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Shell Oil Co. v. United States

United States Court of Appeals, Federal Circuit

July 18, 2018

SHELL OIL COMPANY, ATLANTIC RICHFIELD COMPANY, TEXACO, INC., UNION OIL COMPANY OF CALIFORNIA, Plaintiffs-Appellees
v.
UNITED STATES, Defendant-Appellant

          Appeal from the United States Court of Federal Claims in Nos. 1:06-cv-00141-SGB, 1:06-cv-01411-SGB, Senior Judge Susan G. Braden.

          Michael W. Kirk, Cooper & Kirk, PLLC, Washington, DC, argued for plaintiffs-appellees. Also represented by Jose Joel Alicea, Vincent J. Colatriano, William C. Marra.

          Franklin E. White, Jr, Commercial Litigation Branch, Civil Division, United States Department of Justice, Washington, DC, argued for defendant-appellant. Also represented by Chad A. Readler, Robert E. Kirschman, Jr., Stephen Carl Tosini.

          Christopher Marraro, Baker & Hostetler LLP, Washington, DC, for amicus curiae American Fuel & Petrochemical Manufacturers. Also represented by Richard Bryan Raile.

          Daniel Max Steinway, Baker Botts, LLP, Washington, DC, for amicus curiae Exxon Mobile Corporation. Also represented by Michael Patrick McGovern.

          Before Prost, Chief Judge, Wallach and Chen, Circuit Judges.

          Wallach, Circuit Judge.

         This case returns to us for a third time. Following two remands on liability determinations, see Shell Oil Co. v. United States (Shell II), 751 F.3d 1282, 1285-90 (Fed. Cir. 2014); Shell Oil Co. v. United States (Shell I), 672 F.3d 1283, 1285 (Fed. Cir. 2012), the U.S. Court of Federal Claims issued two orders, which are the subject of the present appeal. In its 2015 Order, the Court of Federal Claims (1) granted appellees Shell Oil Company, Atlantic Richfield Company, Texaco, Inc., and Union Oil Company of California's (collectively, "the Oil Companies") motion for partial summary judgment to prevent discovery into any insurance coverage settlements and policies, and (2) denied appellant the United States' ("Government") motion for leave to amend its answer to assert counterclaims in fraud. See Shell Oil Co. v. United States (Shell III), 123 Fed.Cl. 707, 714-15, 727 (2015). In its 2017 Order, the Court of Federal Claims awarded damages in the amount of $99, 509, 847.32 to the Oil Companies for breach of certain contracts entered into during World War II to produce 100-octane aviation gasoline ("avgas") (the "Avgas Contracts") for the war effort. See Shell Oil Co. v. United States (Shell IV), 130 Fed.Cl. 8, 11-13 (2017).

         The Government appeals. We have jurisdiction pursuant to 28 U.S.C. § 1295(a)(3) (2012). We affirm.

         Background

         I. The Avgas Contracts[1]

         In 1942 and 1943, the Government contracted with the Oil Companies to purchase avgas, "the most critically needed refinery product during World War II." Shell II, 751 F.3d at 1285 (internal quotation marks omitted).[2]Under the Avgas Contracts, the Government would purchase large quantities of avgas, and would "enable[] the Oil Companies to build the new refining facilities needed to produce the high levels of avgas vital to the war effort." Id.; see, e.g., J.A. 1467-90 (April 10, 1942 contract), 1560-88 (May 1, 1943 contract). The Avgas Contracts permitted a profit margin for the Oil Companies of "between 6% and 7%." Shell II, 751 F.3d at 1287. "Given the low profit margin," the Avgas Contracts "contained various concessions to the Oil Companies." Id.; see id. (describing contract clauses wherein the "agreed-upon base price of avgas was subject to adjustment depending on the Oil Companies' costs" and contracts were signed for "three-year[s]" to "provid[e] some measure of certainty that the newly-constructed avgas production facilities would pay off over time"). Under the Avgas Contracts, "avgas production increased over twelve-fold" from 1941 to 1945, and "was crucial to Allied success in the war." Id. (footnote omitted).

         II. The Oil Companies' Production of Avgas and Disposal of Associated Waste Products

         The manufacture of avgas from crude oil uses a 98% purity sulfuric acid to serve as a catalyst in a process known as alkylation. Id. at 1288. The alkylation process dilutes the sulfuric acid such that it turns it into a waste product called "spent alkylation acid." Id. Spent alkylation acid may be used to (1) catalyze the alkylation process again following purification; (2) produce non-avgas petroleum by-products; or (3) be disposed of as waste. Id.

         If spent alkylation acid is used to produce other non-avgas petroleum by-products, it becomes a secondary waste product with a lesser percentage of acid content called "acid sludge." Id. Acid sludge can be (1) used to manufacture fertilizer; (2) burned; or (3) disposed. See Shell IV, 130 Fed.Cl. at 22 (stating "both of the parties' petroleum engineering experts essentially agreed on how crude oil was processed").

         The Avgas Contracts placed no restrictions on how the Oil Companies could use the spent alkylation acid that resulted from catalyzing crude oil to produce avgas. See, e.g., J.A. 1467-90, 1560-88. The Oil Companies used some of the spent alkylation acid to acid treat other products and produce non-avgas petroleum by-products. Shell IV, 130 Fed.Cl. at 23, 29. Unable to reprocess the increased amount of spent alkylation acid given the Government's prioritization of production over reprocessing, [3] the Oil Companies dumped additional spent alkylation acid, along with acid sludge, on property in California owned by Eli McColl ("the McColl site"). Shell II, 751 F.3d at 1285, 1288; see Shell IV, 130 Fed.Cl. at 29.[4] Twelve percent of the waste dumped at the McColl site was spent alkylation acid, and 82.5% was acid sludge resulting from the treatment of non-benzol products. Shell II, 751 F.3d at 1288.[5] The McColl site closed on September 6, 1946. Shell IV, 130 Fed.Cl. at 14.

