Free Response to Supplemental Brief - District Court of Federal Claims - federal

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

No. 02-1460C (Judge Block)

PLAINTIFF'S REPLY TO DEFENDANT'S SUPPLEMENTAL BRIEF Plaintiff, Hermes Consolidated, Inc., doing business as Wyoming Refining Company ("Wyoming"), respectfully submits this Reply to Defendant's Supplemental Brief. I. WYOMING HAS CARRIED ITS BURDEN OF DEMONSTRATING THAT IT IS ENTITLED TO A REMEDY FOR DESC'S VIOLATION OF LAW This Court already has rejected DESC's harm argument at least four times: in Pride, in Gold Line, and, most recently, in La Gloria and Phoenix Petroleum.1 In each instance, the Court has found that the damages phase of the litigation is the appropriate time to compare the fair market value of the fuel delivered with how much the contractors were paid for their goods. We have previously discussed the rulings in Pride and Gold Line, in which the Court twice rejected DESC's argument that there is an additional "harm" wicket through which a plaintiff, like Wyoming, must go to establish liability in this type of case. See Pl.'s Reply at 15-16. La Gloria and Phoenix Petroleum have now joined the unbroken line of the Pride and Gold Line precedent. In La Gloria, DESC argued, like here, that the contractor "has failed to demonstrate that it was harmed by the use of the EPA clauses in its contracts and thus cannot
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La Gloria Oil & Gas Co. v. United States, No. 02-465C, 2003 U.S. Claims LEXIS 89 (Fed. Cl. Apr. 15, 2003); Phoenix Petroleum Co. v. United States, No. 97-315C (Fed. Cl. Apr. 30, 2003). Copies of the La Gloria and Phoenix Petroleum decisions are attached hereto at Tabs 1 and 2.

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recover." 2003 U.S. Claims LEXIS 89, at *40. The Court disagreed. First, it noted that, in Barrett, the Federal Circuit "agree[d] with the Court of Federal Claims' factual finding of a promise by the government to pay at least fair market value" (id. at *42 (quoting Barrett, 242 F.3d at 1060)) and found that, as in Barrett, "there is evidence in the case that supports a finding that defendant promised to pay fair market value for the military fuel it procured." Id. at *43. The Court concluded that the presence of that evidence, coupled with its finding that the EPA clause is unlawful, was all plaintiff needed to establish DESC's liability: [t]he Federal Circuit decision in Barrett III [, 242 F.3d at 1060,] teaches that the use of an illegal EPA clause together with an implied-in-fact governmental promise to pay at least fair market value entitles a plaintiff to quantum valebant relief. . . . In determining the quantum valebant relief, the measure of actual harm incurred by La Gloria must be determined. Thus, contrary to defendant's assertions, plaintiff is entitled to prove harm by establishing, under an appropriate valuation methodology, that it failed to receive fair market value. Id. at *44. Wyoming has presented the same evidence of the parties' intent in this case, the EPA clause used in this case is illegal for the reasons already discussed, and thus Wyoming is entitled, without any further showing, to summary judgment as to liability. This line of precedent continues with Phoenix Petroleum. The Court stated that, having found DESC's EPA clause to be "invalid," the clause is stricken and the express contract incorporates DESC's implied-in-fact promise to pay at least fair market value for the fuel delivered. Phoenix Petroleum, slip op. at 5. Citing Gold Line, the Court found that plaintiff was entitled to quantum valebant relief or, in the alternative, reformation of the EPA clause. Id. (citation omitted). The Court concluded that, "[a]s there is clearly a genuine dispute as to material issues of fact regarding harm or damages in the instant case, [DESC's] argument must fail." Id. DESC, apparently undaunted by the consistent and repeated rejection by this Court of its harm argument, goes so far as to file a Supplemental Brief in this case to reargue its discredited harm point. (See Def.'s Supp. at 1-10). In so doing, DESC simply ignores precedent contrary to 2

