Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 1 of 55
IN THE UNITED STATES COURT OF FEDERAL CLAIMS
SHELL OIL COMPANY, UNION OIL COMPANY OF CALIFORNIA, ATLANTIC RICHFIELD COMPANY, and TEXACO INC., Plaintiffs, v. UNITED STATES OF AMERICA, Defendant.
) ) ) ) ) ) ) ) ) ) ) ) )
Case No. 06-CV-141 (Senior Judge Smith)
PLAINTIFFS' BRIEF IN OPPOSITION TO DEFENDANT'S MOTION TO DISMISS AND IN SUPPORT OF THEIR CROSSMOTION FOR PARTIAL SUMMARY JUDGMENT AS TO LIABILITY
Michael W. Kirk Counsel of Record COOPER & KIRK, PLLC 555 Eleventh Street, NW Suite 750 Washington, DC 20004 (202) 220-9600 (202) 220-9601 (fax) Of Counsel: Nicholas A. Oldham COOPER & KIRK, PLLC 555 Eleventh Street, N.W. Suite 750 Washington, D.C. 20004 (202) 220-9600 (202) 220-9601 (fax)
June 30, 2006
Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 2 of 55
TABLE OF CONTENTS Page TABLE OF AUTHORITIES ............................................................................................................... iii INDEX TO APPENDIX ........................................................................................................................v INTRODUCTION .................................................................................................................................1 QUESTIONS PRESENTED..................................................................................................................8 STATEMENT OF THE CASE..............................................................................................................9 I. II. III. IV. WORLD WAR II AVGAS PRODUCTION PROGRAM ................................................10 THE AVGAS CONTRACTS ............................................................................................13 AVGAS PRODUCTION ...................................................................................................17 THE CERCLA LITIGATION ...........................................................................................21
STANDARD OF REVIEW .................................................................................................................24 ARGUMENT.......................................................................................................................................24 I. THE AVGAS CONTRACTS UNAMBIGOUSLY REQUIRE THE GOVERNMENT TO REIMBURSE THE OIL COMPANIES FOR THE CERCLA CLEANUP COSTS .........................................................................24 A. The Reimbursement Clause Does Not Require that the New or Additional Costs Be Impose During Contract Performance...........................26 B. The Oil Companies' CERCLA Cleanup Costs Were Incurred By Reason Of Their Production of Avgas in Performance of the Contracts.......................................................................................27 C. The Contract Provision Requiring Limiting Damages To Those Arising Proximately From Breach of the Avgas Contracts Does Not Bar Recovery....................................................................31 II. THE OIL COMPANIES' CLAIMS ARE NOT BARRED BY THE ANTI-DEFICIENCY ACT................................................................................32 A. The First War Powers Act Authorized the Reimbursement Promises that the Government Made to the Oil Companies........................................33
Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 3 of 55
1. Executive Order 9024 ...................................................................................33 2. Executive Order 9001 ...................................................................................36 B. The National Defense Act of 1916 Authorized the Reimbursement Promises that the Government Made to the Oil Companies........................................41 C. DSC's Charter and RFC's Enabling Legislation Authorized the Reimbursement Promises the Government Made to the Oil Companies...............43 CONCLUSION....................................................................................................................................45
-ii-
Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 4 of 55
TABLE OF AUTHORITIES Page Cases Adams v. United States, 391 F.3d 1212 (Fed. Cir. 2004) ....................................................................24 Cadillac Fairview/California, Inc. v. Dow Chem. Co., 299 F.3d 1019 (9th Cir. 2002) ................................................................................................ passim E.I. DuPont de Nemours v. United States, 54 Fed. Cl. 361 (2002) ..............................................32, 38 E.I. DuPont de Nemours & Co. v. United States, 365 F.3d 1367 (Fed. Cir. 2004) .............14, 5, 27, 28 Federico v. United States, 70 Fed. Cl. 378 (2006) ..............................................................................24 Ford Motor Co. v. United States, 378 F.3d 1314 (Fed. Cir. 2004).............................................. passim Huntington Cab Co. v. American Fidelity & Casualty Co., 155 F.2d 117 (4th Cir. 1946) .........................................................................................................30 International Paper Co. v. United States, 282 U.S. 399 (1931) ................................................7, 42, 43 Johns-Manville Corp. v. United States, 12 Cl. Ct. 1 (1987) ..........................................................38, 39 Martin v. Occupational Safety & Health Review Comm'n, 499 U.S. 144 (1991) ...............................39 Pacific Ins. Co. v. Eaton Vance Mgmt., 369 F.3d 584 (1st Cir. 2004) ................................................29 Rappold v. Indiana Lumbersmen's Mut. Ins. Co., 431 S.E.2d 302 (Va. 1993) ...................................30 Spirtas Co. v. Insurance. Co. of the State of Pa., No. 4:05CV100DDN, 2006 U.S. Dist. LEXIS 27498 (E.D. Mo. May 9, 2006) ................................................................29 Udall v. Tallman, 380 U.S. 1 (1965)..............................................................................................39, 40 United States v. Shell Oil Co., 841 F. Supp. 962 (C.D. Cal. 1993) .....................................................21 United States v. Shell Oil Co., No. 91-0589, 1995 U.S. Dist. LEXIS 19778 (C.D. Cal. Sept. 18, 1995) ...................................................................................................... passim United States v. Shell Oil Co., 13 F. Supp. 2d 1018 (C.D. Cal. 1998) ........................................ passim United States v. Shell Oil Co., 294 F.3d 1045 (9th Cir. 2002) .................................................... passim
-iii-
Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 5 of 55
Statutes, Rules, and Regulations 42 U.S.C. § 9607(a)(3).........................................................................................................................22 42 U.S.C. § 9613(f)(1) .........................................................................................................................21 Act of Feb. 27, 1906, Pub. L. No. 59-28, 34 Stat. 27 (1906) ..............................................................32 National Defense Act of 1916, Pub. L. No. 64-85, 39 Stat. 166 (1916)........................................11, 41 Reconstruction Finance Corporation Act, Pub. L. No. 72-2, 47 Stat. 5 (1932).............................14, 43 Reorganization Plan No. I of 1939, 53 Stat. 1423 (1939)....................................................................37 Act of June 25, 1940, Pub. L. No. 76-664, 54 Stat. 572 (1940) ....................................................14, 44 Act of June 10, 1941, Pub. L. No. 77-108, 55 Stat. 248 (1941) ..........................................................44 First War Powers Act of 1941, Pub. L. No. 77-354, 55 Stat. 838 (1941)................................33, 38, 39 Renegotiation Act of 1942, Pub. L. No. 77-528, 56 Stat. 226 (1942) ................................................15 Joint Resolution of June 20, 1945, Pub. L. No. 79-109, 