtain in the event it proves a breach of contract.

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 19 of 58
20 PURE WAFER V. CITY OF PRESCOTT

Indeed, Pure Wafer included a claim for simple breach of

contract in its suit against the City, alleging that “Pure Wafer

cannot comply with the Ordinance without incurring

substantial costs which the DevelopmentAgreement allocated

to the City,” and specifically requested “such amount of

damages as Pure Wafer may establish at any trial of this

action as flowing from the City’s breach.”

Crucially for our purposes here, the City has never

asserted the Ordinance as a defense that would have the legal

effect of discharging the City’s duty to perform and would

thereby relieve the City of its legal obligation—established

by the contract—to pay damages or some other remedy as a

consequence of its non-performance.6

But we need not speculate about what legal effect the

Ordinance might have on Pure Wafer’s entitlement to judicial

remedies, because the City has by now several times

expressly represented that the Ordinance does not operate to

dissolve (that is, impair) its binding obligation to perform

whatever it promised to do under the Development

Agreement. For instance, as the City put it in briefing

following the district court’s hearing on Pure Wafer’s motion

for a preliminary injunction:

Pure Wafer . . . is suing the City in this case

for breach of contract and is seeking money

damages. . . . The City is defending this claim

based upon the plain terms of the

Development Agreement. If Pure Wafer

6

In fact, as noted above, the district court had ordered the trial

proceedings bifurcated into a liability phase and a damages phase,

something to which the City voluntarily agreed.

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 20 of 58
PURE WAFER V. CITY OF PRESCOTT 21

prevails upon its breach of contract claims,

the Court will presumably assess damages, to

the extent damages are proven and

appropriate. In any event, the Pretreatment

Ordinance would not frustrate recovery.

Likewise, at the hearing on Pure Wafer’s motion for a

preliminary injunction, the City represented that “[t]his is a

contract dispute as to what the Development Agreement

between plaintiff and the city defendant provides. . . . It’s a

garden-variety contract dispute. . . . They’re seeking

damages for [the City’s] alleged breach of the contract. . . . 

They’re asking for damages if they have to comply because

of the breach of contract. . . . The City can respond in money

damages if it loses this case at the end of the day.”7

Although the City has argued that the Ordinance survives

Contract Clause scrutiny because any impairment was not

substantial, the thrust of that argument was contract based,

i.e. that Pure Wafer “agreed to comply with environmental

regulations,” and that the “cost of regulatory compliance

[was] not a term that was bargained for.” To the extent the

City’s argument could be read otherwise, it should go without

saying that the City is barred from altering its position on the

legal effect of the Ordinance at subsequent stages in this

litigation, thanks to the doctrine of judicial estoppel and

related principles. See Whaley v. Belleque, 520 F.3d 997,

7 We also note that the Agreement goes out of its way to state that

“[i]n the event City is in default herein, [Pure Wafer] shall have all legal

and equitable remedies available to it,” and further provides that the

Agreement shall be enforceable “subject to a court’s equitable powers.” 

The City has not attempted to cast doubt on those provisions. Hence, in

addition to damages, Pure Wafer may be able to request injunctive relief

or specific performance if it so desires.

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 21 of 58
22 PURE WAFER V. CITY OF PRESCOTT

1002 (9th Cir. 2008); State v. Towery, 920 P.2d 290, 304

(Ariz. 1996) (in banc).

C

The City’s analysis persuades us that Pure Wafer does not

have a claim under the Contract Clause. This case has all the

hallmarks of a quintessential contract dispute, and insofar as

the City has attempted to refute Pure Wafer’s claimed rights

under the Agreement—but has not attempted to render such

rights legally unenforceable—it should be treated as a

contract dispute. The district court’s judgment in favor of

Pure Wafer’s Contract Clause claim cannot stand.

III

Nevertheless, Pure Wafer seeks to protect the judgment

in its favor on the alternative claim that the City has simply

breached the contractual obligations it undertook in the

Development Agreement. Although the district court did not

rule on this claim outright, it discussed the Agreement at

length, considered extensive trial testimony, and made

sufficient findings of fact and conclusions of law for us to

resolve the scope of the parties’ contractual rights without

need for a remand.8

8

Indeed, the district court itself recognized that “[t]he resolution of

the issues in this case hinges on the nature and extent of the City’s

obligations to accept Pure Wafer’s effluent under the terms of the

Agreement.” Those same inquiries overlap substantially with our breach

of contract analysis. Given that the district court, in its Contract Clause

analysis, made sufficient findings of fact to conclude that the City had

breached the contract, we disagree with the dissent that remand is

necessary.

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 22 of 58
PURE WAFER V. CITY OF PRESCOTT 23

We therefore proceed to the merits,9 mindful that with

respect to any factual findings, “[i]f the district court’s

account of the evidence is plausible in light of the record

viewed in its entirety, the court of appeals may not reverse it

even though convinced that had it been sitting as the trier of

9 The dissent argues that because “we have dismissed the only federal

claim before us” we must remand the case back to the district court so that

it might determine whether it should continue to exercise supplemental

jurisdiction over the breach of contract claim under 28 U.S.C. § 1367(a). 

Dissent at 33–34. The district court had supplemental jurisdiction, as do

we, because the Contracts Clause claim is a federal question. We

respectfully disagree with our dissenting colleague.

Section 1367(c) allows a district court to decline to exercise

supplemental jurisdiction for one of four reasons. The district court could

have invoked it and dismissed the state-law breach of contract claim at

any time, but chose not to. And, nothing in this opinion precludes the

district court from invoking § 1367(c) after we remand the case back to it. 

The dissent misreads § 1367(c)(3); it only applies when “the district court

has dismissed all claims over which it has original jurisdiction.” (emphasis

added).

The dissent relies on cases such as Fang v. U.S. to argue we are

improperly usurping the district court’s discretion. Dissent at 36–38

(citing 140 F.3d 1238, 1240 (9th Cir. 1998)). But, we are reviewing a

district court’s merit decision, not instructing the district court on whether

to exercise supplemental jurisdiction. Fang involved a district court’s pretrial dismissal of federal claims for lack of jurisdiction, and then a

dismissal of related state claims pursuant to § 1367(c)(3). Id. We

reversed in that case, reinstating some of the federal claims and all of the

state claims, but made clear the district court could reassess whether it

should retain supplemental jurisdiction in the face of the defendant’s

arguments that the state law claims raised novel issues of state law. Id. at

1241–43. Here, we are not dismissing or reinstating any state law claims. 

The dissent’s real objection is that we reach the merits of the breach of

contract issue—but that is a separate concern from whether we are

usurping the district court’s § 1367(c) authority.

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 23 of 58
24 PURE WAFER V. CITY OF PRESCOTT

fact, it would have weighed the evidence differently.” 

Anderson v. City of Bessemer, 470 U.S. 564, 573–74 (1985).

A

The Development Agreement specifies that it “shall be

governed by and construed under the laws of the State of

Arizona.” The Arizona Supreme Court has made clear that

“in Arizona, a court will attempt to enforce a contract

according to the parties’ intent.” Taylor v. State Farm Mut.

Auto. Ins., 854 P.2d 1134, 1138 (Ariz. 1993) (in banc). 

Moreover, under Arizona law, “a court may consider

surrounding circumstances, including negotiation, prior

understandings, and subsequent conduct.” Id. at 1139. 

Further, courts applyingArizona contract law are not required

to find ambiguity in the contractual language before theymay

entertain extrinsic evidence bearing on the parties’ intents. 

Id. at 1140. Rather, we are instructed “first [to] consider[] the

offered evidence and, if [we] find[] that the contract language

is ‘reasonablysusceptible’ to the interpretation asserted by its

proponent, the evidence is admissible to determine the

meaning intended by the parties.” Id. Such practice is

permissible so long as the evidence “is being offered to

explain what the parties truly may have intended.” Id.

