Merced Irrigation District v. County of Mariposa (941 F. Supp. 2d 1237, 2013)

United States District Court for the Eastern District of California 2013-04-23

Conservation Internal Revenue Code Government Organization and Employees

Citations

Full opinion text

ORDER ADOPTING THE MARCH 4, 2013, FINDINGS AND RECOMMENDATIONS (Doc. 27)

ORDER GRANTING MERCED IRRIGATION DISTRICT’S MOTION TO REMAND (Doc. 13)

LAWRENCE J. O’NEILL, District Judge.

I. INTRODUCTION

Plaintiff Merced Irrigation District (“MID”) filed a declaratory relief action against the County of Mariposa (“Mariposa”) in Merced County Superior Court on September 5, 2012. On October 5, 2012, Mariposa removed Plaintiffs declaratory relief action to this Court. (Doc. 1.) On November 2, 2012, MID filed a motion to remand the action to Merced County Superior Court. (Doc. 13.) Mariposa filed a brief in opposition to MID’s motion on December 5, 2012, and MID filed a reply brief on December 12, 2012. On December 18, 2012, U.S. Magistrate Judge Sheila K. Oberto ordered the parties to submit additional briefing. On January 4, 2013, Mariposa filed a supplemental brief and on January 15, 2013, MID filed a supplemental brief. (Docs. 24, 25.)

On March 4, 2013, the Magistrate Judge issued Findings and Recommendations (“F & Rs”) recommending that MID’s motion to remand be granted. (Doc. 27.) The parties each filed objections to the F & Rs on March 28, 2013 (Docs. 33, 34), and each filed responses to the other’s objections on April 11, 2013 (Docs. 36, 37).

In accordance with the provisions of 28 U.S.C. § 636(b)(1)(C), this Court has conducted a de novo review of the case. Having carefully reviewed the entire file, the Court concludes that the Magistrate Judge’s F & Rs are • supported by the record and proper analysis; for the reasons set forth below, the March 4, 2013, F & Rs are ADOPTED, MID’s motion to remand is GRANTED, and the case shall be remanded to the Merced County Superior Court.

II. DISCUSSION

A. MID’s Objections

MID objects to the portions of the F & Rs that determined MID’s complaint fairly anticipated state law claims for anticipatory breach and breach of the implied covenant of good faith and fair dealing. MID argues that the only claim anticipated by its complaint is one for breach of contract relevant to the payment provisions under Paragraph 3 of the 1960 Agreement. The hypothetical state law causes of action posed by Mariposa “could only arise as a counterclaim or rejoinder by [Mariposa], premised on the affirmative defenses set up by the District’s complaint for declaratory relief.” (Doc. 33, 2:17-20.) As it pertains to a claim for anticipatory breach of Paragraph 4 of the parties’ 1960 Agreement, MID has not opposed any application by Mariposa to the State Water Resources Control Board. Moreover, MID contends that there is no actual repudiation of the parties’ contract such that Mariposa has any anticipatory breach claim or implied covenant claim, and none of the allegations in its declaratory relief complaint can themselves give rise to such claims.

Mariposa filed a response to MID’s objections, asserting that MID is incorrect in its argument that Mariposa’s coercive claims for anticipatory breach and breach of the implied covenant would not arise but for MID’s declaratory relief action and would only arise as counterclaims or rejoinders to MID’s defenses in the declaratory relief action. Mariposa asserts that MID has made statements publicly before the Federal Energy Regulatory Commission (“FERC”) prior to filing its declaratory relief action that due to the National Wild and Scenic Rivers Act (“WSRA”) Mariposa “can exercise no more than the 5,000 [acre feet (“AF”)] it was separately allocated under the 1990 Agreement for the Saxon Creek Project, and that MID’s payment obligations are capped by the cost of that product due solely to the enactment of the WSRA.” (Doc. 37, 3:21-23.) Thus, the repudiation of Mariposa’s water allocation rights did not arise as a result of MID’s complaint, and Mariposa’s claims in this regard are not simply rejoinders to MID’s defenses as stated in its declaratory relief complaint.

MID’s objections are not persuasive. Mariposa is correct that its hypothesized claims for anticipatory breach and breach of the implied covenant do not arise but for the filing of MID’s complaint. MID’s statements to FERC and to Mariposa itself prior to the litigation can be construed as a repudiation of Mariposa’s allocation rights under Paragraph 1 of the 1960 Agreement. Mariposa also argues that by entering into Paragraph 4 of the 1960 Agreement, MID impliedly agreed that it would not take a position effectively foreclosing Mariposa’s right to apply for a permit from the State Water Resources Control Board (“SWRCB”) or any other regulatory agency. As demonstrated in Mariposa’s opposition, the documents filed in support of Mariposa’s opposition, and Mariposa’s brief and materials filed in response to MID’s objections, Mariposa’s hypothetical state law claims were not precipitated by MID’s declaratory relief complaint. Further, the Court does not construe the Magistrate Judge’s discussion of the allegations in MID’s complaint as a finding that Mariposa’s hypothetical claims arose out of or because of the complaint, but reflect consideration of how MID’s declaratory relief complaint fairly anticipated such state law claims.

B. Mariposa’s Objections

1. Mariposa’s Hypothetical Federal Claims

Mariposa argues that it has potential federal claims against federal agencies under Section 7 of the WSRA and the National Environmental Protection Act (“NEPA”) pursuant to the Administrative Procedure Act (“APA”). The Magistrate Judge found that Mariposa’s hypothetical federal claims could not confer federal-question jurisdiction:

[HJypothetical coercive claims (1) adverse to a federal agency that is not the declaratory judgment plaintiff (MID), (2) challenging a hypothetical federal agency decision where agency proceedings have either not been initiated (e.g., under Section 7 of the WSRA) or have not been completed (e.g. FERC relicensing proceedings) such that they could be considered final and ripe for purposes of judicial review, and (3) that involve issues that are beyond the scope of what is fairly anticipated by the declaratory judgment complaint, do not confer federal-question jurisdiction on the Court.

(Doc. 27, 25:11-17.)

Mariposa objects to each of these findings asserting that (1) its federal claims are fairly anticipated by MID’s declaratory relief complaint; (2) MID would most likely assert that it was a necessary party to any action Mariposa brought against a federal agency under the WSRA or NEPA, and, under Federal Rule of Civil Procedure 19, MID would be included as a necessary party; (3) its hypothetical APA claim under the WSRA or NEPA would be ripe under the test applied by the Ninth Circuit in San Luis & Delta-Mendota Water Authority v. Salazar, 638 F.3d 1163, 1173 (9th Cir.2011) (“San Luis ”); and (4) its hypothetical challenge to FERC’s decision on MID’s pending application is required to be heard in a federal court of appeals which underscores the need for federal jurisdiction over MID’s state law declaratory judgment complaint.

