Free Reply to Response to Motion - District Court of Federal Claims - federal

Case 1:02-cv-00466-LB

Document 82

Filed 03/10/2006

Page 1 of 52

IN THE UNITED STATES COURT OF FEDERAL CLAIMS No. 02-466C (Judge Block)

SUNOCO, INC. AND PUERTO RICO SUN OIL COMPANY, Plaintiffs, v. THE UNITED STATES, Defendant. DEFENDANT'S REPLY TO PLAINTIFFS' OPPOSITION TO DEFENDANT'S MOTION TO DISMISS THE COMPLAINT AND SECOND SUPPLEMENTAL APPENDIX PETER D. KEISLER Assistant Attorney General DAVID M. COHEN Director OF COUNSEL: DONALD S. TRACY Trial Attorney Defense Supply Center Richmond Richmond, VA 23297 STEVEN J. GILLINGHAM Assistant Director Commercial Litigation Branch Civil Division Attn: Classification Unit 1100 L Street, N.W., 8th Floor Department of Justice Washington, D.C. 20530 Tele: (202) 616-2311 Fax: (202) 353-7988

HOWARD M. KAUFER Assistant Counsel Office of Counsel Defense Energy Support Center Ft. Belvoir, VA

Attorneys for Defendant March 10, 2006

Case 1:02-cv-00466-LB

Document 82

Filed 03/10/2006

Page 2 of 52

TABLE OF CONTENTS PAGE(S) FACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 I. DESC's EPA Clauses Are Authorized by FAR 16.203-1 . . . . . . . . . . . . . . . . . . 10 A. B. C. EPA Clauses Need Not Be Based Upon Plaintiff's Own Prices . . . . . . . 10 DESC's PMM-Based EPA Clause Is Legal . . . . . . . . . . . . . . . . . . . . . . 11 Sunoco's FAR 15.802(b) Allegation Does Not State A Cause of Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

II.

Sunoco's Alternative Illegality Theories In Counts II-VI Must Be Dismissed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 A. B. Count II (Misrepresentation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Count III ("Breach of Contract") and Count IV ("Implied-In-Fact Contract") . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Count V ("Failure of Consideration and Frustration of Purpose") . . . . . 19 Count VI (Mistake) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

C. D. III. IV.

Sunoco's Takings Claim Should Be Dismissed . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Sunoco's Small Business Program Complaints Must Be Dismissed . . . . . . . . . . 22 A. The Court Lacks Jurisdiction To Entertain The Fifth Amendment Complaint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 DESC's Small Business Program Is Not Improper . . . . . . . . . . . . . . . . . 24

B. V.

Waiver and Estoppel Bar Sunoco's Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 A. B. C. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Sunoco has Waived As A Matter Of Fact . . . . . . . . . . . . . . . . . . . . . . . . 29 Sunoco has Waived Its Claims As A Matter Of Law . . . . . . . . . . . . . . . 34

Case 1:02-cv-00466-LB

Document 82

Filed 03/10/2006

Page 3 of 52

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 SUPPLEMENTAL APPENDIX Excerpt from deposition of John Cook, dated July 29, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Excerpt from deposition of Jacob Bournazian, dated December 3, 2003 . . . . . . . . . . . . . . . . . . . 7 Form EIA-782A ("Refiners'/Gas Plant Operators' Monthly Petroleum Product Sales Report . . 9 A Comparison of Selected EIA-782 Data with Data From Other Sources, by Jacob Bournazian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Comptroller General Opinion re: DFSC Small Business Set-Aside Procurements . . . . . . . . . . . 35 Declaration of Lawrence Ervin with attachments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

TABLE OF AUTHORITIES CASES PAGE(S)

American Telephone and Telegraph Co. v. United States, 307 F.3d 1374 (Fed. Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim American Telephone & Telegraph Co. v. United States, 177 F.3d 1368 (Fed. Cir. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39, 42 Armstrong v. United States, 364 U.S. 40 (1960) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Barrett Refining v. United States, 242 F.3d. 1055 (2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Barrett v. United States, 50 Fed. Cl. 567 (2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Beta Systems, Inc. v. United States, 838 F. 2d 1179 (Fed. Cir. 1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Brooklyn Sav. Bank v. O'Neill, 324 U.S. 697 (1945) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Calcasieu v. United States, 2003 WL 22049528, *13 (Fed. Cl.) . . . . . . . . . . . . . . . . . . . . . . . . . 27 Calcasieu v. United States, No. 02-1219C (Fed. Cl.) (Order of March 6, 2006) . . . . . . . . . . . . 29 - ii -

Case 1:02-cv-00466-LB

Document 82

Filed 03/10/2006

Page 4 of 52

Catawba Indian Tribe of South Carolina v. United States, 982 F. 2d 1564, 1570 (Fed. Cir. 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Cessna Aircraft v. Dalton, 126 F.3d 1442 (Fed. Cir. 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Chris Berg, Inc. v. United States, 426 F. 2d 314 (Ct. Cl. 1970) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Clark v. United States, 95 U.S. 539 (1877) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Coflexip & Servs., Inc. v. United States, 961 F. 2d 951, 952-953 (Fed. Cir. 1992) . . . . . . . . . . 23 Costanza Coal Min. Co. v. Weirton Steel Co., 150 F.2d 929 (4th Cir. 1945) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43, 44 Dairyland Power Cooperative v. United States, 16 F.3d 1197 (Fed. Cir. 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 DGS Contract Services, Inc. v. United States, 43 Fed. Cl. 227, 239 (1999) . . . . . . . . . . . . . 24, 26 E. Walters & Co., Inc. v. United States, 217 Ct. Cl. 576 F.2d 362 (1978) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Federal Crop Ins. v. Merrill, 332 U.S. 380 (1947) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Federal Elec. Corp. v. United States, 486 F.2d 1377 (Ct. Cl. 1973) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 General Eng'g. & Mach. Works v. O'Keefe, 991 F. 2d 775 (Fed. Cir. 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Gold Line Refining v. United States, 54 Fed. Cl. 285 (2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Gould v. United States, 67 F.3d 925 (Fed. Cir. 930 (Fed. Cir. 1995) . . . . . . . . . . . . . . . . . . . . . 23 Hartford Accident & Indem. Co. v. United States, 127 F. Supp. 565 (Ct. Cl. 1955) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Hermes v. United States, 58 Fed. Cl. 409 (2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Ide v. United States, 25 Ct. Cl. 401 (1890) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 - iii -

