Appeal from the United States District Court for the Eastern District of Wisconsin. No. 02-C-0270-Charles N. Clevert, Jr., Judge.
The opinion of the court was delivered by: Cudahy, Circuit Judge
Before BAUER, CUDAHY, and WOOD, Circuit Judges.
This case has a long and stormy history. Its full background was set out in this court's previous opinion, Friends of Milwaukee's Rivers and Lake Michigan Fed'n v. Milwaukee Metro. Sewerage Dist., 382 F.3d 743 (7th Cir. 2004) (FMR I). After over six years of litigation and two trips back and forth between the district court and this court, we are hopeful that the sun is breaking through.
For the ease of the reader, a brief review of the facts and procedural history is provided below.
A. The Initial Proceedings in the District Court
Friends of Milwaukee's Rivers and Lake Michigan Federation, n/k/a Alliance for the Great Lakes (collectively, Friends), filed this citizens' suit against the Milwaukee Metropolitan Sewerage District (MMSD) under the Federal Water Pollution Control Act (the Clean Water Act or the Act), 33 U.S.C. §§ 1251 et seq., in the United States District Court for the Eastern District of Wisconsin on March 15, 2002. Friends alleged that certain sanitary sewer overflows that occurred between January 1, 1995 and September 25, 2001 were violations of MMSD's Clean Water Act permit and of the Act itself. They sought a declaratory judgment, injunctive relief, civil penalties and costs and fees under the citizens' suit provision of the Act. FMR I, 382 F.3d at 751. Later that same day, the State of Wisconsin (the State) also filed suit against MMSD.
Within a few months, the State and MMSD reached a settlement (the 2002 Stipulation), which provided for expenditures of more than $900 million on various projects. MMSD agreed to (1) build new Deep Tunnel projects that increase wastewater storage capacity from 405 to 521 million gallons; (2) upgrade its information and control technology, including the installation of a Real Time Control system; (3) reduce infiltration and inflow of storm water into the system by five per cent; and (4) complete a number of other projects, including a Capacity Management, Operation and Maintenance Program as well as projects provided for in its long-term facilities plan.
MMSD then moved to dismiss Friends' citizens' suit. The district court found that the State had commenced and diligently prosecuted judicial and administrative enforcement actions against MMSD. Therefore, it dismissed Friends' suit as barred first by the Act and in the alternative by res judicata. Friends appealed.
In FMR I, we undertook a comprehensive review of MMSD's background, systemic difficulties and ongoing litigation with the State and with Friends. 382 F.3d at 748-51. We also recognized the occurrence of a massive, unprecedented dumping in May 2004 of 4.6 billion gallons of rainwater laced with raw sewage-including a sanitary sewer overflow (SSO) of about 500 million gallons-directly into Lake Michigan and Milwaukee-area rivers. Id. at 749 n.1.
We found, first, that the Clean Water Act did not bar Friends' suit. The Act strips the courts of subject matter jurisdiction over citizens' suits where the State has timely commenced judicial or administrative enforcement actions. See 33 U.S.C. §§ 1365(b)(1)(B), 1319(g). Because the State's actions in this case were not commenced before Friends filed their citizens' suit, we held that these provisions did not apply. 382 F.3d at 757. That holding is not at issue in this appeal.
Second, with respect to res judicata, we agreed that two out of its three requirements had been satisfied: there had been prior litigation resulting in a final judgment on the merits by a court with jurisdiction, and there was identity of the causes of action in the two suits. FMR I, 382 F.3d at 757-58. We found, however, that the record was insufficient to determine whether Friends were in privity with the State for purposes of the two actions.
We explained, "in order for the state agency to be in privity with the public's interests, the State's subsequently-filed government action must be a diligent prosecution." FMR I, 382 F.3d at 759. Looking to the language of the Act to define "diligent prosecution," we said, "[o]ur diligent prosecution analysis of the 2002 Stipulation will examine whether it is capable of requiring compliance with the Act and is in good faith calculated to do so." Id. at 760. We recognized "that diligence on the part of the State is presumed," id., and neither perfect foresight nor success are required. Id. at 759. Notwith-standing those points, however, "a diligent prosecution analysis requires more than mere acceptance at face value of the potentially self-serving statements of a state agency and the violator with whom it settled regarding their intent with respect to the effect of the settlement." Id. at 760. Therefore, we engaged in a substantive analysis of whether the 2002 Stipulation was capable of requiring compliance with the Act and was in good faith calculated to do so.
Most of the concerns that Friends raised about the diligence of the 2002 Stipulation were easily dispensed with, but we shared their concern that "the planned improvements to MMSD's system under the 2002 Stipulation may not in fact result in MMSD's eventual compliance with the Act and its permit." Id. at 763. We did not "feel confident that the 2002 Stipulation will indeed result in elimination of the root causes underlying the large-scale violations alleged by the plaintiffs, regardless of the State's and MMSD's self-serving statements that it is intended to do so." Id. at 764. Therefore, we could not say on the basis of the record as it existed before the district court whether the 2002 Stipulation was calculated to result in compliance with the Act and remanded for determination of that issue. Id. at 765. Our specific instructions were the following:
[T]he district court should determine whether the systemic inadequacies of MMSD's sewerage facilities will be sufficiently ameliorated by the proposed remedial projects to result in compliance. If the district court concludes, after giving some deference to the judgment of the State, that there is a realistic prospect that violations due to the same underlying causes purportedly addressed by the 2002 Stipulation will continue after the planned improvements are completed, the plaintiffs' suit may proceed. If, after a more detailed examination of the 2002 Stipulation, the district court concludes that no such prospect exists, it may so find, provide a thorough explanation of its conclusion and consider reinvocation of the res judicata bar.
C. The District Court's Opinion on Remand
The district court held a two-day evidentiary hearing and ordered post-hearing briefing to address whether the 2002 Stipulation was capable of achieving, and calculated to achieve, compliance with the Act and was therefore a diligent prosecution for privity purposes.
The court began by defining compliance with the Act as compliance with the permit MMSD had with the State at the time, citing 33 U.S.C. §§ 1311(a), 1346(a)-(b). That was the 1997 Wisconsin Pollutant Discharge Elimination System (WPDES) permit, which prohibited SSOs subject to certain "exceptions to enforcement," including unavoidable bypasses "necessary to prevent loss of life or severe property damage." Friends of Milwaukee's Rivers and Lake Michigan Fed'n v. Milwaukee Metro. Sewerage Dist., No. 02-C-0270, 2007 WL 4410402, at *4 (E.D. Wis. Dec. 14, 2007). The court then noted that the capacity and physical infrastructure of the sewer system is in turn determined by the State, including the Wisconsin Department of Natural Resources (WDNR), in cooperation with MMSD. Therefore, the court reasoned, if the ...