Whether MID may be a necessary party to any future hypothetical challenge to a federal agency decision under Section 7 of the WSRA or pursuant to NEPA is irrelevant in light of the ripeness and finality issues noted by the Magistrate Judge. Mariposa asserts that its hypothetical APA claim under the WSRA or NEPA is ripe under the test applied by the Ninth Circuit in San Luis, 638 F.3d at 1173. In San Luis, the Ninth Circuit applied the ripeness test articulated by the Supreme Court in Abbott Laboratories v. Gardner, 387 U.S. 136, 149, 87 S.Ct. 1507, 18 L.Ed.2d 681 (1967), which determined ripeness based on the fitness of the issues for judicial decision and the hardship of the parties of withholding court consideration. Mariposa argues that the situation here is identical to that in San Luis because MID’s declaratory judgment complaint has interfered with Mariposa’s ability to utilize WSRA Section 7. Specifically, Mariposa argues that MID has articulated a concrete plan to use Mariposa’s water to expand its power generation capacity and has sought intervention to terminate Mariposa’s rights as a matter of federal law.

Even if the Abbott Laboratories ripeness analysis applied in San Luis applies here, the outcome of such an analysis would not favor Mariposa. In San Luis, agricultural interests receiving water from a federal/state water project challenged an Endangered Species Act (“ESA”) biological opinion issued to the water project operators. 638 F.3d at 1168. The district court found plaintiffs’ challenge under ESA § 7 (the statutory provision requiring issuance of biological opinions) ripe, but dismissed a parallel claim brought under ESA § 9 (which makes it unlawful to “take” listed species without a permit) on the ground that there was no threat that § 9 would be enforced against the plaintiffs. 638 F.3d at 1168-69. The Ninth Circuit reversed as to the § 9 claim, reasoning that the “preenforcement” ripeness analysis should not apply. Rather, applying the Abbott Laboratories test, the Ninth Circuit concluded:

First, the challenge is fit for judicial review because further factual development would not significantly advance the Court’s ability to deal with the legal issues presented.... Second, the Growers will suffer hardship if the court withholds consideration because the Service’s continued power to enforce ESA § 9 imposes a significant practical harm upon the Growers.

Id. at 1173 (finding the § 9 claim ripe).

Mariposa argues that application of this test favors a finding of ripeness here. But, Mariposa confuses and oversimplifies the relevant inquiry by arguing: “The only issue before the court, whether the WSRA entirely terminates Mariposa’s water rights by precluding its ability to obtain a permit, is a pure issue of federal law that MID wants decided before its FERC license renewal.” (Doc. 34, 9:12-15). That is not the “issue” to be considered in the Abbott Laboratories inquiry. Here, the hypothetical APA claims would be premised upon a hypothetical refusal of a federal agency to grant Mariposa permission to pursue an entirely hypothetical specific water project. Even assuming the project was defined, there is no way to know on what grounds permission to proceed would be denied. Only if the federal agency outright refused to consider the petition on the ground that no such permission could ever be granted would the question posed by Mariposa be presented to this Court in an APA claim. Further factual development would not only “significantly advance the Court’s ability to deal with the legal issues presented,” it is absolutely necessary. Mariposa’s hypothetical APA claims are not ripe and therefore cannot provide removal jurisdiction.

Additionally, as the Magistrate Judge noted, there is no final agency decision to challenge under the APA with respect to Section 7 proceedings under the WSRA or NEPA because no agency proceedings have been initiated. As federal courts are required to strictly construe jurisdictional statutes, and doubt is to be resolved in favor of remand, the Court concludes that there is no APA claim that confers subject matter jurisdiction under these circumstances. Hunter v. Philip Morris USA, 582 F.3d 1039, 1042 (9th Cir.2009); Gaus v. Miles, Inc., 980 F.2d 564, 566 (9th Cir.1992); see also Durham v. Lockheed Martin Corp., 445 F.3d 1247, 1252 (9th Cir.2006).

With respect to MID’s FERC licensing proceedings, Mariposa asserts it may have a future federal claim challenging the FERC determination. Mariposa argues that a state court has no interest, familiarity, or jurisdiction related to FERC, and contract litigation that may affect a FERC determination belongs in federal court. (Doc. 34, 14:2-22.) Despite that a federal district court has no subject matter jurisdiction over challenges to FERC decisions, Mariposa argues its hypothetical challenge to a future FERC decision should confer the district court with jurisdiction. The mere fact that the parties’ contractual dispute may affect a future FERC determination does not provide this Court with subject matter jurisdiction over the future FERC decision. Mariposa’s objection in this regard provides no basis to conclude that the Magistrate Judge erred in finding that a hypothetical FERC challenge could not confer the district court with subject matter jurisdiction.

2. Mariposa’s Hypothetical Anticipatory Breach Claim — Paragraph 3

In its opposition, Mariposa claims to have two anticipatory breach claims. The first based on the payment provision in Paragraph 3 of the 1960 Agreement, and a second claim predicated on Mariposa’s right to the 70,000 AF of water under Paragraph 1 of the 1960 Agreement (as renegotiated in 1990) in conjunction with MID’s obligation under Paragraph 4 not to oppose any application or permit for which Mariposa applies with respect to the water allocation in Paragraph 1. Mariposa objects to the Magistrate Judge’s finding that it has an alternative theory of recovery not dependent on federal law as to its first hypothetical claim for anticipatory breach regarding MID’s payment obligations under Paragraph 3, arguing that the payment obligations of the 1960 Agreement represent only half of Mariposa’s rights” under the contract, with its 70,000 AF water right defined in Paragraph 1 making up the other half. {See Doc. 34, 11:1-2.)

Mariposa’s hypothesized anticipatory breach claim with regard to MID’s payment obligations under Paragraph 3 is separate from its potential anticipatory breach claim with respect to its water diversion rights under Paragraph 1 and MID’s obligations under Paragraph 4. The Magistrate Judge analyzed the claims separately and did not conclude that anticipatory breach claim with respect to the water diversion rights under Paragraph 1 or MID’s obligations under Paragraph 4 could be resolved on an alternative theory. Mariposa’s objections in this regard are without merit.

3. Mariposa’s Hypothetical Anticipatory Breach Claim — Water Allocation under Paragraph 1 and MID’s Obligations under Paragraph 4

Mariposa’s opposition brief asserts that the element of its hypothetical anticipatory breach claim resulting from MID’s interference with a potential attempt by Mariposa to develop a “water resources project” on the South Fork depends on establishing Mariposa’s ability to perform under the WSRA. (Doc. 21, 26:14-19 (“Because the element of Mariposa’s ‘ability to perform’ in an action for anticipatory breach relating to MID’s attempt to prevent Mariposa from utilizing its water allocation for a ‘water supply project’ on the South Fork [of the Merced River] rests on this Court’s interpretation of federal law ... such a claim would necessarily raise a federal issue that is actually disputed.”).)