Case 1:02-cv-00466-LB

Document 82

Filed 03/10/2006

Page 5 of 52

Integrated Logistics Support Systems, Int'l v. United States, 42 Fed. Cl. 30 (1998) . . . . . . . . . 21 Jones v. United States, 6 Cl. Ct. 531, 533 (1984) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 LaBarge Prods., Inc. v. West, 46 F.3d 1547 (Fed. Cir. 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim LaGloria v. United States, 56 Fed. Cl. 211 (2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 La Van v. United States, 382 F.3d 1340, 1352 (Fed. Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . 21 Ling-Temco-Vought, Inc. v. United States, 201 Ct. Cl. 135, 475 F.2d 630 (1973) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Louisville and Nashville R.R. Co. v. Cent. Iron and Coal Co., 265 U.S. 59 (1924) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34, 43 MAPCO Alaska Petroleum, Inc. v. United States, 27 Fed. Cl. 405 (1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Millmaster Intl. Inc. v. United States, 427 F. 2d 811 (Cust. Ct. 1970) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Mitsubishi Motors Corporation v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Nautilus Shipping Corp. v. United States, 141 Ct. Cl. 391 (1958) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Navajo v. United States, 58 Fed. Cl. 200, 213 (2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Northern Helex Co. v. United States, 197 Ct. Cl. 118, 125-26 (1972) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Osprey Pacific Corp. V. United States, 41 Fed. Cl. 250 (1998) . . . . . . . . . . . . . . . . . . . . . . . . . 21 PCL Construction Services, Inc. v. United States, 41 Fed. Cl. 242, 252 (1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Pi Electronics Corp. V. United States, 55 Fed. Cl. 279 (2003) . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Pittsburgh C.C. & St. L. Ry. Co. v. Fink, 250 U.S. 577 (1919) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34, 43 Rough Diamond Co. v. United States, - iv -

Case 1:02-cv-00466-LB

Document 82

Filed 03/10/2006

Page 6 of 52

351 F.2d 636 (Ct. Cl. 1965) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Safeco Credit v. United States, 44 Fed. Cl. 406 (1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Shearson/American Express, Inc. v. McMahon, 482 U.S. 220 (1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Short Bros., PLC v. United States, 65 Fed. Cl. 695 (2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Shutte v. Thompson, 82 U.S. 151 (1872) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Sola Electric Co. v. Jefferson Electric Co., 317 U.S. 173 (1942) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Sprague Steamship Co. v. United States, 172 F. Supp 674 (Ct. Cl. 1959) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Tesoro v. United States, 58 Fed. Cl. 65 (2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Tesoro et al. v. United States, 405 F. 3d 1339 (Fed. Cir. 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Thomas v. United States, 125 Ct .Cl. 76, 80 (1953) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Trauma Service Group v. United States, 104 F.3d 1321 (Fed. Cir. 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Union Pacific Railroad Co. v. United States, 847 F.2d 1567 (Fed. Cir. 1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 United States v. Mezzanatto, 513 U.S. 196 (1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 United States v. Wurts, 303 U.S. 414, 415 (1937) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Urban Data Sys., Inc. v. United States, 699 F.2d 1147 (Fed. Cir. 1983) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Whittaker Electronic Systems v. Dalton, 124 F.3d 1443 (Fed. Cir. 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim

-v-

Case 1:02-cv-00466-LB

Document 82

Filed 03/10/2006

Page 7 of 52

STATUTES AND REGULATIONS 15 U.S.C. § 644 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 15 U.S.C. § 772 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 41 U.S.C. § 423 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,25 DAR § 1-1502(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 FAR § 15.402(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim FAR 15.404-1(b)(2)(I) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 FAR § 15.802(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim FAR § 15.804-3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 FAR § 16.203-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim FAR § 16.203-3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 FAR § 16.203-4(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 FAR 52.219-7(b)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 MISCELLANEOUS Restatement (Second) of Contracts § 178 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Nash and Cibinic, Formation of Government Contracts (3rd Ed. 1998) . . . . . . . . . . . . . . . . . . . 17

- vi -

Case 1:02-cv-00466-LB

Document 82

Filed 03/10/2006

Page 8 of 52

IN THE UNITED STATES COURT OF FEDERAL CLAIMS SUNOCO, INC., and PUERTO RICO SUN OIL COMPANY, Plaintiffs, v. THE UNITED STATES, Defendant. ) ) ) ) ) ) ) ) ) ) ) ) )

No. 02-466C (Judge Block)

REPLY TO PLAINTIFFS' OPPOSITION TO MOTION TO DISMISS THE COMPLAINT In our moving brief, we demonstrated that Plaintiffs' complaint attempted to clone the cause of action at issue in MAPCO Alaska Petroleum, Inc. v. United States, 27 Fed. Cl. 405 (1992), which held that that DESC's jet-fuel contract price escalation Clause B19.33 was inconsistent with the Federal Acquisition Regulation ("FAR"). In Tesoro et al. v. United States, 405 F. 3d 1339 (Fed. Cir. 2005), petition for reh'g. en banc denied, No. 04-5064 (Fed. Cir. Aug. 22, 2005) ("Tesoro"), the court of appeals abrogated MAPCO, holding that B19.33 had been legal all along. The court explicitly rejected the contractors' contention, repeated here, that B19.33 was illegal because it was based upon "indexes rather than on Plaintiff's own established fuel prices;" and because it used the Department of Energy's Petroleum Marketing Monthly ("PMM") as a price reference. As our moving brief explains, the standard Tesoro established for economic price adjustment ("EPA") clauses also effectively disposes of Sunoco's miscellaneous complaints concerning the legality of its contracts' EPA clauses, because it makes clear that the various tests Sunoco would have these clauses pass simply do not exist. In fact, the court held, in order to pass muster under FAR 16.203-1, EPA clauses need only rely upon "industry-based

Case 1:02-cv-00466-LB

Document 82

Filed 03/10/2006

Page 9 of 52

prices," which "may be established by reference to either a catalog or market sources independent of the manufacturer or vendor." Id. at 1347. In response, Sunoco amended its complaint to assert that the contracting officer had an obligation to assure Sunoco was paid "fair and reasonable prices, pursuant to FAR 15.802(b) (currently codified at FAR § 15.402(a))" (see Compl. ¶ 40); yet, still clung to allegations squarely rejected by Tesoro (that the escalation clause must be based upon Sunoco's own prices) or those that invoke requirements found nowhere in the law (that EPA clauses must be "designed or intended" to set prices and "reflect at least the fair market value of military fuel"). As our motion explains, these allegations do not invoke a proper legal test for EPA clauses and, therefore, fail to state a claim upon which relief can be granted. Sunoco also clung to its common-law allegations which, although allegedly grounded in the parties' understandings and commitments, lack a factual basis -- one that might establish the essential unrequited promise or understanding that typically undergirds such allegations. Their deficiency is unsurprising, because, as our motion explains, they are but thinly-disguised restatements of the Count I complaints, which, in turn depend upon MAPCO for their vitality. Accordingly, with regard to these allegations too, there simply is no relevant fact that Sunoco possessed or envisioned that can transform these counts into authentic common law claims. We also explained that, regardless of the above, Sunoco abandoned any rights the FAR might have conferred upon it, and Sunoco forfeited any right it might have had to test those rights in litigation when it waited as many years as it did to file the necessary claims. In doing so, we relied upon this Court's decision in Hermes v. United States, 58 Fed. Cl. 409 (2003) ("Hermes II"), which held that the contractor that brought a suit identical to this one no longer

