Shell Oil Co. v. United States

• Decision Date: 28 August 2014
• Docket Number: No. 2013–5051.,2013–5051.
• Citation: 751 F.3d 1282
• Parties: SHELL OIL COMPANY, Atlantic Richfield Company, Texaco, Inc., and Union Oil Company of California, Plaintiffs–Appellants, v. UNITED STATES, Defendant–Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

751 F.3d 1282

SHELL OIL COMPANY, Atlantic Richfield Company, Texaco, Inc., and Union Oil Company of California, Plaintiffs–Appellants,

v.UNITED STATES, Defendant–Appellee.

No. 2013–5051.

United States Court of Appeals,Federal Circuit.

April 28, 2014.

Rehearing En Banc Denied Aug. 28, 2014.

Recognized as Preempted

41 U.S.C.A. § 101

Michael W. Kirk, Cooper & Kirk, PLLC, of Washington, DC, argued for plaintiffs-appellants. With him on the brief were Vincent J. Colatriano and Peter A. Patterson.

Stephen C. Tosini, Senior Trial Counsel, Commercial Litigation Branch, Civil Division, United States Department of Justice, of Washington, DC, argued for defendant-appellee. With him on the brief were Stuart F. Delery, Acting Assistant Attorney General, Jeanne E. Davidson, Director, and Franklin E. White, Jr., Assistant Director.

Hilary S. Cairnie, BakerHostetler LLP, of Washington, DC, for amicus curiae American Fuel & Petrochemical Manufacturers. Of counsel were Richard B. Raile and Christopher H. Marraro.

Daniel M. Steinway, Baker Botts L.L.P., of Washington, DC, for amicus curiae Exxon Mobil Corporation. With him on the brief were William S. Foster, Jr., and Michael Patrick Mcgovern.

Before O'MALLEY, REYNA, and WALLACH, Circuit Judges.

Opinion for the court filed by Circuit Judge WALLACH.

Dissenting opinion filed by Circuit Judge REYNA.

WALLACH, Circuit Judge.

The seventieth anniversary of the end of active United States participation in the Second World War will fall on September 2 of next year. A nation of pragmatists, we tend to forget our history until necessity revives our memory.¹ To resolve this contract claim by Shell Oil Co. (“Shell”), Atlantic Richfield Co. (“ARCO”), Texaco, Inc. (“Texaco”), and Union Oil Co. of California (“Union Oil”) (collectively, “the Oil Companies”), we must recall and place into its appropriate context the atmosphere of stark determination for victory at all costs, which drove our war effort after the Japanese Empire attacked the United States Naval Base at Pearl Harbor on December 7, 1941.

Each of the Oil Companies entered into contracts with the United States to provide high-octane aviation gas (“avgas”) to fuel military aircraft as part of the national war effort (“the avgas contracts”). The production of avgas resulted in waste products such as spent alkylation acid and “acid sludge.” The Oil Companies disposed of such acid waste by contracting with Eli McColl, a former Shell engineer, to dump the waste at real property in Fullerton, California (“the McColl site”). Over fifty years later, 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 McColl site. The Oil Companies filed suit in the Court of Federal Claims, arguing the avgas contracts require the Government to indemnify them for the CERCLA costs. The Court of Federal Claims granted summary judgment in favor of the Government and denied the Oil Companies' motion for summary judgment. Shell Oil Co. v. United States, 108 Fed.Cl. 422 (Fed.Cl.2013) (“Shell Remand Decision ”). Because the avgas contracts require the Government to reimburse the Oil Companies for their CERCLA “charges,” this court reverses with respect to breach of contract liability. The Court of Federal Claims correctly determined, however, that material factual disputes preclude granting summary judgment on damages, and that issue is accordingly remanded for trial.

Background

I. World War II and the Need for Avgas

Compared to other available fuels, high-octane avgas enabled aircraft to fly faster and higher, with improved rates of climb and higher payload carrying capacity. It was “the most critically needed refinery product” during World War II and was essential to the United States' war effort.² J.A. 477 ¶ 4. It was still a new technology in the late 1930s, however, and production was nowhere near sufficient for the massive quantities the United States and its allies would need to prosecute the war.

In 1942 and 1943, the Government, acting through the Defense Supplies Corporation (“DSC”) entered into the avgas contracts with the Oil Companies. The avgas contracts were long-term (primarily three-year) contracts to purchase avgas from the Oil Companies' refineries in Southern California, and enabled the Oil Companies to build the new refining facilities needed to produce the high levels of avgas vital to the war effort.

