[00:00:01] Speaker 00: Case number 14-5302, Lockheed Martin Corporation versus United States of America Appellate. [00:00:08] Speaker 00: Mr. Gunter for the Appellate, Mr. Himaffar for the Appellate. [00:00:21] Speaker 02: Mr. Gunter. [00:00:22] Speaker 05: Good morning. [00:00:23] Speaker 05: I'm David Gunter from the Department of Justice here on behalf of the United States. [00:00:26] Speaker 05: I'll argue for about 13 minutes and with the first permission, save two for rebuttal. [00:00:31] Speaker 05: During the two-week trial of this case, the District Court found that the United States is equitably responsible for no more than 30 percent of Lockheed's cleanup costs at the sites at issue. [00:00:41] Speaker 05: It also found that the United States has already paid 72 percent of those costs, with more to come. [00:00:47] Speaker 05: As a matter of law, these two findings mean that the United States can't be required under CERCLA to continue to pay Lockheed for its cleanup costs. [00:00:55] Speaker 05: And that's the case for two reasons. [00:00:58] Speaker 05: First, the United States compensated Lockheed for its cleanup costs under the federal acquisition regulation. [00:01:03] Speaker 05: The contracts between the United States and Lockheed don't say anything about environmental costs at discontinued sites. [00:01:09] Speaker 05: Lockheed's theory is that it's the federal acquisition regulations that give it the right to charge those costs to its United States agency customers through contract. [00:01:18] Speaker 05: As a result, CERCLA section 114 bars Lockheed from continuing to seek those costs again in a CERCLA action. [00:01:25] Speaker 05: Second, equitable recovery under CERCLA is only available for a party that has paid more than its fair share of a common cost. [00:01:33] Speaker 05: And at these sites, Lockheed hasn't paid more than its fair share. [00:01:36] Speaker 05: The United States has paid the majority of the costs and more than its own equitable share. [00:01:41] Speaker 05: Despite this, the district court ordered the United States to pay tens of millions of dollars more in future costs, which will increase the government's equitable share of those costs, I'm sorry, effective share of those costs, and decrease Lockheed's effective share even further. [00:01:55] Speaker 05: This is the result of two critical errors by the district court, which I'll address this morning, both of which require reversal. [00:02:03] Speaker 05: The district court's first error was in its application of section 114B of CERCLA, which provides that a party that has been compensated for its response costs pursuant to state or federal law can't recover those response costs again in a cost recovery action under CERCLA. [00:02:17] Speaker 05: What this does is it puts the party seeking its costs in the driver's seat. [00:02:21] Speaker 05: It can seek to recover first under CERCLA, first under state law, under federal regulations, but what it can't do is seek to recover the same cost twice by two different means, especially from the same party. [00:02:32] Speaker 05: Once the party that has incurred costs makes that choice, Section 114B protects other parties from having to pay twice. [00:02:39] Speaker 05: This is evident and the government's argument begins with the text of section 114B, which imposes two conditions for the bar on further circular recovery to apply. [00:02:49] Speaker 05: First, the party seeking costs has to have been previously compensated for those costs. [00:02:55] Speaker 05: Circle uses broad language here, removal costs or damages or claims, and the district court made specific findings that that condition is met here, that Lockheed has been compensated for more than 70% of its cost of response at these sites. [00:03:09] Speaker 03: The other condition that section. [00:03:14] Speaker 05: Our position is that that compensation has taken place pursuant to law. [00:03:18] Speaker 05: It's true that there are contracts in place here and without those contracts there would be no payment obligation. [00:03:23] Speaker 05: But it's also true that without the federal acquisition regulation and its provision for the payment of indirect costs, there would be no payment regulation, payment obligation. [00:03:33] Speaker 02: Nothing. [00:03:33] Speaker 02: Is the government required to pay the indirect costs if Lockheed puts them in? [00:03:40] Speaker 05: Under the settlement agreement at issue P. No, under FAR. [00:03:44] Speaker 05: That was a disputed issue. [00:03:45] Speaker 02: So the government doesn't necessarily agree that indirect costs [00:03:50] Speaker 02: The FAR requires them to pay indirect costs. [00:03:53] Speaker 05: Let me try and be precise. [00:03:55] Speaker 05: We do have to pay indirect costs. [00:03:57] Speaker 05: The question is whether environmental response costs at discontinued sites [00:04:02] Speaker 05: qualify for the definition of indirect costs. [00:04:04] Speaker 00: And I thought the DOSA settled that, the discontinued operation settlement agreement, that they do qualify, and you agree to that, and that's not an issue here. [00:04:11] Speaker 05: That's right, and that's Lockheed's own theory. [00:04:14] Speaker 05: Lockheed came to the government and wanted to charge its agency customers more so that it could obtain payment for those costs. [00:04:20] Speaker 02: On non-discontinued sites, are all circular sites going to be discontinued? [00:04:25] Speaker 05: No, for instance, if there's a circle site where Lockheed is still doing work to fulfill government contracts. [00:04:33] Speaker 02: Is the government required to pay their cleanup costs? [00:04:35] Speaker 05: Yes, at sites like that, because those sites are allocable to the contracts that are being performed at those sites. [00:04:42] Speaker 02: And the question with respect to discontinued was disputed. [00:04:45] Speaker 05: That's right. [00:04:46] Speaker 05: The question is, is there any existing current contract to which you can allocate costs that are incurred at discontinuities? [00:04:51] Speaker 02: So if it was disputed, how does it... I get the argument about if FAR requires you to pay it, but if it's only the settlement that requires you to pay it, how is it pursuant to law? [00:05:02] Speaker 05: Well, I think the court should view that as any other settlement agreement. [00:05:05] Speaker 05: If we had simply entered into a settlement agreement, if Lockheed had threatened to sue over a circular cost recovery, and we entered into a settlement agreement to settle that claim and pay pursuant to that, then we wouldn't normally describe the United States payment obligation as pursuant to the settlement agreement only. [00:05:22] Speaker 05: It's also pursuant to CERCLA. [00:05:24] Speaker 02: And in fact, Lockheed- Why is it pursuant to CERCLA? [00:05:26] Speaker 05: Because it's in settlement of a legal claim that arises under CERCLA. [00:05:29] Speaker 05: So we're trying to avoid [00:05:31] Speaker 05: the litigation risk. [00:05:32] Speaker 02: What if it was just a contract agreement? [00:05:34] Speaker 02: There was no FAR here at all and the government just said, you know, we agree as a matter of contract to pay your cleanup costs. [00:05:42] Speaker 02: Would that be pursuant to law? [00:05:45] Speaker 05: No, I would not say that that's pursuant to law. [00:05:47] Speaker 02: So why isn't a settlement where both sides dispute whether it's covered or not and they've just [00:05:54] Speaker 02: reached a settlement agreement, how does the settlement agreement become law? [00:05:58] Speaker 05: Because the alternative to reaching that agreement would have been to go to court under the contract disputes act. [00:06:01] Speaker 02: You could have done that. [00:06:02] Speaker 02: You could have done that. [00:06:03] Speaker 02: You didn't. [00:06:03] Speaker 02: Instead, we have a settlement. [00:06:04] Speaker 02: So maybe we have a very narrow case here that won't govern too many more cases, and the government will know that the settlement agreement itself isn't law. [00:06:13] Speaker 02: So I'm not saying that's all come up, but I'm just wondering why, just because you could have done something else and you didn't, why that makes it law. [00:06:21] Speaker 05: Well, it makes it law because of how pervasive the federal acquisition regulation is in the interpretation of government contracts. [00:06:29] Speaker 05: And so as a result of that, even Lockheed says that it is recovering its costs from the government, not pursuant to the settlement agreement that's at issue here, but pursuant to US government regulation. [00:06:38] Speaker 05: Because in their view, it's the US government regulation that allows them to charge these costs. [00:06:42] Speaker 02: What if it was, what about non, these are costs, you're talking about a cost plus contract, right? [00:06:48] Speaker 05: Some of them are cost plus and some of them are fixed costs. [00:06:50] Speaker 02: Well, the only ones