-2-

Case 1:02-cv-00466-LB

Document 82

Filed 03/10/2006

Page 10 of 52

could pursue its illegality-based claims. As we demonstrated, Sunoco's rights with respect to its derivative claims are indistinguishable and also should be dismissed. Sunoco responds with a broadside attack upon the PMM itself, based upon incomplete quotations, innuendo, and a report from its consultants quibbling with the use of the escalation clause that the parties agreed to use. Absent from the report's theoretical discussion is a report of actual harm to Sunoco and an acknowledgment that the court of appeals has determined that the clause is legal, even if not to the liking of Sunoco's pricing advisors. Sunoco's efforts to resuscitate the complaint via common law complaints of mistake, misrepresentation, breach, frustration of purpose and the lack ­ premised on the very same lack of "fair market" element to its contracts, and absent traditional allegations of agreement-based, unrequited expectations ­ fare no better. That is so, because a cause of action that has, at its root, the existence of a right that does not exist (the right to an EPA clause based upon its own prices, or one based upon "fair market value") does not get stronger by adding further elements of proof. The other basis of Sunoco's response is that it "requires discovery." As we explain in our response to Sunoco's RCFC 56(f) motion, Sunoco's motion demonstrates that it "requires discovery" only to discover its own case and matters unconnected to legal causes of action. Accordingly, Sunoco is not entitled to discovery and cannot prevent the termination of this litigation upon that basis. FACTS Sunoco continues to rely upon the same partial quotations and quaint charges of Government scheming pedaled in its opposition to our motion for partial summary judgment. To this, Sunoco adds a consultants' opinion concerning the performance of the PMM, also builtupon unfounded premises, and a conclusory statement from one of Sunoco's officials declaring

-3-

Case 1:02-cv-00466-LB

Document 82

Filed 03/10/2006

Page 11 of 52

that Sunoco intended to receive legal prices and fair market value.1 See Compl. ¶¶ 16-21; Pl. Br. 4-7. In addition to being untrue, these allegations concern the relative merits of various price references - a discussion left to the realm of economists and fuel-industry analysts -- not the parties to a contract years after their contracts have been fully performed. In general, Sunoco's logic-bending story is that: DESC knew that its use of the PMM was corrupt; DESC had concluded that the price of fuel would, in the future, move in one direction; the PMM and all of the references DESC used would report movement in the opposite direction; that movement always would favor DESC's customers; and, somehow, the fuel industry never would detect this or, upon learning it, would bid eagerly nonetheless. Sunoco's story begins with the Energy Information Administration ("EIA"), the author of the PMM. Among Sunoco's favorite allegations and a pillar of its complaint is that the EIA has acknowledged that the PMM was not "intended to be an index that is used for setting prices." Pl. PFF 16. The implication is that the PMM is unsuitable or illegal for use as a price reference. What Sunoco avoids quoting is the testimony of the EIA's Dr. Cook on that point, which was: We're not opposed to [the PMM] being used for that purpose. We don't, per se, collect the data and justify its collection with OMB for that specific use. We justify its collection on the basis of its general value in measuring actual average prices, wholesale and retail, for everything from crude oil from the wellhead to the pump for state energy offices or various federal agencies, and most especially for Congressional committees for analysis purposes, forecasting, market tracking, all those uses. It's, it's, it happens to

Notably, Sunoco's brief does not address the contracts containing price references other than the PMM. In fact, Sunoco's consultants uses Platts to assess the market and also appears to endorse BLS, the publisher of the PPI and CPI, discussed at Pl. App. 618. Accordingly, there is no basis for further proceedings concerning paragraph 26 of the complaint, which alleges that "[o]n information and belief, DESC also knew that some of the other indexes it used to set or adjust prices were not appropriate for these purposes." -4-

1

Case 1:02-cv-00466-LB

Document 82

Filed 03/10/2006

Page 12 of 52

be useful, according to oil companies and DFSC for indexing, as well, but we didn't specifically design it for that. Second Supplemental Appendix ("SA2") (attached to this brief) at 5 (Tr. 632, l. 14). Sunoco also suggests that EIA and DESC cooperated surreptitiously to tilt the PMM in DESCs' favor, and that had breached an obligation to disclose that it worked with EIA "to see that our needs were met." Pl. Br. at 37, n.36; see also Pl. Br. at 4, n.8. However, the document upon which the assertion relies, Pl. App. 100, is taken out of context. As Sunoco's next document explains, DESC asked that EIA employ a "phased-in" approach to a new PMM format EIA was developing. DESC suggested that this could take the form of a dual reporting scheme in which EIA proceeded with its new method, but also included the old method until existing DESC contracts relying on the old method expired. Pl. App. 101-02. This hardly affected the contracts at issue or implicated a legal duty owing the Government's fuel suppliers. Lacking EIA's condemnation, Sunoco relies upon a litigation consultants' generalized assessment of the PMM, to argue that the PMM is illegal because it does not "reflect fair market value" (Pl. Br. 8), suffers from an "index number problem" (Pl. Br. 12), and does not measure "military jet fuel." Id. at 13. As we explain in our response to Sunoco's proposed findings, the difficulty with the fair market value allegation (in addition to its lack of relevance to the parties' actual price agreement) is the fact that it depends upon the assumption that the "market" is represented only by data published in Platts. Platts publishes spot market price assessments. Def. Exh. 4 ¶ 6. The PMM reports all sales. SA2 at 12 (item III) and 19 (item 23). A "spot" market is "a market where goods are traded for immediate delivery." www.platts.com/Oil/ Resources/Glossaries/#spotmarket. See also www.nymex.com glossary.Spot (spot is a "[t]erm which describes one-time open market case (CHANGE TO CASH) transaction, where a -5-

Case 1:02-cv-00466-LB

Document 82

Filed 03/10/2006

Page 13 of 52

commodity is purchased `on the spot' at current market rates. Spot transactions are in contrast to term sales, which specify a steady supply of product over a period of time." Sunoco's "index number problem" allegation also is untethered from the parties' contracts, and is not supported by the evidence. The index number problem occurs when an "index" contains two or more products whose relative quantities change. The basis for this argument is Sunoco's assertion that the PMM "uses current-period volume weights; that is, the reported sales prices are weighted by the actual sales volumes of different products and in different locations in each period." Pl. App. 615. Sunoco also asserts that "the price data reported in the PMM often represent an aggregate of multiple different fuels sold across many locations." Id. at 616. (Apparently, meaning the product mix changes). However, as Mr. Bournazian explained to Sunoco's counsel, during a deposition in La Gloria v. United States, No. 02-465 (Fed. Cl.), the PMM is not an index, which is "a ratio of two numbers." SA2 at 8. Moreover, the PMM does not mix fuel products. As the contracting officer has explained "PMM price averages are based on petroleum product sales information reported to DOE and grouped by product, type of sale, states, and by geographic region." Def. Exh. 1 (Walker Decl. ¶ 9). The EIA Form 782A, which collects that information, confirms as much. SA2 9-20. It provides strict requirements that require the segregation of product sales reports. Thus, kerosene-based jet fuel is reported on one line of the form, while different types of gasoline and diesel fuels are reported on others.2 Even the article cited by the consultants their proposition

