The Supreme Court’s New Equity: We’re Not in Kansas Anymore – Henry Smith

Post by Henry Smith

This is a private law blog, but that doesn’t make the U.S. Supreme Court irrelevant. This past term, in Kansas v. Nebraska, 135 S. Ct. 1042 (2015), the Court afforded equitable relief to both sides in a dispute over water taken by Nebraska from the Republican River Basin under an interstate compact involving those two states and Colorado, along with and a previous settlement. The case has it all: water, interstate relations, federal supremacy, original jurisdiction, contract law – and equity. Although there is a lot to say about this case, it is this last aspect – the role of equity – that I think is underappreciated or mis-appreciated.

Noting that proceedings under the Court’s original jurisdiction have long be held to be “basically equitable in nature,” the majority per Justice Kagan saw this as a contract dispute in which Nebraska’s “knowing” (here “reckless”) breach made other remedies inadequate and an order of disgorgement appropriate. (The Court also endorsed the application of the equitable remedy of reformation in favor of Nebraska.) As a matter of contract law, disgorgement is quite controversial (efficient breach and all that), and besides joining Justice Thomas’s concurrence/dissent Justice Scalia wrote separately for the sole purpose of pouring scorn on the Restatement Third of Restitution and Unjust Enrichment (R3RUE) for endorsing the possibility of restitution in cases of opportunistic breach (in Section 39). There is a lot to say about the increasing popularity of notions of willful or opportunistic breach in the commentary and whether the R3RUE went too far here. (In general it is much more faithful to existing law than a lot of recent Restatements, and is truly outstanding.) That’s for another time.

Instead I want to suggest that the Court’s (and perhaps the Restatement’s) reaching for novel equitable remedies is understandable and regrettable at the same time. Both the majority and the dissent believe they have the traditions of equity on their side. Justice Kagan sees this as an instance where judicial discretion is needed to prevent a party from breaching in such a way that the other party has no effective remedy. Justice Thomas regards this approach as uncabined and in its novelty untethered to historic exercises of equitable jurisdiction. All this is a replay of earlier splits between the formalists and contextualists on the Court over new equitable remedies. The problem then as now is that the traditions of equity are not well understood, and are not regarded as serving any distinct function. I would (and have) argued that a core function of equity, for which there is a great deal of historical evidence – see for example Justice Story’s treatise on “constructive fraud” – was to combat opportunism. Here Nebraska was arguably gaming the system. And yet no one asked for specific performance.

Why not an injunction? One possible reason the Supreme Court and the federal courts, starting with eBay v. MercExchange, 547 U.S. 388 (2006), have detached injunctions from historical equitable questions of opportunism and the traditional rules of thumb based on bad faith and disproportionate hardship. Once injunctions (and specific performance) are no longer tailored to dealing with opportunists, the ever-present need to deal with the “constructive fraud” will inevitably lead to calls for punishing willful or opportunistic breach – through new contract law, restitution, or novel applications of “equity.” None of this would be nearly so necessary if a (somewhat) more expansive – and more traditional – version of equity were back on the table.