B

Pure Wafer’s theory is that the City promised to accept its

effluent so long as its non-pretreated fluoride content remains

at or below 100 mg/L, and to bear the financial risk of any

future occurrence that would prevent the City from doing so,

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 24 of 58
PURE WAFER V. CITY OF PRESCOTT 25

including future changes in law.10 To Pure Wafer’s mind, the

Agreement gave it a “contractual . . . right to discharge at

[contractually specified] rates up to 195,000 gallons per day

of effluent containing up to 100 mg/L of fluoride,” and what

is more, “[t]he parties agreed that . . . if it became necessary

to modify the sewer system so as to permit Pure Wafer to

discharge [such] effluent, the City would pay for that

modification cost.” In Pure Wafer’s view, ADEQ’s

inauguration of the APP regime has made it “necessary to

modify the sewer system” in order to ensure Pure Wafer’s

ability to discharge its effluent in the manner it believes the

Agreement protects—and, Pure Wafer continues, recent

regulatory changes are among the future contingencies whose

risk the City agreed to shoulder. In other words, Pure Wafer

believes it struck a bargain with the City which “allocated to

the City the risk of potential future consequences of its

acceptance of . . . Pure Wafer’s effluent,” including the risk

that later-enacted legislation or regulation would require the

City to pretreat such effluent as a condition of continuing to

accept it.

10 The dissent contends that this breach of contract theory was never

articulated by Pure Wafer in its Amended Complaint. Dissent at 40–41. 

It accuses us of inventing a new theory for Pure Wafer. Yet, Pure Wafer’s

Amended Complaint articulates this theory several times. ¶¶ 3, 127, 142. 

Its two breach of contract claims incorporate preceding allegations and

allege that by failing to exempt Pure Wafer from the Ordinance, as

required by sections 9.2 and 14.4 of the Agreement, the City breached its

contract. ¶¶ 149, 154. The logical conclusion from the Amended

Complaint is that by trying to impose a new, lower discharge limit via the

Ordinance, rather than exempting Pure Wafer, the City breached the

Agreement. Of course, had the City exempted Pure Wafer it would not be

in breach—a point no one contests.

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 25 of 58
26 PURE WAFER V. CITY OF PRESCOTT

Pure Wafer effectively describes the Agreement as a socalled “regulatory contract,” in which a “regulated entity

contractually promises the government that [it] will provide

or do something that is not otherwise clearly required by

extant law. In return, the government contractually promises

the regulated entity to maintain the regulatory regime set out

in the contract. If the government breaches its promise of

regulatory stability, it must pay contract damages.” David

Dana & Susan P. Koniak, Bargaining in the Shadow of

Democracy, 148 U. Pa. L. Rev. 473, 475 (1999).

Such contracts are hardly novel. To take one prominent

example, United States v. Winstar Corp. involved contracts

between the federal government and certain thrift institutions,

and the Supreme Court held that in such contracts the

government had promised to regulate the thrifts in a specific

manner, and to pay them damages if it later changed the

regulatory landscape in a way that caused them financial

harm. 518 U.S. 839, 871 (1996) (plurality opinion) (“The

thrifts do not claim that the [federal government] purported

to bind Congress to ossify the law in conformity to the

contracts . . . . They simply claim that the Government

assumed the risk that subsequent changes in the law might

prevent it from performing, and agreed to pay damages in the

event that such failure to perform caused financial injury.”);

id. at 887 (“[T]he Government agreed to . . . indemnify its

contracting partners against financial losses arising from

regulatory change.”); id. at 916 (Breyer, J., concurring)

(explaining that the class of contract at issue amounts to “a

promise that obliges the government to hold a party harmless

from a change in the law that the government remains free to

make”); id. at 918 (“The thrifts demonstrate that specific

promises were made to accord them particular regulatory

treatment for a period of years, which, when abrogated by

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 26 of 58
PURE WAFER V. CITY OF PRESCOTT 27

subsequent legislation, rendered the Government liable for

breach of contract.”); id. at 923–24 (Scalia, J., concurring in

the judgment) (“[I]t is clear from the contract in question that

the Government . . . had assumed the risk of a change in its

laws.”).11 As Justice Souter explained, “[c]ontracts like this

are especiallyappropriate in the world of regulated industries,

where the risk that legal change will prevent the bargainedfor performance is always lurking in the shadows.” Id. at 869

(plurality opinion).12

The contracts at issue in Winstar operated in the same

manner as Pure Wafer alleges the Development Agreement

operates here. That is, Pure Wafer claims that the Agreement

requires the City to give it the benefit of (among other things)

whatever fluoride regulations were in force at the time the

Agreement was entered into, and that insofar as newly

enacted laws (including the Ordinance) frustrate the City’s

ability to do so, the City is in breach of the Agreement and

must submit to whatever remedy the court deems appropriate.

11 See also, e.g., Amino Bros. Co. v. United States, 372 F.2d 485, 491

(Ct. Cl. 1967) (“The Government cannot make a binding contract that it

will not exercise a sovereign power, but it can agree in a contract that if

it does so, it will pay the other contracting party the amount by which its

costs are increased by the Government’s sovereign act.”).

12 See also, e.g., Hughes Commc’ns Galaxy, Inc. v. United States,

998 F.2d 953, 959 (Fed. Cir. 1993) (“[Government] contracts routinely

include provisions shifting financial responsibility to the government for

events which might occur in the future. That some of these events may be

triggered by sovereign government action does not render the relevant

contractual provisions any less binding than those which contemplate third

party acts, inclement weather and other force majeure.” (footnote

omitted)).

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 27 of 58
28 PURE WAFER V. CITY OF PRESCOTT

C

The district court’s findings amply support Pure Wafer’s

position. As the district court recounted, “Pure Wafer

presented undisputed evidence that its operations require the

discharge of effluent with a fluoride concentration above

16.3 mg/L, that it expected at the time of the Agreement to be

able to discharge at concentrations of up to 100 mg/L, that

this right was critical to its negotiations based on its past

experiences with its San Jose facility, and that the financial

viability of the Prescott facility is threatened if it must bear

the pretreatment costs.” Likewise, the district court

concluded that “Pure Wafer was willing to incur the

substantial initial capital investment to construct a reclaim

facility in Prescott only if the City agreed to commit to

maintaining water and sewer services to the facility at the

specifications Pure Wafer needed to productively operate its

facility,” and that “Pure Wafer need only establish that it has

the right to discharge at least 100 mg/L, which it has done.”

Although the district court did not use the phrase

“regulatory contract” as we did above, the district court’s

findings make unmistakably clear that the parties created

such a contract. As the district court put it, the City cannot

“force Pure Wafer to pay for pretreatment when the City has

contractually agreed to not pass along such costs. The City

must accept Pure Wafer’s effluent as-is and pretreat it at the

City’s own expense.”

We agree with the district court that the City agreed to

accept such effluent as the parties knew Pure Wafer would

need to discharge in order to maintain a viable business, and

that the City agreed to bear the financial risk that Stateinitiated regulatory changes would make complying with

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 28 of 58
PURE WAFER V. CITY OF PRESCOTT 29

such promise more costly than it was when the parties entered

into the Agreement.13 Hence, the City may not force Pure

Wafer to absorb the costs needed to bring the City into line

with the terms of its APP. Enforcing the Ordinance against

Pure Wafer would eviscerate the benefit of Pure Wafer’s

bargain; the City cannot do so without putting itself in breach

of the Agreement.