The Magistrate Judge determined that a claim for anticipatory breach would not require Mariposa to show it could perform under the WSRA. In its objections, Mariposa asserts that it would be required to prove how MID’s excuse for non-performance was without legal cause. This does not address the fact that a defendant’s excuses for non-performance are affirmative defenses and proof of those issues lie with the defendant — Mariposa’s responses to MID’s affirmative defenses are simply rejoinders and not a necessary element of Mariposa’s claim. While a plaintiff has a duty to plead its own performance or excuse for the failure to perform, it does not have to prove or plead how the defendant’s excuse for non-performance was not justified. Transmarine Corp. v. R.W. Kinney Co., 123 Cal.App. 411, 421, 11 P.2d 877 (1932) (A plaintiff need not anticipate or negate any defense or counterclaim on the part of the defendant (citing 21 Cal. Jur. 61-63)).

Mariposa also asserts that it will be required to show causation and establish its damages, which necessarily implicate the WSRA as the statute will govern the amount of water that could be diverted from the South Fork and the calculation of damages. This argument, however, is raised for the first time in the objections and provides no explanation of how damages or causation are necessarily tied to an interpretation of the WSRA. MID’s reason for repudiating Mariposa’s right to the water allocation under Paragraph 1 or objecting to any application or request by Mariposa to use the water is not an aspect of showing that MID caused Mariposa damage. Further, even if the WSRA were somehow relevant to calculating the amount of Mariposa’s damages or the causation analysis, it would be so fact-specific to this dispute that it would not qualify as a substantial federal issued under Grable & Sons Metal Prods. v. Darue Eng’g & Mfg., 545 U.S. 308, 314, 125 S.Ct. 2363, 162 L.Ed.2d 257 (2005).

4. Implied Covenant of Good Faith and Fair Dealing

Mariposa objects to the Magistrate Judge’s findings and conclusion that the federal issue arising in a potential breach of the implied covenant claim would not be substantial under Grable. Mariposa argues that the WSRA would be interpreted as a pure question of law in deciding such a claim, and that interpretation would be fully dispositive of MID’s bad faith.

Mariposa’s theory of MID’s alleged breach of the implied covenant is somewhat amorphous. In its opposition, Mariposa explained its potential claim for breach of the implied covenant as predicated “on MID’s long-time recognition of Mariposa’s right to deplete MID’s water allocation (including its formal recognition in the 1990 Agreement), and MID’s recent assertion that the [ ] WSRA prohibits Mariposa’s exercise of those rights.” (Doc. 21, 24:19-22.) In its response to MID’s objections, Mariposa articulates its claim differently, asserting that by entering into Paragraph 4 of the 1960 Agreement, “MID impliedly agreed that it would not take a position effectively foreclosing Mariposa’s right to apply for a permit from the SWRCB or any other regulatory agency.” (Doc. 37, 6:1-3.)

Mariposa characterizes MID’s position as an assertion that the WSRA has no regulatory process for approval of a diversion project on the South Fork, which is an unreasonable interpretation as a matter of law. Mariposa cites Morris v. Paul Revere Life Ins. Co., 109 Cal.App.4th 966, 973-74, 135 Cal.Rptr.2d 718 (2003), and argues that where the analysis of bad faith turns on the reasonableness of the legal argument advanced, it presents a pure question of law that depends entirely on an analysis of legal precedent and statutory language. Therefore, the only question that would arise in its breach of the implied covenant claim would be a matter of law determination regarding the interpretation of the WSRA and whether any reasonable person could interpret it as MID has done. The issue, therefore, is not fact-specific, and it involves a pure interpretation of law which is dispositive to the claim.

The bad-faith analysis in Morris — the reasonableness .of insurer’s legal position in erroneously interpreting the policy language — is an unworkable analogy here. Morris involved a matter-of-law coverage determination that led to an improper denial of a claim (and, therefore, a breach of the contract). The only question remaining in that case was whether the legal interpretation that led to the breach of the contract could be construed as reasonable — e.g., the law was unsettled and there were competing interpretations of the policy language that supported a “genuine dispute.”

Unlike the insurer’s legal interpretation of the policy language in Morris, MID’s interpretation of the WSRA is not a construction or interpretation of the terms of the parties’ contract nor does it establish as a matter of law the nature of the implied duties arising from the contract. In other words, whether MID had an implied duty under the contract, whether that duty was breached by certain conduct, and whether that conduct was objectively unreasonable cannot be determined only by an interpretation of the WSRA.

Further, although Mariposa characterizes MID’s interpretation of the WSRA as reading Section 7 out of the statute, it is not clear this is actually MID’s position. MID has communicated to Mariposa and to FERC that the WSRA precludes further water diversions by Mariposa from the Merced River. MID has not pointed to any particular language in the WSRA that requires this as a matter of law, nor has MID claimed that Mariposa cannot seek an exemption under Section 7 of the WSRA. MID’s assertion with respect to the WSRA could be construed as an argument that the restrictions imposed by the WSRA, the water acreage at issue in the parties’ contract, and the specific conditions on the South Fork of the Merced River make it impossible as a practical matter for Mariposa to build a water resources project on the South Fork, which in turn affects the parties’ contract. This is not necessarily an argument that Mariposa cannot seek federal agency approval of a water resources project under Section 7 or that the WSRA precludes every water resource project on a wild-and-scenic river as a matter of law. Testing the objective reasonableness of such a position, even if erroneous, would not be predicated only on a matter-of-law interpretation of the WSRA. Further, determination of the implied duties under the contract as well as any conduct breaching that duty would arguably involve factual issues. The Court agrees with the Magistrate Judge’s findings that Mariposa’s hypothetical claim for breach of the implied covenant would not be necessarily decided by a matter-of-law interpretation of the WSRA, and the resolution of the claim would be situation specific and fact bound.

Mariposa also contends that the U.S. Supreme Court’s recent decision in Gunn v. Minton, — U.S.-, 133 S.Ct. 1059, 185 L.Ed.2d 72 (2013), undercuts the Magistrate Judge’s reliance on Empire Healthchoice Assurance v. McVeigh (“Empire ”), 547 U.S. 677, 699, 126 S.Ct. 2121, 165 L.Ed.2d 131 (2006), Adventure Outdoors, Inc. v. Bloomberg (“Adventure Outdoors ”), 552 F.3d 1290 (11th Cir.2008), and Mikulski v. Centerior Energy Corp., 501 F.3d 555, 570 (6th Cir.2007) (en banc), in finding that the substantiality of the WSRA’s application in a claim for breach of the implied covenant did not meet the standard articulated in Grable.

