Tesoro Hawaii Corp. v. U.S., 04-5064.

• Decision Date: 26 April 2005
• Docket Number: No. 04-5064.,04-5064.
• Citation: 405 F.3d 1339
• Parties: TESORO HAWAII CORPORATION, Tesoro Alaska Company and Hermes Consolidated, Inc., d/b/a Wyoming Refining Company, Plaintiffs-Appellants, v. UNITED STATES, Defendant-Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

405 F.3d 1339

TESORO HAWAII CORPORATION, Tesoro Alaska Company and Hermes Consolidated, Inc., d/b/a Wyoming Refining Company, Plaintiffs-Appellants, v. UNITED STATES, Defendant-Appellee.

No. 04-5064.

United States Court of Appeals, Federal Circuit.

April 26, 2005.

J. Keith Burt, Mayer, Brown, Rowe & Maw, LLP, of Washington, DC, argued for plaintiffs-appellants. With him on the brief were Michael E. Lackey, Jr., Gary A. Winters, and Monica A. Aquino.

Steven J. Gillingham, 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 Peter D. Keisler, Assistant Attorney General; David M. Cohen, Director; and Kyle Chadwick, Trial Attorney. Of counsel on the brief were Bernard A. Duval, Counsel; and Howard M. Kaufer and Donald S. Tracy, Assistant Counsel, Office of Counsel, Defense Energy Support Center, of Ft. Belvoir, Virginia.

Ralph C. Nash, Jr., of Washington, DC, for amicus curiae Chamber of Commerce of the United States. Of counsel on the brief was Robin S. Conrad, National Chamber Litigation Center, Inc., of Washington, DC.

Carolyn F. Corwin, Covington & Burling, of Washington, DC, for amicus curiae American Petroleum Institute. With her on the brief were Robert A. Long, Jr. and James R. Dean, Jr. Of counsel on the brief was Douglas W. Morris, American Petroleum Institute, of Washington, DC.

Roy T. Englert, Jr., Robbins, Russell, Englert, Orseck & Untereiner LLP, of Washington, DC, for amicus curiae National Petrochemical & Refiners Association. With him on the brief were Donald J. Russell and Max Huffman. Of counsel on the brief was Robert G. Slaughter, National Petrochemical & Refiners Association, of Washington, DC.

Before RADER, BRYSON, and GAJARSA, Circuit Judges.

GAJARSA, Circuit Judge.

Tesoro Hawaii Corporation and Tesoro Alaska Company (collectively "Tesoro") and Hermes Consolidated, Inc. ("Hermes") jointly petitioned this court for permission to appeal certified orders of the United States Court of Federal Claims in the separate proceedings, Tesoro Hawaii Corp. v. United States, 58 Fed. Cl. 65 (2003), and Hermes Consol., Inc. v. United States, 58 Fed.Cl. 409 (2003). We granted Tesoro and Hermes permission to pursue interlocutory appeal of issues relating to the legality of contract price determinations made by the Defense Energy Support Center ("DESC"). Tesoro Hawaii Corp. v. United States, 89 Fed.Appx. 732 (Fed.Cir.2004). Because DESC's price setting mechanism was consistent with the applicable regulations, we reverse the decisions of the trial court holding that DESC's practice was illegal.

I. BACKGROUND

DESC is the principal purchaser of military fuel for the United States Department of Defense. Between 1983 and 1999, Tesoro entered into thirty-six contracts with DESC to supply the government with military jet fuel. Hermes entered into nine comparable contracts with DESC between 1988 and 1994.

Each of the DESC military fuel contracts contained a clause that adjusted on a monthly basis the prices paid for the fuel supplied. The Economic Price Adjustment ("EPA") clause provided that "[t]he prices payable under this contract for listed items shall be the base [bid] price for the listed item increased or decreased by the same number of cents, or fraction thereof, that the reference price increases or decreases per like unit of measure from the base reference price." The reference prices to which the price adjustments were tied were drawn from market publications. Until June 23, 1994, DESC drew its EPA reference prices from the market publication known as the Petroleum Marketing Monthly ("PMM").

The PMM, which is published by the Department of Energy ("DOE"), is a report compiling the monthly average sales figures for specified fuels for five regions known as Petroleum Administration for Defense Districts ("PADDs"). All refiners, including Tesoro and Hermes, are required by law to submit monthly sales data to the DOE, which then compiles the data to report the monthly average sales prices per PADD for various products. The compilation and computation process takes approximately three months, which means that the PMM report for April's sales figures is typically published in mid-July. In order to accommodate this lag time, the DESC contracts tied to the PMM provided for an interim reference price tabulation subject to final adjustment upon publication of the appropriate PMM.