59 Stat. 310 (1945) ......................................14 Act of Sept. 6, 1950, Pub. L. No. 81-759, 64 Stat. 595 (1950)............................................................32 Reorganization Plan No. 1 of 1957, 71 Stat. 647 (1957).....................................................................14 RCFC 56(c)..........................................................................................................................................24 Exec. Order No. 9001, 6 Fed. Reg. 6787 (Dec. 27, 1941)...................................................................36 Exec. Order No. 9024, 7 Fed. Reg. 329 (Jan. 16, 1942)....................................................11, 12, 34, 40 Exec. Order No. 9040, 7 Fed. Reg. 527 (Jan. 24, 1942)....................................................11, 12, 41, 42 Exec. Order No. 9071, 7 Fed. Reg. 1531 (Feb. 24, 1942) ...................................................................37 Exec. Order No. 9246, 7 Fed. Reg. 7379 (Sept. 17, 1942) ............................................................35, 36 Exec. Order No. 9264, 7 Fed. Reg. 9105 (Nov. 5, 1942) ....................................................................37 Exec. Order No. 9276, 7 Fed. Reg. 10091 (Dec. 12, 1942).................................................................12
-iv-
Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 6 of 55
INDEX TO APPENDIX Contracts Contract between Defense Supplies Corporation and Shell Oil Company, Inc. (Apr. 10, 1942)................................................................................0001 Contract between Defense Supplies Corporation and Shell Oil Company, Inc. (May 1, 1943)..................................................................................0025 Contract between Defense Supplies Corporation and Union Oil Company (Dec. 31, 1942)......................................................................................0054 Contract between Defense Supplies Corporation and Union Oil Company of California (May 1, 1943) ..................................................................0068 Contract between Defense Supplies Corporation and Richfield Oil Corporation (Feb. 3, 1942)................................................................................0099 Contract between Defense Supplies Corporation and Richfield Oil Corporation (Feb. 20, 1943)..............................................................................0117 Contract between Defense Supplies Corporation and The Texas Company (Jan. 17, 1942) ......................................................................................0149 Contract between Defense Supplies Corporation and The Texas Company (Feb. 8, 1943)........................................................................................0164 Contract between Defense Supplies Corporation and Tidewater Associated Oil Company (June 10, 1942) .............................................................0192 Contract between Defense Supplies Corporation and Tidewater Associated Oil Company (Feb. 18, 1943) .............................................................0216 Executive Orders Executive Order No. 9001, 6 Fed. Reg. 6787 (Dec. 27, 1941)..................................................0244 Executive Order No. 9024, 7 Fed. Reg. 329 (Jan. 16, 1942).....................................................0246 Executive Order No. 9040, 7 Fed. Reg. 527 (Jan. 24, 1942).....................................................0248 Executive Order No. 9071, 7 Fed. Reg. 1531 (Feb. 24, 1942) ..................................................0249 Executive Order No. 9246, 7 Fed. Reg. 7379 (Sept. 17, 1942) .................................................0250
-v-
Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 7 of 55
Executive Order No. 9264, 7 Fed. Reg. 9105 (Nov. 5, 1942) ...................................................0251 Executive Order No. 9276, 7 Fed. Reg. 10091 (Dec. 12, 1942)................................................0252 Statutes Act of Feb. 27, 1906, Pub. L. No. 59-28, 34 Stat. 27 (1906) (excerpt) .....................................0255 National Defense Act of 1916, Pub. L. No. 64-85, 39 Stat. 166 (1916) (excerpt) ....................0258 Reconstruction Finance Corporation Act, Pub. L. No. 72-2, 47 Stat. 5 (1932).........................0261 Reorganization Plan No. I of 1939, 39 Stat. 1423 (1939)..........................................................0269 Act of June 25, 1940, Pub. L. No. 76-664, 54 Stat. 572 (1940) ................................................0279 Act of June 10, 1941, Pub. L. No. 77-108, 55 Stat. 248 (1941) ................................................0282 First War Powers Act of 1941, Pub. L. No. 77-354, 55 Stat. 838 (1941)..................................0285 Renegotiation Act of 1942, Pub. L. No. 77-528, 56 Stat. 226 (1942) (excerpt)........................0289 Joint Resolution of June 20, 1945, Pub. L. No. 79-109, 59 Stat. 310 (1945) ...........................0294 Act of Sept. 6, 1950, Pub. L. No. 81-759, 64 Stat. 595 (1950) (excerpt) ..................................0295 Reorganization Plan No. 1 of 1957, 71 Stat. 647 (1957)...........................................................0300 Other Amendment to the Charter of the Defense Supplies Corporation, 6 Fed. Reg. 3363 (1941) .........................................................................................................0303 Letter from WPB Chairman Nelson to Harold I. Ickes, Petroleum Coordinator for National Defense (Feb. 13, 1942)................................................0305 40 Op. Atty. Gen. 225 (1942) ...................................................................................................0307 Memorandum from Robert P. Patterson (Oct. 10, 1942)...........................................................0317 Reference Manual of Government Corporations, GAO, Senate Doc. No. 86 (June 30, 1945) (excerpt)........................................................................0318 A History of the Petroleum Administration for War (1946) (excerpts).....................................0335 United States v. Shell Oil Co., No. 91-0589 (RJK) (C.D. Cal.)
-vi-
Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 8 of 55
Partial Consent Decree (Filed Dec. 12, 1994) ........................................................................0345 United States v. Shell Oil Co., No. 91-0589 (RJK) (C.D. Cal.) Stipulated Facts (June 23, 1995) ............................................................................................0377 United States v. Shell Oil Co., No. 91-0589 (RJK) (C.D. Cal.) Supplemental Stipulated Facts (July 31, 1995).......................................................................0476 United States v. Shell Oil Co., No. 91-0589 (RJK) (C.D. Cal.) Preliminary Draft Pretrial Conference Order and Supplemental Stipulated Facts (Dec. 11, 1997).............................................................................................0479 Shell Oil Co. v. United States, No. 05-704 (Fed. Cl.) Docket Sheet (as of Mar. 2, 2006) .........................................................................................0551 Letter from Michael W. Kirk to The Honorable David L. Bibb re Claims on Contracts between the United States and Various Oil Companies for the Production of High-Octane Aviation Fuel During World War II (Nov. 23, 2005)............................................................................0554 Letter from Ruth Kowarski to Michael Kirk re Claims on Contracts between the United States and Various Oil Companies for the Production of High-Octane Aviation Fuel During World War II (Feb. 15, 2006).............................................................................0560
- vii
Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 9 of 55
IN THE UNITED STATES COURT OF FEDERAL CLAIMS
SHELL OIL COMPANY, UNION OIL COMPANY OF CALIFORNIA, ATLANTIC RICHFIELD COMPANY, and TEXACO INC., Plaintiffs, v. UNITED STATES OF AMERICA, Defendant.
