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IN THE UNITED STATES COURT OF FEDERAL CLAIMS ________________________________________________________________________ No. 02-466C (Chief Judge Damich) ________________________________________________________________________ SUNOCO, INC., AND PUERTO RICO SUN OIL COMPANY, Plaintiffs, v. THE UNITED STATES, Defendant. ________________________________________________________________________ PLAINTIFFS' OPPOSITION TO DEFENDANT'S MOTION TO DISMISS ________________________________________________________________________

J. Keith Burt Mayer, Brown, Rowe & Maw LLP 1909 K Street, N.W. Washington, D.C. 20006 (202) 263-3208 Attorneys for Plaintiffs Sunoco, Inc. and Puerto Rico Sun Oil Company Of Counsel: Gary A. Winters Mayer, Brown, Rowe & Maw LLP 1909 K Street, N.W. Washington, DC 20006 February 7, 2006

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TABLE OF CONTENTS Page TABLE OF AUTHORITIES ........................................................................................................ iv STATEMENT OF FACTS ............................................................................................................ 2 I. II. III. IV. V. VI. VII. THE PARTIES....................................................................................................... 2 DESC'S MILITARY FUEL PRICES.................................................................... 2 DESC'S CONFLICTING ASSESSMENTS OF ITS MILITARY FUEL PRICES .................................................................................................................. 4 THE NON-NEGOTIABILITY OF DESC'S MILITARY FUEL PRICES........... 7 THE FAILURE OF DESC'S MILITARY FUEL PRICES TO REFLECT FAIR MARKET VALUE ...................................................................................... 8 DESC'S MINORITY PRICE PREFERENCES AND FUEL CONTRACT AUCTIONS ......................................................................................................... 14 SUNOCO'S AMENDED COMPLAINT ............................................................ 14

ARGUMENT............................................................................................................................... 16 I. II. DESC'S MOTION FAILS TO SATISFY THE STANDARDS FOR JUDGMENT AS A MATTER OF LAW ............................................................ 16 DESC IS NOT ENTITLED TO JUDGMENT AS A MATTER OF LAW ON SUNOCO'S CLAIMS THAT DESC'S MILITARY FUEL PRICES VIOLATE FAR § 16.203 .................................................................................... 19 A. B. III. Only The Issue Of Per Se Illegality Was Before The Court In Tesoro .................................................................................................. 19 DESC's Construction Of Tesoro Ignores Its Plain Language ................. 22

DESC IS NOT ENTITLED TO JUDGMENT AS A MATTER OF LAW ON SUNOCO'S CLAIMS THAT DESC'S MILITARY FUEL PRICES VIOLATE FAR § 15.802(b)(1) ........................................................................... 25 DESC IS NOT ENTITLED TO JUDGMENT AS A MATTER OF LAW ON SUNOCO'S CLAIMS OF MISREPRESENTATION ................................. 31 DESC IS NOT ENTITLED TO JUDGMENT AS A MATTER OF LAW ON SUNOCO'S CLAIMS OF BREACH OF CONTRACT............................... 33

IV. V.

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TABLE OF CONTENTS (continued) Page VI. DESC IS NOT ENTITLED TO JUDGMENT AS A MATTER OF LAW ON SUNOCO'S CLAIMS OF BREACH OF AN IMPLIED-IN-FACT CONTRACT ........................................................................................................ 37 DESC IS NOT ENTITLED TO JUDGMENT AS A MATTER OF LAW ON SUNOCO'S CLAIMS OF FAILURE OF CONSIDERATION AND FRUSTRATION OF PURPOSE ......................................................................... 38 DESC IS NOT ENTITLED TO JUDGMENT AS A MATTER OF LAW ON SUNOCO'S CLAIMS OF MISTAKE.......................................................... 41 DESC IS NOT ENTITLED TO JUDGMENT AS A MATTER OF LAW ON SUNOCO'S CLAIMS OF A FIFTH AMENDMENT TAKING ................. 43 DESC IS NOT ENTITLED TO JUDGMENT AS A MATTER OF LAW ON SUNOCO'S CLAIMS THAT DESC ILLEGALLY PROVIDED PRICE PREFERENCES TO MINORITY-OWNED SUPPLIERS..................... 50 DESC IS NOT ENTITLED TO JUDGMENT AS A MATTER OF LAW ON SUNOCO'S CLAIMS THAT DESC ILLEGALLY AUCTIONED THE AWARD OF MILITARY FUEL CONTRACTS ....................................... 52 DESC IS NOT ENTITLED TO JUDGMENT AS A MATTER OF LAW ON ITS AFFIRMATIVE DEFENSE THAT SUNOCO WAIVED ALL OF ITS CLAIMS ................................................................................................. 59 A. B. As A Matter Of Fact, DESC Fails To Establish That Sunoco Waived All Of Its Claims ....................................................................... 59 As A Matter Of Law, Sunoco's Claims Of Illegality Cannot Be Waived ..................................................................................................... 67 1. 2. 3. Sunoco Is Entitled To Recover A Lawful Price For Fuel............ 68 Because The Law At Issue Protects Contractors, DESC's Violations Of Law Cannot Be Waived ........................................ 71 DESC May Not Use A Defense Of Waiver To Seek A Judicially-Imposed Statute Of Limitations Congress Did Not Enact ..................................................................................... 74 Federal Crop Insurance v. Merrill Does Not Support A Finding Of Waiver ....................................................................... 76

VII.

VIII. IX. X.

XI.

XII.

4.

CONCLUSION............................................................................................................................ 78 -ii-

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TABLE OF AUTHORITIES Page(s) Cases A Olympic Forwarder, Inc. v. United States, 33 Fed. Cl. 514 (1995) .....................................60, 67 AT&T v. United States, 177 F.3d 1368 (Fed. Cir. 1999) .........................................................29, 37 AT&T v. United States, 307 F.3d 1374 (Fed. Cir. 2002) .............................................29, 30, 72, 76 Accardi v. Shaughnessy, 374 U.S. 260 (1954)...............................................................................31 Adams v. United States, 391 F.3d 1212 (Fed. Cir. 2004) ........................................................16, 59 Adarand Constructors, Inc. v. Pena, 515 U.S. 200 (1995)............................................................50 Aerojet-General Corp. v. Askew, 453 F.2d 819 (5th Cir. 1971) ....................................................38 Ahrenholz v. Bd. of Trustees, 219 F.3d 674 (7th Cir. 2000) ..........................................................21 Alaska Pulp Corp. v. United States, 48 Fed. Cl. 655 (2001) .........................................................63 Alde, S.A. v. United States, 28 Fed. Cl. 26 (1993) .........................................................................49 Aluminum Co. of Am. v. Essex Group, Inc., 499 F. Supp. 53 (W.D. Pa. 1980).......................................................................................43 American Capital Corp. v. United States, 58 Fed. Cl. 398 (2003) ................................................35 American Sav. Bank, F.A. v. United States, 62 Fed. Cl. 6 (2004) .................................................36 Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986) ............................................................16, 17 Applied Devices Corp. v. United States, 591 F.2d 635 (1979) ................................................69, 72 Armstrong v. United States, 364 U.S. 40 (1960) ...........................................................................48 Ashford v. United States, 43 Fed. Cl. 1 (1997) ..............................................................................32 Barrett Ref. Corp. v. United States, 242 F.3d 1055 (Fed. Cir. 2001) .................................... passim Barrett Ref. Corp. v. United States, 42 Fed. Cl. 128 (1998)..................................................3, 8, 42 Barrett Ref. Corp. v. United States, 45 Fed. Cl. 166 (1999).................................................. passim Beta Systems, Inc. v. United States, 838 F.2d 1179 (Fed. Cir. 1988) .................................... passim Board Machine, Inc. v. United States, 49 Fed. Cl. 325 (2001)......................................................46 Boston Edison Co. v. United States, 64 Fed. Cl. 167 (2005) .........................................................45 Brown v. Legal Found. of Washington, 538 U.S. 216 (2003)........................................................44 -iii-

