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

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS No. 02-1460C (Judge Block)

HERMES CONSOLIDATED, INC., Doing Business As Wyoming Refining, Plaintiff, v. THE UNITED STATES, Defendant. DEFENDANT'S RESPONSE TO PLAINTIFF'S OPPOSITION TO DEFENDANT'S MOTION TO DISMISS 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 February 22, 2006

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TABLE OF CONTENTS PAGE(S) SUMMARY OF THE ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 I. DESC's EPA Clauses Are Authorized by FAR 16.203-1 . . . . . . . . . . . . . . . . . . 11 A. B. C. EPA Clauses Need Not Be Based Upon Plaintiff's Own Prices . . . . . . . 11 DESC's PMM-Based EPA Clause Is Legal . . . . . . . . . . . . . . . . . . . . . . 12 Hermes' FAR 15.802(b) Allegation Does Not State A Cause of Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

II.

Hermes' Alternative Illegality Theories In Counts II-VI Must Be Dismissed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 A. B. Count II (Misrepresentation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Count III ("Breach of Contract") and Count IV ("Implied-In-Fact Contract") . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Count V ("Failure of Consideration and Frustration of Purpose") . . . . . 20 Count VI (Mistake) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

C. D. III.

Waiver and Estoppel Bar Hermes' Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 A. B. C. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Plaintiff has Waived As A Matter Of Fact . . . . . . . . . . . . . . . . . . . . . . . . 13 Plaintiff has Waived Its Claims As A Matter Of Law . . . . . . . . . . . . . . . 26

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

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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

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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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Barrett Refining v. United States, 242 F.3d. 1055 (2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 19 Barrett v. United States, 50 Fed. Cl. 567 (2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim 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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27, 28 Costanza Coal Min. Co. v. Weirton Steel Co., 150 F.2d 929 (4th Cir. 1945) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36, 7 Dairyland Power Cooperative v. United States, 16 F.3d 1197 (Fed. Cir. 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 E. Walters & Co., Inc. v. United States, 217 Ct. Cl. 576 F.2d 362 (1978) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim E. Walters & Co., Inc. v. United States, 576 F.2d 362 (Ct. Cl. 1978) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Federal Crop Ins. v. Merrill, 332 U.S. 380 (1947) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36, 37 -iii-

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Federal Elec. Corp. v. United States, 486 F.2d 1377 (Ct. Cl. 1973) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 General Eng'g. & Mach. Works v. O'Keefe, 991 F. 2d 775 (Fed. Cir. 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Hartford Accident & Indem. Co. v. United States, 127 F. Supp. 565 (Ct. Cl. 1955) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Hermes v. United States, 58 Fed. Cl. 409 (2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim LaBarge Prods., Inc. v. West, 46 F.3d 1547 (Fed. Cir. 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim 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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26, 36 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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Mitsubishi Motors Corporation v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Nautilus Shipping Corp. v. United States, 141 Ct. Cl. 391 (1958) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Northern Helex Co. v. United States, 197 Ct. Cl. 118, 125-26 (1972) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 PCL Construction Services, Inc. v. United States, 41 Fed. Cl. 242, 252 (1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Pittsburgh C.C. & St. L. Ry. Co. v. Fink, 250 U.S. 577 (1919) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26, 36 Rough Diamond Co. v. United States, 351 F.2d 636 (Ct. Cl. 1965) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim -iv-

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Safeco Credit v. United States, 44 Fed. Cl. 406 (1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Shearson/American Express, Inc. v. McMahon, 482 U.S. 220 (1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Short Bros., PLC v. United States, 65 Fed. Cl. 695 (2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 11 Shutte v. Thompson, 82 U.S. 151 (1872) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Sola Electric Co. v. Jefferson Electric Co., 317 U.S. 173 (1942) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Sprague Steamship Co. v. United States, 172 F. Supp 674 (Ct. Cl. 1959) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Tesoro et al. v. United States, 405 F. 3d 1339 (Fed. Cir. 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Thomas v. United States, 125 Ct .Cl. 76, 80 (1953) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Trauma Service Group v. United States, 104 F.3d 1321 (Fed. Cir. 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Union Pacific Railroad Co. v. United States, 847 F.2d 1567 (Fed. Cir. 1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 United States v. Mezzanatto, 513 U.S. 196 (1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Urban Data Sys., Inc. v. United States, 699 F.2d 1147 (Fed. Cir. 1983) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26, 27 Whittaker Electronic Systems v. Dalton, 124 F.3d 1443 (Fed. Cir. 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim STATUTES AND REGULATIONS 15 U.S.C. § 772 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 DAR § 1-1502(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 -v-