) ) ) ) ) ) ) ) ) ) ) ) )
Case No. 06-CV-141 (Senior Judge Smith)
PLAINTIFFS' BRIEF IN OPPOSITION TO DEFENDANT'S MOTION TO DISMISS AND IN SUPPORT OF THEIR CROSSMOTION FOR PARTIAL SUMMARY JUDGMENT AS TO LIABILITY
Plaintiffs Shell Oil Company, Union Oil Company of California, Atlantic Richfield Company, and Texaco Inc. (collectively, the "Oil Companies") respectfully oppose the Government's motion to dismiss this suit, and ask instead that the Court enter partial summary judgment as to liability for breach of contract in their favor. INTRODUCTION During World War II, the United States required massive quantities of 100-octane aviation fuel, known as Avgas, for use in airplane engines. The production of sufficient quantities of Avgas was perhaps the single most critical requirement for the successful prosecution of the war. Indeed, less than a year after Pearl Harbor, Under Secretary of War Robert P. Patterson bluntly stated that, "[i]f we have a program more urgent than the 100 octane gasoline program, I do not know what it is." Memorandum from Robert P. Patterson (Oct. 10,
Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 10 of 55
1942), Pl. App. 317.1 The Government "had the authority to require production of goods at refineries owned by the Oil Companies, and even to seize refineries if necessary." United States v. Shell Oil Co., 294 F.3d 1045, 1050 (9th Cir. 2002). However, recognizing that maximum production would more likely flow from cooperation with the petroleum industry, the Government "relied almost exclusively on contractual agreements to ensure avgas production." Id. Accordingly, the Government, acting through the Defense Supplies Corporation ("DSC"), entered supply contracts with each of the Oil Companies that "were of the `cost plus' variety, meaning that the Government would reimburse the Oil Companies for all the costs of avgas production plus a small profit, typically between 6 and 7 percent of costs." United States v. Shell Oil Co., 13 F. Supp. 2d 1018, 1023 (C.D. Cal. 1998), aff'd in part and rev'd in part on other grounds, 294 F.3d 1045 (9th Cir. 2002). Under the contracts (collectively referred to as the "Avgas Contracts"), the Oil Companies recovered their costs primarily through the price paid for each gallon of Avgas sold to the Government, which was based upon the Oil Companies' estimated costs and then adjusted to reflect their actual costs. However, the parties recognized that the price adjustment mechanism was ill-suited to provide for reimbursement of new or additional governmental charges that could arise from the production of Avgas. Accordingly, it was expressly agreed in each of the contracts entered by the Oil Companies that such charges would be directly reimbursed by the Government. Specifically, the Avgas Contracts state that the Government "shall pay in addition to the prices as established [in the price provisions of the contract], any new or additional taxes, fees, or charges, other than income, excess profits, or corporate
The materials supporting the Oil Companies' cross-motion for summary judgment have been compiled in Plaintiffs' Appendix in Support of Their Cross-Motion for Partial Summary Judgment as to Liability, which will be cited as "Pl. App." -2-
1
Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 11 of 55
franchise taxes, which Seller may be required by any municipal, state, or federal law in the United States or any foreign country to collect or pay by reason of the production, manufacture, sale or delivery of the commodities delivered hereunder." See, e.g., Contract between Defense Supplies Corporation and Shell Oil Company, Incorporated (May 1, 1943) ("1943 Shell Contract") 16-17, Pl. App. 41-42.2 The Oil Companies have now been required, by "federal law in the United States," to pay "new or additional ... charges ... by reason of the production, manufacture, sale or delivery of" Avgas under the contracts. Following enactment of the Comprehensive Environmental Response, Compensation and Liability Act of 1978 ("CERCLA"), as amended, 42 U.S.C. § 9601, et seq., the United States and the State of California brought suit in 1991 in the United States District Court for the Central District of California seeking to require the Oil Companies to pay cleanup costs arising from acid waste generated by the Oil Companies in the course of producing Avgas pursuant to their World War II contracts with the Government. The acid waste had been deposited at the McColl Superfund site in Fullerton, California. After extensive litigation over the course of more than a decade, the Oil Companies were found liable under CERCLA and required to pay all of the non-benzol related cleanup costs associated with the McColl Site. See Shell, 294 F.3d at 1048-49 (summarizing holding). The Oil Companies have already incurred over $65 million in cleanup costs, and will likely be required to pay millions more over the next 15 to 30 years to complete, and to operate and maintain, the remedy they implemented to cleanup the site. Simply stated, the Government promised to reimburse costs such as these, and its refusal to do so constitutes a breach of its contracts with the Oil Companies. In recent years, the Federal
2
As demonstrated below, each of the other contracts entered between the Oil Companies and the Government at issue in this case contains identical language. -3-
Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 12 of 55
Circuit has twice entertained similar breach of contract claims, and it has twice held that promises made by the United States in World War II contracts to reimburse costs arising from the performance of the contract cover environmental cleanup costs incurred decades later. See Ford Motor Co. v. United States, 378 F.3d 1314, 1315 (Fed. Cir. 2004) (holding that Ford was entitled to recover "environmental cleanup costs arising from a World War II bomber contract"); E.I. DuPont de Nemours & Co. v. United States, 365 F.3d 1367, 1369 (Fed. Cir. 2004) (holding that DuPont was entitled "to recover costs it incurred pursuant to [CERCLA] for an ordnance plant it built and operated for the government during World War II"); see also Cadillac Fairview/California, Inc. v. Dow Chem. Co., 299 F.3d 1019, 1027-29 (9th Cir. 2002) (holding that the Government was contractually obligated to indemnify Dow Chemical for CERCLA costs arising from performance of a World War II contract to operate a rubber plant). In each of these cases, the Government sought to repudiate its promises with arguments similar to those advanced here, and in each of these cases, the Court of Appeals rejected the Government's arguments. The Government admits that the above-quoted contractual provision "covers ... new costs (with exceptions not pertinent here) imposed by authorities at any level of Government `by reason of the production, manufacture or sale of commodities delivered hereunder,' " Defendant's Motion to Dismiss the Complaint, Doc. No. 7 ("Gov't Br.") 11 (quoting 1943 Shell Contract 17, Pl. App. 42),3 but argues that the provision is limited "to costs imposed during contract performance." Gov't Br. 11. (emphasis in the original). The Federal Circuit has rejected the same argument in Ford, holding that "[t]he passage of time did not negate Ford's liability, and does not defeat the government's obligation of reimbursement." 378 F.3d at 1320; see also id. ("Ford's claim for reimbursement is not barred merely because the originating events
3
The Government slightly misquotes the contractual language, compare Gov't Br. at 11 with 1943 Shell Contract 16-17, Pl. App. 41-42, but the misquotation is immaterial. -4-
Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 13 of 55
are long past, for the liability for cleanup did not arise until after enactment of CERCLA"). And in DuPont, the Court of Appeals rejected the closely related argument that the Government should not be required to reimburse DuPont because the parties could not have foreseen the enactment of CERCLA decades later. 365 F.3d at 1373-74. The Government also argues that the costs the Oil Companies seek to have reimbursed were not incurred "by reason of" the production of the Avgas, but rather "by reason of the fact that they generated hazardous substances that were released into the environment at the McColl site." Gov't Br. 11-12. But it is undisputed that the relevant hazardous substances, "acid sludge and alkylation acid, necessarily resulted from the production of avgas." United States v. Shell Oil Co., No. 91-0589, 1995 U.S. Dist. LEXIS 19778, at *7 (C.D. Cal. Sept. 18, 1995) (emphasis added) (ruling on summary judgment on the basis of the parties' joint statement of undisputed facts), aff'd in part and rev'd in part on other grounds, 294 F.3d 1045 (9th Cir. 2002). Indeed, the Government has stipulated that the acid sludge and the spent alkylation acid dumped at the McColl site was generated during the production of Avgas pursuant to the contracts at issue in this case. Stipulations between the United States and the Oil Companies in United States v. Shell Oil Co., No. 91-0589 (RJK) (C.D. Cal.) ("Stipulation"), ¶¶ 493-96, Pl. App. 510-11. What is more, "the Government['s] acts or omissions" in exercising its power to allocate scarce resources during the war "foreclosed the reasonable alternative methods of disposal (transportation via tank cars for recycling or construction of regeneration plants) of the waste." Shell, 13 F. Supp. 2d at 1028. As the Ninth Circuit explained, by 1944, "the Oil Companies were producing so much spent alkylation acid that they could not reuse all of it in their own refineries, and the facilities for reprocessing this acid were insufficient. When the resulting bottleneck threatened to halt avgas production, the Oil Companies dumped large quantities of spent