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TABLE OF AUTHORITIES (continued) Page(s) Burness v. Bruce, 776 P.2d 32 (Or. Ct. App. 1989).......................................................................61 C & H Comm. Contractors, Inc. v. United States, 35 Fed. Cl. 246 (1996) .......................33, 35, 43 Cain v. Burns, 280 P.2d 888 (Cal. Dist. Ct. App. 1955)................................................................69 Carter v. Seaboard Fin. Co., 203 P.2d 758 (Cal. 1949) ................................................................69 Castle v. United States, 48 Fed. Cl. 187 (2000).......................................................................47, 49 Celotex Corp. v Catrett, 477 U.S. 317 (1986) ..................................................................1-2, 17-18 Centel Communications Co., 89-1 B.C.A. (CCH) ¶ 21,225 (Sept. 8, 1988) .................................70 Centex Corp. v. United States, 395 F.3d 1283 (Fed. Cir. 2005) ....................................................37 Cessna Aircraft Co. v. Dalton, 126 F.3d 1442 (Fed. Cir. 1997)........................................ 28, 71-73 Cherokee Nation v. United States, 174 Ct. Cl. 131 (1966)............................................................60 Chris Berg, Inc. v. United States, 426 F.2d 314 (Ct. Cl. 1970) .....................................................70 Clark v. United States, 95 U.S. 539 (1877) ...................................................................................76 Coastal Corp. v. United States, 713 F.2d 728 (Fed. Cir. 1983).....................................................52 Commodity Futures Trading Comm'n v. Schor, 478 U.S. 833 (1986)..................................... 72-73 Conley v. Gibson, 255 U.S. 42 (1957) .......................................................................................1, 16 Consolidated Edison Co. of N.Y., Inc. v. United States, 67 Fed. Cl. 285 (2005) .................................................................................................46, 47 Cont'l Bus. Enter., Inc. v. United States, 452 F.2d 1016 (Ct. Cl. 1971) ........................................31 Cornetta v. United States, 851 F.2d 1372 (Fed. Cir. 1988) ...........................................................75 Costanzo Coal Mining Co. v. Weirton Steel Co., 150 F.2d 929 (4th Cir. 1945) ..................................................................................................................................68 D.F.K. Enter., Inc. v. United States, 45 Fed. Cl. 280 (1999)................................................... 36-37 DGS Contract Serv., Inc. v. United States, 43 Fed. Cl. 227 (1999)...............................................58 DSI Corp. v. United States, 655 F.2d 1072 (Ct. Cl. 1981) ............................................................49 Del-Rio Drilling Programs Inc. v. United States, 146 F.3d 1358 (Fed. Cir. 1998) ..................................................................................................................................46 Desert Apartments, Inc. v. United States, 250 F.2d 457 (10th Cir. 1957) .....................................67 -iv-

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TABLE OF AUTHORITIES (continued) Page(s) Detroit Edison Co. v. United States, 56 Fed. Cl. 299 (2003)...................................................45, 48 District of Columbia v. Thompson, 281 U.S. 25 (1930) ................................................................38 Dow Chem. Co. v. United States, 226 F.3d 1334 (Fed. Cir. 2000)................................................62 E. Walters & Co. v. United States, 576 F.2d 362 (Ct. Cl. 1978) ...................................................72 Edwards v. Aguillard, 482 U.S. 578 (1987) ..................................................................................28 Everett Plywood Corp. v. United States, 227 Ct. Cl. 415 (1981) ............................................ 40-41 Far West Fed. Bank, S.B. v. Director, OTS, 930 F.2d 883 (Fed. Cir. 1991) ........................... 39-40 Far West Fed. Bank, S.B. v. OTS, 119 F.3d 1358 (9th Cir. 1997).................................................40 Fed. Crop Ins. v. Merrill, 332 U.S. 380 (1947) ..................................................... 34, 62, 70, 76-77 Franconia Assocs. v. United States, 61 Fed. Cl. 718 (2004) .........................................................48 Freightliner Corp. v. Caldera, 225 F.3d 1361 (Fed. Cir. 2000)..............................................26, 28 G.L. Christian & Assocs. v. United States, 320 F.2d 345 (Ct. Cl. 1963)................................. 69-70 Gardner v. Brown, 5 F.3d 1456 (Fed. Cir. 1993) ..........................................................................54 Gen. Eng'g & Machine Works v. O'Keefe, 991 F.2d 775 (Fed. Cir. 1993)....................................61 George Solitt Constr. Co. v. United States, 64 Fed. Cl. 229 (2005)..............................................31 Gold Line Ref., Ltd. v. United States, 43 Fed. Cl. 291 (1999) .......................................................70 Gold Line Ref., Ltd. v. United States, 54 Fed. Cl. 285 (2002) ................................................. 71-72 Gould, Inc. v. United States, 67 F.3d 925 (Fed. Cir. 1995) ...........................................................51 Hamilton v. Williams, 573 N.E.2d 1276 (Ill. Ct. App. 1991) ........................................................61 Hamlet v. United States, 873 F.2d 1414 (Fed. Cir. 1989)..............................................................50 Hansen v. United States, 65 Fed. Cl. 76 (2005).............................................................................45 Hendler v. United States, 11 Cl. Ct. 91 (1986) ..............................................................................44 Hercules, Inc. v. United States, , 292 F.2d 1378 (Fed. Cir. 2002).................................................33 Hermes Consol., Inc. v. United States, 58 Fed. Cl. 3 (2003) ................................................. passim Hermes Consol., Inc. v. United States, 58 Fed. Cl. 409 (2003) ............................. 22, 62, 71, 76-77 -v-