in which you're required to pay indirect costs are cost plus contracts, right? [00:06:57] Speaker 05: Those are the only ones in which the FAR says anything at all, right? [00:07:01] Speaker 05: No, I think that even with respect to fixed price contracts, the FAR allows Lockheed to incorporate the price of its cleanup, the anticipated price of its cleanup, as overhead into the costs that will be charged in a fixed price contract. [00:07:13] Speaker 02: But if it's a fixed price, you just agree on a particular amount. [00:07:17] Speaker 02: If somebody else comes in a lower amount and therefore a lower profit, you take that. [00:07:21] Speaker 02: Is that right? [00:07:22] Speaker 05: Yes, but I think that in justifying its bid, Lockheed would have to say that there are environmental costs that we're going to charge here. [00:07:29] Speaker 05: And in fact, the experts that the district credited at trial looked at fixed-price contracts and identified a percentage of costs that are attributable to those fixed-price contracts. [00:07:39] Speaker 05: So in the normal case, it might be hard to sort all that out. [00:07:42] Speaker 05: But here we actually have fact findings by the District Court and expert testimony to try and identify what increment of those fixed price contract prices are attributable to the response cost. [00:07:53] Speaker 00: So I have a little bit of a difficulty with your 114B argument, maybe you can help me out. [00:07:58] Speaker 00: If we were to agree with your reading, [00:08:03] Speaker 00: Wouldn't it be the case that in a situation in which all of the potentially responsible parties are not the United States government, Lockheed and other parties, but the current and since the cleanup started only contracting party with Lockheed, [00:08:22] Speaker 00: is the government that you could have a situation in which costs, the clinical costs were passed through as overhead to the government under the fall and therefore paid pursuant to federal law under your theory and then when Lockheed turns around in the circular suit and tries to recover from the potentially responsible parties, that would be barred by your reading of 114b, isn't that correct? [00:08:48] Speaker 05: That is possible, but let me explain why I think that's an unlikely situation, especially if this court clarifies the scope of Section 114b. [00:08:55] Speaker 05: Lockheed's own argument is that it hurts its competitive position to charge those costs to its agency clients. [00:09:01] Speaker 05: We're not trying to stop Lockheed from recovering under Section 107. [00:09:05] Speaker 05: We simply say it can't recover under Section 107 after having already recovered under its contracts. [00:09:10] Speaker 05: So in the situation that you described, Lockheed could certainly go after money from other PRPs first under Circle Section 107 and see what it could get, and then charge whatever it can't get its own share to its government contracts. [00:09:22] Speaker 05: In fact, it could get that money from the judge. [00:09:24] Speaker 00: In fact, it would have to do that if it wanted to ever recover from the potentially responsible parties. [00:09:28] Speaker 00: It could do that. [00:09:30] Speaker 00: I mean, notwithstanding the amicus brief, which talks about how competitive government contracting is, we all know that there are contracts. [00:09:37] Speaker 00: In fact, the rocket contracts here are probably not at all competitive. [00:09:41] Speaker 00: And so you've got a situation in which Lockheed is saying, well, I can just pass it through to the taxpayers and not be bothered with recovering from the PRPs through circle litigation. [00:09:52] Speaker 00: Or I can wait, go into circle litigation with all the problems of proof that that involves, [00:09:59] Speaker 00: What are they going to do? [00:10:00] Speaker 00: They're going to pass it through to the taxpayers. [00:10:01] Speaker 00: So it seems to me for the United States government to be taking this position is a little bit perverse given the purpose of CERCLA and given this kind of risk. [00:10:13] Speaker 05: In a situation where a government contractor can only recover from other private PRPs, [00:10:18] Speaker 05: You might be right, but certainly there are many situations in which the government is a PRP at a site that involves a government contractor. [00:10:26] Speaker 05: And the interpretation of Section 114B that we're advancing would protect the government in that situation. [00:10:32] Speaker 05: And I think, in fact, is more consistent with the purpose of Section 114B, which is to say that once you have recovered, you can't recover again. [00:10:39] Speaker 00: And can you spell out a little bit [00:10:43] Speaker 00: the treatment of future costs, assuming Lockheed prevails versus assuming you prevail. [00:10:50] Speaker 00: It's a little challenging to keep hold of why you all are in court, since everyone seems to agree that if the government pays the CERCLA recovery, that that'll be credited into the Disc Ops pool or credited against environmental liabilities. [00:11:12] Speaker 00: And so they want the money to come in just so they can send it out again. [00:11:16] Speaker 00: And you don't want to pay the money just so you can receive the benefit of it again. [00:11:20] Speaker 00: Could you spell out for us a little bit why this matters so much, and particularly with respect to post-judgment costs? [00:11:28] Speaker 05: Sure. [00:11:29] Speaker 05: The principal problem is that the crediting mechanism is incomplete. [00:11:33] Speaker 05: So the United States will pay 100% of a circle of judgment. [00:11:36] Speaker 05: But when that circle of judgment goes into the pool as a credit, the United States will only benefit from it in the same proportion as it has business with Lockheed. [00:11:45] Speaker 00: Which is like 87%. [00:11:46] Speaker 00: It's higher than it was on the back end. [00:11:48] Speaker 05: Right. [00:11:48] Speaker 05: So this actually leads into the point about actual allocation. [00:11:53] Speaker 05: Despite that crediting mechanism, if the United States pays a circular judgment here, its effective share of the cost is going to go up, because it will pay 100% of a judgment. [00:12:01] Speaker 05: And Lockheed will only credit us back some of that. [00:12:04] Speaker 00: But that's not taking account of the fact that somehow the non-US government contractors with Lockheed have, even though they're [00:12:13] Speaker 00: they're not responsible at all for the environmental harm. [00:12:16] Speaker 00: They've also been paying a share. [00:12:18] Speaker 00: And in fact, a bigger share than the part that you anticipate will be deprived. [00:12:27] Speaker 00: The United States government will be deprived on the front end. [00:12:29] Speaker 05: That's right, but that's why it's important that this particular argument arises in the context of the equitable allocation, where the question is not the overall number of dollars we've paid or whether we would be credited back the same amount as we were charged in contracts, but the question is, would our effective share increase and has the share that we have already paid exceeded our share of the responsibility of the site? [00:12:48] Speaker 05: So even with the incomplete payment scheme that you're describing, [00:12:52] Speaker 05: We have still paid more than double our share. [00:12:55] Speaker 00: Well, wait a minute. [00:12:57] Speaker 00: I assume you don't take issue with the fact that the government has chosen to contract with Lockheed and is paying for Lockheed's own share of the environmental response in the form of environmental recovery costs being passed through in contracts. [00:13:13] Speaker 00: That's something. [00:13:14] Speaker 00: That's the dosa. [00:13:14] Speaker 00: And so when you say you're paying more than your share, aren't you [00:13:19] Speaker 00: acting as if part of what you paid is not, in fact, that authorized payment for Lockheed's share? [00:13:25] Speaker 05: No, the entire payment that we've made so far is authorized. [00:13:29] Speaker 05: And we don't dispute that. [00:13:30] Speaker 05: In fact, we have a Section 113 contribution claim against Lockheed. [00:13:34] Speaker 05: We're not trying to recover the amount that we've paid to them in excess of our equitable share. [00:13:38] Speaker 05: But those obligations arise under contract. [00:13:41] Speaker 05: And the question that the district court was considering here is whether there's any additional obligation that CERCLA imposes. [00:13:48] Speaker 05: CERCLA imposes an additional obligation if a party has not yet paid its fair share. [00:13:52] Speaker 05: And it allows a party to recover if a party has paid more than its fair share. [00:13:57] Speaker 05: And the problem here is that Lockheed has not paid more than its fair share. [00:14:01] Speaker 00: Well, and you haven't paid all of your fair share at ongoing costs, right? [00:14:06] Speaker 00: Isn't the remediation still