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FAR § 15.402(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim FAR § 15.802(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim FAR § 15.804-3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 14 FAR § 16.203-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 11 FAR § 16.203-2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 FAR § 16.203-3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 MISCELLANEOUS Restatement (Second) of Contracts § 178 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Nash and Cibinic, Formation of Government Contracts (3rd Ed. 1998) . . . . . . . . . . . . . . . . . . . 13

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS HERMES CONSOLIDATED, INC., Doing Business As Wyoming Refining Company, Plaintiff, v. THE UNITED STATES, Defendant. ) ) ) ) ) ) ) ) ) ) )

No. 02-1460C (Judge Block)

DEFENDANT'S REPLY TO PLAINTIFF'S OPPOSITION TO DEFENDANT'S MOTION TO DISMISS THE COMPLAINT The United States respectfully submits its reply to Plaintiff's opposition to our motion to dismiss the complaint. For our reply, we rely upon our: "Response to Plaintiff's Proposed Findings of Uncontroverted Fact" (filed today), in which we respond to many of the factual premises of plaintiff's opposition to our motion; the appendix to our motion to dismiss ("Def. App."); our Supplemental Appendix ("SA"), which is attached to our moving brief; and our Supplemental Appendix II ("SA 2"), which is attached to this brief. SUMMARY OF THE ARGUMENT In our moving brief, we demonstrated that Plaintiff's complaint is an "everything but the kitchen sink" pleading designed to take advantage of 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"). Subsequent to MAPCO, the FAR's promulgation authority and DESC's parent issued regulations explicitly legalizing the clauses, which are in use to this day. The absurdity of the entire litigation, based upon contracts repeatedly formed, and longago performed, with no contemporaneous question about their legality or their interpretation -

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was thrown into dramatic relief when, 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 Hermes' miscellaneous complaints concerning the legality of its contracts' EPA clauses, because it makes clear that the various tests Hermes 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 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, Hermes filed a second amended complaint designed to bolster the alternative counts with further factual allegations and an assertion that the contracting officer had the obligation to assure Hermes was paid "fair market value, pursuant to FAR 15.802(b) (currently codified at FAR § 15.402(a))" (see Compl. ¶ 35). Hermes also stubbornly clung to allegations found in its original complaint that either were squarely rejected by Tesoro, or were disguised as "common law" allegations, such as mistake, misrepresentation, and breach. The former allegations assert that DESC improperly based its escalation clause upon a reference other than Hermes' prices, and should not have used the PMM in any case (Tesoro's explicit holding rejected that argument); or invoke requirements found nowhere in the law (asserting that EPA clauses must be "designed or intended" to set prices and "reflect at least the fair market value of -2-

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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. In short, we have argued that, as a matter of law (regardless of whatever facts it may or may not find), Hermes cannot prevail. Hermes' common-law allegations echo its "illegality" allegations, found in Count I. Although allegedly grounded in the parties' understandings and commitments, they 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, our motion argued that, as a matter of law, there simply was no relevant fact that plaintiff possessed or envisioned that could transform these counts into authentic common law claims. We also explained that, regardless of the above, Hermes abandoned any rights the FAR might have conferred upon it, and Hermes 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 Hermes may no longer pursue its illegality-based claims. As we demonstrated, Hermes' rights with respect to its derivative claims are indistinguishable and also should be dismissed. Hermes responds, for the most part, as we expected, 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. Lost in the report is that the court of appeals has determined that the clause is legal, even if not to the liking of -3-