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TABLE OF AUTHORITIES (continued) Page(s) Heydt v. United States, 38 Fed. Cl. 286 (1997) .............................................................................45 Hughes Communications Galaxy, Inc. v. United States, 271 F.3d 1060 (Fed. Cir. 2001)..........................................................................................48 INS v. Hibi, 414 U.S. 5 (1973).................................................................................................63, 74 Integrated Logistics Support Sys. Int'l, Inc. v. United States, 42 Fed. Cl. 30 (1998) ............................................................................................. 45, 47-48 Interstate Plywood Sales Co. v. Interstate Container Corp., 331 F.2d 449 (9th Cir. 1964) .............................................................................................32 Inupiat Community of the Arctic Slope v. United States, 680 F.2d 122 (Ct. Cl. 1982) ...............................................................................................51 J&E Salvage v. United States, 37 Fed. Cl. 256 (1997)..................................................................43 John C. Grimberg Co. v. United States, 185 F.3d 1297 (Fed. Cir. 1999) .....................................31 John Deere Ind. Equip. v. Triple Cities Equip., Inc., 646 F. Supp. 114 (N.D.N.Y. 1986)....................................................................................61 John Massman Contracting Co. v. United States, 23 Cl. Ct. 24 (1991) ........................................32 Johnson v. Zerbst, 304 U.S. 458 (1938) ...................................................................... 59-60, 73, 75 Kaiser Aluminum & Chem. Sales, Inc. v. Avandole Shipyards, Inc., 677 F.2d 1045 (5th Cir. 1982) ...........................................................................................69 Kaiser Steel Corp. v. Mullins, 455 U.S. 72 (1982) ............................................................68, 71, 73 Keystone Driller Co. v. Gen. Excavator Co., 290 U.S. 240 (1933)...............................................24 L.W. Matteson, Inc. v. United States, 61 Fed. Cl. 296 (2004) .......................................................34 LaBarge Products, Inc. v. West, 46 F.3d. 1547 (Fed. Cir. 1995) .......................................... passim La Gloria Oil & Gas Co. v. United States, No. 02-456C (Fed. Cl.)................................................6 LeBlanc v. United States, 50 F.3d 1025 (Fed. Cir. 1995) ..............................................................51 Leiter v. United States, 271 U.S. 204 (1926) .................................................................................72 Logicon, Inc. v. United States, 22 Cl. Ct. 776 (1991)....................................................................58 Lone Mtn. Prod. Co. v. Nat. Gas Pipeline Co. of Am., 710 F. Supp. 305 (D. Utah 1989).......................................................................................60 Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419 (1982).................................44, 45 -vi-

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TABLE OF AUTHORITIES (continued) Page(s) Louisville & Nashville R.R. Co. v. Cent. Iron & Coal Co., 265 U.S. 59 (1924).............................................................................................................74 Lynch v. United States, 292 U.S. 571 (1934)...........................................................................44, 47 M.A. Mortenson Co. v. Brownlee, 363 F.3d 1203 (Fed. Cir. 2003)......................................... 33-34 MAPCO Alaska Petroleum, Inc. v. United States, 27 Fed. Cl. 205 (1992) ............................................................................................... passim M.G. Constr., Inc. v. United States, 67 Fed. Cl. 176 (2005)..........................................................35 Maine Yankee Atomic Power Co. v. United States, 225 F.3d 1336 (Fed. Cir. 2000)..........................................................................................47 Maislin Ind., U.S., Inc. v. Primary Steel, Inc., 497 U.S. 116 (1990) .......................................62, 74 Majernick v. Hartford Cas. Ins. Co., 688 A.2d 1330 (Conn. 1997) ..............................................61 McDonnell Douglas Corp. v. United States, 182 F.3d 1319 (Fed. Cir. 1999) ..................................................................................................................................31 Motorola Inc. v. West, 125 F.3d 1470 (Fed. Cir. 1997).................................................................74 Mullenberg v. United States, 857 F.2d 770 (Fed. Cir. 1988).........................................................51 Nat'l Leased Housing Ass'n v. United States, 24 Cl. Ct. 647 (1991) .............................................52 Navajo Ref. Co., L.P. v. United States, 58 Fed. Cl. 200 (2003).....................................8, 29, 66, 67 Newell Cos. v. Kenney Mfg. Co., 864 F.2d 757 (Fed. Cir. 1988) ..................................................20 Nortel Networks, Inc. v. Gold & Appel Transfer, S.A., 298 F. Supp. 2d 81 (D.D.C. 2004) .....................................................................................60 Northern Helex Co. v. United States, 455 F.2d 546 (Ct. Cl. 1980) ...............................................65 OPM v. Richmond, 496 U.S. 414 (1990) .......................................................................................70 Osprey Pacific Corp. v. United States, 41 Fed. Cl. 150 (1998)...............................................45, 46 Pauley Petroleum, Inc. v. United States, 219 Ct. Cl. 24 (1979) ....................................................41 Payne v. Block, 714 F.2d 1510 (11th Cir. 1983)............................................................................31 Perpetual Fin. Corp. v. United States, 61 Fed. Cl. 126 (2004) .....................................................40 Phoenix Petroleum Co. v. United States, No. 98-5124, 1999 U.S. App. LEXIS 16939 (Fed. Cir. July 23, 1999).............................................................................24 -vii-

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TABLE OF AUTHORITIES (continued) Page(s) Phoenix Petroleum Co. v. United States, No. 97-315C Slip Op. (May 11, 1998)............................................................................................................. 71-73 Pi Elecs. Corp. v. United States, 55 Fed. Cl. 279 (2003) ........................................................48, 49 Pittsburgh Ry. Co. v. United States, 250 U.S. 577 (1919).................................................68, 74, 76 Pleasant Country, Ltd. v. United States, 37 Fed. Cl. 321 (1997) ..................................................16 Princess Cruises, Inc. v. United States, 397 F.3d 1358 (Fed. Cir. 2005) ......................................67 Puerto Rico Dep't. of Labor & Human Res. v. United States, 49 Fed. Cl. 24 (2001) .........................................................................................................34 RCS Enters., Inc. v. United States, 53 Fed. Cl. 303 (2002) ...........................................................31 Randy v. Columbia/HCA Healthcare Corp., 2003 U.S. Dist. LEXIS 17270 (N.D. Tex. Sept. 30, 2003).................................................................................................61 Reliance Ins. Co. v. United States, 20 Cl. Ct. 715 (1990)..............................................................60 Rose v. Mitsubishi Int'l Corp., 423 F. Supp. 1162 (E.D. Pa. 1976) ...............................................61 Roseburg Lumber Co. v. Madigan, 978 F.2d 660 (Fed. Cir. 1992)...............................................32 Rothe Dev. Corp. v. United States Dep't of Defense, 262 F.3d 1306 (Fed. Cir. 2001)..................................................................................................................51 Rothe Dev. Corp. v. United States Dep't of Defense, 324 F. Supp. 2d 840 (W.D. Tex. 2004) ...............................................................................................................50 Rothe Dev. Corp. v. United States Dep't of Defense, 413 F.3d 1327 (Fed. Cir. 2005)..........................................................................................50 Rough Diamond Co. v. United States, 351 F.2d 636 (1965) .........................................................69 Roxco, Ltd. v. United States, 60 Fed. Cl. 39 (2004).......................................................................59 S.E.R., Jobs for Progress, Inc. v. United States, 759 F.2d 1 (Fed. Cir. 1985)..................................................................................................................75 S.J. Amoroso Constr. Co. v. United States, 12 F.3d 1072 (Fed. Cir. 1993)...................................69 Saunders v. Hilpertshauser, 1988 U.S. Dist. LEXIS 3646 (S.D.N.Y. 1988) ................................39 Scan-Tech Security, L.P. v. United States, 46 Fed. Cl. 326 (2000) ..............................44-45, 47-49 In re Schenck Tours, Inc., 69 B.R. 906 (E.D.N.Y. 1987) ..............................................................39 Seaboard Lumber v. United States, 308 F.3d 1283 (Fed. Cir. 2002).............................................40 -viii-