happening? [00:14:10] Speaker 00: The remediation is still happening. [00:14:11] Speaker 00: But even if you look at... How could you then have paid more than your share? [00:14:16] Speaker 00: There has to be some [00:14:18] Speaker 00: post-judgment and post-now cost. [00:14:22] Speaker 00: And so you haven't paid it all, unless you're counting part of what you paid toward Lockheed's share, as if that were going toward the government's share. [00:14:30] Speaker 05: You're right that I am basing that argument in part on what the shares are estimated to be in the future. [00:14:35] Speaker 05: And it's possible that if we stop paying Lockheed under contracts, despite the existence of the DOSA, [00:14:40] Speaker 05: And if costs at the site balloon out of control beyond any estimate that the parties are currently making, then it's possible that the United States' payments so far will eventually not meet our equitable share of at most 30%. [00:14:54] Speaker 05: But under the costs as they're estimated to occur in the future, we've paid more than 50% of all past and future estimated costs. [00:15:03] Speaker 00: but not more than 70%. [00:15:06] Speaker 00: And if you're accepting that you're gonna ultimately, let's just say, let's put the other contracting parties out of the picture and just imagine that you're, just you and Lockheed, right, 70%, 30%. [00:15:20] Speaker 00: Ultimately, you're gonna pay 100%, presumably. [00:15:23] Speaker 00: You're gonna pay the 70% amortized through contract recoveries. [00:15:29] Speaker 00: And you're going to pay the 30%, whether through the contracts or through CERCLA or through both, you know, contract and then CERCLA. [00:15:39] Speaker 05: If you leave the other parties out of it entirely? [00:15:41] Speaker 05: Yeah. [00:15:41] Speaker 05: That's accurate. [00:15:42] Speaker 00: Yeah. [00:15:43] Speaker 05: The problem is you can't leave the other parties out of it entirely because they will receive some of the CERCLA judgment that the United States pays. [00:15:49] Speaker 00: They're ending up on the short end of the stick, though, not the other way around, given the way I understand the numbers are going. [00:15:54] Speaker 05: Well, that's true. [00:15:56] Speaker 05: If they have made the same deal with Lockheed to pay indirect costs as the United States has, it may be, however, that Lockheed is allocating some indirect costs, the 13 percent slice, to those customers who have not agreed to pay indirect costs, and Lockheed is simply eating those costs. [00:16:12] Speaker 05: We don't know what's going on with those third parties. [00:16:14] Speaker 05: All we know is what's going on with the United States, and that will be an incomplete crediting. [00:16:21] Speaker 00: I thought they said in the record that they were paying, we can hear from them, but that they were paying, that they were charging everyone across the board in overhead costs. [00:16:32] Speaker 00: We'll ask them. [00:16:33] Speaker 00: Do we need to decide both issues? [00:16:35] Speaker 00: You suggest somewhere that we do, and I'm not sure that I follow that. [00:16:41] Speaker 05: In my view, you do need to decide both issues, because there are factual scenarios that could occur in the future that will require the United States to pay future response costs that would be resolved by a decision on Section 114B. [00:16:53] Speaker 02: You mean in other cases or in this case? [00:16:55] Speaker 05: Both in this case, theoretically, although not likely, because of the estimates of costs that we currently have. [00:17:03] Speaker 02: On the 114B issue, your brief is a little [00:17:09] Speaker 02: ambiguous, because it says that under 114B, you can recover for those that have already been compensated. [00:17:18] Speaker 02: So those would be past costs. [00:17:20] Speaker 02: And although the judge didn't give it to you on the meaning of 114B, the judge gave it to you on the equitable tolling. [00:17:28] Speaker 02: So in a way, it's kind of moot with respect to past costs. [00:17:33] Speaker 02: Is that right or wrong? [00:17:34] Speaker 05: I think it's wrong, Judge Garland, because we will... I don't mean moot in the legal sense. [00:17:38] Speaker 02: I mean moot in the sense that you're getting everything that you wanted with respect to pass costs. [00:17:44] Speaker 05: Right. [00:17:47] Speaker 05: The district court's judgment on future costs will require us to pay future response costs, even if those costs have already been credited, have already been passed on to U.S. [00:17:57] Speaker 05: government agencies. [00:17:58] Speaker 05: through the pool. [00:17:59] Speaker 05: So let's say in 2017 Lockheed incurs response costs, charges them to the pool, and then seeks circular recovery from us. [00:18:07] Speaker 05: We would consider that to be a situation in which Section 114B bars Lockheed's circular claim, even though it's with respect to future costs at least from the cost of today, from the date of today's argument. [00:18:18] Speaker 05: I think it's more true that if the court agrees with us entirely on the Section 113 equitable issue and says that we don't have to pay any future costs because those costs have already been paid as a matter of equity, then it's less necessary for the court to decide the Section 114B issue. [00:18:37] Speaker 02: What if we decided the 114B issue in your favor? [00:18:41] Speaker 02: Would there be any equitable allocation after that? [00:18:44] Speaker 05: Yes, because Lockheed could seek only its costs that have been previously compensated pursuant to the federal acquisition regulation, and there's a slice of cost that will not be compensated pursuant to federal acquisition regulation. [00:18:57] Speaker 00: Is that clear? [00:18:58] Speaker 00: Is that clear? [00:18:59] Speaker 00: So what happens from, I don't know, whether it's judgment forward, [00:19:04] Speaker 00: Presumably, now that you know the allocation as between Lockheed and the federal government, when bills come due, they discharge the government directly for the 30%. [00:19:16] Speaker 00: They're not putting those liabilities into the disc stop pool and then amortizing them out five years, are they? [00:19:22] Speaker 05: Well, I'm glad you asked, because that's critical. [00:19:24] Speaker 05: They are doing both. [00:19:26] Speaker 05: They will put it into the pool. [00:19:27] Speaker 05: They will charge US government contracts the price of those response costs. [00:19:31] Speaker 05: And they will also make a circular claim for those same response costs. [00:19:36] Speaker 05: The reason they say that's OK is because then they will credit the circular judgment back to the pool. [00:19:41] Speaker 05: But as I tried to explain this morning, that crediting would be incomplete. [00:19:44] Speaker 05: Lockheed would keep some of that money. [00:19:47] Speaker 05: It would also give discounts to its other customers using some of that money. [00:19:51] Speaker 05: And the overall cost to the United States would go up. [00:19:54] Speaker 05: So Lockheed is saying our theory benefits government agencies because it will lower the price of their contracts. [00:19:59] Speaker 00: I don't understand that. [00:20:00] Speaker 00: It seems like now that you have a circular judgment, [00:20:05] Speaker 00: that any response costs incurred from now on, they just, you know, tote it up and send you 30% of the bill, done. [00:20:14] Speaker 00: And this whole idea of using the discharge pool, that's for prompt, you know, [00:20:22] Speaker 00: them having to have a reliable way to recover costs, given that they didn't know if they were going to be holding the bag completely. [00:20:28] Speaker 00: And that's something we all approved. [00:20:30] Speaker 00: So it seems to me the treatment is different with respect to future ongoing. [00:20:34] Speaker 00: And again, we'll hear from Lockheed on this. [00:20:36] Speaker 05: Right, and I agree that the system you're describing under which Lockheed can choose to charge its costs under contract or under CERCLA is a more equitable system. [00:20:45] Speaker 00: I'm not even saying choose. [00:20:47] Speaker 00: I'm saying once they get the CERCLA judgment, the whole need for charging through under contract is gone. [00:20:54] Speaker 00: And they don't choose. [00:20:56] Speaker 00: They charge you the 30%. [00:20:57] Speaker 00: And why wouldn't that be the way things are going? [00:21:00] Speaker 00: Is that not the way they've been going? [00:21:02] Speaker 05: It should be. [00:21:02] Speaker 05: And it hasn't been? [00:21:04] Speaker 05: The need for charging government contracts will be gone. [00:21:07] Speaker 05: But Lockheed's theory is that it can charge contracts even after having a CERCLA judgment. [00:21:10] Speaker 00: Except on prior. [00:21:12] Speaker 00: I mean, the prejudgment incurred response costs. [00:21:17] Speaker 05: Well, because of the district court's equitable allocation, Lockheed won't get any pass costs. [00:21:21] Speaker 