In Gunn, the Court considered whether a state law claim for malpractice as it related to an attorney’s conduct in separate patent litigation necessarily raised a disputed and substantial issue of federal patent law such that the federal court had exclusive jurisdiction under 28 U.S.C. § 1338(a). Id. at 1063. In holding that the patent issue presented by the malpractice claim was not substantial under Grable, the Court noted that the Texas Supreme Court, from which certiorari was granted, had erroneously focused on the importance of the issue to the plaintiffs case and the parties before it. Id. at 1066. The Court reasoned that a necessary and disputed federal issue will always be significant and substantial to the particular parties in the immediate suit. Id. The Court emphasized that the Grable analysis, however, requires that the inquiry focus on the importance of the issue to the federal system as a whole, as opposed to merely the importance to the parties in the case. Id.

The substantiality analysis undertaken in the F & Rs specifically examined to what extent an interpretation of the WSRA as applied in a claim for breach of the implied covenant would have importance to the federal system as a whole. The Magistrate Judge noted that no federal agency was involved in this matter nor was a federal agency’s actions at issue, there was no authority offered for the proposition that any federal agency would be bound by a court decision on a bad faith contract claim, and the claim determination would be fact-bound and situation specific such that it was unlikely to have broad application to litigants everywhere, all in contrast to Grable. This is precisely the importance-to-the-federal-system analysis that Gunn held Grable’s analytical framework requires.

In arguing the importance of an interpretation of the WSRA to the federal system, Mariposa does not establish how a determination of a claim for breach of the implied covenant would have the sweeping impacts Mariposa predicts. As already noted, there is no authority offered establishing how a state-court interpretation of the effects of the WSRA on the parties’ contract obligations as related to claim for breach of the implied covenant would be binding on any federal agency, or another court interpreting and applying the WSRA, or parties in other cases.

Similarly, Mariposa raises concerns as to what effects would be felt by the federal system if the state court incorrectly, in its view, resolved the issue. Beyond that an interpretation of the WSRA inside a claim for breach of the implied covenant would not have foreseeable binding effects on other litigants, federal courts, or federal agencies, the Gunn decision rejected similar arguments. In Gunn, Minton argued that state courts’ answers to hypothetical patent issues could have real-world effects on other patents through issue preclusion. Gunn, 133 S.Ct. at 1067-68. The Court reasoned that it was unclear whether such a preclusive effect could occur, but even to the extent that it did, the result would be limited to the parties and the patents before the state court. Id. The Court concluded that such a fact-bound and situation-specific effect was not sufficient to establish arising under jurisdiction. Id. Here, the Magistrate Judge noted the lack of authority to suggest that a fact-bound claim for breach of the implied covenant, even to the extent it considered MID’s interpretation of the WSRA, would have binding and far-reaching effect on litigants elsewhere.

The Court in Gunn also rejected Minton’s suggestion that the federal courts had greater familiarity with patent law and an interest in the uniformity of the development of patent law such that the case belonged in federal court. Id. at 1068. The Court noted that state courts could “be expected to hew closely to pertinent federal precedents” in deciding a hypothetical issue of patent law, and that the possibility that the state court would incorrectly resolve the claim was not enough to trigger the federal court’s exclusive patent jurisdiction, even to the extent that the error “finds its root in a misunderstanding of patent law.” Id. Although the patent law to be decided by the state court in Gunn was a purely hypothetical determination for purposes of the malpractice claim at issue, this reasoning applies here as well. Federal courts do not have exclusive jurisdiction over interpretations of the WSRA, and as the Magistrate Judge noted, state courts are competent to interpret and apply federal law, and would be guided by relevant federal court interpretations of the statute. Id. at 1067 (citing Tafflin v. Levitt, 493 U.S. 455, 465, 110 S.Ct. 792, 107 L.Ed.2d 887 (1990) (“State courts adjudicating civil RICO claims will ... be guided by federal court interpretations of the relevant federal criminal statutes, just as federal courts sitting in diversity are guided by state court interpretations of state law”)). The F & Rs consideration of Grable’s substantiality prong is fully consistent with the Supreme Court’s decision in Gunn.

III. CONCLUSION AND ORDER

Accordingly, IT IS HEREBY ORDERED that:

1. For the reasons set forth above, the March 4, 2013, F & Rs are ADOPTED IN FULL;

2. Merced Irrigation District’s Motion to Remand pursuant to 28 U.S.C. § 1447(c) is GRANTED;

3. The Clerk of Court is DIRECTED to serve a copy of this order on the Merced County Superior Court; and

4. This case shall be administratively closed.

SO ORDERED.

FINDINGS AND RECOMMENDATIONS THAT PLAINTIFF’S MOTION TO REMAND BE GRANTED

SHEILA K. OBERTO, United States Magistrate Judge.

I. INTRODUCTION

Plaintiff Merced Irrigation District (“MID”) filed a declaratory relief action against the County of Mariposa (“Mariposa”) in Merced County Superior Court on September 5, 2012. On October 5, 2012, Mariposa removed Plaintiffs declaratory relief action to this Court. (Doc. 1.) On November 2, 2012, MID filed a motion to remand the action to Merced County Superior Court. (Doc. 13.) Mariposa filed a brief in opposition to MID’s motion on December 5, 2012, and MID filed a reply brief on December 12, 2012. On December 18, 2012, the Court ordered the parties to submit additional briefing. On January 4, 2013, Mariposa filed a supplemental brief and on January 15, 2013, MID filed a supplemental brief. (Docs. 24, 25.) For the reasons set forth below, the undersigned RECOMMENDS that MID’s motion to remand be GRANTED.

II. FACTUAL BACKGROUND

A. The 1960 Agreement

MID owns and operates the Merced River Hydroelectric Project (the “Project”), located in Mariposa County. (Doc. 1-1 (Cmplt.), ¶ 9.) The Project impounds waters of the Merced River to form Lake McClure behind the New Exchequer Dam, and Lake McSwain behind the McSwain Dam. (Cmplt., ¶ 9.) The Project provides irrigation waters for agricultural farmland in Merced County, Lakes McLure and McSwain provide recreational benefits to the residents of Merced and Mariposa counties, and the Project includes a hydroelectric power generation output capacity of 103 megawatts. (Cmplt., ¶ 9.)

The contract at dispute between the parties in this litigation arises out of the original permitting and construction of the Project. In December 23, 1954, MID filed applications with the California Water Rights Board (now known as the State Water Resources Control Board) for appropriation of water from the Merced River to be diverted for the Project. (Cmplt., ¶ 10.) The first application (No. 16186) sought to appropriate 900,000 acre feet (“AF”) of water per year from the Merced River for irrigation and domestic use. (Cmplt., ¶ 11.) The second application (No. 16187) sought a permit to use the same 900,000 AF per year appropriation for power generation. (Cmplt., ¶ 11.) In March 1955, MID filed an application with the Federal Power Commissioner (now known as the Federal Energy Regulatory Commission (“FERC”)) for a preliminary permit for development of the hydroelectric generation components of the Project. (Cmplt., ¶ 12.)