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TABLE OF AUTHORITIES (continued) Page(s) Shimrak v. Garcia-Mendoza, 912 P.2d 822 (Nev. 1996)...............................................................69 Short Bros. PLC v. United States, 65 Fed. Cl. 695 (2005) ............................................................30 Sola Elec. Co. v. Jefferson Co., 317 U.S. 173 (1942)........................................................59, 65, 68 Southern Pacific Transp. Co. v. Commercial Metals Co., 456 U.S. 336 (1982)...........................................................................................................68 Spalding & Sons, Inc. v. United States, 28 Fed. Cl. 242 (1993)....................................................40 Sprague Steamship Co. v. United States, 172 F. Supp. 674 (Ct. Cl. 1959) .......................69, 75, 77 State Oil Co. v. Khan, 522 U.S. 3 (1997).......................................................................................19 Stone Forest Indus., Inc. v. United States, 973 F.2d 1548 (Fed. Cir. 1992) ............................35, 39 Sun Oil Co. v. United States, 572 F.2d 786 (Ct. Cl. 1978) ............................................................48 Sunoco, Inc. v. United States, 59 Fed. Cl. 390 (2004) ................................................. 35, 59-60, 67 Sweat Fashions, Inc. v. Pannill Knitting Co., Inc., 833 F.2d 1560 (Fed. Cir. 1987)........................................................................................................ 1, 16-17 System Fuels, Inc. v. United States, 65 Fed. Cl. 163 (2005)..........................................................45 T. Brown Constructors, Inc. v. Sec'y. of Transp., 132 F.3d 724 (Fed. Cir. 1997)............................................................................................................ 31-32 T.L. Roof & Assoc. Constr. Co. v. United States, 28 Fed. Cl. 572 (1993).....................................33 Tesoro Hawaii Corp., et al. v. United States, 58 Fed Cl. 65 (2003)...................................... passim Tesoro Hawaii Corp., et al. v. United States, No. 02-704C, 2003 U.S. Claims LEXIS 410 (Fed. Cl. Oct. 30, 2003) ....................................................22 Tesoro Hawaii Corp. v. United States, 405 F.3d 1339 (Fed. Cir. 2005) ............................... passim Thomas v. United States, 125 Ct. Cl. 76 (1953) ............................................................................74 Tongue Lab., Inc. v. University of Ill. Found., 402 U.S. 313 (1971).............................................23 Toxgon Corp. v. BNFL, Inc., 312 F.3d 1379 (Fed. Cir. 2002).......................................................59 Trauma Serv. Group v. United States, 104 F.3d 1321 (Fed. Cir. 1997) ..................................50, 52 Tylor Bank v. Truck Ins. Exch., 51 F.3d 736 (7th Cir. 1995).........................................................61 U.S. Philips Corp. v. Sears Roebuck & Co., 55 F.3d 592 (Fed. Cir. 1995)...................................22 -ix-

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TABLE OF AUTHORITIES (continued) Page(s) USA Petroleum Corp. v. United States, 821 F.2d 622 (Fed. Cir. 1987) ........................................36 United Counties Trust Co. v. Maclum, Inc., 643 F.2d 1140 (5th Cir. 1981) .................................61 United States Fid. & Guar. Co. v. Bimco Iron & Metal Corp., 464 S.W.2d 353 (Tex. 1971)..............................................................................................61 United States v. Amdahl, 786 F.2d 387 (Fed. Cir. 1986)...................................................44, 70, 77 United States v. Cleveland Indians Baseball Co., 532 U.S. 200 (2001)........................................27 United States v. Connolly, 716 F.2d 882 (Fed. Cir. 1983).............................................................50 United States v. Mitchell, 463 U.S. 206 (1983) .............................................................................50 United States v. Pewee Coal Co., 341 U.S. 114 (1951).................................................................45 United States v. Spearin, 248 U.S. 132 (1918) ..............................................................................36 Urban Data Sys., Inc. v. United States, 699 F.2d 1147 (Fed. Cir. 1983) ..............37, 52, 70, 74, 77 Utah Power & Light Co. v. United States, 243 U.S. 389 (1917).............................................63, 74 Walker v. Cont. Life & Accident Co., 445 F.2d 1072 (9th Cir. 1971) ..................................... 39-40 Washington State Hop Producers, Inc. v. Goschie Farms, Inc., 773 P.2d 70 (Wash. 1989)..................................................................................................39 Whittaker Elec. Sys. v. Dalton, 124 F.3d 1443 (Fed. Cir. 1997) ...................................................72 Williams Alaska Petroleum, Inc. v. United States, No. 02-705C (Fed. Cl.) ............................14, 23 Yee v. City of Escondido, 503 U.S. 519 (1992)..............................................................................44 Yerxa v. United States, 11 Cl. Ct. 110 (1986)................................................................................75 Yosemite Park & Curry Co. v. United States, 582 F.2d 552 (Ct. Cl. 1978) ..................................77 Yuba Goldfields, Inc. v. United States, 723 F.2d 884 (Fed. Cir. 1983) .........................................49 Statutes and Regulations 28 U.S.C. § 1292(d)(2) ............................................................................................................ 21-22 28 U.S.C. § 1491............................................................................................................................50 41 U.S.C. § 253(b) .........................................................................................................................30 41 U.S.C. § 423(a)(1)...............................................................................................................53, 56 -x-