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plaintiff's pricing advisors. Hermes' 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 their contracts, and absent traditional allegations of real, discussed, 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 Hermes' response is that it "requires discovery." As we explain in our separate response to Plaintiff's RCFC 56(f) motion, Hermes' motion demonstrates that it "requires discovery" principally to discover its own case and other matters that are untethered to legal causes of action. Accordingly, Hermes is not entitled to discovery and cannot plead lack of discovery to prevent the termination of this litigation. FACTS To add a gloss to its otherwise legally-untethered case, Hermes 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, Plaintiff adds an opinion by its consultants concerning the performance of the PMM, also built-upon unfounded premises, and a conclusory statement from one of plaintiff's officials declaring that plaintiff intended to receive legal prices and fair market value. See, Compl. ¶¶ 16-21; Opp., at pp. 5-8. We addressed many of these fallacies in our earlier briefing and see no reason to repeat them in detail here. In general, Plaintiff's logic-bending story is that: DESC knew there was something corrupt about its use of the PMM; apparently 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 -4-

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direction; somehow that movement always would favor DESC's customers; somehow the fuel industry never would detect this or, upon learning it, would bid eagerly nonetheless. In fact, none of the documents upon which plaintiff's case rests can remotely be read to suggest that the Government believed there was a problem with the accuracy of the PMM or any other reference ­ or that there is one. Indeed, review of the complete documents cited by Plaintiff makes clear that the Government considered the PMM the benchmark for all other references, yet was keenly interested in studying any reference that was suitable for purposes of contract price adjustment. Plaintiff's story begins with the Energy Information Administration ("EIA"), the author of the PMM. Among Plaintiff'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 15. The implication, of course, is that the PMM is unsuitable or illegal for use as a price reference. What plaintiff 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 be useful, according to oil companies and DFSC for indexing, as well, but we didn't specifically design it for that. SA 2 at 5 at 632, l. 14. Plaintiff also asserts that the PMM is illegal because it suffers from an "index number problem." An index number problem refers to an "index" that contains two or more products -5-

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whose relative prices or quantities are changing. However, as Jacob Bournazian, of the EIA, explained to plaintiff's counsel, during Mr. Bournazian's deposition in La Gloria v. United States, No. 02-465 (Fed. Cl.), the price data at issue is not an index, which is "a ratio of two numbers." SA2 2. Surprisingly, Plaintiff's consultants cite Mr. Bournazian's article concerning the PMM as the basis of its assertion that there is an index number problem, asserting 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. 616. The report repeats this characterization of the PMM further below, on page 616, asserting that "the price data reported in the PMM often represents an aggregate of multiple different fuels sold across many locations." However, this is not at all apparent from the article cited. In fact, Mr. Bournazian's article compares prices of different fuels to each other, including "U.S. Kerosene-Type Jet Fuel." 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 have their own individual lines.1

Thus, this reporting is different than that that might be encountered with a true "index," such as the Consumer Price Index, which consists of a mix of 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 number of price and quantity variables? This is the basic index number problem"). -6-

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Another pillar of Plaintiff's argument is that somehow DESC breached an obligation to the contractors by failing to disclose that it worked with DOE "to see that our needs were met." Pl. Br. At 40, n.36; see also Pl. Br. at 5, n.9. However, the document upon which the assertion relies, Pl. App. 100, is taken out of context. As plaintiff'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 any proof of the PMM's inherent illegality, plaintiff asserts that DESC concluded as early as January, 1986 that PMM prices moved as much as one or two cents per gallon out of step with other market references, did not disclose this to its suppliers, and continued to use PMM prices despite this knowledge. Amend. Compl. at ¶¶ 16-17; Opp., at p. 56. But, what plaintiff refers to 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 underpredict 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 payment procedure would have been unnecessary if the prices in both references were identical. Thus, plaintiff knew from the many interim and final payments it received under its contracts that the reference prices differed.2 Compl. ¶¶ 9, 27; See, PFF 13.3

Plaintiff's attempts to infuse some significance to the difference between the PMM and other price references by asserting that, in contrast with the "one or two cent per gallon" -7-

2

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Another pillar of Plaintiff's complaint is its characterization of reviews conducted by DESC concerning the use of the PMM as a price reference.4 For example, the second amended complaint alleges that a study DESC conducted in 1987 concluded that " . . . PMM did not protect against market fluctuations and did not ensure that the prices DESC paid for military fuel under the long term contracts reflected at least fair market value" and that "DESC did not disclose this 1987 study to its suppliers . . . ." Compl. ¶¶ 18, 19. Plaintiff also asserts that the " . . . study supported using the commercial price references Platts and OPIS to make price adjustments-not the PMM." Pl. Br. 6. In fact, the study found that PMM prices were adequate for price adjustment purposes and, judged by some criteria, superior to commercial trade publication prices. PFF 15-23. The study concluded that DESC should continue using PMM prices, but modify the system to use a published PMM reference price instead of an unpublished price. PFF 23. It did not conclude that PMM prices were inadequate for EPA purposes, or unfair to suppliers, or failed to reflect the market.5