05: But if the court had awarded pass costs, then Lockheed would happily demand payment from the United States again under CERCLA, even though it has already been paid under contracts. [00:21:29] Speaker 05: And for future costs, that's what's going to happen. [00:21:31] Speaker 03: District court didn't order pass costs. [00:21:32] Speaker 05: That's right. [00:21:33] Speaker 05: And so that mitigates the inequity of it. [00:21:35] Speaker 05: But it's still inequitable with respect to future costs, which Lockheed will recover under its contracts and still charge against the United States at a 30% rate because of the district court's equitable allocation. [00:21:44] Speaker 03: Well, you know that both district court judges chastise you politely for now complaining about a scheme that you essentially put into place. [00:21:54] Speaker 03: What happened? [00:21:55] Speaker 03: How did you change your mind? [00:21:57] Speaker 03: This is essentially your scheme. [00:21:58] Speaker 05: It's our scheme and Lockheed's scheme. [00:22:00] Speaker 03: Lockheed is the party that wanted to charge these costs. [00:22:15] Speaker 05: The element of recovering costs through government contracts is something that we did agree to put in place at Lockheed's request in the settlement agreement. [00:22:33] Speaker 05: But in that settlement agreement, we reserved our circular defenses just as Lockheed reserved its circular claims. [00:22:39] Speaker 05: And now we're trying to assert those defenses here in this litigation. [00:22:42] Speaker 05: The district court's error was to say that by reserving those defenses in the settlement agreement, we somehow gave them up and can no longer complain about them here. [00:22:50] Speaker 05: Meanwhile, Lockheed in the settlement agreement fought for the right to charge its government customers higher contract prices to recover these costs. [00:22:57] Speaker 05: And it's here before this court complaining about that choice, saying that that hurts it competitively and that the court should fix it. [00:23:04] Speaker 05: But in fact... Go ahead, I'm sorry. [00:23:06] Speaker 05: Between these two parties, Lockheed is the one who knew and had clear understanding of the consequences of that choice at the time of the settlement agreement, whereas the United States thought that it would be able to assert these circular defenses later on and has been barred from doing so by the district court. [00:23:23] Speaker 00: Two questions. [00:23:26] Speaker 00: Can you identify any case in which a government contract or settlement agreement like this, not a consent decree but a settlement agreement, was deemed to be federal law, whether under CERCLA or otherwise? [00:23:42] Speaker 00: Your best case. [00:23:46] Speaker 05: There are no prior cases like this one that came out in the government's favor. [00:23:51] Speaker 05: The only prior case like this one is the Raytheon case, which was decided under the theory that Section 114B refers only to state mini-circlas, statutes that are like CIRCLA, but have been passed by the states. [00:24:04] Speaker 05: And even Judge Robertson walked back from that theory in his reconsideration decision. [00:24:09] Speaker 05: So this is really a case of first impression in our view. [00:24:14] Speaker 05: But it's a case that will have consequences. [00:24:15] Speaker 05: There's currently a case involving Lockheed at the Great Neck site under the settlement agreement at issue here that's pending before Judge Leon in the district court. [00:24:24] Speaker 05: And he has not yet ruled on Section 114B summary judgment motions. [00:24:28] Speaker 05: So there's a real benefit to the court deciding that issue here. [00:24:31] Speaker 00: I had a second question about, so you're arguing that [00:24:34] Speaker 00: What you've already paid in overhead cost pursuant to contract essentially should prevent you from having to pay a circular recovery for post-judgment incurred cleanup costs. [00:24:54] Speaker 00: Is that right? [00:24:56] Speaker 05: We're arguing that the full amount of our past payments should be credited against any circular liability, whether it's the past costs or future costs. [00:25:04] Speaker 00: All right, you don't have a past cost liability. [00:25:07] Speaker 00: So you're talking about future costs. [00:25:08] Speaker 00: And I have trouble within 114B, the reference to the same costs, that these aren't the same costs. [00:25:16] Speaker 00: You're talking about, you're trying to, it really becomes not a 114B argument, but an equitable argument that you paid more than your share in the past, and that should relieve you from paying up to the 30% going forward. [00:25:30] Speaker 05: That's accurate. [00:25:31] Speaker 05: Our section 114b argument applies only to costs that have already passed through the pool or that will pass through the pool. [00:25:38] Speaker 05: If Lockheed hasn't charged us those costs yet in the pool, then we would say that it's only our equitable argument that prevents us from having to pay again. [00:25:49] Speaker 05: But with respect to both past and future costs, the district court had to answer two questions. [00:25:53] Speaker 05: What does each party share? [00:25:54] Speaker 05: And what has each party already paid? [00:25:56] Speaker 05: And the answer to both of those questions was in the government's favor. [00:25:59] Speaker 05: In fact, Rockheed says the government won this case at trial. [00:26:02] Speaker 05: And yet we have a judgment that will require us to pay tens of millions of dollars more in future costs, despite already having paid our share. [00:26:08] Speaker 00: That you'll then get back and you just don't like. [00:26:10] Speaker 00: So is your only concern that you're getting it back [00:26:14] Speaker 00: in the region of 87% rather than 100%. [00:26:18] Speaker 00: If there weren't that crediting to other contractors, you would be fine with this. [00:26:27] Speaker 05: On the equitable side, it would have been within the district court's equitable discretion. [00:26:32] Speaker 05: to take account of that, if it was 100% recovery. [00:26:35] Speaker 05: Our view under section 114B is that we should really only have to pay once. [00:26:39] Speaker 05: But if we paid twice and were fully credited, I don't think that would cause an equitable problem. [00:26:44] Speaker 05: The problem here is that that's not what's going to happen. [00:26:46] Speaker 00: How can that be? [00:26:47] Speaker 00: I mean, I'm asking a question I already asked, but how can that be your objection when, in fact, you lucked out because they were also charging private or non-US government contractors the overhead? [00:27:02] Speaker 00: And so you weren't paying – you were paying 70-something percent, if I'm reading the record correctly. [00:27:06] Speaker 05: When you say we lucked out, we benefited from the deal that we struck in the DOSA and that Lockheed agreed to. [00:27:12] Speaker 05: So true, we have not paid 100 percent of those costs. [00:27:16] Speaker 05: But recall that the obligation to pay those costs, to the extent it doesn't arise under CERCLA, is only a matter of contract. [00:27:22] Speaker 05: And we have fully paid the amount that we agreed to pay in those contracts. [00:27:25] Speaker 05: And the question here is whether CERCLA allows Lockheed to recover anything else above what the United States agreed to pay. [00:27:32] Speaker 05: And they don't dispute the principle of equitable allocation that we cite in our brief, that CERCLA applies and that equitable allocation is available for a party that has paid more than its fair share of costs. [00:27:42] Speaker 05: And that's simply not the case here with respect to Lockheed. [00:27:44] Speaker 05: They've paid less than their fair share. [00:27:50] Speaker 00: Do you, is there any legislative history you could point to that supports your reading of 114B? [00:27:56] Speaker 05: Neither of the parties cited any legislative history in the briefs because it is unenlightening on this point, I would say. [00:28:04] Speaker 05: You can tell from Section 114A, the preemption section, that the primary concern of Congress in writing this language was in making sure that state mini-circles were not preempted. [00:28:14] Speaker 05: But then in Section 114B, they actually enacted language that was broader than that and referred to any costs or damages or claims. [00:28:21] Speaker 00: But aren't they also thinking about state tort law and or, I don't know, Federal Tort Claims Act or Clean Water Act, Petroleum Recovery or, you know, other, I mean there are other possible sources of recovery, no? [00:28:35] Speaker 05: There are other possible sources of recovery and so the general thrust of Section 114B is that the party that incurs cleanup costs can choose. [00:28:42] Speaker 05: If there are multiple avenues to recovery of response costs, then the party that incurs those costs can choose which avenue it's going to take, but that choice forecloses