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TABLE OF AUTHORITIES (continued) Page(s) 41 U.S.C. § 423(b)(3) ..............................................................................................................54, 58 41 U.SC. § 423(h)(1) .....................................................................................................................54 41 U.S.C. § 601..............................................................................................................................50 Department of Defense Act, 101 Stat. 1329 ..................................................................................29 DFARS § 252.219-7001(c)(3) ...........................................................................................56, 57, 58 FAR § 15.306(e) ............................................................................................................................58 FAR § 15.402(a) ......................................................................................................................15, 30 FAR § 15.506(d) ............................................................................................................................56 FAR § 15.610(d)(3) ........................................................................................................... 54-55, 71 FAR § 15.802(b)(1) ..........................................................................................17, 25-26, 29-30, 54 FAR § 15.803(c) ............................................................................................................................26 FAR § 15.804-1 .............................................................................................................................26 FAR § 15.804-3(c)(2) ................................................................................................................3, 25 FAR § 16.203......................................................................................................................... passim FAR § 19.502-3(c)(1) ........................................................................................................ 53, 56-58 FAR § 19.507(a) ................................................................................................................ 53, 56-58 FAR § 33.206(a) ............................................................................................................................74 FAR § 52.219.7.................................................................................................................. 53, 56-58 H. Rep. No. 100-911 at 21, 18 (Sept. 9, 1988) ..............................................................................53 Pub. L. 100-679, § 27.....................................................................................................................53 Pub. L. 101-28 (1989)....................................................................................................................53 Pub. L. 101-84 (1989)....................................................................................................................53 Pub. L. 104-106, § 4304.................................................................................................................53 Miscellaneous 2 DCAM, § 9-201(b) at 924 (July 1, 1989) ...................................................................................27 -xi-

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TABLE OF AUTHORITIES (continued) Page(s) ASPM § 1.3 (Dep't of Def. 1986) ..................................................................................................27 Allan Farnsworth, Farnsworth on Contracts § 8.6 at 452 (3d ed. 2004) ......................................61 Arthur L. Corbin, 6A Corbin on Contracts §§ 40.1, 1255, 1540 (1962)...........................38, 61, 69 Black's Law Dictionary (8th ed. 1999)..........................................................................................19 Cascading Set-Asides: A Legal and Fair Procedure, 19 Nash & Cibinic Report ¶ 39 (Aug. 2005) .....................................................................57 Chevron Products Company, Aviation Fuels Technical Review 13 (2000).....................................2 Contracting Pricing Reference Guide § I.2.1 (available at http://www.acq.osd.mil/dpap/contractpricing/vol1intro.htm#I.2.1) (last updated Aug. 26, 2005)..............................................................................................27 Joseph Perillo, Calamari And Perillo On Contracts at 458 (5th ed. 2003) ...................................61 Kevin R. Garden, Fifth Amendment Takings of Rights Arising from Agreements with the Federal Government, 29 Pub. Cont. L.J. 187, 205 (2000)..........................................................................................................................48 Professional Materials Handling Co., Inc.--Reconsideration, B-205969.2, B-205969.3, 82-1 CPD § 501 (May 28, 1982) .......................................55, 58 Restatement (Second) of Contracts § 84........................................................................................61 Restatement (Second) of Contracts § 93........................................................................................61 Restatement (Second) of Contracts, § 161(b) (1981).....................................................................33 Restatement (Second) of Contracts § 162 (1979) ..........................................................................32 Restatement (Second) of Contracts § 237 cmt. a ...........................................................................38 Restatement (Second) of Contracts § 241......................................................................................35 Restatement (Second) Contracts § 266 cmt. a ...................................................................39, 40, 41 Webster's II New Riverside University Dictionary 161 (1988) .....................................................28 Webster's New World Dictionary of the American Language 502 (2d ed. 1984) ..................................................................................................................................28 Williston on Contracts § 814 (3d ed. 1962)...................................................................................38

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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 (Chief Judge Damich)

PLAINTIFFS' OPPOSITION TO DEFENDANT'S MOTION TO DISMISS Plaintiffs, Sunoco, Inc. and Puerto Rico Sun Oil Company (collectively "Sunoco"), respectfully submit their Reply to Defendant's Motion to Dismiss. In its motion, Defendant seeks dismissal of Sunoco's Amended Complaint pursuant to RCFC 12(b)(1) and 12(b)(6), and, alternatively, seeks summary judgment pursuant to RCFC 56(b) on all of Sunoco's claims, save Sunoco's minority price preference claim. DESC's Motion at 1. As set forth below, Defendant's RCFC 12(b) motion to dismiss, which must assume the truth of the well-pleaded allegations in the Complaint, should be denied because Defendant fails to establish that it is entitled to judgment as a matter of law. Conley v. Gibson, 255 U.S. 42, 45-46 (1957). Furthermore, Defendant's alternative request for summary judgment must be denied because Defendant fails to provide evidence which "would establish its right to judgment," Sweat Fashions, Inc. v. Pannill Knitting Co., Inc., 833 F.2d 1560, 1562 (Fed. Cir. 1987), and its motion amounts to little more than "a conclusory assertion that the plaintiff has no evidence to prove his case." Celotex Corp. v Catrett, 477 U.S. 317, 328 (1986) (White, J., concurring). (See discussion pp. 16-18, infra.) Moreover, to the extent that DESC could be deemed to satisfy its burden with respect to any material fact, and, to the extent that Sunoco is deemed not to provide sufficient countering evidence to establish a genuine issue with respect to that fact, this Court should, pursuant to Sunoco's accompanying motion under RCFC 56(f), refuse DESC's application for summary judgment or, in the alternative, grant a continuance to permit Sunoco

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the discovery it requires to establish these facts. Celotex, 477 U.S. at 326. For these reasons and as further set forth below, Defendant's motion should be denied. STATEMENT OF FACTS I. THE PARTIES DESC1 is the principal purchaser of military fuel for the Department of Defense ("DOD"). It is the single largest purchaser of fuel in the world.2 As relevant here, DESC principally purchased unique types of military jet fuel and a unique military distillate. Amended Complaint ¶ 6.3 Sunoco was a supplier of military fuel to DESC. Sunoco maintained long-term supply relationships with DESC and committed substantial, long-term capacity to refining military fuel. Amended Complaint ¶ 6. DESC purchased military fuel from Sunoco, as it did from essentially all military fuel suppliers, under long-term contracts typically lasting one year. Amended Complaint ¶ 6. During the period relevant here, Sunoco and DESC entered 41 contracts providing for the delivery of military fuel at different locations in the United States and in Puerto Rico. Amended Complaint ¶¶ 32-33. II. DESC'S MILITARY FUEL PRICES DESC's military fuel contracts contained adjustable prices that permitted DESC to set military fuel prices monthly or weekly during the contract term. App. 649-1007. FAR § 16.203 permits use of adjustable prices where, inter alia, prices are set based on changes in "established DESC previously was known as the Defense Fuel Supply Center ("DFSC"). For simplicity, "DESC" is used throughout.
2 1

Dimensions, Defense Logistics Agency News Magazine (1999 Almanac ed.), available at http//www.dla.mil/dimensions/almanac/desc.htm. Chevron Products Company, Aviation Fuels Technical Review 13 (2000) (military "maintain[s] separate specifications for jet fuel [because of] operational and logistical differences between the military and civilian systems and the additional demands high-performance jet fighter engines place on the fuel").