differential between interim prices and PMM prices, DESC required its suppliers to submit bids to the one ten-thousandth of a cent, is equally misleading. DESC did not "require" that offerors ". . . submit bids to sell military fuel to the one-ten-thousandth of a cent ($.000001)." Compl. ¶16; Opp. p. 6. DESC only evaluated offers to that decimal place. Bidders were free to, and often did, submit bids to two decimal places, such as $.35, or .60, or .70 per gallon of fuel. Plaintiff's "Statement of Genuine Issues" denies PFF 13, stating "[d]enies the allegations pursuant to Rule 56(f)." But plaintiff cannot seriously claim that it needs discovery regarding whether some of its DESC contracts contained interim and final price adjustments. In fact, plaintiff's own Appendix contains a contract with a PMM clause providing for interim and final price adjustments precisely as set forth in PFF 13. Pl. App. 665-666.
4 3

We have described these reviews in our PFFs 14-21.

Plaintiff's allegation that "DESC did not disclose this study to its suppliers" is undercut by the very evidence it proffers in its Opposition. The cover memorandum on the "proposed final draft" study that plaintiff includes in its appendix clearly shows, in a handwritten note, that at least some suppliers were canvassed on the proposal to continue using PMM prices with an -8-

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Plaintiff relies upon selective quotation of the 1987 study, rather than reporting the report's actual conclusions. For example, plaintiff repeats the report's quotation of a supplier that "we never know if we have made or lost money when you (D[E]SC) lift a cargo." However, Plaintiff neglects to mention that the comment concerned the interim-final price adjustment issue, not the use of PMM per se. See, SA 8, Background. Plaintiff's reliance upon quotations from DESC economists that 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" are, likewise, taken out of their context. In fact, the quotations concerned perceived weaknesses with trade journal prices, not defects in PMM prices. Thus, the "market risk" alluded to in the study of using trade journal prices was based upon the analysis that trade journals suffered from "price stickiness" during periods of declining prices and would "cost DESC money" during those times. PFF 19; SA 10. Likewise, the "market risk" noted with using trade journal prices for "jet kerosene" was not due to any PMM defect or failure, but to the availability of only a single trade journal reporting "jet kerosene" prices, and the risk that it might discontinue publication. PFF 19; SA 10. To attempt to add weight to its innuendo, Plaintiff 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., ¶ 20. However, it was DESC, not senior DLA officials, which, in 1994, first sought a FAR deviation to begin using trade publication prices for price adjustments. PFF 22, 23. DESC did so, not because it had

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) Pl. App. 596. -9-

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concluded that refiners were not receiving "fair market value" with PMM price adjustment clauses. Rather, the decision was based upon some of the same criteria that had been set out in the 1987 study, including the elimination of 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 22. The apparent basis for plaintiff'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 23. However, as he explained, the basis was DLA's hope that changing from PMM prices to Platts would "produce substantial savings to the taxpayer." Id. It would make no sense for DLA to have hoped to produce "substantial savings to the taxpayer" by eliminating the use of PMM prices that were allegedly underpaying suppliers. Plaintiff's argument also is based upon a mischaracterization of a 1994 price analysis memorandum. As plaintiff explains it, DESC admitted that its use of PMM prices had " . . . distorted military fuel prices materially . . . " and that " . . . prices it had previously set using the PMM so departed from market value that they could not be compared to prices set based on Platts and OPIS." Compl., ¶ 21; Pl. Br. 8. In fact, as the memorandum makes clear, the quotation was not an admission regarding the validity of PMM prices, but the unremarkable observation that it was not possible to directly compare prices between contracts where the price adjustment references differed, with one contract adjusted using monthly PMM prices and interim adjustments, and the other using weekly adjustments. App. 144. In addition to being untrue, the allegations added to this lawsuit through the second amended complaint add no legal weight to plaintiff's case. At best, they concern the relative merits of various price references - a discussion left to the realm of economists and fuel-industry -10-