Our conclusion is bolstered by representations the City

itself made in a letter to ADEQ in the summer of 2004, in

which the City explained that it had “signed an agreement

with [Pure Wafer] on 2/11/97 allowing them to discharge

Fluoride between 50 mg/l and 100 mg/l” into the City’s

AWRF. And our conclusion derives further support from the

district court’s finding that “[a]s early as 1994, ADEQ

informed the City that its Groundwater Quality Protection

Permit would no longer be sufficient for the operation of the

AWRF,” and that, consequently, the City was “[c]learly . . .

aware at the time it entered into the Agreement that there

existed some level of fluoride concentration that would

require treatment prior to its ultimate discharge,” but had

“inaccurately estimated the particular fluoride concentration

above which treatment (or pretreatment) [would be]

required.” The City’s ability to anticipate stricter discharge

limitations like those ADEQ ultimately passed defeats any

impossibility defense the City might have asserted, because

it means the “non-occurrence” of such regulatory change was

not a “basic assumption on which the contract was made.” 

Restatement (Second) of Contracts § 261 (1981); see also id.

§ 264, cmt. a (“With the trend toward greater governmental

13 We disagree with the district court’s determination that the City is

obligated to accept Pure Wafer’s effluent “regardless of its fluoride

concentration,” but this error is irrelevant to the outcome of the case.

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 29 of 58
30 PURE WAFER V. CITY OF PRESCOTT

regulation, . . . parties are increasingly aware of [the] risks

[that new government regulations will frustrate performance],

and a party may undertake a duty that is not discharged by

such supervening governmental actions . . . . Such an

agreement is usually interpreted as one to pay damages if

performance is prevented . . . .”); 12 Joseph M. Perillo,

Corbin on Contracts § 64.10 (rev. ed. 1993) (explaining that

in some cases where post-formation changes in law render

performance illegal, “damages are still available as a remedy,

either because the promisor assumed the risk or for other

reasons”).

D

The City’s most basic counterargument is that the

Ordinance is an “environmental regulation” of the sort Pure

Wafer expressly agreed to obey, in section 9.1 of the

Agreement. “No further analysis is required,” says the City. 

We are not persuaded.

The trouble with the City’s argument is it completely

ignores the context of the parties’ negotiations. As the

district court put it, “Pure Wafer would not construct the

Prescott facility without a commitment from the City that it

could discharge up to 100 mg/L of fluoride,” for it “did not

want to build a Prescott facility that could be ‘rendered

useless at any time by the City.’” Much like the financial

institutions in Winstar, “[i]t would . . . have been madness for

[Pure Wafer] to have engaged in these transactions with no

more protection than the Government’s reading would have

given them, for the very existence of their institutions would

then have been in jeopardyfrom the moment their agreements

were signed.” 518 U.S. at 910 (plurality opinion).

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 30 of 58
PURE WAFER V. CITY OF PRESCOTT 31

The district court concluded that “[a]ccording to the

City’s logic, this violation of the Agreement is not a breach

of contract because Pure Wafer agreed not to discharge

effluent in violation of local environmental regulations. But

Pure Wafer neither anticipated nor agreed that it would

comply with cost-shifting regulations cloaked as

environmental regulations.” For the reasons explained above,

we agree with the district court that Pure Wafer was not so

reckless with its own future, and so we cannot accept the

City’s position that by agreeing to section 9.1, Pure Wafer

unwittinglywelcomed a Trojan Horse containing within itself

the seeds of destruction of its own business.

The City also derives no help from the “reserved powers

doctrine,” which holds generally that “the exercise of the

police power cannot be limited by contract for reasons of

public policy; nor can it be destroyed by compromise,” for “it

is beyond the authority of the state or the municipality to

abrogate this power so necessary to the public safety.” N.

Pac. Ry. Co. v. Minnesota, 208 U.S. 583, 598 (1908). Pure

Wafer is not arguing that the City promised never to adopt

regulations limiting the amount of fluoride industrial users

like itself may discharge into the City’s sewer system. And

giving Pure Wafer a contractual remedy for the City’s breach

would not block the City from reducing the amount of

fluoride exiting the City’s AWRF. As the City itself

recognizes, “ultimately the only question is who should pay

the cost of bringing the Facility into compliance with the

amended City Code.” Indeed, the district court found that “if

Pure Wafer does not pretreat its effluent, the City will do so

to comply with its APP. Counsel for the City has suggested

as much to the Court.” The City would not be forced to

surrender any of its sovereign powers if it is held to its

promise to bear the risk that a change in applicable laws

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 31 of 58
32 PURE WAFER V. CITY OF PRESCOTT

might make performance under the Development Agreement

more costly.

E

In light of the foregoing, we conclude that while the City

prevails on its appeal of the Contract Clause issue, judgment

for Pure Wafer can be sustained on the alternative ground that

the City has breached its contract with Pure Wafer. We leave

it for the district court on remand to decide the appropriate

remedy.

14

IV

The judgment of the district court is AFFIRMED IN

PART and REVERSED IN PART, and the case is

REMANDED for further proceedings consistent with this

opinion. The district court’s injunction forbidding

enforcement of the Ordinance against Pure Wafer shall

remain in effect during subsequent stages in this litigation. 

Each party shall bear its own costs on appeal.

14 Because we affirm the district court’s judgment as to the City’s

liability, we also AFFIRM its denial of the City’s counterclaim. We have

no occasion to examine the City’s objection to the district court’s separate

judgment that Pure Wafer is entitled to attorneys’ fees.

In addition, Pure Wafer’s two motions for judicial notice, filed April

12, 2016, and April 13, 2016, are GRANTED.

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 32 of 58
PURE WAFER V. CITY OF PRESCOTT 33

N.R. SMITH, concurring in part and dissenting in part:

I. United States and Arizona Constitutional Contract

Clause Claims

I concur with the majority’s conclusion that “Pure Wafer

does not have a claim under the Contract Clause” of the

United States or Arizona Constitutions. Maj. Op. 22. Thus, I

agree that the judgment must be reversed and remanded.1

II. Arizona Breach of Contract Claims

However, I must dissent from the majority’s sua sponte

decision to reach Pure Wafer’s alternative claims that the City

breached the Development Agreement. Instead, we should

remand for the district court (1) to consider whether to

exercise supplemental jurisdiction over the breach of contract

claims, and (2) (if it decides to exercise such jurisdiction) to

make findings of fact as to those claims.

A. We must allow the district court to assess in the first

instance whether to exercise its supplemental

jurisdiction.

In holding the Contract Clause inapplicable to this case,

we have dismissed the only federal claim before us. Thus,

only claims for breach of contract under Arizona state law

remain. Pure Wafer invoked supplemental jurisdiction over

these claims in the district court but did not plead diversity.

Therefore, the first question must be whether the federal,

1

I also agree that the City should continue to be enjoined from

enforcing the Ordinance against Pure Wafer during subsequent stages of

this litigation.

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 33 of 58
34 PURE WAFER V. CITY OF PRESCOTT

rather than the Arizona state, court should decide the

remaining claims. See Carnegie-Mellon Univ. v. Cohill,

484 U.S. 343, 350 n.7 (1988). The majority errs in failing to

allow the district court to consider in the first instance

whether to exercise its supplemental jurisdiction.

Although district courts generally have supplemental

jurisdiction over state law claims forming “part of the same

case or controversy” as federal claims, there are a number of

circumstances in which “[t]he district court may decline to

exercise [this]jurisdiction,” includingwhen all federal claims

have been dismissed. See 28 U.S.C. § 1367(a), (c). The

decision is discretionary, and, if one of the § 1367(c)

circumstances is present, “the exercise of discretion [is]

triggered.” Exec. Software N. Am., Inc. v. U.S. Dist. Court for

Cent. Dist. of Cal., 24 F.3d 1545, 1557 (9th Cir. 1994),

overruled on other grounds by Cal. Dep’t of Water Res. v.

Powerex Corp., 533 F.3d 1087 (9th Cir. 2008). Section 1367

plainly vests this discretion with the district court. See

28 U.S.C. § 1367(c); see also Foster v. Wilson, 504 F.3d

1046, 1051 (9th Cir. 2007) (“The decision whether to

continue to exercise supplemental jurisdiction over state law

claims after all federal claims have been dismissed lies within

the district court’s discretion.” (emphasis added)); Exec.

