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Lockheed Martin Corp. v. United States

United States Court of Appeals, District of Columbia Circuit

August 19, 2016

Lockheed Martin Corporation, Appellee
v.
United States of America, Appellant

          Argued November 2, 2015

         Appeal from the United States District Court for the District of Columbia (No. 1:08-cv-01160)

          J. David Gunter II, Attorney, U.S. Department of Justice, argued the cause for appellant. With him on the briefs were John C. Cruden, Assistant Attorney General, and John E. Sullivan and Justin D. Heminger, Attorneys.

          Dan Himmelfarb argued the cause for appellee. With him on the brief were Marcia G. Madsen and E. Brantley Webb. Raymond B. Ludwiszewski entered an appearance.

          Jessica Ring Amunson was on the brief for amici curiae National Defense Industrial Association and the Aerospace Industries Association of America, Inc. in support of appellee.

          Before: Garland, [*] Chief Judge, Pillard, Circuit Judge, and Edwards, Senior Circuit Judge.

          OPINION

          PILLARD, CIRCUIT JUDGE.

         The United States appeals its liability under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) for a portion of the cost of cleaning up hazardous substances at three California facilities owned by Lockheed Martin (Lockheed or the Company). The government's involvement at the facilities dates to the Cold War, when the Department of Defense contracted with Lockheed to build state-of-the-art, solid-propellant rockets. Lockheed's production of those rockets severely contaminated the sites, with the contamination migrating into groundwater miles away. The United States and Lockheed acknowledge their joint responsibility for the contamination. Neither party challenges the district court's percentage allocations of liability.

         The parties' disagreement stems from the fact that the government has been and remains Lockheed's principal source of business, and in that capacity has agreed to allow Lockheed to charge costs incurred in cleaning up the sites-including Lockheed's own CERCLA liability-to new federal contracts unrelated to these facilities and contracts. The government, in other words, acknowledges its own share of CERCLA liability and also that it agreed to reimburse Lockheed's share via overhead charges on unrelated contracts. The only question here is whether the government has a valid claim that the particular mechanism by which the United States will pay its share of the costs of environmental remediation under CERCLA interacts with the parties' agreed-upon contract-based reimbursement method in a way that impermissibly requires the government to make double payment. We conclude that, in the circumstances of this appeal, the government's claims fail.

         I.

         A. CERCLA's Cost-Recovery and Contribution Provisions

         Congress enacted CERCLA, 42 U.S.C. §§ 9601-75, in 1980 "in response to the serious environmental and health risks posed by industrial pollution." United States v. Bestfoods, 524 U.S. 51, 55 (1998) (citing Exxon Corp. v. Hunt, 475 U.S. 355, 358-59 (1986)). Congress thereby sought "to promote the timely cleanup of hazardous waste sites and to ensure that the costs of such cleanup efforts [a]re borne by those responsible for the contamination." Burlington N. & Santa Fe Ry. Co. v. United States, 556 U.S. 599, 602 (2009) (internal quotation marks and citation omitted). The statute imposes strict liability for environmental remediation, assigning responsibility for cleaning up even pollutants disposed of according to then-acceptable practices before they were known to be hazardous.

         CERCLA section 107 creates a cause of action through which entities that have incurred costs cleaning up contaminated sites may sue to recover cleanup costs from parties that may have played a role in causing the pollution, whom CERCLA refers to as potentially responsible parties (PRPs). See United States v. Atl. Research Corp., 551 U.S. 128, 135-36 (2007). PRPs may include, as relevant here, owners or operators of facilities contaminated by hazardous substances, such as Lockheed, and entities that arranged for disposal or treatment of such substances. See 42 U.S.C. § 9607(a)(2)-(3). In this case, Lockheed filed a section 107 claim against the United States, alleging that the government played a critical role in the activities leading to contamination of the three California sites and seeking reimbursement of a portion of the response costs Lockheed incurred at those sites.

         The United States responded to Lockheed's CERCLA claim with a counterclaim under CERCLA section 113(f), id. § 9613(f), asserting that Lockheed was the owner and operator of the sites and had transported and arranged for disposal of hazardous wastes there. Section 113(f) authorizes courts to "allocate response costs among liable parties using such equitable factors as the court determines are appropriate." 42 U.S.C. § 9613(f). Under section 113(f), a defendant seeking to avoid being assigned more than its fair share of liability in a section 107 action may "blunt any inequitable distribution of costs by filing a [section] 113(f) counterclaim" against the section 107 plaintiff. Atl. Research Corp., 551 U.S. at 140. "Resolution of a [section] 113(f) counterclaim would necessitate the equitable apportionment of costs among the liable parties, including the PRP that filed the § 107(a) action." Id. The United States counterclaimed that its liability under CERCLA should be reduced to reflect only its proportionate responsibility for the contamination.

         CERCLA also codifies in a number of provisions a general principle of avoiding double recovery of response costs. See, e.g., 42 U.S.C. § 9607(f)(1) (prohibiting "double recovery under this chapter for natural resource damages"); id. § 9612(f) (prohibiting double recovery out of CERCLA's Superfund for any response costs); id. § 9613(f)(2) (reducing PRP liability for CERCLA response costs by dollar amount of settlements paid on the same matter to the state or federal government). The government here invokes CERCLA's principal double-recovery bar, which appears in section 114. Section 114(a) defines CERCLA's relationship to other law, including non-preemption of state tort or environmental law beyond the liability CERCLA imposes, and coordination with other federal laws. Section 114(b), in turn, states that "[a]ny person who receives compensation for removal costs or damages or claims pursuant to any other Federal or State law shall be precluded from receiving compensation for the same removal costs or damages or claims as provided in this chapter." Id. § 9614(b). In its answer to Lockheed's section 107 complaint, the United States invoked section 114(b), contending that Lockheed's suit unlawfully sought recovery for the same removal costs the United States had already paid as overhead on contracts with Lockheed for other goods and services.