Mariposa objected to MID’s water applications to the California Water Rights Board and the application for a license from FERC. Mariposa asserted it had a senior right to use the waters of the Merced River that MID was proposing to use for its Project. (Cmplt., ¶¶ 13, 17.) At that time, Mariposa was analyzing its own plans for water diversion projects, which involved diversions of approximately 100,000 AF of water per year from the South Fork of the Merced River. (Cmplt., ¶ 14.)

MID and Mariposa engaged in extended negotiations, and on March 1,1960, executed an agreement that Mariposa would withdraw its opposition to MID’s applications to the California Water Rights Board and to MID’s FERC licensing application (the “1960 Agreement”). (Cmplt., ¶¶ 15-26.) In relevant part, the 1960 Agreement provides:

1.[MID] and [Mariposa] will jointly request the State Water Rights Board to grant and issue permits to [MID] under said Applications No. 16186 and 16187 subject to conditions to be set forth or incorporated by reference substantially as follows:

The permits and all rights acquired or to be acquired thereunder are and shall remain subject to depletion of stream flow in the quantities set forth in sub-paragraphs (a), (b) and (c) by future appropriations of water for reasonable beneficial use within Mariposa County; provided such future appropriations shall be initiated and consummated pursuant to law.

(a) From the South Fork of the Merced River a maximum of 500 cubic feet per second of water not to exceed a total of 112,000 acre-feet annually by direct diversion to beneficial use and/or by diversion to storage to be later applied to beneficial use; provided that such future appropriations shall not be made in whole or in part within the payout period of the bonds by which [MID] shall finance the project under those permits, but not to exceed a period of 55 years beyond the date of the beginning of construction of the projects of [MID] as allowed under the permits or extensions thereunder, unless the person or agency making such future appropriation shall compensate [MID] for the loss of power revenue resulting during said period from said appropriation.

2. In the event, and only in the event, that the State Water Rights Board shall grant and issue to [MID] permits under said Applications No. 16186 and 16187, substantially as applied for by [MID], and subject to the conditions substantially in conformity with paragraph numbered 1 as hereinabove set forth, and in the event that [MID] shall pursuant to said permits proceed to construct and constructs a project or portion of project from which power is developed on the Merced River substantially as contemplated by [MID], as provided and set forth in its said Applications No. 16186 and 16187, and the proposed amendments thereto, then and in such event [MID] will pay to [Mariposa] for use in water development within Mariposa County or investment by [Mariposa] of such funds and the earning of interest thereon during the period in which proper disposition of said funds is under study, the amounts of money at the times and in the manner as specified either in paragraph (a) or (b) of this paragraph numbered 2 at [MID’s] option.

3. Beginning one year from the date of final payment of all bonds sold by [MID] to finance the project under said applications No. 16186 and No. 16187, [MID] will make annual payments to [Mariposa] each year in the amount and for the period as described in paragraphs (a) and (b) of this paragraph numbered 3.

(a) Each such payment shall be the greater of either (1) 20% of the gross power revenue from [MID’s] completed project on the Merced River earned during the year preceding such payment or (2) 25% of the amount of said gross power revenue after first deducting the actual operation and maintenance costs and expenses of the Merced Irrigation District in its entirety during said preceding year.

(b) Said annual payments shall continue for either (1) a period of 50 years from their commencement or (2) until the cost of financing construction of a project by [Mariposa] to fully exercise and utilize the water from the South Fork of the Merced River as set forth in paragraph numbered 1 hereof, has been repaid, whichever occurs first.

4. [MID] agrees, upon condition that permits be issued to it as herein contemplated, not to protest or to oppose any application for permit or license which may be filed by [Mariposa] in the future for the appropriation of water as set forth and contained in the permit conditions set forth in paragraph numbered 1 hereof.

(Cmplt., Doc. 1-2, Exhibit A.)

To finance the construction of the New Exchequer Dam component of the Project, MID issued bonds from the revenues generated by the sale of hydroelectric power from the New Exchequer Dam. (Cmplt., ¶ 37.) MID’s repayment of this indebtedness and retirement of the bonds to finance the Project are expected to be concluded on or about July 1, 2014. (Cmplt., ¶ 37.)

B. The National Wild and Scenic Rivers Act (“WSRA”)

In 1968, following the parties’ 1960 Agreement, Congress enacted the WSRA, 16 U.S.C. §§ 1271-1287, in an effort to identify and protect certain “rivers which, with their immediate environments, possess outstandingly remarkable scenic, recreation, geologic, fish and wildlife, historic, cultural, or other similar values.” 16 U.S.C. § 1271. Section 7 of the WSRA provides that “no department or agency of the United States shall assist by loan, grant, license, or otherwise in the construction of any water resources project that would have a direct and adverse effect on the values for which such river was established, as determined by the Secretary charged with its administration.” 16 U.S.C. § 1278(a). Section 7 requires the Secretary of the Interior to evaluate whether a “water resources project ... would have a direct and adverse effect” on the river’s values. When a water resources project is found to have a “direct and adverse effect” on a wild and scenic river, the project cannot be authorized or funded absent congressional intervention. Id. “The WSRA also provides that Congress may authorize the Secretary of the Interior or the Secretary of Agriculture to study additional rivers for inclusion in the wild and scenic rivers system [ (“WSRS”) ]. After such a study, the Secretary submits a report, along with comments by other federal agencies and by state governors, to the President, who in turn makes a recommendation to Congress. The Congress then decides whether or not to designate the ‘study river’ as a wild and scenic river.” Town of Summersville, W.Va. v. FERC, 780 F.2d 1034 (D.C.Cir.1986) (citing 16 U.S.C. §§ 1275, 1278(a)).

In 1987, the South Fork of the Merced River was designated as “wild and scenic” under the WSRA. Pub. L. No. 100-149, 101 Stat. 879 (Nov. 2, 1987) (codified at 16 U.S.C. § 1274(a)(62)(A) (designating approximately 71 miles of the Merced River’s main stem and approximately 43 miles of its south fork as wild and scenic)). MID’s complaint alleges that the 1987 legislation deferred wild-and-scenic designation as to an eight-mile segment “of the South Fork of the Merced River,” from the town of Briceburg to the point of maximum flood control storage at Lake McClure, and designated that segment as a “study river” for a period of three years. (Cmplt., ¶30.) According to MID, the study-river designation was requested by the Mariposa County Board of Supervisors and Mariposa County Water Agency to permit Mariposa time to evaluate whether it could identify a water resource project that would enable it to use at least a portion of the water rights development opportunity and the construction funding mechanism provided to it pursuant to Paragraphs 1, 2, and 3 of the 1960 Agreement. (Cmplt., ¶ 31.)

Ultimately, Mariposa developed plans to construct the “Saxon Creek Project,” using water from the lower Merced River. According to Mariposa, the U.S. Bureau of Land Management (“BLM”) granted Mariposa approval under Section 7 of the WSRA to develop the project. (See Doc. 21-3, Exhibit A.)