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its position, tries to recast Wyoming's claims, misstates the precedent upon which Wyoming relies, and raises arguments that are not relevant to the legal issue presented. At the outset, DESC disclaims knowledge of any possible contract interests that could have been implicated by its use of an illegal pricing clause in its contracts with Wyoming, which resulted in Wyoming being paid less than fair market value for the fuel it sold DESC. (Def.'s Supp. at 1-2). By so doing, DESC ignores the fact that Wyoming expected that its contracts would contain a lawful pricing clause and that the contracts would not be breached. Moreover, both parties expected the pricing clause in the contracts to operate so that DESC would pay Wyoming fair market value for its fuel. See Barrett, 242 F.3d at 1060. It is, at a minimum, those "expectation" interests, among others, that DESC's conduct has upset. DESC also contends that Wyoming is not entitled to a restitutionary remedy because that remedy "is aimed at preventing unjust enrichment." (Def.'s Supp. at 3 n.3.) DESC's argument is obviously conclusory, as it is entirely founded upon the false, and certainly unproven, assertion that the use of the illegal pricing clause resulted in Wyoming receiving fair market value for the fuel it provided and thus, that DESC was not unjustly enriched by receiving fuel for which it paid less than full market value. In fact, Wyoming's argument that the illegal pricing clause resulted in payments less than fair market value is supported by the MAPCO, Barrett, and Pride decisions, in which this Court held that DESC, using essentially an identical pricing clause, paid contractors tens of millions of dollars less than the fair market value of their fuel. The pricing clause DESC used in Wyoming's contracts is illegal, and it impacted both Wyoming's base bid price and how that base price was subsequently adjusted during the performance of the contracts. Wyoming calculates that the illegal clause resulted in it being paid more than $33 million less than the fair market value of the fuel it provided. (Compl. ¶¶ 33, 41, 50, 56, 65, 80, 89). DESC, therefore, was unjustly enriched by, at a minimum, the difference between the amount it paid Wyoming for its fuel and the fair market value of the fuel. A restitutionary remedy is an appropriate method by which to disgorge DESC of its ill-gotten gains and to compensate Wyoming for the fair market value of the fuel it provided to DESC. 3

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Next, DESC responds to Wyoming's harm argument by recharacterizing both Wyoming's Complaint and its argument. Wyoming's Complaint is plain: It seeks contractual relief for DESC's failure to comply with law and regulation in awarding and administering the contracts. (Compl. ¶¶ 17-89). There can be no doubt that a violation of a regulation ­ especially one, like here, that was enacted for the benefit of the contractor and the violation of which directly affected the price received by the contractor for its goods ­ gives rise to contractual relief. In Norby Lumber Co. v. United States, 46 Fed. Cl. 47, 52 (2000), this Court expressly held that a plaintiff seeking money damages based on violation of environmental regulations states a breach of contract claim. See also Northrop Grumman Corp. v. United States, No. 97276C, slip op. at 11-13 (Fed. Cl. Dec. 20, 1999) (denying government's motion to dismiss a claim for breach of contract founded upon a violation of regulation) (App. 1623-25); Slagan v. John Whitman & Assocs., No. 97-3961, 1997 U.S. Dist. LEXIS 14146, at *14 (E.D. Pa. Sept. 10, 1997) ("Whether under the Restatement's implied duty of good faith performance of a contract or the doctrine of necessary implication, the Court finds that Plaintiff's employment contract contained the implied term that his conduct would be lawful."); Space Age Eng'g v. United States, 4 Cl. Ct. 739, 742 (1984) ("a plaintiff may rely on the violation of a statute or regulation to show its implied contract for fair consideration has been breached"); see, e.g., Kelso v. Kirk Bros. Mech. Contractors, Inc., 16 F.3d 1173, 1176 (Fed. Cir. 1994) ("failure to comply with federal labor standards may justify a default termination"); Hartzell v. Burdick, 398 N.Y.S.2d 649, 650 (N.Y. City Ct. 1997) ("failure to observe the mandate of the statute would be a breach of contract").2 Indeed, among other contractual theories, Wyoming seeks recovery for breach of contract here. (Compl. ¶¶ 42-50.) DESC cites no authority for its assertion that Wyoming is not

Indeed, so fundamental to a contract is the parties' compliance with the law that the law is read into the contract quite apart from the parties' intent. College Point Boat Corp. v. United States, 267 U.S. 12, 15 (1925).
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seeking contractual relief or that the principles governing contractual relief do not apply to Wyoming's claims.3 Wyoming's harm argument is equally plain ­ but also misconstrued by DESC. Wyoming's argument that there is no requirement to prove DESC's concept of harm is not limited to Wyoming's breach of contract theory of recovery. Rather, Wyoming contends, as this Court already has expressly found three times, that in this type of case a plaintiff is not required to prove DESC's idea of harm to establish DESC's liability. See Pl.'s Reply at 8-14. In support of its position, Wyoming has cited abundant precedent ­ including Barrett, Urban Data, MAPCO, Gold Line, Pride, La Gloria, and Phoenix Petroleum ­ many of which involved implied-in-fact theories and none of which were limited to a breach of contract theory of liability. See Pl.'s Reply 13-14. Amazingly, in more than nine pages of argument, DESC does not devote a single word addressing this unbroken line of precedent supporting Wyoming's argument.4