         B. Federal and Defense Agency Procurement Regulations

         The second principal authority the government invokes is federal procurement law. The Federal Acquisition Regulations (FAR), 48 C.F.R. §§ 1.000-53.303, together with agency-specific acquisition regulations, see, e.g., id. §§ 201.1-253.3 (Defense FAR Supplement), govern federal government contracts for goods and services, see id. § 1.101. The FAR authorize two types of government contracts: fixed-price and cost-reimbursement. See id. § 16.101(b). For fixed-price contracts, the parties set a price based on an estimate of the total allowable costs and profits, id. § 16.202-1, with sharply circumscribed opportunities thereafter to adjust those estimates (and hence the contract price), see, e.g., id. § 15.407-1(b). Cost-reimbursement contracts, by contrast, set a ceiling on the government's price, and authorize payment up to that ceiling based on allowable costs the contractor incurs in performing the contract, plus profit at an agreed-upon rate. See id. § 16.301-1. Allowable costs under either type of contract include "direct costs, " e.g., material and labor, as well as "indirect costs" that comprise the company's overhead not directly related to a specific contract. Id. § 31.201-1; see also id. §§ 31.202-.203. The FAR provide that the government may only reimburse a contractor for indirect costs that are: "allowable, " id. § 31.201-2(a), i.e., "reasonable, " or of a kind that would be "incurred by a prudent person in the conduct of competitive business, " id. § 31.201-3(a); "allocable, " i.e., "necessary to the overall operation of the business, although a direct relationship to any particular cost objective cannot be shown, " id. § 31.201-4(c); and not otherwise specifically disallowed, id. § 31.201-6. If the contractor's cost of performance is cheaper than anticipated, the overall contract price drops only if it is a cost-reimbursement contract; if the contract is fixed-price, the contractor retains the excess.

         The Defense Contract Audit Agency (DCAA) "was established to provide necessary audit services to government officers in contract administration." Cuneo v. Schlesinger, 484 F.2d 1086, 1088 (D.C. Cir. 1973). The DCAA in its internal Manual provides specific guidance on application of the FAR's legal limitations to environmental costs from defense contracts. See Defense Contract Audit Agency Manual (Dec. 12, 2012) (DCAA Manual). The DCAA Manual states that, if a contractor that complied with applicable law and exercised due care to avoid contamination nonetheless experiences contamination not caused by its own wrongdoing, its environmental cleanup costs may be treated as "normal business expenses." DCAA Manual § 7-2120.3, J.A. 493; see id. §§ 7-2120.1, 7-2120.5, 7-2120.13, J.A. 493-94, 497. The DCAA Manual also limits that principle: For purposes of the government's payment through defense procurement contracts, "the allowable environmental cost should only include the contractor's share of the clean-up cost based on the actual percentage of the contamination attributable to the contractor." Id. § 7-2120.9(a), J.A. 496. A contractor thus cannot pass through to the government in its defense contracts any cleanup costs not attributable to the contractor under CERCLA.

         Government contracting law also prohibits double charging. Where a contractor receives from another source any portion of a cost that it has already charged to the government as an indirect cost, the FAR require that the payment received for those same costs "shall be credited to the Government either as a cost reduction or by cash refund." 48 C.F.R. § 31.201-5; see also id. § 52.216-7(h)(2). In other words, if the government has paid a contractor a dollar in indirect costs for a specific overhead cost, the contractor must credit back to the government any portion of a dollar it otherwise receives (from another responsible party or an insurer, for example) to cover that same cost.

         C. Factual Background

         In the 1980s and 1990s, Lockheed and state and local agencies discovered hazardous substances at and emanating from three Lockheed facilities in Redlands and Beaumont, California-the Redlands facility, the Potrero Canyon facility, and the LaBorde Canyon facility (the sites or the facilities)- with the bulk of contamination located at the Redlands facility. See Lockheed Martin Corp. v. United States (Lockheed II), 35 F.Supp.3d 92, 105-09 (D.D.C. 2014). Lockheed's corporate predecessor, Lockheed Propulsion Company, had manufactured solid-propellant rockets pursuant to government contracts at those facilities between 1954 and 1975 using myriad hazardous substances, including the organic solvents trichloroethylene and 1, 1, 1-trichloroethane, polychlorinated biphenyls (PCBs), and ammonium perchlorate. Id. at 99-109. To dispose of those substances, Lockheed Propulsion Company had, among other things, pumped waste into shallow, concrete-lined "evaporation pits" resulting in evaporation-pit sludge and other propellant wastes, burned such wastes in unlined earthen "burn pits, " and simply poured onto the ground toxic substances and wastewater contaminated from rinsing those substances from equipment. Id. at 104-05. Those operations allowed hazardous substances to seep into the ground and infiltrate nearby groundwater. Id. at 105-06. For example, trichloroethylene, a probable carcinogen, and perchlorate, a constituent of ammonium perchlorate known to decrease thyroid hormone production, migrated approximately four miles from the facilities to form the "Redlands ...


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