C. The 1990 Agreement

The parties’ 1960 Agreement provided that Mariposa would not divert its allocated water acreage under the Agreement during the time the bonds were being repaid by MID (Cmplt., Doc. 1-2, Exh. A, Paragraph 1(a) (“such future appropriations shall not be made in whole or in part within the payout period of the bonds ... unless the person or agency making such future appropriation shall compensate [MID] for the loss of power revenue resulting during said period from said appropriation”). In 1990, the parties modified the 1960 Agreement to secure water rights from the lower Merced River for the Saxon Creek Project. (Doc. 21, 14:23-15:3; Doc. 21-1, Exhibit A; 21-7, Exhibit D.) Under the 1990 Agreement, Mariposa accepted a reduction in its future annual depletion rights from 112,000 AF (as set out in Paragraph 1(a) of the 1960 Agreement) to 70,000 AF in return for being permitted to take 5,000 AF per year from the lower Merced River near Saxon Creek. (Doc. 21, 14:23-15:3; Doc. 21-1, Exhibit A, Doc. 21-7, Exhibit D.)

In relevant part, the 1990 Agreement provides the following:

RECITALS

A. On March 1,1960, [MID] and [Mariposa] entered into a contract entitled “Agreement Between Merced Irrigation District And The County of Mariposa For Settlement Of Water Rights Dispute,” which is hereinafter referred to as “the 1960 Agreement!)”] In this 1960 Agreement, the Parties agreed to jointly request the State Water Rights Board, the predecessor of the present State Water Resources Control Board, to grant and issue permits to [MID] under [MID’s] Applications 16186 and 16187, subject to various conditions being incorporated in any such permits to allow for depletions of stream flow for beneficial use within [Mariposa].

C. [Mariposa] is in need of an additional supply of surface water to serve developments occurring in the Mariposa Public Utility District’s service area.

D. [MID] is willing to allow [Mariposa] to divert and use a portion of the water [MID] is entitled to use under its licenses in exchange for [Mariposa] relinquishing a portion of the rights reserved to it in the 1960 Agreement, all in accordance with the terms and conditions provided for in this contract.

ARTICLE 3 — AMOUNT AND RATE OF DELIVERY

[MID] agrees, subject to the approval of the State Water Resources Control Board and [MID’s] Securities Division as provided for in Article 2, to permit the County each year hereafter to divert an amount not to exceed 5,000 acre-feet per year under [MID’s] licence 2685. The maximum instantaneous rate of diversion shall not exceed seven (7) cubic feet per second.

ARTICLE 6 — CONSIDERATION FOR WATER

In consideration for [MID’s] agreeing to allow [Mariposa] to divert water under the District’s License 2685 as provided for herein, [Mariposa] hereby agrees that during the existence of this Contract the amount of water provided for in subparagraph (a) of paragraph 1 of the 1960 Agreement is reduced from 112,000 acre-feet to 70,000 acre-feet annually. ■

ARTICLE 7 — COMPENSATION FOR LOSS OF POWER REVENUE

[Mariposa] agrees to compensate [MID] for loss of power revenue resulting from the appropriation of water. [MID] will notify [Mariposa] of the amount of revenue loss and the County will pay same within thirty (30) days of receipt of said invoice. [Mariposa] agrees to provide to [MID] such information and statistics as requested regarding water appropriation and use. The obligation to compensate for loss of power revenue shall remain in force and effect for such period of time as set forth in paragraph 1(a) of the March 1, 1960, Agreement referenced above.

(Doc. 21-7.)

D. 1992 Amendment to the WSRA

On October 23, 1992, Congress amended the WSRA to include as a component the eight-mile segment of the lower Merced River that had been previously designated as a study river. Pub. L. 102-432. The 1992 amendment specified that

To the extent permitted by, and in a manner consistent with section 7 of this Act (16 U.S.C. § 1278), and in accordance with other applicable law, the Secretary of the Interior shall permit the construction and operation of such pumping facilities and associated pipelines as identified in the Bureau of Land Management right-of-way application CACA 26084, filed by the Mariposa County Water Agency on November 7, 1989, and known as the ‘Saxon Creek Project,’ to assure an adequate supply of water from the Merced River to Mariposa County.

MID maintains that the designation of the remaining “eight-mile segment of the South Fork of the Merced River” as wild- and-scenic in 1992, and the creation of the corresponding exemption for the Saxon Creek Project at a maximum water withdrawal of 5,000 AF per year, effectively concluded Mariposa’s opportunity to develop a water project to fully exercise and utilize water from the South Fork of the Merced River under the parties’ 1960 Agreement. (Cmplt., ¶ 33.)

Mariposa contends that the 1987 designation of segments the Merced River as wild and scenic under Public Law 100-149, codified at 16 U.S.C. § 1274(a)(62), included the entirety of the South Fork of the Merced River. The eight-mile study river was located on the Lower Merced River and not on the South Fork. According to Mariposa, in 1992, Public Law 102-432 further amended 16 U.S.C. § 1274(a)(62) to designate the eight-mile segment of the Lower Merced River as wild and scenic.

E. Retirement of MID’s Project Bonds and FERC Relicensing

To finance the New Exchequer Dam, which was part of MID’s Project, MID issued bonds, which will be retired in approximately July 2014. (Cmplt., ¶ 37.) Mariposa has informed MID that, pursuant to the parties’ 1960 Agreement, it expects MID to make payments to Mariposa under the 1960 Agreement beginning July 1, 2015 (one year after retirement of the bonds), and continuing for a period of fifty years. (Cmplt. ¶ 42.)

Although not referenced in MID’s complaint, Mariposa asserts that MID is also undergoing a fifty-year relicensing application process with FERC. (See Docs. 21-4, 21-5, Exhibit B.) According to Mariposa, MID’s initial license for its Merced River Hydroelectric Project was issued on April 18, 1964, for a term ending February 28, 2014. In its new application with FERC (“Final FERC Application”), MID seeks a new 50-year license on the grounds that it “anticipates incurring major expenses for implementing protection, mitigation, and enhancement measures, including construction and refurbishing recreation facilities during the next license term.” (Doc. 21-4, Exh. B, p. 8.) Mariposa contends it is an interested party to these FERC licensing proceedings; Mariposa is also identified in MID’s Final FERC Application as a party that “would likely be interested in or affected by this relicensing.” (Doc. 21-4, Exh. B, p. 12.)