At the time the contracts were signed, the Government exercised substantial wartime regulatory control over almost every aspect of the petroleum industry. It had authority to impose obligatory product orders on private companies, with noncompliance subject to criminal sanctions or Government takeover. See Selective Training and Service Act of 1940, Pub.L. No. 76–783, ch. 720, § 9, 54 Stat. 885, 892 (1940). Facilities that accepted such obligatory product orders had to prioritize government military contracts above all other contracts. Act of May 31, 1941, Pub.L. No. 77–89, ch. 157, 55 Stat. 236 (1941). To the extent facilities relied on scarce raw materials, the Government could regulate supply chains to ensure continuing production. Id.; see also Second War Powers Act of 1942, Pub.L. No. 77–507, ch. 199, § 301, 56 Stat 176, 178 (1942) (authorizing the President to allocate any material or facility as necessary “in the public interest and to promote the national defense” whenever the country's defense needs would create a shortage in such materials or facilities).

The Government regulatory entities most relevant to the avgas contracts were (1) the Office of Petroleum Coordinator for National Defense (“OPC”), later replaced by the Petroleum Administration for War (“PAW”), and (2) the Office of Production Management (“OPM”), later run by and then replaced by the War Production Board (“WPB”). The WPB and PAW were created in January and December 1942, respectively. The WPB had primary authority over war procurement and production, and cooperated with the PAW to determine petroleum requirements and set national priorities for supplying the petroleum industry. Subject to the direction of the WPB, the PAW was charged with ensuring “adequate supplies of petroleum for military, or other essential uses” and “[e]ffect[ing] the proper distribution of such amounts of materials.” Exec. Order No. 9276, 7 Fed.Reg. 10,091, 10,092 (Dec. 4, 1942). The “PAW told the refiners what to make, how much of it to make, and what quality.” John W. Frey & H. Chandler Ide, A History of the Petroleum Administration for War 219 (1946), available at J.A.1917.

Days after Pearl Harbor, the Government recognized the need to quickly mobilize avgas production, with the OPC stating: “ ‘It is essential, in the national interest that the supplies of all grades of aviation gasoline for military, defense and essential civilian uses be increased immediately to the maximum.’ ” J.A. 498–99 (quoting OPC Recommendation No. 16) (emphases added). Then-existing facilities could not produce the required levels of avgas, necessitating construction of additional facilities. However, the Government's substantial authority to control production only extended to existing facilities; it could not force companies to invest in new ones. See, e.g., An Act to Expedite National Defense and for Other Purposes, Pub.L. No. 76–671, ch. 440, § 8(b), 54 Stat. 676, 680 (1940) (authorizing the Secretary of the Navy to nationalize and operate “any existing manufacturing plant or facility necessary for the national defense” when certain conditions were met) (emphasis added). A further stumbling block for the Government was that contracts with the Army and the Navy were subject to annual Congressional appropriations and thus limited to a one-year term. Such one-year contracts did not provide the long-term security necessary to justify the Oil Companies' investment in new facilities. In light of these limitations, the Government turned to the DSC, a government-owned corporation authorized to acquire critical and strategic materials, including avgas.

The DSC was a subsidiary of the Reconstruction Finance Corporation (“RFC”), another government-owned corporation. The designation in 1941 of avgas as a critical material enabled the RFC and its subsidiaries to buy, sell, and produce avgas and to make loans to companies to construct avgas production facilities. See Act of June 25, 1940, Pub.L. No. 76–664, ch. 427, § 5(1), 54 Stat. 572, 573 (codified at 15 U.S.C. § 606b (1940)). After purchasing avgas from the Oil Companies, the DSC resold it to the Army and the Navy at the national price established by the PAW (or its predecessor, the OPC).

Between 1942 and 1943, the Oil Companies entered into contracts with the DSC agreeing to sell vast quantities of avgas.³The contracts set forth a base price for each barrel of avgas, which was negotiated individually with each refiner based on the refiner's production costs. The base price was calculated with the goal of permitting an estimated profit of between 6% and 7%. Profits were further subject to the Renegotiation Act of 1942, which required contractors to repay excess profits to the Government. Pub.L. No. 77–528, ch. 247, § 403, 56 Stat. 226, 245 (1942).

Given the low profit margin, the avgas contracts contained various concessions to the Oil Companies. They were three-year contracts, thus providing some measure of certainty that the newly-constructed avgas production facilities would pay off over time. They also contained cost-allocation measures to limit the Oil Companies' risk in producing avgas. For instance, the agreed-upon base price of avgas was subject to adjustment depending on the Oil Companies' costs, including the price of crude and other raw materials, and the transportation of raw materials. The contracts also required the Buyer, DSC, to pay “any now existing taxes, fees, or...