other avenues. [00:28:56] Speaker 05: So that in the end, there's only a single recovery. [00:28:58] Speaker 05: Our problem under section 114B is not necessarily double recovery, but just a second recovery. [00:29:04] Speaker 05: Section 114B doesn't say anything about crediting or realizing a benefit or what happens in future accounting. [00:29:09] Speaker 05: No, I understand that. [00:29:12] Speaker 05: Unless the court has further questions, we'll simply ask that the district court be reversed. [00:29:17] Speaker 02: Thank you. [00:29:25] Speaker 04: Chief Judge Garland, and may it please the court, the government section 114B theory is wrong for a variety of reasons, one of which Judge Pillard put her finger on, which is that if it were adopted, it would have consequences that Congress couldn't possibly have intended. [00:29:43] Speaker 04: In this case, the government happens to be both the customer and the PRP, the Potentially Responsible Party. [00:29:50] Speaker 04: But the government's theory would apply equally. [00:29:53] Speaker 04: There's no way it would not apply equally to a situation where the government was customer, but not PRP, or conversely, where the government was PRP, not customer, or for that matter, where the government was either. [00:30:06] Speaker 00: Well, not the latter, because the government as PRP, but not customer, the payments between private customers wouldn't be pursuant to state and federal law. [00:30:17] Speaker 00: Well, we think this- Unless it was a state law [00:30:20] Speaker 04: I mean, this gets to what we think is a flaw in the government's textual theory, which is that this covers payments for goods and services under contracts. [00:30:34] Speaker 04: And we think under the government's theory, that would apply, whether it's a government contractor or any other company that is passing through its cleanup costs. [00:30:42] Speaker 04: Well, that's what I was asking about. [00:30:45] Speaker 02: Wouldn't it be your position that under four that far, they have to pay this money? [00:30:49] Speaker 04: No, they don't. [00:30:50] Speaker 04: It's not required under FAR. [00:30:52] Speaker 04: It's authorized under FAR in the same way. [00:30:55] Speaker 02: Authorized in the sense that if you allocate, forget about, I'd like to leave out the settlement and the [00:31:05] Speaker 02: sites that are over with continuing sites. [00:31:09] Speaker 02: With respect to those, if you allocate your cleanup costs in a cost plus contract, doesn't the government then have to pay? [00:31:17] Speaker 04: Yes, because there are contracts between the parties in which the government has agreed to pay overhead. [00:31:23] Speaker 02: And they've agreed to pay. [00:31:24] Speaker 02: And FAR requires that indirect costs be paid, right? [00:31:29] Speaker 04: It doesn't require it in the sense that the parties aren't free to negotiate about whether they would pay, the circumstances in which they would pay. [00:31:38] Speaker 02: So in a cost plus contract, the government could say, we're going to enter in a cost plus contract, but we are not going to pay, and FAR doesn't require us to pay cleanup costs? [00:31:48] Speaker 04: Yes, absolutely, in the same way that all sorts of bodies of law that govern contracts authorize the parties to do some, and for that matter, sometimes require the parties to do something. [00:32:00] Speaker 04: We would say FAR doesn't require this, it just authorizes it, but even if it required it, the payments would still be pursuant to contracts in the same way that when you enter into... I'm interested in the other side of this question. [00:32:13] Speaker 02: Your position is that the government can contract around [00:32:17] Speaker 02: the indirect cost provision of FAR. [00:32:20] Speaker 02: Is that right? [00:32:20] Speaker 04: Yes. [00:32:21] Speaker 04: I mean, in a way, it has done that here in the DOSA. [00:32:24] Speaker 04: I mean, the parties agreed that certain discontinued operation costs would not be paid. [00:32:30] Speaker 04: They agreed that they would be amortized over five years. [00:32:33] Speaker 04: That's just because the parties agreed to it. [00:32:36] Speaker 04: And if you want to talk about the FAR, I think one of the provisions that is most telling here [00:32:41] Speaker 04: is section 163011, which is on page 15 of the statutory appendix in the amicus brief. [00:32:48] Speaker 04: It's called description. [00:32:50] Speaker 04: And what it's a description of is cost reimbursement contracts. [00:32:53] Speaker 04: The first sentence says, cost reimbursement types of contracts provide for payment of allowable incurred costs, which include direct and indirect costs, to the extent prescribed in the contract. [00:33:05] Speaker 04: So the FAR itself recognizes that. [00:33:08] Speaker 00: Can you tell me that page again? [00:33:08] Speaker 03: That's page 15 of the statutory appendix in the amicus brief. [00:33:21] Speaker 04: That's absolutely right. [00:33:22] Speaker 04: It allows the government to do it. [00:33:24] Speaker 04: It allows the government to pay it. [00:33:26] Speaker 04: It allows contractors to charge it. [00:33:29] Speaker 04: But when it is charged and when it is paid, it is pursuant to contract, not pursuant to law. [00:33:35] Speaker 02: Even the district judge, in the first opinion, said it was pursuant to FAR. [00:33:40] Speaker 02: He used those words, pursuant to FAR. [00:33:43] Speaker 04: I'm just reading you from JA 31. [00:33:49] Speaker 02: The government pays its contractors in accordance with a Byzantine set of rules known as the FAR. [00:33:55] Speaker 02: Pursuant to the FAR, the government pays contractors their direct and their indirect costs plus a profit. [00:34:01] Speaker 02: Use the word pursuant. [00:34:02] Speaker 04: Right, I think, Chief Judge Garland, I think he used that, in fairness, in his statement of facts. [00:34:07] Speaker 04: I don't think he was focusing on this precise question there. [00:34:10] Speaker 02: Ultimately, of course, Judge Robertson, in denying the motion... Well, I understand, but what I'm saying is the way ordinary... One way you can tell how ordinary people talk is to see how ordinary people talk, not that the judge is ordinary. [00:34:23] Speaker 02: But the same with you in your... [00:34:28] Speaker 02: in the Lockheed Accounting Memorandum says amounts that have been included in our contracts pursuant to FAR Part 3 31 cost principles. [00:34:36] Speaker 02: Same thing, you use pursuant to FAR. [00:34:39] Speaker 02: And how do we know Congress doesn't mean pursuant to in the same sense that both of you used it and in the same sense that the dictionary definition provided by the government uses it? [00:34:48] Speaker 02: Pursuant to meaning the same thing as in accordance with. [00:34:51] Speaker 04: Well, let me say a few things, if I could. [00:34:53] Speaker 04: First, as far as Judge Robertson is concerned, ultimately in denying the government's motion for reconsideration, he characterized this very argument as far-fetched and unpersuasive. [00:35:02] Speaker 02: He did, but that made me wonder what he thought of his first memorandum opinion, which used exactly those words. [00:35:08] Speaker 04: Right, but I guess the second thing I would say is that [00:35:11] Speaker 04: Even the government agrees that in the law, there is this fundamental distinction between contract and law. [00:35:18] Speaker 04: Supreme Court's decisions have made this clear. [00:35:21] Speaker 04: The government's position is that there is something different about government contracts. [00:35:26] Speaker 04: Our submission is that there isn't. [00:35:28] Speaker 04: The government's position seems to depend upon the idea, it's not entirely clear what the proper distinctions are. [00:35:36] Speaker 04: One of them is that the FAR is more detailed, [00:35:39] Speaker 00: Well, it's also that the government has to act with legal authorization. [00:35:44] Speaker 00: I mean, Congress enacts legislation pursuant to the Commerce Clause. [00:35:47] Speaker 00: It doesn't have to. [00:35:48] Speaker 00: It's not required to. [00:35:48] Speaker 00: But it does it pursuant to authority. [00:35:50] Speaker 00: And here, there was a question whether you could even get these kinds of costs from the government, which wouldn't be a question with a private party. [00:35:58] Speaker 00: They agree. [00:35:59] Speaker 00: They agree. [00:36:00] Speaker 00: But here, they need to be empowered to act. [00:36:02] Speaker 00: And so they acted pursuant to the far. [00:36:04] Speaker 00: I mean, that's why you had a dispute that you had to settle in the DOSA. [00:36:07] Speaker 04: The government doesn't have to enter into contracts. [00:36:10] Speaker 00: No, but when it enters into contracts, it has to do so if there's a question whether it's even legally authorized to pay for something that it's not getting in goods and services, it has to be pursuant to some authorization to take