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prices." "Established prices" are "established market prices." Tesoro Hawaii Corp. v. United States, 405 F.3d 1339, 1345 (Fed. Cir. 2005) (quoting the prior provisions of FAR § 15.8043(c)(2)). Established market prices may include price references such as indexes, but, where used, indexes must be "market-based references." Id. at 1347-48.4 As relevant to DESC's motion, DESC set fuel prices under its military fuel contracts using a compilation of petroleum sales data published by the Department of Energy ("DOE") known as the Petroleum Marketing Monthly ("PMM").5 App. 669. The PMM reports a monthly average sales figure for specified fuels, such as jet fuel or diesel fuel, for five regions known as Petroleum Administration for Defense Districts ("PADDs"). Barrett Ref. Corp. v. United States, 42 Fed. Cl. 128, 130 n.6, 131 (1998), aff'd in part and rev'd in part, 242 F.3d 1055 (Fed. Cir. 2001). As the PMM moved upward or downward each month, DESC's fuel prices also moved upward or downward. App. 669.6 DESC's Deputy Director of Contracting, Edward Biddle, stated in a 1993 memorandum that the purpose of DESC's adjustable prices was to "ensure[] that the sale will be at the market price, which is a fair and reasonable price. Not only is the government protected, but the contractor is protected by knowing that its price will always be related to the price it could obtain in the commercial marketplace." App. 4 (emphasis added). DESC's Director of the Office of Market Research and Analysis, Lawrence Ervin, testified similarly before this Court in 1998 that DESC used adjustable prices because: "[W]e wanted our prices to reflect, as closely as possible, market levels for the same or similar commercial fuels in the marketplace. . . . We
4 5

See infra fn. 21.

DESC also used other compilations of sales data to set fuel prices. However, in its motion, DESC offers no evidence concerning these other compilations. Because DESC fails to meet its burden to offer any evidence concerning these other compilations, or otherwise move with respect to them, Sunoco does not address them specifically in its response and limits its discussion to the PMM. The PMM is designed for Congressional use in developing broad energy policy. Barrett, 42 Fed. Cl. at 131.

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wanted the price to go up and also down when the market prices of similar fuel went [up or] down." App. 14; see also App. 62 ("the EPA [economic price adjustment] reference selected is [intended to be] reflective of changes in commercial market prices"); App. 67 ("the EPA reference is designed to adjust the award price in concert with changes in going market price levels;" "the D[E]SC Office of Market Research and Analysis endeavors to select the reference that most accurately reflects movements of going market prices"). Consistent with this purpose, DESC's pricing clause is titled "Economic Price Adjustment ­ Published Market Price." App. 9. Among its various iterations over time, the clause states that "[t]he market price [used to set military fuel prices] is derived from quotes, assessments, or sales prices in the market place" and further provides that military fuel prices are "to reflect market conditions." App. 9 (emphasis added).7 It is therefore unsurprising that in Barrett the United States Court of Appeals for the Federal Circuit expressly found that DESC's adjustable pricing clause embodied a promise to "pay at least fair market value" for fuel. 242 F.3d at 1060. III. DESC'S CONFLICTING ASSESSMENTS OF ITS MILITARY FUEL PRICES Outwardly, DESC maintained that the PMM was the "gold standard" for measuring fair market value. DESC wrote to its parent organization, the Defense Logistics Agency ("DLA"), that its PMM "references are virtually unimpeachable from an accuracy standpoint, since they don't just `track' the market ­ they are the market." App. 98 (emphasis added).8 In response to a supplier's objection to the PMM, DESC similarly wrote that the PMM "consistently reflects See also App. 87 (Mr. Ervin stating that, pursuant to DESC's pricing clause, "replacement of the escalation reference is called for if the reference `consistently fails to reflect market value'"); App. 85 (Mr. Ervin stating that through its pricing clause "DESC assumes the risk of higher product prices").
8 7

DESC's public espousal of the PMM is unsurprising, given DESC's acknowledgment that "DOE normally will work with us to see that our needs are satisfied as we are one of the primary users of PMM." App. 100.

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actual market prices," App. 96, and to another objecting supplier DESC wrote that the PMM is "a reliable indicator of price movements in the petroleum products market." App. 91. As late as 1998, DESC's Mr. Ervin testified before this Court that the PMM is "the benchmark against which we . . . compare everything domestically." App. 29. DESC's statements to DLA, its suppliers and this Court stand in stark contrast to DESC's expert economists' assessment of the PMM. In 1986, DESC's then-Director of the Office of Market Research and Analysis, Mr. Christopher Lee, undertook an assessment of the PMM to compare its performance with commonly used commercial price references for fuel, such as Platts and OPIS (which DLA subsequently directed DESC to use in place of the PMM). Referring to Platts and OPIS as "other references,"9 Mr. Lee, who holds a Doctorate in Economics,10 stated: "Yet our analysis of the movement of the PMM as compared to other references as used for interim price adjustments indicates that the PMM may have moves as much as one or two cents per gallon out of step with such interim references." App. 103 (emphasis added). In contrast, DESC required its suppliers to submit bids to the one tenthousandth of a cent ($0.000001). App. 743. In 1987, DESC's Office of Market Research and Analysis undertook another study "comparing PMM versus Platts and OPIS." App. 134. That study supported using the commercial price references Platts and OPIS to make price adjustments ­ not the PMM. App. 134. When DLA ultimately learned of DESC's 1987 study ­ albeit seven years later ­ DLA directed DESC to stop using the PMM to set prices and to use Platts and OPIS instead.

In the 1986 assessment, Mr. Lee uses the phrase "other references as used for interim price adjustments." App. 103. DESC used its interim price adjustments to set prices on an interim basis at the time fuel was delivered. App. 120. DESC set final prices when the PMM was published three months after the fact ­ i.e., three months after the fuel was delivered. App. 121. DESC's interim references, as identified in its adjustable pricing clause, were Platts and OPIS. App. 120.
10

9

App. 111.