Thus, this reporting is different than that that might be encountered with a true "index," such as the Consumer Price Index, which is based upon a "market basket" of different items. See, generally, http://www.bls.gov/lpc/lprdho95.pdf (Bureau of Labor Statistics paper on the index number problem); http://www.imf.org/external/np/sta/tegppi/ch15.pdf (International Monetary Fund paper addressing the question of "How exactly should the microeconomic information involving possibly millions of prices and quantities be aggregated into a smaller -6-

2

Case 1:02-cv-00466-LB

Document 82

Filed 03/10/2006

Page 14 of 52

does not indicate fuel products were mixed. Indeed, the article studies the different types of fuel separately, including "U.S. Kerosene-Type Jet Fuel." SA2 22-7. Sunoco's quarrel with the type of fuels used as references goes well beyond the test of a "market based" EPA clause announced in Tesoro, and also is unwarranted. The contracts at issue were for the sale of a variety of fuels, including JP-4, JP-5, and JP-8 jet fuel. Def. Exh 3 ¶ 2. The PMM explicitly requires the report of JP-5 and JP-8 sales on line 15 (SA2 at 10) in the PMM report form, and that is the item to which the JP-5 and JP-8 contracts referred. See SA2 19 (Item 13); Pl. App. 797. JP-4 is a blend of naphtha and kerosene. SA 2 at 40. Accordingly, Sunoco's contracts designated the reference price as a combination of PMM-reported prices relating to naphtha and kerosene. SA2 at 41. Because kerosene-based jet fuel is, by far, the largest volume kerosene product, DESC used the PMM report of kerosene-type jet fuel to reflect changes in value of the kerosene component of JP-4. Id. Naphtha sales are not reported in PMM. However, naphtha is an intermediate product in the manufacture of gasoline and, therefore, changes in its value are logically related to changes in the price of gasoline. Id. Accordingly, Sunoco's contracts used the report of wholesale gasoline to reflect changes in the value of the naphtha component of JP-4. Id. Lacking any proof of the PMM's inherent illegality, Sunoco asserts it was misled, because DESC knew that the PMM moved as much as one or two cents per gallon out of step with other market references, would not protect its suppliers, and failed to disclose that. Compl. ¶¶ 17-20; Pl. Br. 4-5. For example, the complaint alleges that a 1987 DESC study concluded that "PMM did not protect against market fluctuations and did not ensure that the prices DESC

number of price and quantity variables? This is the basic index number problem"). -7-

Case 1:02-cv-00466-LB

Document 82

Filed 03/10/2006

Page 15 of 52

paid for military fuel under the long-term contracts reflected at least fair market value." Compl. ¶ 19. See also Pl. Br. 5 (the "study supported using the commercial price references Platts and OPIS to make price adjustments -- not the PMM"). In fact, although the study found features to recommend both the PMM and trade publications (Def. PFF 18-24), it concluded that DESC should continue using PMM prices, but change the reference month, in order to use a reference price that had been published and was available at the time bidders were submitting their offers to the government. PFF 24.3 Avoiding the 1987 study's actual conclusions, Sunoco relies upon out of context quotations from the report. For example, Sunoco cites a supplier's statement that "we never know if we have made or lost money when you (D[E]SC) lift a cargo." Pl. Br. 6. Sunoco fails to explain that the comment concerned the interim-final price adjustment issue, not the use of PMM per se. See, SA 21, Background. But, the disparity between interim payments and final payments was well known by both parties, i.e., that various interim references (those used to provide a price adjustment while final PMM numbers for the month were being compiled by EIA), yielded different figures than the PMM and could over or under-predict the final price adjustment due. For that very reason, the contracts with PMM EPA clauses provided for final price adjustments, to be made when the applicable PMM prices were published. Such a two-step

Sunoco's allegation that "DESC did not disclose this study to its suppliers" is undercut by the very evidence it offers on that point. See Pl. App. 596 (handwritten note on cover memorandum to "proposed final draft" shows that some suppliers were canvassed on the proposal to continue using PMM prices with an earlier base reference price. ("Option II industry survey-Barrett, Pride, Chevron, Dia. Sh.-great idea! Calcasieu-indifferent Sun, West. Pet, Gladieux, Peerless, AIRI-won't hurt-might help")). -8-

3

Case 1:02-cv-00466-LB

Document 82

Filed 03/10/2006

Page 16 of 52

payment procedure would have been unnecessary if the references were identical. Thus, Sunoco knew from its many interim and final payments that reference prices differed.4 See PFF 13.5 Sunoco also cites a DESC statement that the use of trade journals "would cost DESC money" and that there would be "market risk" if adjustments were based on trade journal prices for "jet kerosene." Pl. Br. 6. But, the quotations were based upon flaws with the trade journals, not advantageous flaws in the PMM. The "market risk" stemmed from DESC's analysis that trade journals reported unrealistically high prices ("price stickiness") during periods of declining prices. PFF 20; SA 23. Another "market risk" noted was the fact that only a single trade journal reported "jet kerosene" prices, and that it might discontinue publication. SA 23. To round out its conspiracy tale, Sunoco alleges that "seven years later, in 1994, senior officials at DLA learned of DESC's 1987 study, and, upon review of the study, directed DESC to stop using PMM to set military fuel prices." Compl. ¶ 21. However, as we explained in our response to Sunoco's PFF 10, it was DESC, not DLA, which, in 1994, first sought a FAR deviation to begin using trade publication prices for price adjustments. PFF 23, 24. DESC did so, not because it had concluded that refiners were not receiving "fair market value," but for some of the same reasons that had been set out in the 1987 study, including the elimination of

Sunoco attempts to infuse some significance to the difference between the PMM and other price references by asserting that DESC required its suppliers to submit bids to the one tenthousandth of a cent. DESC did not "require" that offerors ". . . submit bids to sell military fuel to the one-ten-thousandth of a cent ($.000001)." Compl. ¶ 17; Pl. Br. 5. DESC only evaluated offers to that decimal place. Bidders were free to, and often did, submit bids to fewer decimal places. See, e.g., Pl. App. 650 (four places), 720 (four places), 750 (two places). Moreover, Sunoco typically requested, and DESC agreed, to five-digit rounding. E.g., Pl. App. 743. Sunoco's "Statement of Genuine Issues" denies PFF 13, "pursuant to Rule 56(f)." Sunoco cannot seriously claim a need for discovery regarding whether its contracts contained interim and final price adjustments. In fact, its own Appendix contains contracts specifying them, precisely as set forth in PFF 13. See, e.g., Pl. App. 809-10. -95