that on. [00:36:23] Speaker 04: I think you could say just the same thing about any contract. [00:36:26] Speaker 04: If somebody enters into an employment contract and has paid the minimum wage, [00:36:31] Speaker 04: I don't think most people employing ordinary English usage would say that that person is being paid pursuant to law. [00:36:37] Speaker 04: That person is being paid pursuant to contract. [00:36:40] Speaker 04: And I guess what I would say to get back to where I started. [00:36:42] Speaker 02: Really, if they're paid only the minimum wage, you wouldn't say they're being paid pursuant to law? [00:36:47] Speaker 02: I get it if they were being paid $10 more than the minimum wage. [00:36:51] Speaker 02: But if they were paid below the minimum wage, you would say they are not being paid pursuant to law, wouldn't you? [00:36:59] Speaker 04: I think you would say they're being paid pursuant to contract. [00:37:03] Speaker 04: There is a body of law that governs all contracts. [00:37:06] Speaker 04: The common law, the UCC, consumer contracts, if you buy a cell phone, there are lots of requirements in there that the seller has to comply with. [00:37:16] Speaker 04: There are limitations on what charges can be imposed, interest rates, and the like. [00:37:20] Speaker 04: If you make a payment for a cell phone, I think most people would say you're paying for it pursuant to contract, not pursuant to law. [00:37:26] Speaker 04: And I guess the other thing I would say is this. [00:37:29] Speaker 04: To the extent that there's any doubt about what the words of the statute mean, this gets back to the point I started to make when I first stood up here and that Judge Pillard was making in her colloquy with my friend Mr. Gunter, which is that it just can't be right. [00:37:44] Speaker 04: that if the government is contractor but not PRP, and just to take a hypothetical example, which is not at all fanciful or far-fetched, where every single one of the- No, we got that, and the government seems to say, okay, we'll take that. [00:37:59] Speaker 02: It's just the way the language falls out. [00:38:01] Speaker 02: That's what he said in response to Judge Pillard's question. [00:38:03] Speaker 04: Well, I mean, the government doesn't get to decide what Congress intended. [00:38:07] Speaker 04: The whole point of CERCLA is that it's the responsible parties that are supposed to be paying. [00:38:13] Speaker 04: If you have a situation where the contractor spends hundreds of millions of dollars on cleanup costs and passes those costs through to its government agency customers, [00:38:22] Speaker 04: And then, in fact, it's the company next door that's 100% responsible for the contamination. [00:38:28] Speaker 04: Congress could not have intended that government contractors, meaning taxpayers, are paying for the cleanup costs when company X next door should be paying that $100 million. [00:38:38] Speaker 00: Mr. Himmelfarb? [00:38:40] Speaker 00: I had asked this of the government. [00:38:42] Speaker 00: I'd like to have your view as well. [00:38:43] Speaker 00: Has your client charged the non-U.S. [00:38:48] Speaker 00: government contractors at the same rate as it has charged the government? [00:38:54] Speaker 00: in the prejudgment world for the cleanup costs. [00:38:58] Speaker 00: In other words, is the overhead, environmental cleanup overhead been across the board? [00:39:02] Speaker 04: Yes, it gets charged to all customers, which is why the government's argument on this equitable point is wrong. [00:39:09] Speaker 00: And how has it been going since [00:39:11] Speaker 00: the district court allocation, are they right that you're going to both continue to charge the discops? [00:39:17] Speaker 00: And do you bill them directly for the 30%? [00:39:21] Speaker 00: How's that going? [00:39:22] Speaker 04: What happened is that when Judge Huvel entered her judgment, [00:39:27] Speaker 04: The government became concerned about how it was going to pay going forward for future costs. [00:39:34] Speaker 04: And it filed a motion to alter amend the judgment, which ultimately resulted in a stipulated amended judgment. [00:39:41] Speaker 04: And the way things work going forward is that the costs are charged through contracts in the same way they were before, in the same way they always are. [00:39:51] Speaker 04: and the circular judgment would get credited and amortized over five years. [00:39:56] Speaker 04: The way the circular judgment gets paid is that first, it doesn't get paid until there's a final judgment in this case, which hasn't happened yet. [00:40:07] Speaker 04: Lockheed Martin submits bills, claims for the circular judgment every six months. [00:40:15] Speaker 04: The government's obligated to pay within four months. [00:40:19] Speaker 04: So I suppose it is theoretically possible, and it may actually be true, I don't know, that there are for future costs, meaning costs post Judge Huvel's judgment last year, some of these costs get charged through contracts before there will ever be a CERCLA payment. [00:40:40] Speaker 00: But once the judgment in this case is final, [00:40:44] Speaker 00: then there won't be any more environmental liabilities on the government's 30% share going into the discops pool as liabilities. [00:40:55] Speaker 00: It would only be Lockheed Martin's 70% share that would continue to go into the pool and be charged out to customers. [00:41:01] Speaker 04: Right, I think that's right. [00:41:02] Speaker 00: But so far that hasn't happened because the judgment's not final? [00:41:09] Speaker 00: They're not challenging the allocation. [00:41:11] Speaker 00: Nobody's challenging 30%, 70%. [00:41:12] Speaker 00: So it's unclear to me why that isn't just being billed out. [00:41:18] Speaker 04: It is being billed out going forward. [00:41:22] Speaker 00: I thought the first thing you said, though, was that it's being charged to the discops pool. [00:41:27] Speaker 04: That's right. [00:41:28] Speaker 04: It's being billed out in the same way. [00:41:30] Speaker 04: It goes into the discops pool. [00:41:33] Speaker 04: The cleanup cost going forward, whether it's the 70% or so that Lockheed Martin's responsible for or the 30% that the government's responsible for, it goes into the pool. [00:41:45] Speaker 04: And then once the circle of judgment is ultimately paid, that will get credited into the pool. [00:41:51] Speaker 00: Are you talking about the... I'm not sure that I follow why any [00:42:00] Speaker 00: payment that Lockheed Martin is incurring for cleanup at the site after the date of the judgment would go into – that the government's 30 percent would go into the pool. [00:42:14] Speaker 00: It would seem to me it would just go straight to them and be charged to them. [00:42:18] Speaker 00: And the 70 percent – your 70 percent goes in, no? [00:42:21] Speaker 04: No, the entirety of the cleanup cost, no matter who's responsible for them, goes into the pool in the same way it did before, and it gets charged to Lockheed Martin's customers, whether government or non-government, in the same way. [00:42:34] Speaker 04: Then once there's a circular recovery, it gets charged into the pool in the same way it would have if there had been a circular judgment for pass costs. [00:42:48] Speaker 00: Can you tell me whether there's any authority requiring that credits be amortized over the five-year period? [00:42:56] Speaker 00: It was a little curious to me that if the government pays you a CERCLA judgment, that that would be credit over five years rather than just credit immediately upon receipt. [00:43:06] Speaker 04: No, that's just part of the agreement in the DOSA. [00:43:09] Speaker 04: The credits are amortized the same way the charges are. [00:43:13] Speaker 00: I didn't think any circled judgment crediting was covered in the DOSA. [00:43:16] Speaker 00: Do you have like a paragraph site or a page site for that? [00:43:29] Speaker 04: There is a credits clause on page 572 of the Joint Appendix. [00:43:37] Speaker 00: General credits, right. [00:43:42] Speaker 04: Lockheed Martin will reimburse the United States for any such double recovery, is the way it's framed, of settled discontinued operation costs under government contracts. [00:43:56] Speaker 00: But credit, and the five years, is that spelled out there? [00:44:00] Speaker 04: Sorry? [00:44:00] Speaker 00: Crediting in the way that it's amortized over time? [00:44:02] Speaker 04: Yes. [00:44:07] Speaker 00: And your argument that the payment here is not pursuant to federal law, is there any other federal law other than the FAR that it could be pursuant to? [00:44:21] Speaker 04: What are you thinking? [00:44:22] Speaker 04: It could be the Clean Water Act. [00:44:25] Speaker 04: We cite a provision in our brief. [00:44:30] Speaker 04: I mean, that's the main one. [00:44:32] Speaker 00: Although, principally, the Clean Water Act is supposed to be either if it's petroleum. [00:44:39] Speaker 00: So it's really just the murky area