Software, 24 F.3d at 1557 (“[S]ubsection (c) [of § 1367]

requires the district court, in exercising its discretion, to

undertake a case-specific analysis.” (emphasis added)

(quoting H.R. No. 734, 101st Cong. § 29 (1990)));

Imagineering, Inc. v. Kiewit Pac. Co., 976 F.2d 1303, 1309

(9th Cir. 1992) (providing that once all federal claims are

dismissed, the exercise of jurisdiction over state law claims

“is within the discretion of the federal district court”

(emphasis added)), overruled on other grounds by Diaz v.

Gates, 420 F.3d 897, 900 (9th Cir. 2005) (en banc).

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 34 of 58
PURE WAFER V. CITY OF PRESCOTT 35

Once it dismisses all federal claims before it, a federal

court “must reassess its jurisdiction by engaging in a

pragmatic and case-specific evaluation of the myriad of

considerations that may bear on the determination of whether

to exercise supplemental jurisdiction.” 16 James WM. Moore

et al., Moore’s Federal Practice § 106.66[1] (3d ed. 2016).

Such considerations include “economy, convenience,

fairness, and comity.” Exec. Software, 24 F.3d at 1557

(quoting Imagineering, 976 F.2d at 1309). These factors must

be “weigh[ed] in each case, and at every stage of the

litigation,” City of Chi. v. Int’l Coll. of Surgeons, 522 U.S.

156, 173 (1997) (quotingCarnegie–Mellon, 484 U.S. at 350),

and the district court is in the best position to weigh them, see

Hoeck v. City of Portland, 57 F.3d 781, 785–86 (9th Cir.

1995); 16 Moore, supra § 106.66[3][a]. In my view, an

Arizona court would be better suited to adjudicate Pure

Wafer’s claims based on Arizona law. However, the district

court should make that decision.

Because the discretion lies with the district court and it is

in the best position to make the decision, several of this

court’s opinions indicate that we should allow the district

court the first opportunity to consider the issue. See Watison

v. Carter, 668 F.3d 1108, 1117 (9th Cir. 2012) (“On remand

[after appellate ruling negated the district court’s basis for

dismissing state law claims], the district court . . . shall decide

anew whether to exercise supplemental jurisdiction.”);

Mendoza v. Zirkle Fruit Co., 301 F.3d 1163, 1174–75 (9th

Cir. 2002) (“The decision to exercise [supplemental]

jurisdiction remains discretionary with the district court. . . .

We therefore remand for the district court to determine, in the

first instance, whether the application of the Gibbs standard

permits the exercise of supplemental jurisdiction, and to

exercise discretion over whether such jurisdiction would be

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 35 of 58
36 PURE WAFER V. CITY OF PRESCOTT

appropriate in the context of this litigation.”); Webster v.

Omnitrition Int’l, Inc., 79 F.3d 776, 790 (9th Cir. 1996) (“The

Attorney Defendants ask us to dismiss the state law claims

against them for lack of pendent jurisdiction. The district

court may, in its discretion, refuse to exercise supplemental

jurisdiction after considering 28 U.S.C. § [1367].

[2] We will

not examine the necessary factors in the first instance.”

(emphasis added)).

In Fang v. United States, the plaintiff filed federal and

state law claims against the United States based on her

daughter’s death in a national park. 140 F.3d 1238, 1240 (9th

Cir. 1998). The district court granted summary judgment on

the federal claims for lack of subject matter jurisdiction under

the Federal Tort Claims Act. Id. It also dismissed the state

law claims for lack of subject matter jurisdiction under

28 U.S.C. § 1367(c)(3). Id. On appeal, after deciding to

reverse the district court’s dismissal of the federal claims, we

considered the dismissal of the supplemental claims. Id. at

1241–43. We reasoned that, because the federal claims “were

erroneously dismissed, the reason for dismissing the

remaining supplemental claims no longer exist[ed].” Id. at

1244. Declining to rule on the defendants’ arguments that

complex state law questions and predominance of state law

issues called for us to uphold the dismissal of the state law

claims, we held:

The decision to exercise supplemental

jurisdiction is within the discretion of the

2 Webster cites 28 U.S.C. § 1366, concerning “laws applicable

exclusively to the District of Columbia,” which were not at issue in that

case. The citation to § 1366 is clearly a typographical error that was

intended to cite 28 U.S.C. § 1367.

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 36 of 58
PURE WAFER V. CITY OF PRESCOTT 37

district court and that court must be given an

opportunity to make that decision. We

therefore remand the case to the district court

where it can determine whether it should

retain jurisdiction over the state law claims in

light of [these] alternate arguments.

Id.

In Hunsaker v. Contra Costa County, the plaintiff brought

disparate impact disability claims under both federal and state

law, seeking a permanent injunction. 149 F.3d 1041, 1042

(9th Cir. 1998). The district court ordered the injunction on

the federal claim. Id. This court reversed, holding that there

was no violation of the federal law. Id. at 1044. Over the

plaintiff’s argument that we should, nonetheless, uphold the

injunction under the alternative state law claim, we held,

“[t]he district court did not rule on this claim, and we have

nothing to review. We should allow the district court to

consider this claim in the first instance or, in its discretion,

decline to exercise supplemental jurisdiction.” Id.

Here, the district court initially exercised supplemental

jurisdiction over the state law breach claims but ultimately

dismissed them as moot, based on its ruling on the

constitutional claims. As in Fang, our disposition of the

federal claims on appeal negated the basis on which the

district court dismissed the state law claims. In Fang, we

could have ruled on whether the plaintiff’s claims presented

novel state law issues that substantially predominated over

the federal claims, which could have disposed of the state

claims. However—recognizing (1) that deciding whether to

exercise supplemental jurisdiction is a discretionary question

for the district court, and (2) ruling on the defendants’

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 37 of 58
38 PURE WAFER V. CITY OF PRESCOTT

alternative arguments would have deprived the district court

the opportunity to decide in the first instance whether to

exercise that jurisdiction—we remanded so the court in the

best position to rule on the jurisdiction issue could do so. See

Fang, 140 F.3d at 1244. The present case compels the same

result. As in Hunsaker, the district court did not rule on the

alternative state law basis for the judgment. 149 F.3d at 1044.

Therefore, we have nothing to review with respect to that

alternative basis, and “[w]e should allow the district court to

consider [the breach of contract claims] in the first instance

or, in its discretion, decline to exercise supplemental

jurisdiction.” See id.

B. Because the district court held that the breach claims

were moot, it made no factual findings specific to

those claims, and we err in failing to remand for

factual findings now that the claims are no longer

moot.

Even if we knew the district court would decide to

exercise supplemental jurisdiction, remand would still be

necessary, because the district court made no factual findings

with respect to the breach of contract claims.

Although pure interpretation of language in a contract is

a question of law, see Grosvenor Holdings, L.C. v. Figueroa,

218 P.3d 1045, 1050 (Ariz. Ct. App. 2009), the primary

purpose of contract law in Arizona is to determine the parties’

intended meaning of the contract at the time of formation, see

Taylor v. State Farm Mut. Auto. Ins. Co., 854 P.2d 1134,

1138–40 (Ariz. 1993) (in banc), which “is a question of fact

left to the fact finder,” Chopin v. Chopin, 232 P.3d 99, 102

(Ariz. Ct. App. 2010). In cases where extrinsic evidence is

used to determine the parties’ intent from multiple reasonable

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 38 of 58
PURE WAFER V. CITY OF PRESCOTT 39

interpretations of contractual language, the interpretation of

the contract will generally also become a question of fact. See

In re Estate of Pouser, 975 P.2d 704, 709 (Ariz. 1999);

Taylor, 854 P.2d at 1144–45. Likewise, “[w]hether a party

has breached [the] contract is a question of fact.” Great W.