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Mr. Ervin explains how DESC's 1987 study led to DLA's directive to stop using the PMM in 1994: I was sitting in a room when the decision happened and it was made in response to some pressure from headquarters to do things differently. So the analysis is based on, basically is the analysis in the '87 study. Some people who have read the '87 studies [stated] that they would draw different conclusions than what was presented at the end of the study, certainly a close call. Analysis would have supported that as well so it's really the '87 study which is the basis for that move [in 1994 from PMM to Platts and OPIS]. App. 134.11 The 1987 study was written by the Office of Market Research and Analysis with the objective of justifying continued use of its "gold standard," the PMM. App. 595-602.12 While the all-important statistical analysis behind the study has not yet been produced, the admissions against interest in the narrative of the study are compelling. DESC's expert economists admit that using Platts and OPIS to set prices instead of the PMM "would cost DESC money" and concede that "[t]here is market risk associated with the move away from escalation on actual sales [PMM] particularly with respect to jet kerosene [military jet fuel]." App. 599; App. 602. DESC's economists additionally recount in the 1987 study how its suppliers had complained that, as a result of DESC's use of the PMM to set prices after fuel is delivered, "`we never know if we have made or lost money when you (D[E]SC) lift a cargo.'" App. 597 (emphasis added); see also App. 595 (cover memorandum to the 1987 study stating with respect to the proposed change in using the PMM, "The issue has been raised several times in recent years, formally and informally, by contractors").
11

DESC proffered Mr. Ervin as a witness in response to a Notice of Deposition served under Rule 30(b)(6) in La Gloria Oil & Gas Co. v. United States, No. 02-456C (Fed. Cl.). App. 141. The notice directed DESC to designate a witness to address the existence of documents requested in the plaintiff's requests for production of documents. App. 141. Because, pursuant to the terms of the notice, the deposition was limited to the existence of responsive documents, the plaintiff's ability to inquire into the substance of the conclusions of the documents was limited. App. 141. That inquiry must await further discovery. While this document is attached to DESC's motion, DESC does not specifically identify the document as the 1987 study referred to by Mr. Ervin in his deposition. Final confirmation of this fact awaits further discovery.

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Once DLA directed DESC to stop using the PMM in 1994 and to set prices using Platts and OPIS instead, DESC made the extraordinary admission that prices it previously had set using the PMM so departed from market value that they could not be compared to prices set based on Platts and OPIS. DESC stated: "Direct contract price comparisons are not possible due to the switch from the monthly interim-final (PMM) escalation method to a weekly market price escalation basis [using Platts and OPIS]." App. 144 (emphasis added).13 DESC's admission is unsurprising, given that DESC had concluded elsewhere that changing from the PMM to commercial references, such as Platts and OPIS, "could significantly influence contract prices," App. 98, and further found, in response to a proposal from one of its largest suppliers to stop using the PMM, that its "PMM JP-5" jet fuel prices were ten cents a gallon higher, then ten cents lower, and yet again ten cents higher than Platts ­ all within the same year. App. 182.14 IV. THE NON-NEGOTIABILITY OF DESC'S MILITARY FUEL PRICES Despite DESC's admission that "comparisons are not possible" between the prices it set using the PMM and those set using commercial market references such as Platts and OPIS, DESC had mandated that "[a]ll offerors are required to accept a method of price adjustment based on . . . the Petroleum Marketing Monthly (PMM)." App. 195; see also App. 199 (stating that DESC "would not consider" an offer unless objection to the PMM was withdrawn). As Mr. Ervin testified before this Court, DESC used its "leverage as a buyer" as the sole purchaser of
13

For each procurement, DESC prepares a "Price Analysis Memorandum" to determine its price objectives during contract negotiations. See, e.g., App. 144, 150, 154, 157, 163. In determining its price objectives for the procurement, DESC typically considers, under the heading "Price History," the price it is paying under its current, existing contracts. See, e.g., App. 144, 151, 155, 157, 163, 167-68. However, as noted above, when DESC stopped using the PMM and switched to using Platts and OPIS instead, it stated that its usual practice of making price comparisons with its existing contracts was "not possible." App. 144. The assessments of the PMM by DESC's expert economists, discussed above, together with DLA's direction to stop using the PMM based on DESC's 1987 study, draw into serious question the credibility of Mr. Ervin's subsequent cross-examination testimony in this Court in 1998 that he never identified any "problem with using the PMM" to set military fuel prices other than "billing" issues. App. 36-37.

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military fuel to "improve the competition" for DESC's business by requiring use of the PMM. App. 17. Accordingly, even though suppliers objected to DESC's use of the PMM as "coerced," App. 201; App. 204, the use of the PMM to set prices was "not negotiable as a matter of policy." App. 205. DESC's procurement authorizations expressly stated under the heading "POTENTIAL PROBLEMS" that "common escalation [using the PMM] is non-negotiable." App. 206-278; Navajo Ref. Co., L.P. v. United States, 58 Fed. Cl. 200, 214 (2003) ("DESC explicitly stated in its pre-negotiation briefing memoranda that it deemed its price adjustment clause to be non-negotiable"); see also Barrett Ref. Corp. v. United States, 45 Fed. Cl. 166, 171 (1999) (supplier "had no control over use of PMM EPA clause, and indeed attempted, unsuccessfully, to persuade the agency not to use it"), aff'd in part and rev'd in part, 242 F.3d 1055 (Fed. Cir. 2001). Evidencing the futility of objecting to DESC's pricing clause, even after a supplier filed a claim in 1988 challenging DESC's use of the PMM, DESC continued to use the PMM for six more years, until it was directed to use Platts and OPIS instead. MAPCO Alaska Petroleum, Inc. v. United States, 27 Fed. Cl. 205, 407 (1992). V. THE FAILURE OF DESC'S MILITARY FUEL PRICES TO REFLECT FAIR MARKET VALUE While Sunoco knew that DESC's use of its adjustable pricing clause and the PMM were non-negotiable, what Sunoco did not know was that DOE had not designed the PMM to be used to set fuel prices or to reflect market value. As Dr. John Cook, Director of the Petroleum Marketing Division of the Department of Energy's Energy Information Administration (which publishes the PMM), has since testified and as this Court found: "[T]he PMM is not intended to be an index that is used for setting prices." Barrett, 42 Fed. Cl. at 131. Thus, while "Sunoco entered the fuel contracts with the intent that the prices it would receive would reflect fair market value[,]" Sunoco could not have been more wrong. App. 638.

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An assessment of the PMM as an established market price is set forth in the Expert Report of Joseph Kalt15 and Peter Killen.16 In their report, Kalt and Killen conclude that DESC's "PMM-based adjustment clauses failed to provide an effective measure of established market prices or the fair market value of military fuels." App. 611. The following chart, drawn from Kalt and Killen's report, dramatically illustrates the PMM's departure from the marketplace:

Joseph Kalt is the Ford Foundation Professor of International Political Economy at the John F. Kennedy School of Government, Harvard University. App. 609-10.
16

15

Peter Killen is a Senior Advisor in the Houston offices of the firm of Muse Stancil & Company, a global consulting firm specializing in the energy industry. He holds a B.S. in Chemical Engineering and is a Registered Professional Engineer. App. 610.