where the petroleum products are mixed with other hazardous waste. [00:44:43] Speaker 00: Is that the only thing you're thinking of? [00:44:45] Speaker 04: No. [00:44:50] Speaker 04: I think it's possible that you could be liable under the Clean Water Act and CERCLA for contamination of water. [00:45:00] Speaker 04: I don't think the government takes issue with that. [00:45:02] Speaker 04: I think the main thing this is meant to cover is state circle laws or common law. [00:45:09] Speaker 04: You know, common law addressing nuisance or trespass or damage to property. [00:45:15] Speaker 04: This is the whole point of Section 114B when it says pursuant to law. [00:45:21] Speaker 04: And as I say, to the extent that there's any question about what the words mean, [00:45:26] Speaker 04: It makes sense to interpret it the way we advocate because it would lead to these perverse consequences where responsible parties aren't paying for cleanup costs and customers that had absolutely nothing to do with the contamination are the ones who are paying for them. [00:45:41] Speaker 02: Could you say a little bit more about why this matters to Lockheed in light of the crediting reimbursement mechanisms that sort of cycle through? [00:45:50] Speaker 04: Well, it matters to Lockheed Martin for the same reason one would think it would matter to their customers. [00:45:57] Speaker 04: It doesn't want to have to be charging their customers for cleaning up environmental contamination. [00:46:04] Speaker 04: It wants to be able to charge them for the things they're actually buying. [00:46:08] Speaker 04: And of course, when it has to charge more than it otherwise would, [00:46:12] Speaker 04: That's bad for Lockheed Martin. [00:46:13] Speaker 04: It affects its competitive position. [00:46:15] Speaker 04: And there are plenty of competitors in different areas that don't have any discontinued operations cleanup costs. [00:46:22] Speaker 04: And they're not passing them through. [00:46:24] Speaker 04: And they're able to charge less than Lockheed Martin is. [00:46:27] Speaker 04: So that's why it matters. [00:46:29] Speaker 02: And are the contracts with the non-government contractees also cost plus? [00:46:38] Speaker 02: Are they both? [00:46:40] Speaker 04: I think they could be either or frankly neither. [00:46:45] Speaker 04: I think they could be, I think generally they're fixed price but of course the costs of cleanup are passed through in the same way that any company [00:46:55] Speaker 04: any profit-making company passes through the cost of environmental cleanup just like any other overhead to its customers, which is another reason why we think 114B can't mean what the government says it means. [00:47:07] Speaker 04: Because if it did, you know, General Motors, when it was selling cars to its customers and passing through its environmental cleanup costs, if it tried to recover from a PRP, [00:47:20] Speaker 04: then you would have the same possibility of the same defense. [00:47:23] Speaker 04: And the government says that that's different. [00:47:27] Speaker 04: This is on page five of the reply brief, I think, because the costs there for non-government contractors to use the government's formulation aren't identifiable. [00:47:38] Speaker 04: But I don't know where you get identifiability or the lack of it from this statute. [00:47:44] Speaker 04: It's a completely unprincipled distinction. [00:47:47] Speaker 02: Maybe a little strong about being unprincipled. [00:47:49] Speaker 02: When you contract with the government, you get audited. [00:47:54] Speaker 02: And the audit includes line items for what the costs are that are being attributed to the government, to the contract. [00:48:02] Speaker 02: If you make an agreement with a private party for a fixed price, there's no auditing of you. [00:48:07] Speaker 02: As long as you only charge the fixed price, there's no auditing. [00:48:10] Speaker 02: That's the end of it, right? [00:48:11] Speaker 02: Right. [00:48:12] Speaker 02: I mean, that may be true, but I think everybody... And the auditing is a question of law. [00:48:15] Speaker 02: That is, if you misstate on the audit, you go to jail or pay a negligence penalty, depending on whether it's willful or not. [00:48:24] Speaker 02: You don't have that issue with respect to a private contract for a fixed price. [00:48:28] Speaker 02: Right. [00:48:28] Speaker 04: I guess what I would say is that it's no more or less true that a non-government contractor will nevertheless pass along... Well, that depends on the elasticity of the demand curve, whether it's passed on or not. [00:48:40] Speaker 04: To make a narrower point, it certainly could and will if it can. [00:48:45] Speaker 04: And then if there is a circular action where that company is trying to recover from a PRP, if the government's position is right, you could imagine the PRP saying, you've already recovered and there will be discovery and those costs can try to be established through discovery. [00:49:00] Speaker 04: So whether there's an audit or not, they could be identifiable. [00:49:06] Speaker 00: In interpreting 114B in your brief, you talk a lot about what is anticipated to happen after the circular recovery and the crediting back, but I do think the government has a pretty good point about that. [00:49:17] Speaker 00: It doesn't matter what's going to happen afterwards. [00:49:19] Speaker 00: You just look at whether the [00:49:21] Speaker 00: the costs have been recovered pursuant to federal law, and if they have, then done. [00:49:27] Speaker 00: And so what's the authority for being able to look down the road and say 114B should be read not to bar the circular recovery because it's going to be credited back? [00:49:39] Speaker 00: That seems like more of an equitable argument to me than a statutory interpretation argument. [00:49:43] Speaker 04: Well, let me say a couple things about that if I could. [00:49:46] Speaker 04: One is that [00:49:48] Speaker 04: I mean, I think everybody agrees that what Section 114B ultimately is, what its purpose is, is to prevent double recovery. [00:49:58] Speaker 04: And if you have accrediting, it seems to us, there is no double recovery. [00:50:02] Speaker 04: So if there is no double recovery and the purpose of the provision, what the provision ultimately is, is a prohibition on double recovery, it seems odd to say that it would bar recovery when there is none. [00:50:15] Speaker 04: The other, I mean, to tie it to the text a little bit, [00:50:18] Speaker 04: There are actually three requirements in the provision. [00:50:21] Speaker 04: The prior recovery has to be compensation for removal costs. [00:50:28] Speaker 04: It has to be pursuant to law. [00:50:30] Speaker 04: And then in the circular case, you have to be receiving compensation. [00:50:36] Speaker 04: So the idea of crediting, I think, can be tied to that word. [00:50:41] Speaker 04: And if you credit, at least in the context of this statute, if you get a circular judgment and then credit it back, you are not, in this context, receiving compensation. [00:50:50] Speaker 04: And then the last thing I would say is, [00:50:52] Speaker 04: You don't have to agree with us about that. [00:50:54] Speaker 04: You could agree with the government that crediting is completely irrelevant. [00:50:57] Speaker 04: They still have to satisfy those two other elements, which we say they can't do. [00:51:03] Speaker 04: And again, to the extent there's any doubt about that, we think it's appropriate to look at the consequences of their theory, which lead to results that we say completely undermine the purpose of CERCLA, which is to ensure that it's the responsible parties who are paying for cleanup costs, not parties who just happen to be customers of the entity that's doing the cleanup. [00:51:24] Speaker 02: Thank you. [00:51:25] Speaker 02: I expect the government is out of time. [00:51:26] Speaker 02: We'll give you another couple minutes. [00:51:34] Speaker 05: Thank you. [00:51:34] Speaker 05: There are just a couple of points that I'm interested in making during this rebuttal. [00:51:38] Speaker 05: And the first is to address this question of what is pursuant to contract and what is pursuant to law. [00:51:44] Speaker 05: I think a helpful place to look for this might be some of the other Court of Appeals cases that have addressed this, including Empire Health Choice in the Second Circuit and Reed versus Norfolk Southern in the Seventh Circuit, which draw a distinction between obligations that are freely assumed and obligations that are imposed as a matter of public policy. [00:51:59] Speaker 05: So the Federal Acquisition Regulation itself is intended to constrain the free choice of contracting officers so that they can only enter contracts that are consistent with the public policy. [00:52:08] Speaker 02: Well, your opponent's view is that you can contract out of this. [00:52:12] Speaker 02: If you don't want to pay them their cleanup costs, you can try to