4

Case 1:02-cv-00466-LB

Document 82

Filed 03/10/2006

Page 17 of 52

the need for interim price adjustments, the wide acceptance of trade publication prices by industry, and the relative simplicity of the use of trade publication prices. PFF 24. The apparent basis for Sunoco's theory is the deposition testimony of Lawrence Ervin that the change from PMM prices to trade journal prices "was made in response to some pressure from headquarters to do things differently." SA 36. However, as he explained, the "pressure" was to "produce substantial savings to the taxpayer." Id; see also Def. Response to PFF 10. Sunoco cannot explain how DLA would expect to produce "substantial savings to the taxpayer" while at the same time eliminating the use of PMM, which, according to Sunoco, underpaid suppliers. ARGUMENT I. DESC's EPA Clauses Are Authorized by FAR 16.203-1 In Count I, Sunoco asserts: (1) that the clauses were illegal because there were not based upon "Plaintiff's own established fuel prices" (Compl. ¶ 38); (2) that the clauses were illegal because they were "not market-based, were not designed or intended to be used to set or adjust prices, and did not reflect at least the fair market value of military fuel" (Compl. ¶ 39); and (3) that the contracts were awarded in violation of FAR § 15.802(b) (currently codified at FAR 15.402(a)) (contracting officer's duty to review offers for price reasonableness) (Compl. ¶ 40). A. EPA Clauses Need Not Be Based Upon Sunoco's Own Prices

As explained in our moving brief, Tesoro explicitly rejected Sunoco's first argument, holding that the theory that "FAR 16.203-3 requires that adjustments be based only on changes in the prices charged by individual contractors eviscerates the regulatory meaning of the term `established prices' and the policy reasons for using it." Id. Summarizing, the court explained that: "According to the interplay of all four sections of FAR § 16.203, a `contractor's

- 10 -

Case 1:02-cv-00466-LB

Document 82

Filed 03/10/2006

Page 18 of 52

established price' may be established by reference to either a catalog or market sources independent of the manufacturer or vendor." Id. at 1347 (emphasis added). Sunoco's only rebuttal to this point is its assertion that Tesoro was wrongfully decided, and that Barrett Refining v. United States, 242 F.3d. 1055, 1060 (2001), provides the proper rule of decision. Pl. Br. 20, n. 21. However, that argument was examined in Tesoro and rejected. Tesoro, 405 F. 3d 1345 (noting that the Barrett court was not presented with the issue of legality). Accordingly, that argument appears to have reached an end ­ at least in this Court. B. DESC's PMM-Based EPA Clause Is Legal

In Tesoro, the court did not stop with the question of whether, in general, an EPA clause not based upon the contractor's own price would be illegal, because the argument presented to it (especially given reliance upon MAPCO) concerned the nature of the PMM. Accordingly, the court of appeals explicitly considered whether DESC's PMM-based EPA clause was an "established prices" clause and held that it was. Our moving brief quoted at length from Tesoro. It demonstrated that the court stated that it was considering the legality of the PMM (e.g., the certified question for interlocutory review was "Did DESC establish the price of fuel in violation of law by employing economic price adjustment clauses indexed to PMM?" (id. at 1342 (emphasis added)), and considered various of the factors cited by MAPCO, as the basis for its holding the PMM was not an "established prices" clause (e.g., that the PMM was an "amalgamation of the previous month's sales data" and, as such, did not comport with the dictionary definition of "established"). Summarizing the sweep of its review, the court of appeals concluded: Because we conclude that DESC's use of a market-based EPA clause tied to the PMM was authorized under the FAR, we do not reach the other issues raised in the certified questions . . . . Our - 11 -

Case 1:02-cv-00466-LB

Document 82

Filed 03/10/2006

Page 19 of 52

holding that the use of the PMM-based EPA clause was authorized under the statute moots the issue [of waiver]. *** For the foregoing reasons, we hold that the Court of Federal Claims erred in holding that DESC's use of a PMM-based EPA clause was not authorized under the FAR. Id. at 1348-9 (emphasis added).6 In the trial-level decisions that led to Tesoro, the plaintiffs disagreed concerning whether the PMM could be considered an "established prices" clause, arguing that the PMM was only an amalgamation of prices, was not based upon actual sales of jet fuel, and so forth. See, e.g., MAPCO, 27 Fed. Cl. 405. Neither the various trial courts nor the court of appeals found a genuine issue that might have precluded a judgment in our favor. Nor did these courts posit that there was a further test of what it means to be "market-based." The plaintiffs in Tesoro certainly never suggested that the PMM or any of the various references were not market-based. Nor does the purpose of the EPA clauses themselves. As we have explained in earlier briefings, the FAR's bias is for competition. Nothing provides a less-assailable ground for competition than firm-fixed prices. To permit an exception ­ one that allows the winning bidder of a single, pricebased competition to escape that price for subsequent sales, yet be the sole supplier for those subsequent lots ­ potentially eviscerates a competition-based system. Accordingly, to assure that prices remain tethered to the competition, the FAR requires that escalators be independent of the contractor's prices and be permitted only when the nature of the sale requires it (such as the

Sunoco reads too much into the comment in our appellate brief that we did not consider the appellate court's review to be a "beauty contest" of individual price references. Indeed, we did not and do not here, because it is not for the courts to determine whether one EPA clause is better than another from a business, pricing or economic standpoint. That choice is the agency's and can be voided only upon a finding that it is illegal. In any event, our argument does not dictate how the court itself actually decided the appeal. - 12 -

6

Case 1:02-cv-00466-LB

Document 82

Filed 03/10/2006

Page 20 of 52

sale of as volatile a commodity as fuel). As the court explained it, "the policy behind requiring use of `established prices' is to avoid contracts subject to the operational whims of individual contractors." Tesoro, 405 F.3d at 1347. Even if the court intended to effect a sub silentio remand on the question of whether a PMM-based clause was a market-based clause, the FAR itself requires nothing more than the clause be "market-based" ­ not that it move with Platts or that it meet any particular standard of precision. Indeed, Sunoco offers no new legal standard. Rather, it simply seeks to remove the unambiguous standard the parties agreed upon years ago.7 And, rooted as it is in the post hoc arguments of economists and industry-watchers, Sunoco's approach relegates the parties to observers, not makers, of their agreements. Nonetheless, the complaint asserts that the PMM clauses could not be legal, because they were "not market-based, were not designed or intended to be used to set or adjust prices, and did not reflect at least the fair market value of military fuel" (Compl. ¶ 39). As we noted in our moving brief, these standards cannot be found in the regulation or in Tesoro. Rather than defend the sufficiency of these proferred legal tests, Sunoco relies upon the opinion offered by its consultants concerning an appropriate price reference. The difficulty with relying upon opinions, even if taken as fact, is that, absent a legally-cognizable cause of action, the facts are immaterial to a court of law. Here, the materiality of the report rests upon Sunoco plumbing some depth in the simple regulatory requirement that an EPA clause be "market-based."