-5-
Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 14 of 55
alkylation acid at the McColl site." Shell, 294 F.3d at 1050-51. Simply put, the Oil Companies' fulfillment of their contractual obligation to produce the massive quantities of Avgas required by the United States to win the war necessarily depended upon dumping the hazardous waste; put another way, the only available alternative to dumping was wholly unacceptable: "to halt avgas production." Accordingly, as both the trial court and the Ninth Circuit found, "the cleanup costs are properly seen as part of the war effort for which the American public as a whole should pay." Shell, 294 F.3d at 1060; see also Shell, 13 F. Supp. 2d at 1027 (same). Finally, the Government seeks to avoid its contractual promise by claiming that it lacked authority to make it under the terms of the Anti-Deficiency Act. See Gov't Br. 13-14. This argument too has been uniformly rejected. Every Court of Appeals to consider the question has held that "the Anti-Deficiency Act does not bar recovery under the [Contract Settlement Act] of environmental cleanup costs arising from performance of a contract during World War II." Ford, 378 F.3d at 1320; see also DuPont, 365 F.3d at 1374 (same). The Ninth Circuit has likewise rejected a Government claim that a promise to reimburse a World War II contractor for CERCLA costs is ultra vires under the Anti-Deficiency Act because the promise "was authorized by law, namely the emergency powers Congress gave the President, and the regulations issued by the executive branch for the prosecution of the war." Cadillac Fairview, 299 F.3d at 1029. As we demonstrate below, the general statutes, executive orders, and executive branch directives relied upon by the Ninth Circuit with respect to the production of rubber, as well as similar materials governing petroleum production, compel the same conclusion here. Most significantly, as the Ninth Circuit held, the First War Powers Act of 1941 empowered President Roosevelt "to authorize agencies to make contracts `without regard to the provisions of law' such
-6-
Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 15 of 55
as the Anti-Deficiency Act, `whenever he deemed such action would facilitate the prosecution of the war.' " Id. (quoting First War Powers Act of 1941, Pub. L. No. 77-354, § 201, 55 Stat. 838, 839, Pl. App. 0286). As we demonstrate below, the President exercised and delegated this power in two Executive Orders that authorized the War Production Board ("WPB") to exercise absolute power with respect to the policies governing war procurement, production, and contracting, and the WPB in turn delegated to DSC the power to determine on behalf of the United States all relevant Avgas contractual terms. Moreover, in one of the Executive Orders referenced above, President Roosevelt invoked and delegated the powers Congress granted to the President in the National Defense Act of 1916. Over 70 years ago, the Supreme Court considered an analogous Government argument that Congress had not authorized the Government to take the actions it took to obtain materials necessary to the prosecution of World War I, and therefore the Government need not reimburse the costs incurred by reason of the Government's procurement activities. Writing for the Court, Justice Holmes accorded "scant consideration to such a repudiation of responsibility," pointing out that "[t]he Secretary of War in the name of the President, with the power of the country behind him, in critical times of war, requisitioned what was needed and got it. Nobody doubts, we presume, that if any technical defect of authority had been pointed out, it would have been remedied at once." International Paper Co. v. United States, 282 U.S. 399, 406 (1931). Observing that the Government waited "until the time comes to pay for what it had" to raise its concerns about its authority, the Court found that its "doubt [was] rather late," and held that Section 120 of the statute provided ample authority for the action taken. Id. This reasoning applies with equal force to the Government's claim that it lacked authority to promise to
-7-
Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 16 of 55
reimburse the Oil Companies for the costs at issue in this case, and compels the conclusion that the Anti-Deficiency Act does not bar the Oil Companies' claim for breach of contract. * * *
Judge Kleinfeld, writing for the Ninth Circuit in Cadillac Fairview, well captured the state of affairs before this Court: This is a shocking case. The government is trying to take money from firms it conscripted for a critical part of a great war effort. The government's arguments are strikingly weak. The pollution occurred almost six decades ago. The polluting conduct was completely under the direction of the government, it was legal at the time, and the government promised to hold the polluters, who acted as government agents, harmless. The government decided at the time that polluting the land and water this way was preferable to diverting resources from the war effort to do anything about it. Now the government wants its servants to pay for what it told them to do and promised they could do with no fear of liability. 299 F.3d at 1029. The Ninth Circuit did not tolerate this stand by the Government in Cadillac Fairview, the Supreme Court refused to accept it in International Paper, and the Federal Circuit did not countenance it in Ford and DuPont. This Court should do likewise here. QUESTIONS PRESENTED 1. Do the Avgas Contracts require the United States to reimburse the Oil Companies
for the CERCLA cleanup costs they incurred by reason of their production of the Avgas during World War II? 2. Did the Anti-Deficiency Act deprive the Government of the authority to promise
to reimburse the Oil Companies for the CERCLA cleanup costs they incurred by reason of their production of the Avgas during World War II?
-8-
Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 17 of 55
STATEMENT OF THE CASE During World War II, the United States, through DSC, entered the Avgas Contracts with the Oil Companies for the production of high-octane aviation fuel, colloquially known as Avgas.4 The production of Avgas necessarily resulted in two related hazardous waste byproducts spent alkylation acid and acid sludge some of which was sent to the McColl Superfund site in Fullerton, California ("McColl Site"). Fifteen years ago, the Government (joined by the State of California) brought suit against the Oil Companies in the United States District Court for the Central District of California under CERCLA seeking to require the Oil Companies to pay the costs of cleaning up the acid waste at the McColl Site. Because of the extensive discovery and a comprehensive stipulation of facts entered into by the parties in the
Specifically, DSC and the Oil Companies' various predecessors-in-interest entered into the following Avgas Contracts: (1) Contract between Defense Supplies Corporation and Shell Oil Company, Incorporated (April 10, 1942) ("1942 Shell Contract"), Pl. App. 1-24; (2) Contract between Defense Supplies Corporation and Shell Oil Company, Incorporated (May 1, 1943) ("1943 Shell Contract"), Pl. App. 25-53; (3) Contract between Defense Supplies Corporation and Union Oil Company (December 31, 1942) ("1942 Union Contract"), Pl. App. 54-67; (4) Contract between Defense Supplies Corporation and Union Oil Company of California (May 1, 1943) ("1943 Union Contract"), Pl. App. 68-98; (5) Contract between Defense Supplies Corporation and Richfield Oil Corporation (February 3, 1942) ("1942 Richfield Contract"), Pl. App. 99-116; (6) Contract between Defense Supplies Corporation and Richfield Oil Corporation (February 20, 1943) ("1943 Richfield Contract"), Pl. App. 117-48; (7) Contract between Defense Supplies Corporation and The Texas Company (January 17, 1942) ("1942 Texas Contract"), Pl. App. 14963; (8) Contract between Defense Supplies Corporation and The Texas Company (February 8, 1943) ("1943 Texas Contract"), Pl. App. 164-91; (9) Contract between Defense Supplies Corporation and Tidewater Associated Oil Company (January 17, 1942) ("1942 Tidewater Contract"), Pl. App. 192-215; and (10) Contract between Defense Supplies Corporation and Tidewater Associated Oil Company (February 18, 1943) ("1943 Tidewater Contract"), Pl. App. 216-43.