Bank v. LJC Dev., LLC, 362 P.3d 1037, 1045 (Ariz. Ct. App.

2015). We must allow the district court an opportunity, in the

first instance, to make these factual determinations for Pure

Wafer’s breach of contract claims.

In its order, the district court found the breach claims

moot in light of how it disposed of the constitutional claims.

This treatment of the breach claims resulted in the court

devoting only about one-quarter of a page (out of a thirty-two

page opinion) directly to these alternative claims. And even

that minimal space includes no findings of fact specific to the

breach claims, instead providing that the district court “need

not reach Pure Wafer’s alternative [contract] claims.”

Because the district court found the breach claims moot based

on the premise that the constitutional claims were valid, our

ruling today has removed the only basis on which the district

court dismissed those claims. Therefore, the breach claims

must be revived. See Fang, 140 F.3d at 1243–44 (reinstating

state law claims where, after court of appeals’ ruling, district

court’s “reason for dismissing the remaining supplemental

claims no longer exist[ed]”). Although the breach claims are

revived—because (1) we have negated the only conclusion

the district court reached with respect to these claims, and

(2) the district court made no factual findings specific to the

breach claims—there is nothing for this court to review

concerning the claims at this stage. Instead, by deciding the

breach claims, the majority steps into the role of fact-finder,

see United Cal. Bank v. Prudential Ins. Co. of Am., 681 P.2d

390, 454 (Ariz. Ct. App. 1983) (resolving evidentiary

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 39 of 58
40 PURE WAFER V. CITY OF PRESCOTT

questions is the role of the district court), without the benefit

of district court findings concerning these claims, and relying

only on findings the district court made in the context of

constitutional claims that we hold today to be invalid.

C. The majority decides this case based on the breach of

contract claims it believes Pure Wafer should have

alleged, instead of addressing the claims Pure Wafer

actually alleged.

In addition to assuming the district court’s role of factfinder, the majority’s breach of contract analysis fails to even

mention the only two provisions Pure Wafer actually alleged

in its complaint that the City breached. The complaint alleged

the City breached the Agreement (1) under section 14.14 by

failing to exempt Pure Wafer from the 2013 ordinance, and

(2) under section 9.2 by failing to exempt Pure Wafer from

the 2013 ordinance. According to the majority, Pure Wafer

alleged “that the City, by enacting the Ordinance, had

committed at least two different breaches of contract.” Maj.

Op. 12–13. Although this initial statement about the breach

claims is accurate, when the majority actually discusses the

substance of those claims it does not once cite to, or analyze

the content of, section 14.14 or section 9.2 of the Agreement.

The majority also asserts that “Pure Wafer included a claim

for simple breach of contract in its suit against the City,

alleging that ‘Pure Wafer cannot comply with the Ordinance

without incurring substantial costs which the Development

Agreement allocated to the City.’” Id. at 19–20. While, again,

the majority correctly recognizes that Pure Wafer included

breach of contract claims, it implies, incorrectly, that Pure

Wafer alleged facts concerning cost allocation specifically in

the context of its breach claims. Pure Wafer did not. Instead

of considering the breach claims as Pure Wafer alleged them,

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 40 of 58
PURE WAFER V. CITY OF PRESCOTT 41

the majority analyzes the breach claims it believes Pure

Wafer should have alleged, rules in Pure Wafer’s favor on

those claims, and never addresses the breach claims Pure

Wafer actually alleged in its complaint.

D. The majority’s analysis of the breach claims

contradicts a plain reading of the Agreement, fails to

addressseveralrelevant provisions, and demonstrates

that further factual development may be needed.

As noted, the primary goal of Arizona contract law is to

determine the parties’ intended meaning of their agreement

and to give effect to that contractual intent. See Taylor,

854 P.2d at 1138–40. Thus, in attempting to discover the

parties’ intent, courts are to liberally consider extrinsic

evidence to show the parties’ intended interpretation of their

contractual language. See id. at 1138–41. However, because

“[i]nterpretation is the process by which we determine the

meaning of words,” see id. at 1138, extrinsic evidence is

useful only to the extent it reveals how the parties’ intent is

reflected in the words they chose to memorialize their

agreement, see id. at 1140–44; see also Smith v. Melson, Inc.,

659 P.2d 1264, 1266 (Ariz. 1983) (in banc) (“A contract

should be read in light of the parties’ intentions as reflected

by their language and in view of all the circumstances.”). And

the further an interpretation gets from the contract’s actual

language, the more convincing the extrinsic evidence must be

to show the parties intended that meaning. See Taylor,

854 P.2d at 1139–40. In addition, the parties’ intent for

specific contractual language must be determined in light of

their entire agreement. See Smith, 659 P.2d at 1267.

At the heart of the parties’ dispute are two difficult,

interrelated issues: (1) the limits of Pure Wafer’s right to

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 41 of 58
42 PURE WAFER V. CITY OF PRESCOTT

discharge into the City’s sewer, and (2) who bears the cost of

bringing that discharge into compliance with Arizona

Department of Environmental Quality(ADEQ) requirements.

The majority appears to rely exclusively on section 4.2 of the

Agreement to answer these questions. Although its

interpretation could be valid, it fails to analyze the specific

language of the provision on which it relies. Further, the

majority fails to consider several other provisions implicated

here. When read as a whole, the Agreement is clearly

susceptible to multiple reasonable interpretationswith respect

to these issues.

1. The majority’s interpretation of Pure Wafer’s

discharge rights contradicts section 4.2’s plain

meaning and has insufficient supporting extrinsic

evidence to overcome that contradiction.

The parties dispute what limits the Agreement places on

Pure Wafer’s right to discharge, and the City’s obligation to

accept, wastewater into the City’s sewer system. Section 4.2

requires the City to provide Pure Wafer 195,000 gallons of

daily “sewer capacity.” It further provides that the “City shall

not reclassify [Pure Wafer’s] effluent” for purposes of sewer

usage rates “unless there is a material change in the waste

water quality from the specifications attached hereto as

Exhibit F.” Exhibit F, in turn, lists 50 mg/L as the “typical

value” for fluoride and 100 mg/L as the “maximum.”

Contrary to the findings of the district court, the majority

concludes Pure Wafer only has a right to discharge

wastewater of up to 100 mg/L fluoride. See Maj. Op. 8, 28,

30. The majority relies on Exhibit F for this limit. See id. at

8–9. It also relies on certain extrinsic evidence: (1) testimony

that, at the time of the Agreement, Pure Wafer expected to

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 42 of 58
PURE WAFER V. CITY OF PRESCOTT 43

discharge up to 100 mg/Lfluoride and this understanding was

critical to its negotiations, id. at 28; (2) a 2004 letter

indicating that a City employee understood Pure Wafer to

have such a right, id. at 29; and (3) letters from ADEQ to the

City prior to the Agreement reflecting that the City knew it

must obtain an aquifer protection permit, see id. at 29.

The district court below persuasively analyzed, and found

antithetical to the Agreement’s plain meaning, the conclusion

the majority now reaches as to Pure Wafer’s discharge rights.

Though section 4.2 obligates the City to supply sewer

capacity, it does not provide that Pure Wafer has a right to

discharge wastewater (through that capacity) with any

specified level of pollutants, or that there are any limits

(regardless of fluoride content) on what Pure Wafer may send

through its 195,000 daily gallons of sewer capacity.

Exhibit F’s plain language cannot be read to impose

discharge limits, as the majority asserts. The district court

persuasively rejected the argument that Exhibit F established

any measure of Pure Wafer’s right to discharge effluent of a

particular fluoride content, and instead, held that no contract

provision could reasonably be interpreted to set such a limit.

