In the case of New York v. Illinois and Sanitary District of Chicago, 1926, the Supreme Court was asked to resolve a dispute between states over water rights. The state of New York sued Illinois and the Sanitary District of Chicago for diverting water from Lake Michigan into the Mississippi River system through an artificial channel known as the Chicago Drainage Canal. This diversion allegedly lowered lake levels, affecting navigation in waters that were important to New York's commerce. The court ruled in favor of Illinois stating that while it is true that each state has equal rights to use interstate bodies of water, those rights are not absolute but subject to "the principle of equitable apportionment." It held that any harm caused by this diversion was outweighed by its benefits such as improving sanitary conditions in Chicago and promoting maritime commerce on a major inland shipping route.

In the dissenting opinion for New York v. Illinois and Sanitary District of Chicago, Justice Holmes argued that the Supreme Court should not have jurisdiction over disputes between states about water rights. He believed such issues were political in nature and thus outside of judicial purview. Furthermore, he contended that even if the court did have jurisdiction, it was inappropriate to grant an injunction against Illinois because there was no proof that its actions had caused substantial injury to New York or other downstream states. In his view, any harm done by diverting water from Lake Michigan into the Mississippi River system was speculative at best and did not warrant intervention by the highest court in the land.