4
-9-
Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 18 of 55
underlying CERCLA litigation, no further factual development is required for resolution of liability on the Oil Companies' contract claims presented here.5 I. WORLD WAR II AVGAS PRODUCTION PROGRAM During World War II, the Government marshaled the largest mobilization in this Nation's history, requiring the unprecedented cooperation of industries in all facets of the economy. Because "World War II, from beginning to end, was a war of oil," perhaps the single most important industry to the successful prosecution of the war was the petroleum industry. A History of the Petroleum Administration for War 1, Pl. App. 336. And that industry's most important product was Avgas, which enabled "allied fighters to attain higher speeds, higher ceilings, faster rates of climb and the ability to carry a heavier load than our enemies could achieve." Shell, 1995 U.S. Dist. LEXIS 19778, at *5; see also Stipulation ¶¶ 4-5, Pl. App. 382. As the Government recognized just two days after Pearl Harbor, " `[i]t is essential, in the national interest that the supplies of all grades of aviation gasoline for military, defense and essential civilian uses be increased immediately to the maximum.' " Stipulation ¶ 117, Pl App. 403-04 (quoting Recommendation No. 16 issued by the Office of the Petroleum Coordinator for National Defense); see also Stipulation ¶ 202, Pl. App. 423. To maximize production of this vital material, the Government instituted a comprehensive regulatory regime whereby it controlled Avgas production. Under this regime, the Government mandated that maximum production took priority over economic costs, disposal of byproducts (including waste), and even routine inspection and maintenance of plants. See, e.g., Shell, 13 F. Supp. 2d at 1027-28; Shell, 1995 U.S. Dist. LEXIS 19778, at *4-*5; Stipulation
The parties entered into Stipulation ¶¶ 1-430 on June 23, 1995, Pl. App. 377-475, Stipulation ¶ 431 on July 25, 1995, Pl. App. 476-78, and Stipulation ¶¶ 432-624 on December 11, 1997, Pl. App. 479-550. - 10 -
5
Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 19 of 55
¶¶ 44, 186, 189, 198, 203-09, 213-14, 365, 372, 395, Pl. App. 390, 419, 420, 421-22, 423-24, 425-26, 456-57, 459, 468. The Government exercised this control in part through two wartime agencies that are particularly relevant to this case: the War Production Board ("WPB") and the Petroleum Administration for War ("PAW"). President Roosevelt established the WPB in January 1942 to "assur[e] the most effective prosecution of war procurement and production," and delegated to it the power to set mandatory policies and procedures for such production and procurement, including the power to issue mandatory directives concerning "contracting, specifications, and construction." Exec. Order No. 9024, ¶ 2, 7 Fed. Reg. 329, 329-30 (Jan. 16, 1942), Pl. App. 246-47. The President also delegated to the WPB the authority vested in him by Section 120 of the National Defense Act of 1916. Exec. Order No. 9040, ¶ 1, 7 Fed. Reg. 527 (Jan. 24, 1942), Pl. App. 248. Section 120 authorized the President, "in time of war or when war is imminent, ... in addition to the present authorized methods of purchase or procurement, to place an order with any [supplier] for such product or material as may be required." National Defense Act of 1916, Pub. L. No. 64-85, § 120, 39 Stat. 166, 213 (1916), Pl. App. 259. This authority included the power to seize plants that did not comply with production orders, and to enforce production under threat of criminal penalties. Id. Section 120, however, required that the "compensation to be paid to any [supplier] for its products or material ... be fair and just." Id. The WPB coordinated the allocation of scarce materials and resources under a priority ranking system. See Stipulation ¶¶ 52-53, Pl. App. 391. In delegating this authority to the WPB regarding war procurement and production, the President provided that the WPB Chairman "may exercise the powers, authority, and discretion conferred upon him by this or any other Order through such officials or agencies and in such
- 11 -
Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 20 of 55
manner as he may determine; and his decisions shall be final." Exec. Order No. 9024, ¶ 5, 7 Fed. Reg. 329 (Jan. 16, 1942), Pl. App. 247; Exec. Order No. 9040, ¶ 3, 7 Fed. Reg. 527 (Jan. 24, 1942), Pl. App. 248. By letter dated February 13, 1942, the WPB Chairman in turn delegated his contracting authority for determining the price and technical details of Avgas to the Office of Petroleum Coordinator for National Defense ("OPC"), and delegated all other contracting authority to the DSC (with an exception not pertinent here). Letter dated Feb. 13, 1942 from WPB Chairman Nelson to Harold I. Ickes, Petroleum Coordinator for National Defense, Pl. App. 305-06. Executive Order 9024 required DSC to comply with the WPB Chairman's delegation of contracting authority. Exec. Order No. 9024, ¶ 3, 7 Fed. Reg. 329 (Jan. 16, 1942), Pl. App. 247. In December 1942, President Roosevelt established an agency subordinate to the WPB the PAW "to coordinate and centralize the war policies and actions of the Government relating to petroleum with a view toward providing adequate supplies of petroleum for the successful prosecution of the war and for other essential purposes." Exec. Order No. 9276, 7 Fed. Reg. 10091 (Dec. 12, 1942), Pl. App. 252. PAW was a successor to OPC (whose name had been changed to "Office of Petroleum Coordinator for War"), which had been established in May 1941. Exec. Order No. 9276, 7 Fed. Reg. 10091 (Dec. 12, 1942), Pl. App. 252; Letter from President Roosevelt to the Secretary of the Interior (May 28, 1941), Pl. App. 343-44. Executive Order 9276 provided for the appointment of a Petroleum Administrator to head PAW, whose duties included "establishing basic policies and formulating plans and programs to assure for the prosecution of the war the conservation and most effective development and utilization of petroleum in the United States and its territories and possessions," and "issuing necessary policy and operating directives to parties engaged in the petroleum industry." Exec. Order No. 9276, ¶¶ 2-3, 7 Fed. Reg. 10091, 10092-93 (Dec. 12, 1942), Pl. App. 253-54.