         III. The Relevant Procedural History

         In 1991, the Government and California sued the Oil Companies under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), 42 U.S.C. §§ 9601 et seq., for costs of cleaning up the McColl site. Shell II, 751 F.3d at 1285. The Oil Companies countersued, alleging the Government was jointly and severally liable for clean-up costs under CERCLA. Id. at 1289; see 42 U.S.C. § 9607(a)(3) (extending CERCLA liability to "any person who by contract, agreement, or otherwise arranged for disposal or treatment, or arranged with a transporter for transport for disposal or treatment, of hazardous substances"). After twelve years of litigation, the Ninth Circuit held that the Oil Companies were liable for all clean-up costs (including cleanup of benzol and non-benzol acid waste) at the McColl site and the Government was liable under CERCLA only for cleanup costs with respect to the disposal of benzol acid waste, United States v. Shell Oil Co., 294 F.3d 1045, 1056, 1060-62 (9th Cir. 2002), which comprised 5.5% of the waste remediated at the McColl site, see Shell II, 751 F.3d at 1288.

         The Oil Companies filed a new complaint in the Court of Federal Claims, seeking reimbursement for CERCLA costs of the non-benzol acid waste clean-up under a breach of contract theory. Id. at 1289. They argued that a clause in the Avgas Contracts in which the Government agreed to reimburse the Oil Companies for "any new or additional . . . charges . . . which [the Oil Companies] may be required . . . to collect or pay by reason of the production, manufacture, sale[, ] or delivery of [avgas]," J.A. 1482 (emphasis added), entitled them to remediation costs at the McColl site, see Shell II, 751 F.3d at 1290-91. "Because there was extensive discovery and the parties entered into comprehensive stipulations of fact in the underlying CERCLA action [in the Ninth Circuit], the parties agreed that no further factual development was necessary . . . ." Shell I, 672 F.3d at 1285. Therefore, "the case was litigated on successive summary judgment motions―one as to liability and the other relating to damages." Id. However, following our initial remand and vacatur of the Court of Federal Claims' liability and damages determinations in Shell I, see id. at 1294, the Court of Federal Claims stated that, with respect to damages, "the issue of what portion of the non-benzol waste was created 'by reason of' the avgas program raise[d] factual questions that [were] simply not adequately answered by the evidence or stipulations currently before the [c]ourt," Shell Oil Co. v. United States, 108 Fed.Cl. 422, 446, 448 (2013). The Court of Federal Claims made these statements "[n]otwithstanding [its] holding that the Oil Companies' indemnification claims fail as a matter of law," id. at 445; in other words, it did not decide the issue of damages on remand because it found the Government did not breach the Avgas Contracts, see Shell II, 751 F.3d at 1289.

         In Shell II, we reversed, holding that "[t]he Avgas Contracts require reimbursement of the Oil Companies' CERCLA costs [for clean-up of non-benzol-related waste]," id. at 1290 (capitalization modified), and remanded because the parties did "not contest the trial court's finding of a genuine dispute regarding how much of the acid waste at the McColl site resulted from the [A]vgas [C]ontracts," id. at 1303.[6] The Court of Federal Claims then reopened the record for further discovery on damages. See Shell III, 123 Fed.Cl. at 714.

         During discovery, the Government requested, for the first time in the litigation before the Court of Federal Claims, information related to the Oil Companies' insurance policies and any insurance coverage settlements that included clean-up costs at the McColl site. Id.; see J.A. 142-45 (stating, in a press release, that Shell Oil Company received insurance settlements for its environmental coverage claims based on filings against insurers in the early 1990s). The Government also filed a Motion for Leave to Amend, seeking to amend its answer to assert counterclaims related to the insurance settlements based on various theories of fraud. See Shell III, 123 Fed.Cl. at 715. The Oil Companies opposed the Motion to Amend, and both parties filed motions for partial summary judgment on the issue. Id. at 714-15.

         The Court of Federal Claims held the following in Shell III: (1) the Government could not engage in discovery related to the Oil Companies' insurance policies or settlements because it waived any arguments related to an insurance offset by not raising them in its Answer in 2008 to the Oil Companies' initial breach of contract claim before the Court of Federal Claims, id. at 719; (2) alternatively, it would exceed the scope of our mandate in Shell II to allow the Government to raise arguments based on any insurance offset, id. at 721; and (3) the Government could not amend its pleadings at such a late stage in the litigation, id. at 727.

         Following the close of discovery and oral arguments, the Court of Federal Claims issued its order on damages in Shell IV. It considered "new evidence not previously considered by the . . . Federal Circuit," 130 Fed.Cl. at 36 (emphasis omitted), and held that the Government was liable for all of the Oil Companies' clean-up costs for non-benzol waste at the McColl site, id. at 38. The Court of Federal Claims allocated a total award of $99, 509, 847.32, including accrued interest, accordingly: $58, 292, 868.56 to Shell Oil Company, $18, 847, 165.08 each to Union Oil Company of California and Atlantic Richfield Company, and $3, 522, 648.60 to Texaco, Inc. Id. at 42.

         Discussion

         The Government makes three primary arguments challenging the Court of Federal Claims' Orders. The Government argues the Court of Federal Claims (1) "failed to allocate between recoverable and non-recoverable costs," Appellant's Br. 23 (capitalization omitted); see id. at 23-33; (2) "wrongfully admitted stipulations" into evidence to calculate damages, id. at 41 (capitalization omitted); see id. at 41-51; and (3) "wrongly refused to allow the Government to prove double recovery," by showing payment of the same ...


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