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analysts -- not the parties to a contract years after their contracts have been fully performed.6 ARGUMENT I. DESC's EPA Clauses Are Authorized by FAR 16.203-1 In Count I, Hermes asserts: (1) that the clauses were illegal because there were not based upon "Plaintiff's own established fuel prices" (Compl. ¶ 33); (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. ¶ 34); 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. ¶ 35) A. EPA Clauses Need Not Be Based Upon Plaintiff's Own Prices

In our moving brief, we demonstrated that the explicit holding of Tesoro was that a FAR 16.203-1 EPA clause need not be based upon the contractor's own prices. As the court put it: Although the term "established price" is not expressly defined in FAR § 16.203, the definition of the term in FAR § 15.804-3 is incorporated by reference. FAR § 15.804-3 defines "established prices" to include contractor-specific prices, namely "established catalog prices," and industry-based prices, namely "established market prices." As indicated by FAR § 16.203-2 and FAR § 15.804-3, 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. Rejecting the contractor's argument (Hermes' here), the court held explicitly that the theory that "FAR 16.203-3 requires that adjustments be based only on changes in the prices

Notably, none of the additional evidence found in the second amended complaint or addressed to plaintiff's opposition concerns the contracts that contained price references other than the PMM. Accordingly, there is no basis for further proceedings concerning those contracts. -11-

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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 established price' may be established by reference to either a catalog or market sources independent of the manufacturer or vendor." Id. at 1347. Plaintiff offers no rebuttal to this point other than to assert that Tesoro was wrongfully decided, and that Barrett Refining v. United States, 242 F.3d. 1055, 1060 (2001), provides the proper rule of decision. However, that argument was presented to the court in Tesoro and rejected. Tesoro, 405 F. 3d 1345 (noting that, in Barrett, the 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 could be illegal, because the argument presented to it (especially given reliance upon MAPCO) invoked 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?"7 ), and considered various of the factors cited by MAPCO, as the basis for its holding the PMM was not an

7

Tesoro, 405 F.3d. at 1342 (emphasis added). -12-

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"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 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 1347 (emphasis added).8 Notwithstanding Tesoro's finding that the PMM-based clauses are legal, the complaint asserts that they could not be, 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. ¶ 34). 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 posited by the complaint, Plaintiff's brief turns straight to the opinion offered by Plaintiff's trial consultants. (Plaintiff offers no criticism of the other EPA references included in the various contracts at issue, such as Platts). In general, without regard to the competition under which the prices at issue were offered or the terms provided in the parties' contract, the consultants' report

Plaintiff's oft-quoted argument from our appellate brief that we did not consider the appellate court's review to be a "beauty contest" does not affect how the court itself viewed the scope of its argument. But, Plaintiff reads too much into our comment, which we repeat here: 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. -13-

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is a comparison between PMM and Platts, and how their report of "the market" may have moved in relation to each other. The difficulty with relying upon opinions, even if taken as fact, is that, absent a legallycognizable cause of action, the facts are immaterial to a court of law. Here, the materiality of the report rests upon plaintiff plumbing some depth in the simple regulatory requirement that an EPA clause be "market-based." Plaintiff'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 12. Because the prices are established in actual sales between a number of 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.9 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 Alaska Petroleum, Inc. v. United States, 27 Fed. Cl. 405 (1992). Neither the various

To the extent that there was a "fair market value" test for the PMM, that was performed by the agency's examination of the various claims, which established, if anything, that contractors were overpaid. See also Barrett v. United States, 50 Fed. Cl. 567, 569-70 (2001) (finding that the use of PMM resulted in the contractor being overpaid in three of the four contract at issue when compared to Platts, the reference upon which the claims were based). -14-

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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 "marketbased." 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 lessassailable ground for competition than firm-fixed prices. To permit an exception ­ one that allows the winning bidder of a single, price-based 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 sale of as volatile a commodity as fuel). As the court of appeals 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. And, even if the court intended to effect a sub silentio remand on the question of whether the PMM was a market-based test, 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, Plaintiff offers no new legal standard. Rather, it simply seeks to remove the unambiguous standard the parties agreed upon many years ago.10 And, rooted as it is in the post

Plaintiff's reference to Beta Systems, Inc. v. United States, 838 F.3d 1198 (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 -15-