According to Mariposa, to obtain relicensing under the Federal Power Act, FERC must evaluate, among other things, the various public interest issues to ensure the best comprehensive use of the Merced River, whether MID can operate the Project to provide efficient and reliable service, whether MID will operate and maintain the Project to provide efficient and reliable service, whether MID will operate and maintain the Project in a cost-effective manner, and other beneficial public uses, including irrigation and water supply. However, as part of the Final FERC Application, Mariposa contends that MID has failed to acknowledge its payment obligations to Mariposa under Paragraph 3 of the parties’ 1960 Agreement or Mariposa’s water allocation rights under Paragraph 1(a), as modified by the 1990 Agreement. (Doc. 21, 21:26-22:8 .(citing 16 U.S.C. §§ 797(e), 803, 808(a)(2)(F).) Given these omissions, Mariposa argues it has grounds to object to any FERC determination on MID’s application for relicensure, and if necessary, challenge FERC’s determination under the Administrative Procedures Act (“APA”) or the National Environmental Protection Act (“NEPA”).

F. Parties’ Contract Dispute

As MID’s Project bonds will be fully repaid in approximately July 2014, the parties dispute how the payment provision in Paragraph 3 of the 1960 Agreement should be interpreted and whether the designation of the South Fork of the Merced River as wild and scenic affects the 1960 Agreement. MID contends that it has informed Mariposa that it believes that the designation of the South Fork of the Merced River as a wild-and-scenic river under federal law precludes further development of water diversions from the South Fork of the Merced River by Mariposa; therefore, the Saxon Creek Project constitutes the full exercise and utilization of water from the South Fork of the Merced River which Mariposa can initiate and consummate pursuant to law. (Cmplt., ¶ 38.) MID has also informed Mariposa of its position that the facts and circumstances establish that any obligation of MID to make payments to Mariposa pursuant to Paragraph 3(b) of the Agreement will be discharged in full upon MID’s repayment of the outstanding indebtedness associated with Mariposa’s Saxon Creek Project. (Cmplt., ¶ 39.)

Mariposa, on the other hand, has informed MID that Mariposa intends to use any payments received from MID under Paragraph 3 of the Agreement for any purpose it chooses, including but not limited to, contributions to Mariposa’s General Fund; Mariposa does not intend to restrict the use of such payments to a water resources project. (Cmplt., ¶ 41.) Mariposa has also informed MID that it expects MID to continue making payments for a period of fifty (50) years, notwithstanding Mariposa’s alleged inability to construct any project other than the Saxon Creek Project using the waters of the South Fork of the Merced River. (Cmplt., ¶ 43.)

G. MID’s Complaint for Declaratory Relief

Based on the parties’ dispute over the payment provisions in Paragraph 3(b) of the parties’ 1960 Agreement, MID filed a declaratory judgment action pursuant to California Code of Civil Procedure § 1060 in Merced County Superior Court. MID asserts that, because the electrical output of the Project is presently committed by contract to be sold by MID to PG & E through June 30, 2014, MID requires a declaration of its rights and obligations under Paragraph 3 of the Agreement to evaluate and determine its future disposition of the electrical capability of the Project following July 1, 2014. (Cmplt. ¶ 44.)

In its first cause of action for declaratory relief construing the obligations of the contract, MID asserts that the primary dispute between MID and Mariposa involves the interpretation of the payment provision set forth in Paragraph 3 of the 1960 Agreement. (Cmplt., ¶ 36.) MID maintains that a controversy has arisen regarding whether MID is obligated to make payments to Mariposa under Paragraph 3(b)(1) of the 1960 Agreement beginning on July 1, 2015, and continuing for fifty (50) years thereafter. MID seeks a declaration that Mariposa’s Saxon Creek Project represents the only construction of a project by Mariposa to fully exercise and utilize the water from the South Fork of the Merced River as set forth in Paragraph 1 of the 1960 Agreement that will occur, and that pursuant to Paragraph 3(b)(2) of the Agreement, MID’s payment of the costs of financing the Saxon Creek Project will fully and finally discharge any and all obligations of MID under Paragraph 3 of the 1960 Agreement. (Cmplt., ¶ 45.)

In its second cause of action for declaratory relief based on frustration of purpose of contract, MID seeks a declaration that (1) the enactment of the WSRA and the designation of the South Fork of the Merced River as a wild-and-scenic river have precluded Mariposa from constructing or causing to be constructed a project to fully exercise and utilize the water from the South Fork of the Merced River as set forth in Paragraph 1 of the 1960 Agreement, other than the Saxon Creek Project; (2) the purpose of the payments that were to have been made by MID to Mariposa pursuant to Paragraph 3 of the 1960 Agreement have thereby been frustrated; and (3) any and all obligations of MID under Paragraph 3 of the 1960 Agreement have been extinguished as a result. (Cmplt., ¶¶ 46-50.)

In its final and third cause of action for declaratory relief based on impossibility of performance, MID seeks a declaration that (1) the enactment of the WSRA and the designation of the South Fork of the Merced River as a wild-and-scenic river have precluded Mariposa from constructing or causing to be constructed a project to fully exercise and utilize the water from the South Fork of the Merced River as set forth in Paragraph 1 of the 1960 Agreement, other than the Saxon Creek Project; (2) the purpose of the payments that were to have been made by MID to Mariposa pursuant to Paragraph 3 of the 1960 Agreement have thereby been rendered impossible to achieve; and (3) any and all obligations of MID under Paragraph 3 of the 1960 Agreement have been extinguished as a result. (Cmplt., ¶¶ 51-54.)

H. Mariposa’s Notice of Removal and MID’s Motion to Remand

On October 5, 2012, Mariposa filed a Notice of Removal. (Doc. 1.) In its Notice of Removal, Mariposa asserts that federal subject matter jurisdiction is proper under 28 U.S.C. § 1331 because all of MID’s claims really and substantially involve a dispute or controversy respecting the construction and effect of federal law. (Doc. I, ¶ 4.) Specifically, the Notice of Removal indicates that “[e]ach of [MID’s] claims for relief raise substantial federal issues that are actually disputed; the federal interests at issue are substantial and central to the case; arid the exercise of federal jurisdiction will not disturb ‘any congressionally approved balance of federal and state judicial responsibility.’ ” (Doc. 1, ¶ 4 (quoting Grable & Sons Metal Prods. v. Darue Eng’g & Mfg., 545 U.S. 308, 314, 125 S.Ct. 2363, 162 L.Ed.2d 257 (2005)).)

On November 2, 2012, MID filed a motion to remand, arguing that the declaratory judgment complaint does not anticipate any potential coercive claim by Mariposa that would provide “arising under” jurisdiction pursuant to Section 1331. As such, MID asserts that the Court lacks jurisdiction, and the action should be remanded to the Merced County Superior Court.

III. APPLICABLE LEGAL STANDARDS

A. Removal Jurisdiction Under 28 U.S.C. § 1441

“A defendant may remove an action to federal court based on federal question jurisdiction or diversity jurisdiction.” Hunter v. Philip Morris, USA 582 F.3d 1039, 1042 (9th Cir.2009) (citing 28 U.S.C. § 1441). It is presumed, however, “that a cause lies outside [the] limited jurisdiction [of the federal courts] and the burden of establishing the contrary rests upon the party asserting jurisdiction.” Id. (internal quotation marks omitted).