- 12 -
Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 21 of 55
"The purpose of the PAW avgas program was to maximize the amount of avgas available to the United States for purchase in order to pursue the war effort." Stipulation ¶ 240, Pl. App. 434; see also Stipulation ¶¶ 202, 213-14, 216, Pl. App. 423, 425-26. Accordingly, PAW was intimately involved with the production of Avgas, and it directed the Oil Companies' operations to produce the maximum quantities of Avgas. See, e.g., Stipulation ¶¶ 212-14, Pl. App. 425-26. For example, one method PAW used to maximize Avgas production was the "Planned Blending Program." Stipulation ¶¶ 211-241, Pl. App. 424-35. Under this program, the Government dictated the quality of Avgas and required quarterly inventory reports from refineries, authorized purchase of certain quantities of raw materials, and instructed refineries with respect to manufacturing specifications. Stipulation ¶¶ 211-241, Pl. App. 424-35. The Government also directed refiners to blend Avgas in a way that would allow increased overall production, even if doing so would reduce an individual refiner's yield. Stipulation ¶¶ 211-241, Pl. App. 424-35. DSC even notified refiners in December 1942 that, "[w]ith respect to PAW requests to shift components among refiners, ... any contractual provisions with DSC were considered waived if and where compliance with the PAW's requests interfered with the company's performance of its contract with the DSC." Stipulation ¶ 199, Pl. App. 422. II. THE AVGAS CONTRACTS Although the Government exercised significant regulatory control over the petroleum industry, and it had the power to seize the refineries needed to produce the required Avgas if necessary, it sought to achieve maximum production primarily through supply contracts with oil producers. Shell, 294 F.3d at 1050. Because of the lack of a significant commercial market for Avgas prior to the war (commercial aviation in this country was then in its infancy), however, the Government had to "create an atmosphere which made financial investments in alkylation
- 13 -
Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 22 of 55
facilities viable." Stipulation ¶ 148, Pl. App. 412. At the time, the military could only enter into one-year purchase contracts, which led the petroleum industry to fear that such purchase contracts would not justify the necessary investments in new or upgraded facilities. Stipulation ¶148, Pl. App. 412. Therefore, to provide industry assurance that its investments would be economically feasible, the Government used its corporation, the Reconstruction Finance Corporation ("RFC"), and that corporation's wholly owned subsidiary, DSC, to enter into long term contracts (primarily three year contracts) to purchase Avgas. Stipulation ¶¶ 148-54, 158, Pl. App. 412-14. These long-term contracts enabled the Oil Companies to build new refining facilities, and they established a centralized purchasing program for the Nation's entire output of Avgas. Stipulation ¶ 151, Pl. App. 413. In December 1942, the DSC, Army, Navy, and PAW agreed that, as of January 1, 1943, DSC would act as the sole purchaser of Avgas from the petroleum industry for the United States, and would then resell it to the Armed Forces as needed. Stipulation ¶ 197, Pl. App. 421.6 The Oil Companies entered into the Avgas Contracts with DSC in 1942 and 1943, and the RFC contractually guaranteed DSC's performance. See, e.g., 1943 Shell Contract 23, Pl. App. 48; Stipulation ¶ 158, Pl. App. 414. The contracts "were of the `cost plus' variety, meaning
Congress created the RFC in 1932 as a wholly owned corporation of the United States, Pub. L. No. 72-2, §§ 1-2, 47 Stat. 5 (1932), Pl. App. 261, and in 1940 authorized it to create subsidiary corporations "[i]n order to aid the Government of the United States in its nationaldefense program." Pub. L. No. 76-664, 54 Stat. 572, 573 (1940), Pl. App. 280. The RFC did so, incorporating several subsidiaries including the DSC in August 1940. GAO Report at 38, 33839, Pl. App. 323, 329-30. In 1945, Congress dissolved the DSC, and the RFC assumed DSC's liabilities "whether arising out of contract or otherwise." Joint Resolution of June 20, 1945, Pub. L. No. 79-109, § 2, 59 Stat. 310 (1945), Pl. App. 294. In 1957, Congress dissolved the RFC and transferred its obligations relevant to this action to the General Services Administration ("GSA"). Reorganization Plan No. 1 of 1957, 71 Stat. 647 (1957), Pl. App. 300-02; see also Gov't Br. 2 n.2 (acknowledging that the GSA is the successor-in-interest to the RFC for purposes of this action).
6
- 14 -
Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 23 of 55
that the Government would reimburse the Oil Companies for all the costs of avgas production plus a small profit, typically between 6 and 7 percent of costs." Shell, 13 F. Supp. 2d at 1023; Stipulation ¶¶ 164-70, 589, Pl. App. 415-16, 538-39. Specifically, the parties negotiated the contract price for the Avgas based on the Oil Companies' estimated production costs, with an estimated profit between 6 and 7 percent. Stipulation ¶¶ 164-70, 589, Pl. App. 415-16, 538-39. The estimated profits, however, were subject to the Renegotiation Act of 1942, Pub. L. No. 77528, § 408, 56 Stat. 226, 245 (1942), Pl. App. 291, as amended, which required contractors to renegotiate their contracts with the United States and make repayments to the Government, " `[w]henever, in the opinion of the [Government], the profits realized or likely to be realized ... may be excessive ....' " Stipulation ¶ 545, Pl. App. 525; see also Stipulation ¶¶ 173, 543-47, Pl. App. 417, 524-25. The Government, therefore, had at least two opportunities to ensure that the Oil Companies did not obtain undue benefits under the Avgas Contracts: once in the course of contracting in the first instance and again when the contracts were renegotiated after the war. Shell, 13 F. Supp. 2d at 1029; see also Stipulation ¶¶ 167-70, 543-58, Pl. App. 416, 524-30. And "[e]ach time, the Government determined that it was getting a fair deal, which is to say that the Oil Companies were not receiving undue benefits from the bargain at taxpayer expense." Shell, 13 F. Supp. 2d at 1029. While the Government thus ensured that the Oil Companies did not excessively profit at the taxpayers' expense, its overriding purpose was to maximize the production of Avgas. This objective took precedence over economic costs, disposal of byproducts (including waste), and even routine inspection and maintenance of plants. See, e.g., Shell, 13 F. Supp. 2d at 1027-28; Shell, 1995 U.S. Dist. LEXIS 19778, at *4-*5; Stipulation ¶¶ 44, 186, 189, 198, 203-09, 213-14, 365, 372, 395, Pl. App. 390, 419, 420, 421-22, 423-24, 425-26, 456-57, 459, 468. To achieve
- 15 -
Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 24 of 55