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hoc arguments of economists and industry-watchers, Plaintiff's approach relegates the parties to observers, not makers, of their own agreements ­ and infuses less certainty, not more, into their dealings. C. Hermes' FAR 15.802(b) Allegation Does Not State A Cause of Action

In our moving brief, we demonstrated that Plaintiff'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.11 See Short Bros., PLC v. United States, 65 Fed. Cl. 695, 764-65 (2005) ("The FAR provisions cited by plaintiff 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").12 We further explained that that provision was found 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 overcome our analysis, Plaintiff relies upon the regulation, the dictionary (definition

further regulate EPA clauses to the degree plaintiff suggests, they would have done so. Where the regulating authorities having stayed their hand, the Courts should not be tempted to regulate. FAR 15.402(a) provides that the contracting officer "must- (a) Purchase supplies and services from responsible sources at fair and reasonable prices." Plaintiff's effort to distinguish Short Bros. is limited to noting that it was very long (and not devoted to the proposition for which we cite it) and that plaintiff sought a different contract type does not affect the case's logic. Nonetheless, the holding we cited is correct, and the plaintiff in Short Brothers also sought more money, as Plaintiff here. Plaintiff 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. -1612 11

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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 plaintiff 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 their offer prices were unreasonable. In any event, the ASPM guidance, the dictionary's definition of fairness, and Plaintiff's other secondary references amount to nothing more than good advice for contracting officers interested in working with contented, motivated contractors, not seeking opportunities to present claims.13 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 illogical.14 Indeed, if, as Hermes argues, the contracting officer's obligation to assess price

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. See FAR 15.404-1(b)(2)(I) (normally, adequate price competition establishes price reasonableness"). 14 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"). The plaintiff's own argument makes this connection, asserting that it is grounded in a misrepresentation. Pl. Br. 32-33. -17-

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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!" Plaintiff suggests that is not true, because courts adjust contract prices all the time. But, they do so upon discernible standards ­ not generalized claims of "unfairness," unrooted in long-recognized causes of action. Indeed, Plaintiff acknowledges that this is its true bottom-line, arguing that there is nothing unique to its FAR 15.402 claim, because Plaintiff "alleges that the determination of price reasonableness was, in essence: that DESC knew that the PMM did not reflect the marketplace, [and] misrepresented that fact. . . ." Pl. Br. 33. In other words, as Plaintiff's allegations of misrepresentation go, so goes its FAR 15.402 allegation. As we have explained, Plaintiff has yet to put a fact in evidence that amounts to a misrepresentation or establish its fanciful conspiracy theory. III. Hermes' Alternative Illegality Theories In Counts II-VI Must Be Dismissed A. Count II (Misrepresentation)

In our moving brief, we established that Plaintiff's 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. ¶ 47) should be dismissed, because there is no such applicable rule for EPA clauses. Plaintiff's brief does not suggest one or that the Government actually misrepresented anything. Instead, Plaintiff asserts that, because the complaint alleged a "misrepresentation," for the purposes of our motion, it is an established fact. Pl. Br. 34. However, misrepresentation is an allegation of law, which we need not accept. In fact, the entire point of our motion is to -18-

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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 Plaintiff'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" (apparently, an amount other than the price adjustment provided by the contract), Plaintiff cites no language to contradict the unambiguous language of the contract's pricing clause. Instead, Plaintiff 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.15 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 parties' dealings

Plaintiff alludes to the "implied" promise to pay fair market value found in Barrett, 242 F.3d 1060. Pl. Br. 36. 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, 50 Fed. Cl. At 569-70. We understand that plaintiff would dispute that an agreement that would yield any such result exists. -19-

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to search for an alternative, implied, arrangement; but, until plaintiff can void this contract through some other cause of action, these counts simply amount to an unnecessary bloating of the complaint. C. Count V ("Failure of Consideration and Frustration of Purpose")

Count V presents a further unnecessary multiplication of Plaintiff's charges. Plaintiff 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. 45. However, it is Plaintiff that bears the burden of proof in advancing evidence of its purported frustration. Moreover, Plaintiff's reply acknowledges that the count is grounded "on the voiding of DESC's pricing clause on the grounds of illegality." Pl. Br. 45. Accordingly, the dismissal of Plaintiff'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 Plaintiff 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. 45. But, Plaintiff'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. Plaintiff itself was required to -20-

