Celia G. Kaechele and Conor B. Dugan of Warner Norcross + Judd (Photo: Courtesy Photo)

The U.S. Court of Appeals for the Sixth Circuit recently held that a federal consent judgment was assignable to a successor of the plaintiff-company that was a party to the original consent judgment. That decision, in and of itself, is not entirely surprising—Michigan contract law allows such rights to be assigned unless clearly barred.

But the Sixth Circuit's decision in Evoqua Water Technologies v. M.W. Watermark, No. 18-2397/2398, raises the larger question of what law should be used to govern the interpretation of a consent decree entered by a federal court: federal common law or state contract law? Numerous circuits have held that in interpreting a federal consent decree, courts should rely on federal common law. A handful, including the Sixth Circuit again in this case, have held that courts are to look instead to state law. Evoqua Water Technologies demonstrates a continuing circuit split that will require U.S. Supreme Court resolution in the near future.

In Evoqua Water Technologies, plaintiff Evoqua appealed the ruling of the U. S. District Court for the Western District of Michigan that a 2003 federal consent decree entered by that same court was not assignable, resulting in the dismissal of the claim for lack of standing. Both plaintiff and defendants appealed additional rulings by the district court related to intellectual property infringement, false advertising and the availability of attorney fees. The Sixth Circuit reversed on the question of assignability, reversed the district court's grant of summary judgment to defendants on a copyright claim, and remanded for further proceedings. It is the Sixth Circuit's analysis of the assignability of the consent decree and Judge John K. Bush's lengthy concurrence—almost the same length as the majority opinion—that are the most notable.

Evoqua and Watermark both manufacture and sell equipment that removes water from industrial waste, and they both have common roots in a corporation named JWI, Inc. JWI was acquired by U.S. Filter Corp. and the two together formed U.S. Filter/JWI, Inc. The combined corporation went through a series of mergers before the water technologies sector of the corporation was sold to Siemens Water Technologies LLC, which later changed its name to Evoqua Water Technologies LLC.

The founder of Watermark, Michael Gethin, was a former employee of U.S. Filter/JWI. Not long after Gethin formed Watermark, U.S. Filter/JWI filed suit against him and his new company for a variety of claims including intellectual property infringement, unfair competition and breach of contract. The parties settled their claims in 2003, and the Western District of Michigan entered the "Final Judgment Including Permanent Injunction," which enjoined Watermark, Gethin and all successors and assigns from using U.S. Filter/JWI's intellectual property and proprietary information.

Pursuant to the consent decree's explicit language, Watermark and Gethin's successors and assigns would be bound to the consent decree's terms. There was no such language affirmatively granting any successors or assigns of U.S. Filter/JWI the right to enforce the decree.

The absence of a parallel assignment clause benefiting U.S. Filter/JWI led the district court to hold that Evoqua, as assignee of U.S. Filter/JWI, did not have standing to enforce the consent decree. The Sixth Circuit, however, disagreed with the district court's holding and vacated it on the grounds that Michigan contract law assumes contract rights are assignable unless clearly restricted and that unnamed third-party beneficiaries have the ability to enforce contracts in limited circumstances. These state law principles, however, are contrary to U.S. Supreme Court precedent holding that consent decrees are not assignable nor that unnamed third-party beneficiaries are barred from enforcing them.

The majority opinion references the leading Supreme Court cases on the assignability of consent decrees, Blue Chips Stamps v. Manor Drug Stores and United States v. Armour & Co., which held that the scope of consent decrees could only be discerned from within the four corners of the actual decree and they are not enforceable by those who are not parties to them.

However, the majority was constrained by the Sixth Circuit's 1998 decision in Sault Ste. Marie Tribe of Chippewa Indians v. Engler. There, the court held that "in the absence of controlling federal law, contractual interpretation of the consent judgment is governed by Michigan law." Following Sault Ste. Marie's instruction to apply the contractual interpretation of the state in which the consent decree was issued, the majority applied the principle of Michigan contract law that "rights can be assigned unless the assignment is clearly restricted" to hold that the consent decree was assignable because it contained no specific language to the contrary.

In Bush's concurrence one realizes the import of the Sixth Circuit's decision in the larger legal landscape. Roughly the same length as the majority opinion, that concurrence is a veritable legal treatise on questions of federal common law and the power of Article III courts.

Bush joined fully in the majority opinion because it properly applied Sixth Circuit precedent; however, it is this precedent he questions in his concurrence. Bush disagrees that the interpretation of a federal consent decree should be governed by state law when such an interpretation is an exercise of a federal court's Article III power. Instead, he advocates for an application of federal common law principles to federal consent decrees, an approach inconsistent with the Sixth Circuit decision in Sault Ste. Marie.

In the concurrence, Bush acknowledges the complicated history of federal common law but explains that the "nation's constitutional structure" compels the use of federal common law when interpreting federal consent decrees. He argues this is because interpretation of federal judgments is "a matter beyond the State legislatures' competence" and at the same time is fundamental to federal courts operating under Article III.

He further argues that applying state law to interpret federal consent decrees would conflict with the Article III power of a federal court over its judgments, but acknowledges that state law could have a role in informing the appropriate interpretation due to its predominance in the area of contract law.

As it turns out, the Sault Ste. Marie decision cited by the majority opinion marked a reversal in Sixth Circuit precedent that has gone unquestioned. Prior to 1998, the Sixth Circuit interpreted federal consent decrees using general principles of federal law with no reference to state law principles. But the court in Sault Ste. Marie ignored this tradition and, without explanation, decided to apply state of Michigan contract law principles instead.

Ever since, the Sixth Circuit has followed that approach. While Bush accepted that Sault Ste. Marie was the applicable precedent to interpret the consent decree before the court in Evoqua, he questioned the validity of that precedent in light of federal courts' powers under Article III of the Constitution and Supreme Court precedent.

Bush also pointed out a stark divide among the circuit on the question. The First, Second, Third, Eighth, Eleventh, and DC circuits have all held that federal common law applies to the interpretation of federal consent decrees. In addition to the Sixth Circuit, the Fifth, Seventh, Ninth and Tenth circuits have held that state law applies.

The question whether federal or state law applied was not merely academic. In Evoqua it was outcome determinative—the application of federal common law to the interpretation of the consent decree would have resulted in a different outcome. Because federal law only allows the parties expressly identified in a consent decree to enforce it, that right could not have been implied to Evoqua. Thus, the district court's conclusion that Evoqua lacked standing would have been upheld rather than reversed. In light of the inconsistencies between the circuits, and the internal inconsistencies within Sixth Circuit precedent, Bush stated that full Sixth Circuit should "revisit" the interpretation of federal consent decrees.

Ultimately, Bush's concurrence demonstrates an important issue that will need to be resolved by the U.S. Supreme Court. As Bush argues, the circuits relying on state law principles have "not satisfactorily explained why state law supplies the rule of decision for a quintessential act of the federal government." The Supreme Court's intervention is needed to clarify this question.

While in this case, the Sixth Circuit recently denied the petition for rehearing en banc so it will not be reviewing its precedent in this area now, it seems likely that the Supreme Court will take this case or another one like it in nature in the future to resolve this tension. But Evoqua Water Technologies also demonstrates that future parties to federally entered consent decrees should be aware of this split in authority when it comes to the interpretation of such decrees. And they should carefully consider the potential ramifications of omitting an assignment clause for both parties.

Conor B. Dugan is senior counsel in the appellate practice group of Warner Norcross + Judd. Celia G. Kaechele is an associate with the firm.