The Agreement refers to Exhibit F only once. A plain reading

of that reference shows Exhibit F does not create any right to

discharge a certain amount of fluoride, but rather, relates only

to “sewer usage fees” Pure Wafer must pay for “sewer

capacity” under section 4.2. This reading was confirmed by

Pure Wafer’s only trial witness, who was involved in the

original planning of the Prescott facility. He testified that

Exhibit F did not relate to any right for Pure Wafer to

discharge certain contaminant levels but, instead, related only

to pricing.

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 43 of 58
44 PURE WAFER V. CITY OF PRESCOTT

Although the majority points to extrinsic evidence to

support its position, it fails to address the interpretation

problem pointed out by the district court—that there is no

provision in the Agreement, the words of which we could

reasonably interpret to impose a 100 mg/L limit. There is no

better indication of contractual intent than a plain reading of

the language the parties chose to express their rights and

obligations in the Agreement. And, here, that language does

not support the majority’s position. Extrinsic evidence is

persuasive only to the extent that it shows the parties’ intent

through the meaning of the contractual language, see Taylor,

854 P.2d at 1140–44; Smith, 659 P.2d at 1266, and the further

an interpretation varies from the written language, the more

convincing the evidence must be to show the parties intended

the proffered interpretation, see Taylor, 854 P.2d at 1139–40.

The evidence on which the majority relies does not clear this

bar. Neither does the majority address the testimony of Pure

Wafer’s only witness, which contradicts the majority’s

reading of Exhibit F. Based on the conflicting interpretations

of the parties’ intended rights and obligations concerning

discharge, at the very least, the district court should be

permitted to determine the facts in the context of Pure

Wafer’s breach of contract claims. And, if on remand, there

is not persuasive evidence as to the parties’ actual intent, any

remaining ambiguity in the parties’ rights and obligations

should be interpreted against Pure Wafer as the party who

drafted the agreement. See Polk v. Koerner, 533 P.2d 660,

662 (Ariz. 1975). Interpretation against the drafter is

particularly applicable where the “party is attempting to

impose an obligation on another where otherwise such an

obligation would not exist.” United Cal. Bank, 681 P.2d at

412.

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 44 of 58
PURE WAFER V. CITY OF PRESCOTT 45

2. The majority’s interpretation of the Agreement’s

cost allocations contradicts the plain meaning of

section 4.2 and ignores several provisions

relevant to the financial obligations.

The parties’ discharge rights and obligations also relate to

a second question at issue here: When environmental laws

allow the City to release wastewater into the aquifer only if

its fluoride content is below a certain level, and it is

undisputed that Pure Wafer’s discharge causes excess

fluoride levels, who bears the cost of abatement? The

majority interprets section 4.2 to impose the cost on the City.

See Maj. Op. 7–8, 24–29. It posits that, by agreeing to take

Pure Wafer’s discharge, the City agreed to bear the cost if the

law required purification to reduce the fluoride. However, this

reading contradicts section 4.2’s plain meaning and fails to

consider several other provisions that appear to affect the

parties’ financial obligations.

Section 4.2 expresses when and how (logistically) the

City provides “sewer capacity” to Pure Wafer: It must hold

195,000 gallons of physical carrying capacity in “reserve in

its sewer disposal system at all times after commencement of

construction of the Facility.” Section 4.2 refers to existing

“[t]runk line facilities . . . currently in place [that] appear[ed]

adequate” to provide this carrying capacity. However, if the

trunk line facilities “prove[d] inadequate,” the “City [was]

obligated to augment such facilities . . . by constructing at no

cost to [Pure Wafer] all mains, lines, and other facilities

necessary to accept or accommodate the additional sewer

flow or effluent from the facility.”

The majority suggests the City’s obligation to “augment

[inadequate] facilities” amounts to a “regulatory contract”

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 45 of 58
46 PURE WAFER V. CITY OF PRESCOTT

under which the City guaranteed Pure Wafer the benefit of

the regulatory scheme existing at the time of the Agreement

by agreeing to bear the cost of any changes. Maj. Op. 7–8,

24–29. However, a plain reading of section 4.2 requires only

that the City make available a specified amount of physical

space in the sewer system to accommodate Pure Wafer’s

discharge. And, if the sewer lines existing at the time of the

Agreement turned out to be insufficient to handle the required

volume of discharge, section 4.2 placed the financial burden

on the City to augment only the physical capacity of those

lines to accommodate the additional discharge that could not

otherwise physically fit through the system. See United Cal.

Bank, 681 P.2d at 425 (explaining that where a contract

includes general terms that accompany specific terms

covering the same subject matter, “the meaning of the general

terms is presumed to be limited [by] the enumerated specific

terms and to include only those things of the same nature as

those specifically enumerated”).

The majority again fails to explain how the language of

section 4.2 supports its position. The section does not impose

an obligation to build some extensive purification facility,

unrelated to the sewer’s physical capacity to accept a certain

volume of wastewater through its pipes. Some extrinsic

evidence may support the majority’s position, but again, that

evidence is persuasive only to the extent it can be tied back

into the actual language of the Agreement, see Taylor,

854 P.2d at 1140–44; Smith, 659 P.2d at 1266, which the

majority has failed to do. Instead, a plain reading of section

4.2 supports a more reasonable alternative. Given the

conflicting interpretations, the district court should be given

the opportunity to make findings of fact—in the context of

Pure Wafer’s breach of contract claims—as to the parties’

understandings of the language in section 4.2. And if, at that

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 46 of 58
PURE WAFER V. CITY OF PRESCOTT 47

point, ambiguity remains as to their intended meaning, that

ambiguity should be resolved against Pure Wafer as the

drafting party. See Polk, 533 P.2d at 662; United Cal. Bank,

681 P.2d at 412.

In addition to section 4.2’s plain meaning, several other

provisions may bear on the parties’ financial obligations

under the contract. Yet the majority has limited its analysis to

section 4.2 in isolation. See Smith, 659 P.2d at 1267. Read as

a whole, article 4 of the Agreement may also speak to the

parties’ cost allocations. For example, the detail with which

they allocate risk in section 4.3 tends to negate an

interpretation that section 4.2 makes allocations not explicitly

stated. Under circumstances not present here, section 4.3

expressly places on Pure Wafer:

responsib[ility] for any engineering and

construction associated with the connection to

that infrastructure[, which shall] include, but

not be limited to, metering and sampling

devices and structures, pipeline, pump

stations, etc. . . . [Pure Wafer] shall be

responsible for sampling and testing costs. . . .

In the event that [Pure Wafer] discharges

effluent of an inferior quality than is required

by permit, and the City’s facilities are

negatively impacted, [Pure Wafer] shall be

financially responsible.

Because some sections allocate the responsibilities, risks, and

costs in such detail, it is reasonable to assume that the parties

would have made similar explicit allocations in section 4.2,

if they intended section 4.2 to have that effect.

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 47 of 58
48 PURE WAFER V. CITY OF PRESCOTT

The Agreement may also allow “surcharges” to Pure

Wafer if its fluoride levels increase the City’s processing

costs. Section 4.1, “Operations Water Supply,” provides that

“Water Supply shall be at City’s sole expense, without any

special assessments, costs, [or] surcharges.” Section 4.2

contains no protection against surcharges. Further, Pure

Wafer’s only witness testified that section 4.2 and Exhibit F

allow the City to charge higher sewer rates as discharge

contaminants increase “because it will cost [the City] more to

process.” His testimony indicates the parties may have

understood, upon executing the Agreement, that if the quality

of Pure Wafer’s discharge increased the City’s processing

costs, the increased costs could be passed on to Pure Wafer.

While section 4.2 provides cost protectionstoPureWafer,

these protections maynot prohibit increased processing costs.

Section 4.2 prohibits increasing Pure Wafer’s “sewer usage

fees” absent “a material change in the waste water quality.”