this goal, the Government expressly agreed in each of the Avgas Contracts that it not the contractor who the Government limited to a modest profit would bear the risk of future governmental acts imposing costs on the contractors "by reason of" their performance of the contracts. Specifically, the Government expressly agreed to pay: [A]ny new or additional taxes, fees, or charges, other than income, excess profits, or corporate franchise taxes, which Seller may be required to pay by any municipal, state, or federal law in the United States or any foreign country to collect or pay by reason of the production, manufacture, sale or delivery of the [Avgas]. See, e.g., 1943 Shell Contract 16-17, Pl. App. 41-42.7 The Government also expressly agreed to bear the risk of increased costs caused by the state of war. 1943 Shell Contract 11, Pl. App. 36. Each of the Avgas Contracts, either originally or as amended, provided that if the war interfered with production "to such an extent that in the opinion of Seller the cost of refining [the Avgas] is increased," the price paid by the Government must be raised "by an amount sufficient to offset such increased cost," unless the Government is willing to accept reduced production. See, e.g., 1943 Shell Contract 11, Pl. App. 36.8 In addition to expressly assuming the risk in the Avgas Contracts of increased costs due to future governmental acts and due to conditions caused by the war, the Government also Each of the Avgas Contracts at issue in this case included this reimbursement clause verbatim. See 1942 Shell Contract 15, Pl. App. 16; 1942 Union Contract 7-8, Pl. App. 61-62; 1943 Union Contract 16, Pl. App. 84; 1942 Richfield Contract 13, Pl. App. 112; 1943 Richfield Contract 15, Pl. App. 132; 1942 Texas Contract 10, Pl. App. 159; 1943 Texas Contract 19-20, Pl. App. 183-84; 1942 Tidewater Contract 16, Pl. App. 208; 1943 Tidewater Contract 15-16, Pl. App. 231-32. The Government devotes the bulk of its motion to dismiss to refuting the proposition that this clause, standing alone, requires reimbursement of the CERCLA costs. However, the Oil Companies do not advance that proposition. Rather, we have drawn this clause to the Court's attention because it reflects the parties' general intent that the Government would bear all of the costs of producing the Avgas. As noted above, the parties recognized that the price adjustment provision was not well suited to address new or additional charges arising from new local, state, federal, or foreign law (such as CERCLA), and for that reason agreed to the separate reimbursement provision. - 16 8 7
Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 25 of 55
"recogni[zed] that the rapid expansion of 100 octane production would require manufacturers to undertake extraordinary modes of operation which were often uneconomical and unanticipated at the time of refiners' entry into their 100 octane contracts," Stipulation ¶¶ 186-87, Pl. App. 419, and the Government agreed to bear those costs as well (albeit outside the Avgas Contracts), Stipulation ¶ 613, Pl. App. 546. Accordingly, in July 1942, the DSC, Army, Navy, and PAW adopted the Aviation Gasoline Reimbursement Plan ("AGRP"). Stipulation ¶¶ 186-87, Pl. App. 419. The AGRP remained in effect until the end of World War II, and provided that the Government would compensate refiners for extraordinary expenditures in connection with production of Avgas at the request of, or with the approval of, PAW, including expenditures incurred under the Planned Blending Program. Stipulation ¶¶ 186-99, 613-17, Pl. App. 419-22, 546-47. In short, the Government established a regime whereby it ensured that the Oil Companies were limited to a modest profit, but, in turn, the Government assumed all the risks of increased costs due to the unusual times and its unqualified mandate that the Oil Companies maximize production of Avgas. III. AVGAS PRODUCTION Avgas was a blend of several different chemical elements, the production of which necessarily produced sulfuric acid waste. See, e.g., Shell, 1995 U.S. Dist. LEXIS 19778, at *7; Stipulation ¶¶ 338, 493-96, Pl. App. 452, 510-11. The Government has stipulated that "[f]rom 1941, the United States was aware that spent alkylation acid and acid sludge were produced in the manufacture of aviation gasoline and that increasing production of aviation gasoline would increase the amount of spent alkylation and acid sludge produced." Stipulation ¶ 338, Pl. App. 452. Similarly, the Government has stipulated, "[m]ost of the acid waste at the McColl Site
- 17 -
Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 26 of 55
began as fresh sulfuric acid ... that was used in the alkylation units to produce alkylate for [Avgas]." Stipulation ¶ 496, Pl. App. 511.9 As the parties expected, the production of Avgas in extraordinary quantities at the demand of the Government and in fulfillment of the requirements of the Avgas Contracts generated much larger quantities of acid waste than before the war. See, e.g., Shell, 294 F.3d at 1050; Shell, 13 F. Supp. 2d at 1020; Stipulations ¶¶ 319-21, 338, 367, Pl. App. 448-49, 452, 457. The Oil Companies' performance of their requirements contracts with the Government helped increase the Nation's production of Avgas from 40,000 barrels a day in December 1941 to 514,000 barrels a day by 1945, Stipulation ¶ 319, Pl. App. 448, with a corresponding increase in the generation of acid waste. Because of the unavailability of reasonable alternatives, the Oil Companies had no choice but to send some of this acid waste to the McColl Site. See Shell, 13 F. Supp. 2d at 1028. To be sure, the technology did exist to reprocess acid waste into fresh acid, Stipulation ¶¶ 329, 408, Pl. App. 450-51, 470, and the Oil Companies did reprocess much of the acid waste generated by the production of Avgas. See, e.g., Stipulation ¶¶ 343-54, 496, Pl. App. 453-54, 511. However, the massive quantities of Avgas required by the Government produced correspondingly massive quantities of waste that overwhelmed existing facilities. See Shell, 294 F.3d at 1050-51; Shell, 13 F. Supp. 2d at 1023. Accordingly, the Oil Companies sought Government approval to build additional acid reprocessing capacity. The construction of acid reprocessing facilities, however, required WPB approval, Stipulation ¶¶ 339-41, Pl. App. 452,
9
A small percentage of the acid waste at the McColl Site is attributable to the production of Government-owned benzol. United States v. Shell Oil Co., 294 F.3d 1045, 1051 (9th Cir. 2002); see also United States v. Shell Oil Co., 13 F. Supp. 2d 1018, 1023 (C.D. Cal. 1998). As discussed in more detail infra, the Ninth Circuit affirmed the Government's liability as arranger under CERCLA for all costs relating to the benzol-related waste. Id. at 1059-61. Accordingly, this action does not involve the costs of cleaning up the benzol acid waste at the McColl Site. - 18 -
Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 27 of 55
and despite the Oil Companies' requests, "the United States refused to allocate resources to build reprocessing plants." Shell, 294 F.3d at 1060; see also Stipulation ¶¶ 365, 379-92, Pl. App. 45657, 461-67. One reprocessing facility that was built near the Oil Companies' refineries during World War II, moreover, failed to operate at design capacity, and could not keep up with the amount of acid waste. Stipulation ¶¶ 351, 357-64, Pl. App. 454, 454-56. As the Government stipulated, this failure "resulted in the dumping" of acid waste. Stipulation ¶ 364, Pl. App. 456. Moreover, "[b]y late 1944 and 1945, the Oil Companies were producing so much spent alkylation acid that they could not reuse all of it in their own refineries, and the facilities for reprocessing this acid were insufficient. When the resulting bottleneck threatened to halt avgas production, the Oil Companies dumped large quantities of spent alkylation acid at the McColl Site." Shell, 294 F.3d at 1051. Of course, in light of the Government's inelastic demand for Avgas, its power to seize and/or impose criminal penalties on plants that failed to meet production orders, and the shared objective of doing everything possible to meet the dire threat to the Nation and its allies posed by enemy forces, slowing the wartime production of Avgas to accommodate the reprocessing bottleneck was not an option for the Oil Companies. As Vice Admiral Moreell put it in a report to the Secretary of War on Governmental efforts to eliminate bottlenecks in Avgas production, We have taken the position that whatever action is necessary to get production must be taken regardless of whose money is involved. My position is that whatever action is necessary to get production of 100 octane gasoline will have to be taken and if either the oil company or the contractor considers that it has a proper claim for additional compensation or damages they can file the claim and have it considered in the proper manner. Stipulation ¶ 204, Pl. App. 423.