Sunoco's reference to Beta Systems, Inc. v. United States, 838 F.2d 1179 (Fed. Cir. 1988) does not supply that standard either. At issue there was a Defense Department FAR supplement not applicable here, which supplied specific criteria for cost index-type clauses. Indeed, the existence of such a detailed provision suggests that, if the agencies had wished to further regulate EPA clauses to the degree Sunoco suggests, they would have done so. Where the regulating authorities having stayed their hand, the Courts should not be tempted to regulate. - 13 -

7

Case 1:02-cv-00466-LB

Document 82

Filed 03/10/2006

Page 21 of 52

Sunoco's effort in that regard comes up empty, because Tesoro levied no greater standard than was sufficient to find that the PMM was market-based -- a finding it was able to make, based upon the simple facts before it. In our moving brief, we established that the PMM was "market-based." Among other things, we included (as we have here) the statute that requires refiners and sellers of petroleum products to report actual sales data to DOE. 15 U.S.C. § 772. It is this data upon which the PMM is based. See Def. PFF 11. Because the prices are established in sales between fuel sellers and buyers, it surely can be said that the EPA clause was based upon market prices, and satisfy the FAR 15.804-3 requirement that market prices be established in the ordinary course of business between buyers and sellers free to bargain. The premise of Sunoco's consultants' report is that the reference must report the very same end products as those being sold. But, that is not required. FAR 16.203-1(a)(1) requires only that adjustments based upon established prices be "based on increases or decreases from an agreed-upon level in published or otherwise established prices of specific items or the contract end items." Emphasis added. Thus, the prices of the precise end items need not be used. To the same effect, FAR 16.203-4(b) ("Adjustment based on established prices -- semistandard supplies") acknowledges that EPA clauses are appropriate for "semistandard" supplies, defined as those for which "the prices can be reasonably related to the prices of nearly equivalent standard supplies that have an established catalog or market price." Emphasis added. Thus, Sunoco's insistence that the products sold (admittedly, different to a degree) need be tracked by the established prices of those products lacks merit. Here, for example, in the case of JP-4 jet fuels, Dr. Schink explained that JP-4 is a naphtha-based jet fuel. Def. Exh. 2 ¶¶ 3, 7. Because naphtha is not reported by PMM, the contract provided that the price of compositionally-related fuels would provide the benchmark for price adjustments. Because naphtha is a component of - 14 -

Case 1:02-cv-00466-LB

Document 82

Filed 03/10/2006

Page 22 of 52

gasoline that can be blended into JP-4, or can be further upgraded for inclusion into gasoline, it was selected along with kerosene jet fuel to form a suitable reference.8 C. Sunoco's FAR 15.802(b) Allegation Does Not State A Cause of Action

In our moving brief, we demonstrated that Sunoco's effort to root its core complaint in a violation of FAR § 15.802(b) (currently codified at FAR 15.402(a)), does not state a claim upon which relief can be granted, because it does not create an enforceable right for contractors.9 See Short Bros., PLC v. United States, 65 Fed. Cl. 695, 764-65 (2005) ("The FAR provisions cited by Sunoco purport to do no more than to provide internal government direction. For example, FAR § 15.802 (1993), entitled "Policy," only requires that the contracting officer "[p]urchase supplies and services from responsible sources at fair and reasonable prices [.]" FAR § 15.802(b) . . . It does not afford a judicial remedy").10 We further explained that that provision was found

Sunoco's consultants' report also is flawed because its key conclusion (that PMM does not track "fair market value") is based solely upon the fact that PMM and Platts do not necessarily track each other. Yet, there is no requirement that they do. The report also is marred by statements for which there is no evidence, including the premise of its "index number" theory (as noted in our fact discussion) that the PMM mixes types of fuel. The report's assertion that the reference formula for JP-4 includes "sales of supplies destined to serve individual consumers at retail outlets" (Pl. App. 620) is similarly misleading. In fact, the formula included 70 percent gasoline of "Unleaded Reg Gasoline All Refiners and Gas Operators Sales for Resale" (Pl. App. 723 (emphasis added)), which is tracked separately in the PMM from retail sales. SA2 10, 19, 25-6. The report's assertion that the PMM also does not report "military" jet fuel is of the same caliber. In fact, EIA captures data for "kerosene-type jet fuel," including military jet fuels JP-5 and JP-8. SA2 at 19 (item 13). FAR 15.402(a) provides that the contracting officer "must- (a) Purchase supplies and services from responsible sources at fair and reasonable prices." Sunoco's effort to distinguish Short Bros. is limited to noting that it was not limited to the proposition for which we cite it, and that plaintiff sought a different contract type. Nonetheless, the holding we cited is correct, and the plaintiff in Short Brothers also sought money, as Sunoco does here. Sunoco seeks to distinguish All Phase Environmental, on the ground that the GAO did not, among other things, discuss the purpose of FAR 15.402. To the contrary, the GAO noted that the agency's concern was in not paying more than warranted. - 15 10 9

8

Case 1:02-cv-00466-LB

Document 82

Filed 03/10/2006

Page 23 of 52

in that part of the regulation that was concerned with obtaining adequate price competition, so that the Government was assured of paying a reasonable price. To address our analysis, Sunoco relies upon the regulation, the dictionary (definition of "fair"), and guidance to contracting officers and auditors found in the Armed Services Pricing Manual ("ASPM"), which suggests that a price should be fair to both sides. However, even if Sunoco were entitled to bring a FAR 15.402-based claim to this Court, the complaint still fails to state a claim, because FAR 15.402 concerns bid and award prices ­ not adjusted prices, which are calculated during contract performance, based upon the movement of the EPA clause. Accordingly, the ASPM refers to "price" in the singular and to "current market conditions," not subsequent adjusted prices. As we have explained, the contractors set their offer prices and no contractor has suggested that its offer prices were unreasonable. In any event, the ASPM guidance, the dictionary's definition of fairness, and Sunoco's other secondary references amount to nothing more than good advice for contracting officers interested in working with contented, motivated contractors, who are not looking to file claims.11 However, they do not establish the existence of an enforceable interest. Moreover, to suggest that the FAR, which was issued against a backdrop of longestablished principles of commercial law (including the principle of unilateral mistake, which the FAR addresses), intended to add a cause of action not rooted in mistake is as preposterous as it is

Indeed, the declarations in the record submitted by the contracting officer, John Walker (Def. Exh. 1) and the DESC Price Analysis and Pre-negotiation Briefing Memoranda (Pl. App. 144-70, 206-78) explain how prices were determined fair and reasonable. The undisputed facts show that prices were determined fair and reasonable based upon competition and, in many cases, comparison with market prices. See FAR 15.404-1(b)(2)(I) ("normally, adequate price competition establishes price reasonableness"). - 16 -