It also provides, “Sewer Capacity shall be at no cost” to Pure

Wafer other than “normal sewer usage fees.” As noted,

section 4.2 indicates “sewer capacity” refers only to physical

sewer space to carry away discharge. Therefore, it would not

preclude discharge-related charges for something other than

that physical space, such as a surcharge for the City’s extra

costs of processing the excess fluoride. Such a “surcharge”

would not amount to a “normal sewer usage fee” protected

under section 4.2, nor would it be assessed for “sewer

capacity.”

In addition, evidence of the parties’ dealings as to the

excess-fluoride costs may show their understandings of cost

allocations. See United Cal. Bank, 681 P.2d at 418

(explaining that the parties’ treatment of terms after the

contract is executed but before a dispute as to meaning arises

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 48 of 58
PURE WAFER V. CITY OF PRESCOTT 49

“is entitled to great weight” as evidence of the parties’

intended meaning for those terms). During the period of their

Agreement, the City accepted Pure Wafer’s discharge

regardless of quality. However, whenever ADEQ found the

City in violation of fluoride limits, the City demanded Pure

Wafer’s help to remedy the problem. And the record reflects

Pure Wafer did help. Although some evidence suggests Pure

Wafer provided the assistance despite having no obligation to

do so, other evidence suggests Pure Wafer believed it was

obligated to help bear these costs: A 2004 letter from Pure

Wafer to the City (following the City’s Notice of Violation

(NOV) from ADEQ) outlined, “It is [Pure Wafer’s] intent to

work with the City to assure that its discharge . . . will enable

the City to consistently meet all of its permit requirements,

including fluoride.” The letter also explained Pure Wafer’s

plan to reduce fluoride concentrations. Finally, the letter

provided that “the NOV issued to the City is directly related

to our operations and potential remedial solutions may

require expenditures on our part.” Other 2004 letters indicate

that Pure Wafer hired an environmental engineer to determine

how to reduce fluoride levels. Pure Wafer’s reduction of

fluoride when its discharge caused the City to exceed

permitted levels tends to contradict Pure Wafer’s position that

it had a right to discharge wastewater with any fluoride

content. Given these interpretation problems, the district court

should have the first chance to determine the facts as to all of

the matters that may have affected the parties’ understandings

of their cost allocations.

A final contract provision that may bear on the parties’

financial obligations is section 12, “Force Majeure.” Both

parties claim it would cost several million dollars to achieve

compliant fluoride levels. Given this burden, both parties

might claim defenses under section 12, which protects a party

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 49 of 58
50 PURE WAFER V. CITY OF PRESCOTT

from defaulting where “inability to perform [is] due [to] . . .

acts or the failure to act, of any utility, public or

governmental agent or entity . . . beyond the control or

without the fault of such party.” Changes to environmental

laws imposing new burdens on either party could possibly

amount to governmental action beyond the control and

without the fault of the parties. But the district court should

be given the first opportunity to make factual determinations

as to the parties’ understandings of the scope of this

provision.

In sum, the majority errs in failing to consider (in any

manner) many of the provisions that may bear on the issues

before us and in failing to recognize that the provisions on

which it relies are subject to competing interpretations by

Pure Wafer and the City. We should allow the district court

to make the factual determinations with respect to these

issues in the first instance.

E. Without allowing the district court an opportunity to

consider the question, the majority bases its decision

on a record that may be insufficient to show the

parties’ contractual intent.

In addition to the lack of written findings as to the breach

claims, a review of the present record suggests that the

abbreviated proceedings in the district court may not have

allowed for admission of extrinsic evidence sufficient to show

the parties’ contractual intent. The district court should be

permitted on remand to determine whether, under Arizona

contract law, the record is adequately developed with facts

that show what the parties truly intended their agreement to

mean.

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 50 of 58
PURE WAFER V. CITY OF PRESCOTT 51

1. Lack of attention to the breach claims indicates

that the parties have not adequately developed the

record as to those claims.

The history of this case evidences that the proceedings

may not have sufficiently developed the record on the breach

claims to allow a proper ruling on the merits. The parties

conveyed their initial expectations for the timing of all the

claims in this case in their joint December 2013 planning

report, where they estimated that discovery would take until

the end of April 2014 and the case would be ready for a threeor four-day trial at the end of May. Instead of progressing

pursuant to this expected timeline, the evidentiary

proceedings in the district court were completed within five

weeks of the parties filing their initial planning report and

concentrated almost exclusively on the constitutional claims.

Pure Wafer did not include breach of contract claims in its

initial complaint. Although Pure Wafer later amended to add

the breach claims at issue, it then immediately moved for a

preliminary injunction, making no argument that its breach

claims justified an injunction or that the claims would

eventually succeed on the merits. Instead, its motion sought

an injunction “pending a final judgment determining Pure

Wafer’s constitutional claims.” The motion referred to the

breach claims only once, representing that Pure Wafer

“add[ed] purely alternative claims for breach of contract . . .

and breach of the implied covenant of good faith and fair

dealing . . . [and that g]iven the City’s stated positions, those

claims would not succeed and [were] asserted only in the

alternative . . . out of an abundance of caution.” It was with

this perspective toward the breach claims that the parties and

district court would have prepared for the preliminary

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 51 of 58
52 PURE WAFER V. CITY OF PRESCOTT

injunction hearing, which the court scheduled for December

19, 2013.

The district court limited each party to only three and onehalf hours to present evidence and argument. Thus, Pure

Wafer called only one witness during its presentation-inchief. At the close of the first day (during which the City also

called only one witness), the district court suggested they

proceed immediately with a trial on the merits, consolidate it

with evidence heard on the motion for preliminaryinjunction,

and finish presenting the evidence on the next available court

date (January 14, 2014). The parties agreed to the district

court’s suggestion. The court’s subsequent order provided

that the remainder of trial would be limited to the City calling

one more defense witness and Pure Wafer calling one rebuttal

witness (the same witness it called in its direct presentation).

The order also provided in a footnote that “the trial

necessarily includes the issue of liability on any claims

pleaded in the alternative, namely Pure Wafer’s alternative

claims for breach of contract and breach of the implied

covenant of good faith.” In other words, trial of the

alternative claims was ordered only after Pure Wafer

completed its presentation-in-chief, which focused primarily

on the preliminary injunction on the constitutional issues.

Indeed, when both parties would have been planning which

witnesses to subpoena, which to call, what questions to ask,

and what other evidence to present, they would have made

those decisions understanding that their presentations needed

to pertain only to Pure Wafer’s entitlement to a preliminary

injunction based exclusivelyon its constitutional claims. And

they certainly would not have made these decisions with the

understanding that they needed to try their entire cases, which

they had estimated (in their initial planning report) would not

be ready for five more months. This approach to the

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 52 of 58
PURE WAFER V. CITY OF PRESCOTT 53

evidentiary proceedings below highlights why the parties and

district court did not attempt to develop the record for the

breach of contract claims.

Like the evidentiary portion of trial and every prior filing

in the case, the post-trial briefing and proposed findings and

conclusions only superficially addressed the breach claims.

As noted, the district court’s opinion devoted less than onequarter of a page (out of thirty-two pages) to the breach

claims, holding that they need not be reached and dismissing

them as moot.

The parties’ treatment of the breach of contract claims on

appeal further supports the conclusion that the parties and

district court did not attempt to develop the record for the

purpose of addressing those claims. The only reference the

parties’ briefing made to the claims was in the City’s opening

brief: “Pure Wafer’s breach of contract claims . . . were

dismissed as moot and are not at issue on this appeal.” Pure

Wafer never disputed this position. Indeed, when asked at

oral argument, neither party was prepared to address the

appeal as a breach of contract case. We asked the City, “is

there a reason we can’t treat [this case] as a contract issue?”