- 19 -
Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 28 of 55
The Government was fully aware of the acid waste disposal problem during World War II. See, e.g., Stipulation ¶¶ 338, 360-64, 366-70, 373-75, 378, 388, 391-93, 395, Pl. App. 452, 455-46, 457-59, 459-60, 461, 464-65, 466-67, 468. For example, in 1945, the WPB observed that " `[r]emoval of alkylation spent sulfuric acid from the oil ref[ineries] of Southern California has become a serious problem and threatens to result in curtailment of aviation gasoline production if immediate means for withdrawing spent acid cannot be provided.' " Stipulation ¶ 367, Pl. App. 457 (quoting March 14, 1945 letter from Mr. Wizeman, Chief Inorganics Branch, WPB, to Mr. Byrne, PAW). The Government attempted to alleviate this problem by facilitating the lease of a large storage tank in Southern California. Stipulation ¶¶ 368-71, Pl. App. 457-59. However, "[a]cid sludge dumping was not halted by the [storage tank]." Stipulation ¶ 375, Pl. App. 460. Furthermore, the demands of World War II caused chronic shortages of tank cars that otherwise might have been available to transport acid waste for reprocessing elsewhere. See, e.g., Shell, 294 F.3d at 1051-51, 1060; Shell, 13 F. Supp. 2d at 1027-28; Stipulation ¶¶ 393, 40102, 414-15, 417-18, 487, Pl. App. 467, 468-69, 471, 472, 507. The WPB alone had the power to allocate tank cars, but "the United States generally refused to make tank cars available to the Oil Companies to transport the waste to Northern California for reprocessing." Shell, 294 F.3d at 1060. Consequently, the shortage left the Oil Companies with no alternative but to dump the acid waste as a last resort. See, e.g., Shell, 13 F. Supp. 2d at 1028; Stipulation ¶¶ 393, 401-02, Pl. App. 467, 468-69. In fact, Eli McColl, a representative of the Oil Companies and the namesake of the McColl Site, see Shell, 294 F.3d at 1051, stated before the Los Angeles Planning Commission that he needed a permit to dispose of acid waste because " `the government [would] not allow [him, or the companies he represented] to use tank cars.' "
- 20 -
Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 29 of 55
Stipulation ¶ 487, Pl. App. 507. In short, "the war requirements created the waste and Government acts or omissions foreclosed the reasonable alternative methods of disposal (transportation via tank cars for recycling or construction of regeneration plants) of the waste." Shell, 13 F. Supp. 2d at 1028. IV. THE CERCLA LITIGATION On February 1, 1991, the United States and the State of California brought suit against the Oil Companies in the Central District of California pursuant to CERCLA for recovery of costs incurred in cleaning up the acid waste at the McColl Site. The Oil Companies counterclaimed against the United States, asserting that the Government should be held responsible for the CERCLA costs. Under CERCLA, the United States Environmental Protection Agency ("EPA") has broad authority to provide for cleanup of sites contaminated by hazardous substances, and the United State may bring suit to hold the parties responsible for the hazardous substances financially liable for the cleanup. While all responsible parties are jointly and severally liable, the court has the authority to equitably apportion the cleanup costs among them. See 42 U.S.C. § 9613(f)(1). On September 28, 1993, the district court granted partial summary judgment in favor of the United States and State of California, holding that the Oil Companies were responsible parties and thus liable under CERCLA. United States v. Shell Oil Co., 841 F. Supp. 962, 968-74 (C.D. Cal. 1993); see also Partial Consent Decree ¶ 10, Pl. App. 357. On December 12, 1994, the parties entered into a partial consent decree pursuant to which the Oil Companies provisionally paid $18,000,000 for CERCLA costs incurred by the United States and State of California through 1990; however, the Oil Companies retained the right to recover these funds
- 21 -
Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 30 of 55
should the Government ultimately be held responsible for the cleanup or liable under the Avgas Contracts to reimburse the Oil Companies. Partial Consent Decree, Pl. App. 345-76. On September 18, 1995, the District Court granted the Oil Companies partial summary judgment as to the liability of the United States as an "arranger" under CERCLA for the CERCLA costs. Shell, 1995 U.S. Dist. LEXIS 19778, at *18-*25.10 Because the court had found both the Oil Companies and United States liable under CERCLA, it conducted a trial in 1998 to determine the appropriate allocation of the cleanup costs. Based on the parties' stipulations and the evidence presented at trial, the district court allocated 100 percent of the costs of cleaning up the non-benzol related waste to the United States, including the $18,000,000 previously paid by the Oil Companies. 13 F. Supp. 2d at 1030. The court cited three reasons for its decision to allocate total responsibility to the Government: "(1) such a result simply places a cost of the war on the United States and thus on society as a whole, (2) the Oil Companies were unable to transport avgas waste to Richmond [a Northern California reprocessing facility] for recycling due to the unavailability of tank cars, and (3) the Oil Companies were unable to construct treatment plants due to the WPB's refusal to issue priorities." Id. at 1027. Simply put, the court found that "[h]aving created the problem and foreclosed the possible solutions, the Government will receive a 100 percent allocation of waste attributable to the avgas program." Id. at 1028; see also Cadillac Fairview, 299 F.3d at 1029 (same). In a later opinion, the district court extended its reasoning to the benzol-related waste and allocated 100 percent of the cleanup costs for that waste to the United States as well. See 294 F.3d at 1060.
An arranger under CERCLA is "any person who by contract, agreement, or otherwise arranged for disposal or treatment ... of hazardous substances owned or possessed by such person, by any other party or entity, at any facility ... owned or operated by another party." 42 U.S.C. § 9607(a)(3). An "arranger" is responsible party that is liable for response costs under CERCLA. - 22 -
10
Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 31 of 55
On appeal, the Ninth Circuit affirmed the district court's judgment holding the Government 100 percent responsible for the cost of cleaning up the benzol waste at the McColl Site, but reversed the ruling that the United States was liable as an "arranger" for the non-benzol waste. Shell, 294 F.3d at 1048-49 (summarizing rulings). Because the Court of Appeals concluded that the United States was not an "arranger" under CERCLA for the non-benzol waste, it did not directly address the district court's allocation of liability for the cleanup of that waste. Id. at 1059. In affirming the trial court's allocation of 100 percent of the benzol-related waste cleanup costs to the United States, however, the Ninth Circuit held that although the "analysis in Shell III [i.e., the 1998 post-trial allocation opinion] was focused on the non-benzol [related] waste," the district court was "entirely justified" in "explicitly extend[ing] its Shell III analysis to the benzol waste." Id. at 1060. Moreover, "to the degree that the equitable factors support allocation of the cleanup costs to the United States with respect to the non-benzol waste, where the arranger status of the United States was disputed, such factors are even stronger with respect to the benzol waste, where the United States concedes that it was an arranger." Id. Accordingly, the Ninth Circuit expressly upheld the findings that led the district court to allocate 100 percent of the non-benzol related cleanup costs to the Government even though it had reversed the judgment as to those costs. Id. Following remand, the district court resolved all remaining counterclaims, except that it transferred, pursuant to 28 U.S.C. § 1631, the Oil Companies' counterclaim for breaches of contract to this Court. Shell Oil Co. v. United States, No. 05-704 (Fed. Cl.), Doc. Entry No. 1, Pl. App. 552. In order to exhaust their administrative remedies in accordance with the Contract Settlement Act of 1944, 41 U.S.C. § 113, however, the Oil Companies voluntarily dismissed the
- 23 -
Case 1:06-cv-00141-LAS
Document 10-2
Filed 06/30/2006
Page 32 of 55
transfer complaint without prejudice. After exhausting those administrative remedies, the Oil Companies brought this action. STANDARD OF REVIEW The Court