In 1992, the Court of Federal Claims issued a decision holding that DESC's use of a PMM-based EPA clause was not authorized by the Federal Acquisition Regulations ("FAR"). MAPCO Ala. Petroleum, Inc. v. United States, 27 Fed.Cl. 405 (1992). Following the MAPCO decision, DESC received permission to deviate from the FAR's provisions by obtaining individual and class deviations authorizing it to continue using EPA clauses identical or similar to the one struck down in MAPCO. According to the regulations applicable at the time, an individual deviation affects only one "contracting action," 48 C.F.R. § 1.403 (1995), whereas a class deviation affects "more than one contracting action," Id. § 1.404. Two of Tesoro's contracts were awarded pursuant to individual deviations and three were awarded pursuant to class deviations.

Tesoro and Hermes filed suit in the Court of Federal Claims alleging that DESC breached their fuel supply contracts by using unlawful EPA clauses that resulted in their receipt of under-payments for the fuel provided. The complaints in both suits included among their claims the charge that DESC's actions were per se illegal because the PMM-based EPA clause was inconsistent with the applicable section of the FAR, Id. § 16.203. Tesoro also alleged that the deviations obtained by DESC were procedurally deficient and therefore ineffective to permit the use of such clauses. The parties in both suits filed cross motions for summary judgment on the claim of per se illegality. In its motions, the government asserted that DESC's use of the EPA clause was legally authorized and raised the equitable defense of waiver.

In Tesoro, the court resolved all issues in favor of the plaintiff holding that DESC's initial use of its EPA clause was not authorized by the FAR; DESC's efforts to obtain individual and class deviations were legally deficient and waiver could not apply to Tesoro's claims as a matter of law. 58 Fed.Cl. at 69-75. In conjunction with its grant of partial summary judgment, the court certified three questions for interlocutory appeal:

(1) Did DESC establish the price of fuel in violation of law by employing economic price adjustment clauses indexed to PMM?

(2) Were DESC's individual or class deviations obtained in violation of law?

(3) Can DESC assert the defense of waiver to bar Tesoro from pursuing a remedy for DESC's illegal fuel prices?

Tesoro Hawaii Corp. v. United States, No. O2-704C (Fed.Cl. Oct. 30, 2003) (order certifying questions for interlocutory appeal).

In Hermes, the trial court also found that DESC's PMM-based EPA clause was not authorized by the FAR, Hermes Consol., Inc. v. United States, 58 Fed.Cl. 3, 9-12 (2003), but determined that Hermes had waived its right to recover by completing performance of the contracts with presumed knowledge of the illegality of their terms, 2003 U.S. Claims LEXIS 312, at *27-28. In conjunction with its grant of partial summary judgment, the trial court in Hermes certified two questions for resolution on interlocutory appeal: "(1) Was DESC's promulgation of the economic price adjustment clauses indexed to the PMM unauthorized?" and "(2) May defendant assert the defense of waiver to bar [Hermes] from pursuing a remedy for DESC's unauthorized fuel prices?" Hermes, 2003 U.S. Claims LEXIS 312, at *35. Because both sets of certified questions involve "controlling questions of law as to which there is substantial ground for difference of opinion and for which an immediate appeal may materially advance the ultimate termination of the litigation," this court granted Tesoro and Hermes (collectively "Appellants") permission to file their interlocutory appeal.¹ Tesoro Hawaii Corp. v. United States, 89 Fed.Appx. 732, 732 (Fed.Cir.2004) (citing 28 U.S.C. § 1292(d)). We have jurisdiction pursuant to 28 U.S.C. § 1292(c)(1).

II. DISCUSSION

This court reviews de novo the grant of a partial summary judgment by the Court of Federal Claims. Allegheny Teledyne v. United States, 316 F.3d 1366, 1373 (Fed.Cir.2003). Likewise, we review certified questions of law without deference to the decisions of the Court of Federal Claims. Vereda, Ltda. v. United States, 271 F.3d 1367, 1374 (Fed.Cir.2001).

A. Governing Regulations

Specific guidelines governing the use by federal agencies of fixed-price contracts with economic price adjustments appear in § 16.203 of the FAR. 48 C.F.R. § 16.203 (1994).² FAR § 16.203-1 describes such contracts as providing "for upward and downward revision of the stated contract price upon the occurrence of specified contingencies." 48 C.F.R. § 16.203-1 (1994). The regulation authorizes the use of three types of EPAs:

(a) Adjustments based on established prices. These price adjustments are based on increases or decreases from an agreed-upon level in published or otherwise established prices of specific items or the contract end items.

(b) Adjustments based on actual costs of labor or material. These price adjustments are based on increases or decreases in specified costs of labor or material that the contractor actually experiences during contract performance.

(c) Adjustments based on cost indexes of labor or material. These price adjustments are based on increases or decreases in labor or material cost standards or indexes that are specifically identified in the contract.

Id. The government asserts that the DESC's EPA clause is properly considered an adjustment based on established prices as contemplated by section (a) of...