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supply the information that was the basic ingredient of the PMM. Plaintiff has failed to show why the purpose of the PMM or why EIA collects PMM data is material to an unambiguous contract provision that was never alleged to operate or be administered or interpreted improperly.16 In sum, Plaintiff's mistake pleading lacks a factual premise. IV. Waiver and Estoppel Bar Hermes' Claims A. Introduction

Our moving brief established that, even if the FAR were to confer some unrealized right, Plaintiff elected to accept the pricing clause it did and, through years of inaction, now is estopped from pursuing any such imagined right in litigation. Our moving brief also demonstrated that Plaintiff's alternate illegality arguments and the common law causes of action are based upon the same faulty premise, i.e., that the Government has a legal duty to use escalators based upon price references that are "intended or designed" to be used as prices references, and to ensure that contracts result in payments that the contractor is satisfied amount to"fair market value" rise or fall with Plaintiff's illegality allegation. In Hermes II, 58 Fed. Cl. 409, this Court held that Plaintiff's allegation that the PMM violated the FAR was waivable, and that Hermes' illegality claim was waived in this case. In reaching its decision, the Court found that the requisite "intelligent waiver" could be discerned from Hermes' general sophistication and lengthy failure to signal its dissatisfaction whatsoever. Id. at 416-18. As the Court observed:

Plaintiff'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. -21-

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It is almost universally conceded that "`wherever a contract not already fully performed is continued in spite of a known breach, the wronged party cannot avail himself of that excuse . . . . As a general proposition, one side cannot continue after a material breach by the other . . ., act as if the contract remains fully in force (although stopping performance would be fair and convenient), run up damages, and then go suddenly to court.'" Id. at 418 (citing Ling-Temco-Vought, Inc. v. United States, 201 Ct. Cl. 135, 146 (1973) (quoting Northern Helex Co. v. United States, 197 Ct. Cl. 118, 125-26 (1972)); see also Hermes II, 58 Fed. Cl. at 413 (a "key factual distinction" to be that Hermes "astonishingly waited 14 years after entering the first [contract at issue] and eight years after entering the last [contract at issue] before litigating"). As explained in our original motion for summary judgment, estoppel also is applicable. Estoppel requires that the party asserting estoppel rely to its detriment upon its opponent's action or inaction. E.g., E. Walters & Co., Inc. v. United States, 217 Ct. Cl. 254, 576 F.2d 362 (1978). Here, because of its superior knowledge of its circumstances, and its extensive experience with the clauses at issue, Hermes was in the best position to assess the efficacy of the EPA clauses regarding its own situation. By adopting the EPA clauses in its offers with the text of the FAR available to it for consultation, Hermes signaled its intent to forego any benefits contained in the FAR. That Hermes continued to offer these clauses, coupled with its failure to protest clearly prejudiced the Government, because, as subsequent events showed, the Government could have obtained a deviation. Either of these would have been a "relatively painless alternative" to the after-the-fact, competition-free, speculative recovery Hermes now seeks. Indeed, as did the contractor in Ling-Temco-Vought, Hermes has "in effect retained all options for itself . . . made its calculations entirely in its own favor, without proper consideration of the defendant's position," and violated the "basic principle calling for fair treatment of both parties." 201 Ct. Cl. -22-

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at 148, 475 F.2d at 638. Hermes seeks to avoid the weight of this authority by asserting it may not be held to have waived as a matter of fact and may not be held to have waived as a matter of law. B. Plaintiff has Waived As A Matter Of Fact

Plaintiff asserts that it cannot be considered to have waived its claims as a matter of fact upon various bases: (1) there is no factual basis for presuming an intentional relinquishment and the declaration of Plaintiff's officer that it believed "DESC prices were legal," that "the prices set would reflect fair market value, and did not "relinquish its right to payment of fair market value" (citing App . 639); (2) that the waiver found in Hermes II was based upon a presumed knowledge of law; (3) Plaintiff had only 11 observations of the performance of the PMM clause; (4) the purchase is analogous to the purchase from a "monopolist;" (5) that "suppliers" objected to the PMM clause; and (6) that DESC knowingly concealed secret knowledge concerning the operation of the PMM and, therefore, has "unclean hands." We have addressed these various allegations, above, and in our response to plaintiff's proposed findings of fact. The essence of every element of Plaintiff's case is a statement by one of its current officers that Plaintiff intended the contracts at issue to be "legal," and that it intended to receive "fair market value" and not to "relinquish its right to payment of fair market value." Essentially, plaintiff has defined the problem away, by assuming that the contract is "illegal," that it has a "right" to receive "fair market value," that it did not receive "fair market value," and that, somehow DESC knew all this.17 However, its declarations and appended