The City answered, “I don’t think the record is developed to

that—that the findings of fact and conclusions of law are

developed to that level to permit you to do that.”3

3 This questioning occurred during the City’s rebuttal. The panel

initially raised the issue in its first question during Pure Wafer’s argument,

only after the City had already completed its argument-in-chief without

being asked to argue its position on the issue. Because the panel spent the

majority of Pure Wafer’s argument exploring whether we could approach

the case as a breach of contract dispute, it is troubling that the panel did

not raise the issue at a time that would ensure the City an equal

opportunity to address it.

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 53 of 58
54 PURE WAFER V. CITY OF PRESCOTT

Pure Wafer was equally reluctant to agree that the case

could appropriately be decided as a breach of contract claim

on the present record. Even in response to the question, “can

you still prevail in this particular appeal by persuading us that

the district court made enough findings to establish that this

was a breach of contract,” Pure Wafer never adopted that

position. As its argument came to a close, Pure Wafer

conceded that the parties’ cost allocations for reducing

fluoride was a term fully covered by the Agreement.

Following this concession, however, we clarified whether

Pure Wafer thought that (because the term was covered by the

Agreement) the case could be decided on a breach of contract

theory, rather than by reaching the constitutional issue. Pure

Wafer reluctantly answered, “Maybe.” This ambivalent

response (the last word of Pure Wafer’s argument) typifies

the parties’ and district court’s perspective of the breach

claims throughout this case.

2. Having clearly not focused on the breach of

contract claims, the proceedings up to this point

may have left the factual record without adequate

evidence of the parties’ contractual intent.

In light of Arizona’s goal of giving effect to the parties’

intent, the Arizona Supreme Court in Taylor explained the

great extent to which the state allows parties to offer extrinsic

evidence to show their understandings of contractual

language, and thus, their contractual intent. See 854 P.2d at

1138–41. In analyzing the meaning of language and how it

shows the parties’ intent, Arizona has expressly rejected the

requirement “to make a preliminary finding of ambiguity”

before the court can consider extrinsic evidence. See id. at

1138. Instead, the court must consider all extrinsic evidence

that may support a party’s reasonable interpretation of

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 54 of 58
PURE WAFER V. CITY OF PRESCOTT 55

contractual language as showing the party’s theory of

contractual intent. See id. at 1139. Under this more liberal

approach, Arizona allows the court to “consider surrounding

circumstances, including negotiation, prior understandings,

. . . subsequent conduct,” and the like in interpreting the

contract. See id. at 1139–40; see also Smith, 659 P.2d at 1267

(“When interpreting an agreement, the court may always

consider the surrounding circumstances.” (citingRestatement

(Second) of Contracts § 212 (1981))). If extrinsic evidence

shows the parties used language in their contract they

mutually understood and intended to have a certain meaning,

the court must give effect to that intent, even if the words

have a different meaning under ordinary usage. See Taylor,

854 P.2d at 1139. “[T]he purpose is to produce the contract

result the parties intended, not that which the judge intends.

Some words are clear beyond dispute. Some may mean one

thing to the judge but could have meant something else to the

parties. It is the latter meaning that is important.” Id. at 1141

n.2.

Because the proceedings in the district court did not

concentrate on the breach of contract claims, the parties had

no reason to develop the record with all the facts relevant to

those claims. Pure Wafer has consistentlymaintained that the

parties extensively negotiated before executing the

Agreement. It alleged that they met “on many occasions and

communicated . . . by telephone and written

communications.” It also alleged they “spent several months

negotiating the terms of [their Agreement] to provide the

protection desired both to Pure Wafer and to the City, on the

key economic development elements of their deal.”

According to Pure Wafer, “effluent capacity and quality were

material terms the parties considered and negotiated . . . , and

[the Agreement]reflects those bargains.” It alleged the parties

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 55 of 58
56 PURE WAFER V. CITY OF PRESCOTT

negotiated for the City to accept effluent of a specific

“chemical profile,” and to accept the risk that the City’s

permit requirements could change, resulting in extra expense.

In describing the parties’ negotiations, the district court

cited only one exhibit and seven pages of trial transcript,

coming from the testimony of only one witness. And even

these two items were considered by the district court only for

their relevance to the constitutional claims. The court did not

address how this evidence may have pertained to the breach

of contract allegations, because it found those claims to be

moot. Arizona law allows a party to offer—and requires the

court to consider—all extrinsic evidence that supports the

party’s reasonable interpretation of a contract. Given Pure

Wafer’s continued insistence that the parties extensively

negotiated the terms at issue in this case prior to executing the

Agreement, it is most likely that more extensive and

compelling evidence exists than the current record shows.

For example, there is no evidence in the record to

establish the City’s intended meaning of the Agreement and

understandings from the negotiations at the time of contract

formation. Surely someone from the City involved in (or

knowledgeable on the details of) the many months of

“telephone and written communications” between the parties

would be available to provide this information. Concerning

negotiations, there may be several witnesses who can testify,

early drafts of the Agreement, the parties’ notes on those

drafts, communications regarding their understandings of

certain terms, compromises theyreached, terms theychanged,

etc., all of which is highly relevant and necessary to

determining the parties’ intent, but none of which can be

found in the record. The record indicates such evidence

exists; it simply has not been made part of the record. For

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 56 of 58
PURE WAFER V. CITY OF PRESCOTT 57

example, a 1997 internal Pure Wafer memo refers to

discussions of sewer usage rates the parties had at “the

Development Agreement meeting.” However, the record

contains no minutes, notes, or correspondence to show

specifically what was discussed at this meeting. Similarly, a

2011 letter from Pure Wafer to the City outlined that, in

preparing the letter, Pure Wafer’s attorney “pulled [Pure

Wafer’s] file from the time the Agreement was drafted and

reviewed the notes of [his] meetings and telephone

conversations with the City, as well as correspondence with

the City and drafts of the Agreement.” Yet these notes,

written correspondence, and draft Agreements are absent

from the record. Given this record, the testimony of a single

witness (testifying on Pure Wafer’s behalf) does not seem

sufficient to establish the contractual intent of both parties at

the time they executed the Agreement, especially where so

much additional extrinsic evidence is likely available.

The parties’ true intent cannot be revealed without

consideration of all available evidence and application of that

evidence to the language of the contract as a whole. Though

it is certainly within the fact-finder’s discretion, I anticipate

the district court on remand would want to conduct additional

proceedings with respect to the breach claims, because the

lack of attention to those claims leaves the record far short of

containing all available evidence of contractual intent. The

parties should be permitted to develop concrete evidence of

their positions and understandings of the relevant terms at the

time they executed the Agreement.

III. Conclusion

The district court should have the first opportunity to

consider whether to exercise supplemental jurisdiction,

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 57 of 58
58 PURE WAFER V. CITY OF PRESCOTT

because we have dismissed the only federal claim. This

dismissal also necessitates a remand for the district court to

make findings of fact and conclusions of law specific to the

breach of contract claims, having previously found those

claims to be moot. The majority errs by stepping into the role

of fact-finder in the first instance with respect to the breach

claims; by failing to address the claims Pure Wafer actually

alleged; and by failing to recognize that its analysis of the

breach claims contradicts the Agreement’s plain meaning,

fails to consider the Agreement as a whole, and is lacking

adequate support from the record.

The circumstances warrant remand to permit the district

court (or an Arizona court) the first opportunity to address the

merits. Doing so would allow the trial court to focus on the

language of the Agreement and, in accordance with Arizona

law, consider any extrinsic evidence that supports a

reasonably susceptible interpretation of the contract. While I

am cognizant of the desire for a speedy and efficient

resolution of this dispute, the majority’s opinion sacrifices a

proper and thorough resolution of this case for a speedy one.

 Case: 14-15940, 01/10/2017, ID: 10260084, DktEntry: 53-1, Page 58 of 58