11

Case 1:02-cv-00466-LB

Document 82

Filed 03/10/2006

Page 24 of 52

illogical.12 Indeed, if, as Sunoco argues, the contracting officer's obligation to assess price reasonableness were actionable, contract pricing never would be binding, because contractors who failed to realize the post hoc demands of their owners or investors could occasion this Court's intervention with no more substantial an allegation than "our price was unfair!" Sunoco suggests that is not true, because courts routinely adjust prices. But, they do so upon discernible standards ­ not generalized claims of "unfairness," unrooted in recognized causes of action.13 II. Sunoco's Alternative Illegality Theories In Counts II-VI Must Be Dismissed A. Count II (Misrepresentation)

In our moving brief, we established that the misrepresentation count (DESC "misrepresented and otherwise failed to disclose that PMM and other indexes were not designed or intended to be used to set or adjust prices and did not reflect at least fair market value." (Compl. ¶ 55) should be dismissed, because there is no such applicable rule for EPA clauses. Sunoco's brief does not suggest one or that the Government actually misrepresented anything. Instead, Sunoco asserts that, because the complaint alleged a "misrepresentation," for the purposes of our motion, it is an established fact. Pl. Br. 32. However, misrepresentation is an

See Nash and Cibinic, Formation of Government Contracts (3rd Ed. 1998) at 1279 ("The primary focus of these requirements is to ensure that the Government does not pay unreasonably high prices," although they caution that "prices that are unreasonably low must also be dealt with before an award is made, because they could be evidence of mistake, nonresponsibility, lack of understanding of the work, or a buy-in"). Sunoco's own argument makes this connection, asserting that it is grounded in a misrepresentation. Pl. Br. 31. Sunoco acknowledges that its claim cannot stand on FAR 15.402 alone, when it argues that it "the determination of price reasonableness was, in essence: that DESC knew that the PMM did not reflect the marketplace, [and] misrepresented what it knew for its own benefit." Pl. Br. 30-31 (emphasis added). In other words, as Sunoco's misrepresentation count goes, so goes its FAR 15.402 count. As we have explained, Sunoco has yet to put a fact in evidence that amounts to a misrepresentation or establishes its fanciful conspiracy theory. - 17 13

12

Case 1:02-cv-00466-LB

Document 82

Filed 03/10/2006

Page 25 of 52

allegation of law, which we need not accept. In fact, the entire point of our motion is to challenge it. Accordingly, absent any material fact pertaining to an actual misrepresentation, that count now must be dismissed. B. Count III ("Breach of Contract") and Count IV ("Implied-In-Fact Contract")

In our moving brief, we established that Sunoco's breach of contract count and impliedin-fact contract counts should be dismissed, because there is no ground for striking the parties' own unambiguous agreement. We also established that an "implied-in-fact contract cannot exist if an express contract already covers the same subject matter." Trauma Service Group v. United States, 104 F.3d 1321, 1326 (Fed. Cir. 1997). Other than asserting that the contract "expressly" requires the payment of "fair market value," Sunoco cites no language to contradict the unambiguous language of the contract's pricing clause. Instead, Sunoco attempts to oust that clause obliquely, reasoning that the Spearin doctrine (Government warrants that design specifications will yield satisfactory result) and principles of contract reformation somehow trump a contract's unambiguous language.14 But, the plain language of the contract's pricing clause do not permit such machinations. We do not disagree that if, as a matter of law, the pricing clause were stricken, that reformation could be available. Nor do we disagree that any such remedy would include an examination of the

Sunoco alludes to the "implied" promise to pay fair market value found in Barrett, 242 F.3d 1060. Pl. Br. 37. However, in that case, the contract was assumed to be invalid, and the court was looking for evidence of an implied in fact contract. Here, should we reach such a remedy phase, we would expect the parties to adduce evidence concerning the fact of any such implied agreement. Absent agreement upon what "fair market value" means, it is unlikely the parties are in any position to agree upon what, specifically, that might be. Notably, the denouement of Barrett was the trial court's finding that, based upon the presumed implied-infact agreement, the Government overpaid for three of the four contracts at issue. Barrett v. United States, 50 Fed. Cl. 567, 569-70 (2001). We understand that Sunoco would dispute that an agreement that would yield any such result exists. - 18 -

14

Case 1:02-cv-00466-LB

Document 82

Filed 03/10/2006

Page 26 of 52

parties' dealings to search for an implied, arrangement; but, until this contract is voided through some other cause of action, these counts unnecessarily bloat the complaint. C. Count V ("Failure of Consideration and Frustration of Purpose")

Count V presents a further unnecessary multiplication of the charges. Sunoco seeks to avoid the dismissal of Count V, by asserting that the matter is not "ripe for decision," because "DESC offers no evidence" concerning the degree of frustration. Pl. Br. 42. However, it is Sunoco that bears the burden of proof in advancing evidence of its purported frustration. Moreover, Sunoco's reply acknowledges that the count is grounded "on the voiding of DESC's pricing clause on the grounds of illegality." Pl. Br. 42. Accordingly, the dismissal of Sunoco's remaining illegality counts would result in the dismissal of this count (conversely, were it not to be dismissed, the frustration count would be superfluous) and, therefore, serves no purpose. D. Count VI (Mistake)

In our moving brief, we demonstrated that Count VI must be dismissed for the same reason as the other alternative causes of action, and that Sunoco failed to meet the basic elements of proof of a mistake claim, including that, at the time of their agreement, the parties shared a mistaken belief "regarding a fact" concerning a "basic assumption underlying the contract." See Dairyland Power Cooperative v. United States, 16 F.3d 1197, 1202 (Fed. Cir. 1994). The reply asserts that the complaint's focus in this Count is the purpose of the PMM and what it is intended to measure. Pl. Br. 43. But, Sunoco's reply fails to identify any belief that it held concerning the PMM ­ let alone one held by DESC. As we have explained, the PMM reports on actual sales data required to be reported by statute. Sunoco itself was required to supply the information that was the basic ingredient of the PMM. Sunoco has failed to show why the purpose of the PMM or why EIA collects PMM data is material to an unambiguous - 19 -