DESC does not offer a single case to support its argument that a plaintiff alleging a breach of contract is not required to make a separate showing of harm, but that such a showing is required by a plaintiff alleging that the government violated a regulation. (Def.'s Supp. at 3-4 & 3 n.4). That is not surprising, because it would be quite odd indeed if the law were that one standard of proof were required to establish liability for otherwise lawful governmental conduct that breaches a government contract and a different, more stringent standard of proof were required to establish liability for unlawful governmental conduct that results in either a breach of a government contract or the nullification of a contract provision or the entire contract. As Wyoming already has demonstrated, the law recognizes no such distinction. See Pl.'s Reply at 8-14.
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DESC reliance on LaBarge Products, Inc. v. West, 46 F.3d 1547 (Fed. Cir. 1995), is strained at best. (Def.'s Supp. at 3 and 3 n.5). In LaBarge, the contract price was not illegal in large part because the contractor did not participate in the government's allegedly illegal attempt to lower bid prices or reduce its bid price in response thereto. Id. at 1556. LaBarge at most stands for the unremarkable proposition that the government's unsuccessful attempt to establish an illegal price is not actionable. DESC does not have the luxury of arguing that position here. Similarly, PCL Construction Services, Inc. v. United States, 41 Fed. Cl. 242 (1998), also cited by DESC, did not involve an illegal price and, in any event, the issue before the Court was not the price to be paid, but rather the "color" of the appropriations available to pay it. Id. at 245-46.
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Neither does DESC have a persuasive response to Wyoming's general damages point. See Pl.'s Reply at 11-14. General damages are a specie of remedy and, contrary to DESC's position, are not narrowly limited only to breach of contract claims.5 In fact, DESC cites nothing to the contrary; once again, it does not even attempt to respond to the numerous cases Wyoming cites that involved implied-in-fact contracts in which plaintiffs established liability without having to make the separate showing of harm that DESC is attempting to contrive here. See Pl.'s Reply at 13-14 (citing, among others, Barrett, Urban Data, MAPCO, and Pride).6 Finally, as Wyoming already has demonstrated, the prices in Wyoming's contracts were illegal. Thus, it is difficult to imagine a greater "but for" nexus than that present here between the government's violation of the law and the contract price: each month DESC adjusted the price of fuel upward or downward illegally and paid prices for fuel that the Federal Circuit has held to be "unenforceable." Barrett, 242 F.3d at 1060; see Pl.'s Reply at 14. Because Wyoming did not receive a lawful price for its fuel, it has been harmed as a matter of law. In addition to the economic harm Wyoming already has alleged and demonstrated, the Gold Line Court has reminded that a contractor, like Wyoming, is "entitled . . . to have its prices adjusted in a manner consistent with law." 54 Fed. Cl. at 298; accord Nat'l Mar. Union of Am. v. Commander, Military Sealift Command, 824 F.2d 1228, 1237 (D.C. Cir. 1987) (government contractor "that claims illegality in a procurement alleges an injury"). In any event, Wyoming has demonstrated As noted above, Wyoming is proceeding also under a breach of contract theory, and DESC appears to concede that Wyoming is seeking general damages pursuant to that breach count.
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San Carlos Irrigation Dist. v. United States, 111 F.3d 1557 (Fed. Cir. 1997), is readily distinguishable. San Carlos involves speculative ­ not general ­ damages: "we hold that the damages alleged by SCIDD . . . are too speculative to create contractual liability on the part of the government." Id. at 1562 (emphasis added); see id. at 1563 (noting that "`remote and consequential damages'" are not recoverable in a common-law suit for breach of contract" (quotation omitted)). SCIDD sought to recover for a loss of water that might have been directed to its use "nine years after the breach." Id. at 1563. The case is silent on the point for which DESC cites it: i.e., the rule in this circuit is that a plaintiff must prove DESC's concept of harm in order to recover general damages. (Def.'s Supp. at 5-6). Once again, DESC's authority fails to support its novel harm argument.
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that the DESC pricing clause used in its contracts is illegal, and that alone is enough to entitle Wyoming to summary judgment as to liability. CONCLUSION For the reasons set forth herein, as well as in Wyoming's Cross-Motion for Partial Summary Judgment and Opposition to Defendant's Motion for Partial Summary Judgment, and Wyoming's Reply to Defendant's Opposition to Plaintiffs' Cross-Motion for Partial Summary Judgment, Wyoming respectfully requests that its Cross-Motion for Partial Summary Judgment be granted and that DESC's Motion for Partial Summary Judgment be denied.

Respectfully submitted, s/J. Keith Burt J. Keith Burt Mayer, Brown, Rowe & Maw 1909 K Street, N.W. Washington, D.C. 20006 (202) 263-3208 (Phone) (202) 263-5208 (Fax) Attorneys for Plaintiff, Hermes Consolidated, Inc., Doing Business As Wyoming Refining Company Of Counsel: Adrian L. Steel, Jr. Nicole H. Fradette Mayer, Brown, Rowe & Maw 1909 K Street, N.W. Washington, DC 20006 May 5, 2003

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