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Last month, the Federal Circuit decided a case over 70 years in the making.  Following the bombing of Pearl Harbor in 1941 and full-scale U.S. entrance into World War II, the government entered into a series of contracts with oil companies to ramp up production of aviation gasoline (“avgas”) desperately needed for the war effort.  But along with increased production came increased waste and toxic byproducts, notably spent alkylation acid and “acid sludge.”  Safe waste disposal could not keep up with production, and much of the waste was eventually dumped at a site in Fullerton, California. 

Until last week, the oil companies were on the hook for the cleanup costs.  Thanks to the Federal Circuit’s recent ruling, though, the government must now reimburse the contractors for their remediation costs.  The discussion below traces the course of the litigation, outlines the Federal Circuit’s legal analysis, and discusses how the decision represents but one potential avenue for U.S. government contractors to recover environmental remediation costs.

·         CERCLA Litigation Holds Contractors Liable for Remediation Costs

In a series of district court and Ninth Circuit opinions from the 1990s and 2000s, California and the United States obtained compensation from the oil companies pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), 42 U.S.C. §§ 9601 et seq., for the costs of cleaning up the avgas waste site.  See United States v. Shell Oil Co., 841 F. Supp. 962, 976 (C.D. Cal. 1993) (holding oil companies, among other parties, jointly and severally liable); United States v. Shell Oil Co., 13 F. Supp. 2d 1018, 1030 (C.D. Cal. 1998) (allocating 100% of the cleanup costs to the government as an “arranger” of the disposal); United States v. Shell Oil Co., 294 F.3d 1045 (9th Cir. 2002) (affirming oil companies’ liability, but reversing allocation to United States).

·         Court of Federal Claims Holds Contractors Not Entitled To Indemnification

Following the CERCLA decisions, the oil companies sought relief in the Court of Federal Claims (“COFC”).  Specifically, they asked the court to find that, under the “Taxes” clauses of their contracts, the government was required to indemnify the contractors for “charges,” and therefore to reimburse them for their CERCLA remediation costs—which totaled close to $100 million.  After an initial decision was set aside and the case reassigned due to a judicial conflict of interest, the COFC held that the contractors were not entitled to indemnification and reimbursement for three separate reasons: (1) the CERCLA costs incurred by the oil companies were not “charges” within the meaning of the contracts’ “Taxes” clauses; (2) the contractors had released any valid claim when their contracts were terminated and settled in the mid-to-late 1940s; and (3) the Anti-Deficiency Act barred such indemnification.  The court further held that, even had the contractors succeeded in establishing government liability, there remained a dispute of fact about the amount of waste at the California site that was attributable to the avgas contracts.  The COFC thus granted summary judgment for the government, and denied summary judgment for the oil companies.  Shell Oil Co. v. United States, 108 Fed. Cl. 422 (2013).

·         Federal Circuit Reverses, Requires Government to Reimburse Contractors

The Federal Circuit, however, reversed.  In a divided decision, Shell Oil Co. v. United States, No. 2013-5051, 2014 WL 1661493 (Fed. Cir. Apr. 28, 2014), Circuit Judges Wallach and O’Malley, after summarizing the wartime context during which the contracts were created—including the government’s “substantial wartime regulatory control over almost every aspect of the petroleum industry,” and its “authority to impose obligatory product orders on private companies, with noncompliance subject to criminal sanctions or Government takeover”—refuted each of the COFC’s three rationales precluding indemnification.

First, the court analyzed the “Taxes” clause in each of the oil companies’ contracts, which required the government to reimburse the contractors for “‘anynew or additional . . . charges’ the Government imposes on the Oil Companies ‘by reason of the production, manufacture, sale or delivery of [avgas].’”  Because “CERCLA is a federal law requiring responsible parties to pay the ‘costs of removal or remedial action,’ 42 U.S.C. § 9607(a)(4)(A) . . . , and is thus a charge (i.e., cost) imposed by a federal law,” the court held that the plain language of the avgas contracts’ “Taxes” clause requires the Government to indemnify the Oil Companies for their incurred CERCLA costs.1

Second, the court held that the COFC erred when it determined that the contractors’ claims had been released when the avgas contracts were terminated and settled in the mid-to-late 1940s.  The court noted that the contractors had brought their claims under legislation that “allows posttermination indemnification claims, such as the Oil Companies’ claims on the terminated avgas contracts, so long as the expenditure arose on account of the contractor’s performance under the contract, and the expenditure is not otherwise excluded from payment by other provisions” (citations omitted).  The court further reasoned that the government had not met its burden to prove release because the government failed to establish the content of the contractors’ settlement agreements or whether they amounted to a general release of claims.

Third, the court held that the Anti-Deficiency Act (“ADA”) did not bar the oil companies’ claims because the avgas contracts were issued by a government-owned corporation acting subject to a delegation of authority not limited by the ADA.

Finally, having found the oil companies entitled to reimbursement in general, the Federal Circuit agreed with the COFC that there remained a genuine dispute of material fact as to the amount of damages the contractors were entitled to recover.  The court thus remanded the case to the COFC “to determine how much acid waste at the [waste] site was ‘by reason of’ the avgas contracts.”

·         Takeaways

The Federal Circuit’s decision in Shell Oil Co. illustrates one means by which a government contractor could recover its environmental cleanup costs.  Other scenarios include “hold harmless” clauses in facilities contracts cases (Ford and DuPont) and indemnification clauses authorized under Public Law 85-804.  The key for any contractor is to recognize such potential claims early and understand the nuances of various cost recovery clauses and statutes.

1          Circuit Judge Reyna, in a dissenting opinion, criticized the majority’s holding for two primary reasons.  First, he interpreted the “Taxes” clause in the oil companies’ contracts as only applying to tax-related costs: “When read as a whole, the contract signals that the parties, at the time they entered into the contract, intended the ‘Taxes’ clause to be read as a price-adjustment mechanism covering unexpected tax-related burdens.”  Second, he argued that even if the “Taxes” clause could be read to allow for indemnification beyond tax-related costs, the clause did not suffice to indemnify CERCLA liability.