Case 1:02-cv-00466-LB

Document 82

Filed 03/10/2006

Page 27 of 52

contract provision that was never alleged to operate or be administered or interpreted improperly.15 In sum, Sunoco's mistake pleading lacks a factual premise. III. Sunoco's Takings Claim Should Be Dismissed Sunoco's extended response to our demonstration that it fails to state Fifth Amendment takings claim, Pl. Br. 43-49, confirms our central point: that Sunoco cannot cite a single judicial decision holding that a compensable "taking" can occur when the Government acquires property from a willing seller, pursuant to a contract that is later (for purposes of argument) held to be "illegal" or void. This is hardly surprising, as such a rule would convert every "illegal contract" claim involving real or personal property into a takings claim. "Sunoco alleges that the contracts were unlawful, and thus DESC physically possessed fuel to which it had no right." Id. at 47. This conclusion concerning the Governments "rights," however, does not follow from the premise of illegality. Indeed, under Sunoco's logic, Sunoco could be liable to a suit by the Government for funds paid to it by the Government (e.g., United States v. Wurts, 303 U.S. 414, 415 (1937)), because it would likewise be true that "Sunoco possessed Government money [paid under the contract] to which it had no right." In truth, of course, both parties rightfully took ownership of the consideration freely exchanged under the fuel supply contracts; both parties received exactly what they contracted for; and these voluntary transactions had none of the aspects of a physical or regulatory taking. In fact, a contract constitutes a right to payment of damages in the event of a failure of

Sunoco's reliance upon Beta Systems does not supply its missing factual ingredient. Not only are the facts of that case not suggested here by any evidence, that case involved a DFAR supplement and specific EPA clause criteria not applicable here. - 20 -

15

Case 1:02-cv-00466-LB

Document 82

Filed 03/10/2006

Page 28 of 52

performance. As long as the right to such damages remains intact, as it does here, no takings has occurred. See, e.g., La Van v. United States, 382 F.3d 1340, 1352 (Fed. Cir. 2004). Sunoco's argument that its constitutional claim is "substantially identical" to that in Osprey Pacific Corp. V. United States, 41 Fed. Cl. 250 (1998), cannot bear scrutiny. Pl. Br. 46. Among other important distinctions, the plaintiff in Osprey was a mere third party to the contract under which the Government asserted ownership of the boat, and plaintiff did not willingly deliver its property to the Government for remuneration, as did Sunoco. Nor is it true that "courts have consistently permitted [a] contractor to pursue takings claims in addition to breach of contract claims" when the contractor is dissatisfied with the price it received. Id. at 48. In the first case cited by Sunoco to support the latter assertion, Pi Electronics Corp. V. United States, 55 Fed. Cl. 279 (2003), the property right allegedly "taken," through disclosure, was a trade secret, which plaintiff did not agree to convey to the Government. Id. at 281-83. Sunoco, by contrast, freely passed title to its fuel for consumption by the military. In Armstrong v. United States, 364 U.S. 40 (1960), also cited by Sunoco, the plaintiffs were not Government "contractors," but subcontractors who asserted liens in the subject of the contract. Those plaintiffs were not attempting to convert contract claims into takings claims. In Scan-Tech Security v. United States, 46 Fed. Cl. 326 (2000), the Court held sensibly that "[i]f the express writings of the parties encompass[ed] the [Government's] right to possession" ­ as DESC's fuel contracts undeniably did ­ plaintiff's "takings claim should be dismissed" and replaced with contract claims. Id. at 332. Similarly, in Integrated Logistics Support Systems, Int'l v. United States, 42 Fed. Cl. 30 (1998), the Court could not "conclude that the contract conferred expressly upon defendant rights of possession, use, ownership, and alienation in the materials . . . ." Id. at 35. No such ambiguity exists in these fuel supply contracts. - 21 -

Case 1:02-cv-00466-LB

Document 82

Filed 03/10/2006

Page 29 of 52

Sunoco was not coerced to bid for or perform these contracts, and the assertion that DESC "abrogated Sunoco's rights" by awarding lucrative contracts to plaintiff in a proprietary capacity refutes itself. Pl. Br. 44 n.41. No authority supports the argument that such free exchanges of a commodity for money in a competitive market can be recharacterized, years after the fact, as a compensable Fifth Amendment taking if the private seller can find some way to undo what both parties understood to be the contracts. Further, even assuming DESC's contracts were unauthorized, this would be true, as the Federal Circuit held in Barrett, only as to the pricing mechanism. The remainder of the agreements, including the Government's right to receive the fuel, would stand, or would, at a minimum, be "implied in fact" from the parties' conduct. Accordingly, there is no basis upon which to allege the fuel was "taken" for use by the sovereign within the meaning of the Constitution. IV. Sunoco's Small Business Program Complaints Must Be Dismissed A. The Court Lacks Jurisdiction To Entertain The Fifth Amendment Complaint

In our moving brief, we demonstrated that this Court possesses no jurisdiction over claims based upon the Fifth Amendment's equal protection clause. Sunoco claims to skirt that rule, because it has an "express contract" tainted by the award. Pl. Br. 50. But, here, Sunoco has no award based upon any purported equal protection violation.16 Moreover, the test is not whether a contractor has a contract, it is whether the contract "underlies its claim." Trauma Service Group, 104 F.3d at 1324. Here, Sunoco's contract is, at best, incidental to its claim, which concerns the award of set-aside portions it presumably was not awarded. By contrast, the

A further symptom of the sheer creativity of the complaint is Sunoco failure to include any evidence that the premise of its argument has any basis in fact, such as a declaration or document explaining how the purported violation affected its contracts. - 22 -

16

Case 1:02-cv-00466-LB

Document 82

Filed 03/10/2006

Page 30 of 52

cases upon which Sunoco relies, such as Urban Data Sys., Inc. v. United States, 699 F.2d 1147 (Fed. Cir. 1983), Gould v. United States, 67 F.3d 925 (Fed. Cir. 930 (Fed. Cir. 1995), and Trauma Service Group, concern claims that contract terms (including their proper interpretation in light of applicable statutes or regulations) were illegal or supported the requested relief. See, e.g., Trauma Service, 104 F.3d 1321, 1325 ("TSG contends the MOA is an express contract"); Gould, 67 F.3d at 929 ("The illegality in this case, if there is one, turns on questions of fact and the terms of the contract in dispute"); LaBarge Prods., Inc. v. West, 46 F.3d 1547 (Fed. Cir. 1995) (pricing provision formed in violation of an auction procedure was reviewable). Here, Sunoco has failed to identify any of its contract terms that were written in violation of any statute or regulation. Sunoco also insists that the "Federal Circuit already has expressly held that there is Tucker Act jurisdiction over this precise type of claim." Pl. Br. 51 (citing Rothe Dev. Corp. v. United States Dep't of Defense, 262 F. 3d 1306 (Fed. Cir. 2001)). However, this is not a Rothe claim. Rothe was a disappointed bidder. It did not seek damages arising from a contract, nor did the court assert its jurisdiction on that basis. Rothe alleged that the application of a 10 percent evaluation preference to a small disadvantaged business bid deprived Rothe of obtaining a contract. Thus, it was upon its bid protest jurisdiction (then based upon the premise that, "[u]nder the Tucker Act an unsuccessful bidder can recover its bid preparation costs from the Government on the theory that failure to evaluate a `bid honestly and fairly' breaches an implied-in-fact contract of fair dealing") that the court entertained the appeal. Rothe, at 1317 (citing Co