Thus, for example, after citing examples of DESC stating that PMM states the fair market value, Plaintiff asserts that such statements are "misrepresentations" that have been "unmasked." In fact, assertions concerning PMM and its relationship to the market place are established by the statute that requires fuel refiners to report their actual sales prices to the EIA -23-

17

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documents fail to establish that. Moreover, the best evidence of plaintiff's intent is its conduct in signing contracts without objection over many years. As the court stated in Safeco Credit v. United States, 44 Fed. Cl. 406, 420 (1999): "Plaintiff's allegation of its intent not to waive a claim when it signed the modifications is insufficient to raise a genuine issue of material fact so as to preclude summary judgment for the government." Plaintiff attempts to put a further gloss on this, by asserting that it could not have known how the PMM would operate, because it had nine "annual observations" of the PMM, and that this was not enough to determine a consistent bias; thus, there is no evidence plaintiff intended to forego fair market value. Actually, plaintiff had at least 108 relevant observations of the operation of the PMM, because prices were adjusted monthly or weekly for nine years (three of plaintiff's contracts used Platts as a base reference). Moreover, if plaintiff's knowledge concerning its current allegations were material, presumably, it would either have gathered that knowledge or determined that it was not material. But, what mystery there might be is confounded by the fact that Plaintiff itself was required to make detailed reports to EIA for the preparation of the PMM. Plaintiff also asserts that the contracting officer, John Walker, whose declaration establishes that Plaintiff did not object to the legality of the PMM did not explain his involvement with plaintiff and failed to disclose that he was not employed by DESC for a portion of the time covered by his declaration. Pl. Br. 54. In fact, the declaration states that from 1987-89, Mr. Walker was employed by the Navy. SA 1. The declaration also explains the basis for Mr. Walker's knowledge, i.e., that he reviewed the contract files and saw no evidence

(PFF 12), DESC's study of the PMM (PFF 14-21), and DESC's consistent statement of its position through its vindication in Tesoro, 405 F. 3d 1339. -24-

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that plaintiff had objected to the EPA clause. And, in 1989, 1990, and 1998, he was the awarding contracting officer. Pl. App. 648, 718, 735.18 Incredibly, Plaintiff offers no evidence that it did object. Accordingly, it is undisputed that Plaintiff did not object.19 Plaintiff's most dramatic gloss is its "clean hands" conspiracy theory. As is the case throughout Plaintiff's brief, Plaintiff's recitation of the tale is marred by its failure to fully quote the evidence cited. Typical is its assertion that DESC "admits" using its "market leverage" as "the sole purchaser of military fuel" to "improve the competition" by making the EPA clause non-negotiable, citing among other documents, Pl. App. 17. Pl. Br. 56. Pl. App. 17 is an excerpt of the testimony of Lawrence Ervin, a DESC pricing official, from the Barrett trial. There, Mr. Ervin stated that, in the mid-1980s, as the market became a buyer's market, DESC used its

In a footnote, Plaintiff declares it has established the "inaccuracy" of Mr. Walker's statement in a similar case, Calcasieu v. United States. Pl. Br. 54, n. 43. In fact, there is no apparent conflict in the document Plaintiff offers in opposition to Mr. Walker's statement. The document is a letter from DESC to Calcasieu, not a letter of complaint from Calcasieu. From the response, it appears that Calcasieu was not complaining about the accuracy of the PMM, but its ability to determine its offer price when the PMM was not yet available for the reference month. Pl. App. 96. DESC resolved this problem in 1987 when it changed the reference month. SA 7. Instead, Plaintiff relies upon the allegation that DESC had received objections to PMM from "suppliers." "as early as 1984. Pl. Br. 55. Plaintiff also asserts that "every known objection was rejected out of hand." Id. In fact, what Plaintiff is referring to is the complaint of the plaintiff in MAPCO, w