“Federal jurisdiction must be rejected if there is any doubt as to the right of removal in the first instance.” Gaus v. Miles, Inc., 980 F.2d 564, 566 (9th Cir.1992) (per curiam). The defendant always bears the burden of establishing that removal is proper, and the court “resolves all ambiguity in favor of remand.” Hunter, 582 F.3d at 1042.

The propriety of removal requires the consideration of whether the district court has original jurisdiction of the' action, i.e., whether the case could have originally been filed in federal court based on a federal question, diversity of citizenship, or another statutory grant of jurisdiction. See Caterpillar Inc. v. Williams, 482 U.S. 386, 392, 107 S.Ct. 2425, 96 L.Ed.2d 318 (1987). If the case is within the original jurisdiction of the district court, removal is proper so long as the defendant has complied with the procedural requirements set forth in 28 U.S.C. § 1446. If the case is not within the original jurisdiction of the district court, removal is improper. The absence of subject matter jurisdiction is not waivable by the parties. See Am. Fire & Cas. Co. v. Finn, 341 U.S. 6, 71 S.Ct. 534, 95 L.Ed. 702 (1951).

B. Federal Question Jurisdiction Under 28 U.S.C. § 1331

“Except as otherwise expressly provided by Act of Congress, any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or defendants .... ” 28 U.S.C. § 1441(a). “The district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States.” 28 U.S.C. § 1331. To assess “arising under” jurisdiction pursuant Section 1331, federal courts apply the “well-pleaded complaint” rule under which “federal jurisdiction exists only when a federal question is presented on the face of the plaintiff’s properly pleaded complaint.” Caterpillar Inc., 482 U.S. at 391-92, 107 S.Ct. 2425. “A defense is not a part of a plaintiff’s properly pleaded statement of his or her claim.” Rivet v. Regions Bank, 522 U.S. 470, 475, 118 S.Ct. 921, 139 L.Ed.2d 912 (1998).

In determining whether jurisdiction is appropriate under Section 1331, courts consider whether state or federal law creates the cause of action. The majority of cases coming under the auspices of Section 1331 “are those in which federal law creates the cause of action.” Merrell Dow Pharm., Inc. v. Thompson (“Merrell Dow ”), 478 U.S. 804, 809, 106 S.Ct. 3229, 92 L.Ed.2d 650 (1986). In those cases, federal courts unquestionably have federal subject-matter jurisdiction. Id.

However, there is a second and “less frequently encountered” category of Section 1331 cases that include state law claims that “necessarily raise a stated federal issue, actually disputed and substantial, which a federal forum may entertain without disturbing any eongressionally approved balance of federal and state judicial responsibilities.” Grable & Sons Metal Prods. v. Darue Eng’g & Mfg. (“Grable”), 545 U.S. 308, 312, 314, 125 S.Ct. 2363, 162 L.Ed.2d 257 (2005); Merrell, 478 U.S. at 808, 106 S.Ct. 3229 (“a case may arise under federal law ‘where the vindication of a right under state law necessarily turn[s] on some construction of federal law' ”) (quoting Franchise Tax Bd. v. Constr. Laborers Vacation Trust (“Franchise Tax Board ”), 463 U.S. 1, 9, 103 S.Ct. 2841, 77 L.Ed.2d 420 (1983)); see also Nevada v. Bank of Am. Corp., 672 F.3d 661, 674 (9th Cir.2012). This type of federal-question jurisdiction, however, applies to a “special and small category” of cases, Empire Healthchoice Assurance v. McVeigh (“Empire ”), 547 U.S. 677, 699, 126 S.Ct. 2121, 165 L.Ed.2d 131 (2006), and the “mere presence of a federal issue in a state cause of action does not automatically confer federal-question jurisdiction,” Merrell Dow, 478 U.S. at 813, 106 S.Ct. 3229.

C. Assessing Federal Question Jurisdiction in the Context of a Declaratory Judgment Action Brought Pursuant to State Law

“Where the complaint in an action for declaratory judgment seeks in essence to assert a defense to an impending or threatened state court action, it is the character of the threatened action ... which will determine whether there is a federal-question jurisdiction in the District Court.” Public Serv. Comm’n v. Wycoff Co. Inc., 344 U.S. 237, 248, 73 S.Ct. 236, 97 L.Ed. 291 (1952). Therefore, to determine federal-question jurisdiction over declaratory judgment actions, courts essentially “reposition the parties in a declaratory relief action by asking whether [the court] would have jurisdiction had the declaratory relief defendant been a plaintiff seeking a federal remedy.” Standard Ins. Co. v. Saklad, 127 F.3d 1179 (9th Cir.1997); see also Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 671-73, 70 S.Ct. 876, 94 L.Ed. 1194 (1950); Franchise Tax Board, 463 U.S. at 19, 103 S.Ct. 2841 (“Federal courts have regularly taken original jurisdiction over declaratory judgment suits in which, if the declaratory judgment defendant brought a coercive action to ehforce its rights, that suit would necessarily present a federal question.”).

Janakes v. U.S Postal Service, 768 F.2d 1091 (9th Cir.1985) is illustrative of this analytical framework. In Janakes, a U.S. Postal Service (“Service”) employee (“Janakes”) was injured while delivering the mail. Id. at 1092. He applied for “continuation of pay” (“COP”) pursuant to 5 U.S.C. § 8118 of the Federal Employees Compensation Act (“FECA”). Id. The Service paid Janakes COP, but subsequently informed him that he would be required to reimburse the Service if he recovered from a third-party tortfeasor for his injuries. Id. at 1092-93. Janakes filed an action under the Declaratory Judgment Act (“DJA”), 28 U.S.C. § 2201, seeking an interpretation of the FECA provisions defining the government’s rights to subrogation and reimbursement. Id. at 1093. Janakes asserted that while 5 U.S.C. § 8132 permitted reimbursement of compensation, that term did not include COP because 5 U.S.C. § 8118(e) excluded COP from the definition of “compensation” as provided in 5 U.S.C. § 8101(12). Id. However, because Janakes’ assertion was made in the face of an anticipated Service action to collect its reimbursement, the Ninth Circuit held that' it was an assertion of a federal defense, which does not confer subject matter jurisdiction under Section 1331. Id. at 1093 (citing Louisville & Nashville R.R. v. Mottley, 211 U.S. 149, 152, 29 S.Ct. 42, 53 L.Ed. 126 (1908) (assertion of federal defense does not confer subject matter jurisdiction)). Furthermore, the appellate court recognized that the Supreme Court made clear in Franchise Tax Board, Wycoff, and Skelly Oil that the DJA itself does not confer federal question jurisdiction. Id.

Therefore, to assess whether federal subject matter jurisdiction existed, the appellate court focused “on the nature of a well-pleaded complaint that the Service could [have brought] for reimbursement of CO