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The chart illustrates how many cents per gallon the marketplace changed more or less than the PMM during the years DESC used the PMM. App. 634; App. 624.17 If the change in the PMM was equal to the change in the marketplace, the bars in the chart would be zero or nonexistent. Thus, as the chart shows, in July of 1990 the marketplace increased by 13 cents a gallon more than the PMM. Indeed, not only did the change in the PMM depart substantially from the change in marketplace, but also the PMM's relationship to the marketplace was fundamentally unstable, inasmuch as the change in the PMM substantially understated the change in the market one month and then substantially overstated the change in the market in the next. As Kalt and Killen explain: "The fact that we see significant bars indicates that the relationship between the movement of the two series [the PMM and marketplace] is notably unstable." App. 624. Thus, as Kalt and Killen explain, the chart shows the PMM's relationship with the marketplace to be "extremely volatile," with the change in the PMM varying from the change in the market place from approximately -7 cents to approximately +13 cents during the relevant period. App. 625; App. 634.18 Equally compelling, Kalt and Killen explain that the PMM and the marketplace "frequently actually move in different directions [e.g., the market goes up and the PMM goes down] in a starkly erratic fashion." App. 625. Kalt and Killen demonstrate that the PMM moved in the opposite direction of the marketplace on average "24% of the time," while, in each of the

17

As Kalt and Killen explain, it is the change in price levels of the PMM and the marketplace, rather than the absolute prices levels themselves, that are relevant here, because "the PMM is used by the DESC to index changes in price levels, rather than the price levels themselves." App. 624 (emphasis original). As Kalt and Killen further explain, the fact the PMM overstated the change in market does not mean that Sunoco was overpaid. Given the PMM's random relationship with the market, "the winning bidder could readily [and erroneously] forecast that the Defendant's PMM index in any particular contract period would turn out to yield payments in the next contract period in excess of fair market value ­ pushing the optimistic bidder's base price bid downward." App. 613; see also App. 629-31.

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years 1987, 1988 and 1992, the PMM moved in the opposite direction of the marketplace 33% of the time. App. 625; App. 635. The next chart, again drawn from Kalt and Killen's report, illustrates on an annual basis how much the change in the PMM departed from the change in the marketplace:

The height of the bars shows for each year how many cents per gallon, on average, the change in the PMM departed from the change in the marketplace. App. 637; App. 626. Once again, not only is the amount of the error significant (in 1986 the PMM understated the marketplace on average 4 cents a gallon), but both the amount and the direction of the error are erratic (in 1987 the PMM overstated the market by 3 cents a gallon).

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This volatile nature of the PMM is significant, because it made it essentially impossible for a bidder to predict correctly how the PMM would relate to the marketplace and, therefore, to bid in a way that would provide some meaningful protection from the PMM. As Kalt and Killen explain: "The deviations between changes in the Market-based escalator and the PMM-based escalator are quite volatile . . . This volatility confounds rational prediction by which a rational bidder might reliably adjust bid prices so as to ensure receipt of no less than market value under a given period's fuel contract." App. 626. Kalt and Killen state that there are a number of reasons why the PMM does not reflect the marketplace. Among them, Kalt and Killen explain, "the PMM data were not designed or intended to be used as an index." App. 611. They also show that the PMM suffers from a statistical flaw known as an "index number problem." App. 616-18. This statistical flaw, Kalt and Killen state, results in the PMM erroneously reporting changing in the volume of fuel sold as changes in the price of fuel. Because of the PMM's index number problem, Kalt and Killen conclude: PMM data do not contain accurate information needed to understand how the prices of specific products, such as a particular grade of military jet fuel, may have changed over time. An index that relies on these data, such as the DESC's PMM-based escalator, is readily susceptible to situations in which the index reports a price increase (or decrease) even though the actual market value of the fuel has declined (or risen) in the marketplace. App. 617. Significantly, Kalt and Killen point out that, unlike DOE here, other federal agencies that publish indexes intended to be used as price indexes go to great lengths to ensure that the indexes do not suffer an index number problem. Kalt and Killen state: It is important to note here that statisticians at government agencies and in other organizations often go to great lengths to address the "index number" problem when constructing indices such as the PPI and the CPI, which are used to reflect the underlying changes in price levels for specific products used by producers and consumers. Each of these indices is constructed using fixed weights from period to period such that short-term variation in the mix of products sold is not mistaken for actual changes in the levels of prices. App. 617-18 (footnote omitted). -12-

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Beyond the PMM's index number problem, Kalt and Killen further conclude that DESC's PMM-based pricing clause failed to reflect the marketplace because "the formulas used by the government to create the index did not track changes in the value of the military jet fuel." App. 611. As they explain, DESC simply used the wrong fuels, and thus the wrong PMM data, in its pricing clause. App. 619-21. Thus, for the military jet fuel known as JP-4, DESC based price adjustments on the PMM data for unleaded gasoline and commercial jet fuel, weighted 70 percent and 30 percent, respectively. App. 620. However, this combination of unleaded gasoline and commercial jet fuel does not reflect the physical characteristics or market value of JP-4. Kalt and Killen state: "The DESC's simplistic use of a 70:30 ratio of gasoline and kerosene-type jet fuel prices to proxy for JP-4 market prices is inappropriate for economic price adjustment purposes given the technical and economic considerations of how JP-4 and other refined products are actually produced." App. 620. Kalt and Killen explain that a proper measure of the physical characteristics and market value of JP-4 should not be based on unleaded gasoline and commercial jet fuel but rather on a combination of naphtha, commercial jet fuel, and diesel fuel. App. 619-20. Notably, both this Court and the Federal Circuit in Barrett also concluded, over DESC's objection, that naphtha and not unleaded gasoline was the proper fuel to use for measuring the value of JP-4. Barrett, 242 F.3d at 1061 ("However, the government does not dispute the Court of Federal Claims' finding that the naphtha-based index `provides data that more closely reflect the product [JP-4] Barrett was actually selling.'"). For these and other reasons, Kalt and Killen observe that commercial buyers and sellers do not use the PMM as a price index. They conclude that the PMM's failure to pass "[t]his `market test' reinforces the conclusion that a PMM-based escalator of the type used by the DESC is simply not suited to represent actual movements of established market prices for any fuel, much less military jet fuel." App. 619.

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VI.

DESC'S MINORITY PRICE PREFERENCES AND FUEL CONTRACT AUCTIONS Beyond DESC's use of the PMM to set military fuel prices, DESC distorted the market

price for fuel in two other ways. First, DESC provided a ten-percent price preference to minority-owned suppliers. Under this price preference, DESC awarded fuel contracts to minority-owned suppliers if their bids were within ten percent of that of the otherwise successful bidder. Def. Supp. App. 5-7; Amended Complaint ¶ 29. In some years, more than twenty percent of the fuel offered (as a percent of that purchased) was subject to DESC's minority price preference. App. 279 (showing volumes offered by minority firms with the designation "SD" and total volume awarded in the procurement); App. 283 (same); Amended Complaint ¶ 29. Second, DESC conducted an auction for fuel contracts, whereby DESC offered fuel contracts to suppliers that agreed to match the price, or adjusted price, of other bidders. Under this auction, DESC awarded contracts to small businesses willing to match the price, or adjusted price, offered by the otherwise successful bidd