negotiate. [00:52:20] Speaker 02: Whoever has greater negotiating power can get out of it. [00:52:22] Speaker 02: Is that true? [00:52:23] Speaker 05: There are provisions in the federal acquisition regulation that allow for deviation from the regulations, which has to be approved by senior agency officials. [00:52:31] Speaker 00: No, no, no, but it's not a deviation from the regulation to not include in a contract a term that you're permitted to include, that nothing requires that an allocable and allowable cost in fact be allowed and allocated, does it? [00:52:48] Speaker 05: Well, please keep in mind that the contracts that you hear don't say anything about environmental response costs at discontinued sites. [00:52:54] Speaker 05: They are about totally unrelated goods and services. [00:52:56] Speaker 05: But you're – well, wait, wait. [00:52:58] Speaker 03: You're not obliged by the FAR to do what it is you're now contesting. [00:53:03] Speaker 03: The FAR does not compel this. [00:53:05] Speaker 03: Assume there was no contract. [00:53:08] Speaker 03: They couldn't come in and say to you, under the FAR, you're required to do this. [00:53:12] Speaker 05: No, if the United States had no contracts with Lockheed, then Lockheed would not be able to do this. [00:53:17] Speaker 02: No, but if they enter into a cost plus contract with Lockheed, does it or doesn't it have to include an agreement to pay indirect costs as part of a cost plus? [00:53:30] Speaker 05: I think that with an appropriate deviation on approval, and if Lockheed agreed, the parties could contract around that so there was no payment of indirect costs. [00:53:37] Speaker 00: But they wouldn't even need the deviation of approval. [00:53:39] Speaker 00: I don't follow that. [00:53:41] Speaker 00: Indirect costs meaning overhead relating to that contract, but the whole reason you had a settlement agreement around the DOSA was because it wasn't [00:53:51] Speaker 00: clear that was required, you were saying, okay, for these contracts, we're going to agree that part of overhead costs is, part of the indirect cost is going to be these environmental costs, no? [00:54:01] Speaker 05: Yes, the purpose of the settlement agreement, the DOSA, was to explain how the federal acquisition regulations are going to apply at these sites. [00:54:09] Speaker 03: No, how the contract was going to be applied. [00:54:13] Speaker 03: Well, Judge Edwards, respectfully, I disagree, because the contracts themselves... Where does the floor say that you have to make this, but I missed it. [00:54:21] Speaker 05: The contracts say that the United States has to pay indirect costs, which is a standard contract term. [00:54:30] Speaker 05: The amicus brief identifies it on the first page as one of the fundamental principles of contracting. [00:54:34] Speaker 05: And so what the settlement agreement does is decide whether particular provisions of the federal acquisition regulation put these costs into that indirect cost term or exclude these costs from that indirect cost term. [00:54:48] Speaker 05: But either way, it's not what the contracts say. [00:54:51] Speaker 02: You're saying it's an interpretation of section 31.202, the meaning of indirect costs? [00:54:57] Speaker 02: That's right. [00:54:58] Speaker 05: And for purposes of these sites, the government agreed to accept Lockheed's interpretation of the federal acquisition regulations. [00:55:05] Speaker 05: And that's what leads Lockheed to be able to charge these costs. [00:55:08] Speaker 03: As part of your agreement, as part of your contractual arrangement? [00:55:11] Speaker 03: as as as part of the agreement and if you had not [00:55:23] Speaker 03: That's not part of our contract. [00:55:25] Speaker 03: We would say that, but I think it's... You're right, because the FAR does not require it. [00:55:29] Speaker 05: But I think it's critical to recognize that Lockheed would say the FAR does require it and would ask for a judgment on that basis. [00:55:35] Speaker 05: And so our settlement of litigation risk still doesn't... Where did they say that in their brief? [00:55:40] Speaker 05: I missed it. [00:55:41] Speaker 05: It's actually, the best place to look would be the first page of the settlement agreement itself, which lays out the party's respective theories about whether particular costs are allowable and allocable under the Federal Acquisition Regulation. [00:55:52] Speaker 03: And I would just point out... They are certainly permissible under the FAR. [00:55:56] Speaker 03: That's not what's in dispute. [00:55:58] Speaker 03: The question is whether they're required under the FAR. [00:56:01] Speaker 03: And you're changing your theories. [00:56:02] Speaker 03: They're not required. [00:56:05] Speaker 03: I disagree. [00:56:05] Speaker 03: You wouldn't hesitate for one second if they didn't have this arrangement. [00:56:10] Speaker 03: And they came in and said, we're entitled to it. [00:56:12] Speaker 03: You would say, where? [00:56:13] Speaker 03: How far does it require us to do that? [00:56:15] Speaker 03: We're not going to do it. [00:56:18] Speaker 03: That's right. [00:56:18] Speaker 03: And you'd be very comfortable with that. [00:56:21] Speaker 03: The only way they get it is because of the contractual arrangement in which you agreed to it. [00:56:25] Speaker 02: Is that right or would it be an interpretation of the FAR itself? [00:56:29] Speaker 02: This is the part that's confused me. [00:56:30] Speaker 02: I have thought, for example, 31.201-1 of the FAR says that the total cost of a contract is the sum of the direct and indirect costs allocable to the contract. [00:56:41] Speaker 02: And when it uses the word allocable, does that mean that they are entitled to allocate under the FAR? [00:56:48] Speaker 02: Or does that mean something else, that the contract in every case has a separate set of agreements as to what's allocable and what's not? [00:56:56] Speaker 05: No, there's a standard set of rules about what's allocable. [00:56:59] Speaker 05: It's in the government cost accounting standards and in the FAR itself. [00:57:01] Speaker 05: And the Defense Contract Audit Agency applies those rules [00:57:04] Speaker 05: across all contracts. [00:57:06] Speaker 05: So in response to Judge Edwards' question, would they have any basis to claim these costs if we didn't have the settlement agreement? [00:57:11] Speaker 05: Lockheed certainly would say that they- No, I'm interested in your position. [00:57:15] Speaker 05: Right. [00:57:15] Speaker 03: We would say- The two district court judges missed it. [00:57:19] Speaker 03: I didn't see it in the brief, and I don't see it in the language of the FAR. [00:57:23] Speaker 05: We would say Lockheed would not have a right to seek those costs. [00:57:26] Speaker 03: The only way they go at it is like contractual agreement. [00:57:29] Speaker 05: Right. [00:57:29] Speaker 05: But the contract is a settlement agreement that incorporates an interpretation of the FAR. [00:57:33] Speaker 05: And I'll give you one example from Lockheed's argument to try and illustrate this. [00:57:37] Speaker 05: They cited the provision of the federal acquisition regulations that requires them to credit back costs [00:57:43] Speaker 05: sorry, to credit back a circular judgment to the United States. [00:57:47] Speaker 05: And so they say, pursuant to the credits clause of the Federal Acquisition Regulation, we credit that back to the United States. [00:57:52] Speaker 05: But it's the settlement agreement that contains an exactly similar provision, which Mr. Himmelfar decided to use just a few minutes ago. [00:57:59] Speaker 05: So that obligation to credit a circular judgment back to the United States doesn't just arise pursuant to contract. [00:58:05] Speaker 05: It also arises pursuant to the FAR as the FAR is incorporated into the settlement agreement. [00:58:12] Speaker 05: There's one final point that I'm interested in making, and that is to re-emphasize the statement that Mr. Hillfarg made that CIRCLA wants responsible parties. [00:58:21] Speaker 05: to pay for these cleanups. [00:58:23] Speaker 05: That's what the United States is arguing for here. [00:58:26] Speaker 05: We've paid more than our share of the cleanup costs, and Lockheed has paid less than our share of the cleanup – less than its share of the cleanup costs. [00:58:33] Speaker 05: In order for the responsible party to bear each responsible party's share of the cost of this site, it was inequitable for the district court to increase payments to Lockheed and have those payments come out of them. [00:58:43] Speaker 02: Well, I think he was saying that in the context of the question about [00:58:47] Speaker 02: where the contractors are both government contractors. [00:58:51] Speaker 02: They're responsible 50-50 for the costs of cleanup under CERCLA. [00:58:57] Speaker 02: And then the government pays A's entire indirect costs, the cleanup costs, both A's and B's. [00:59:05] Speaker 02: And then [00:59:07] Speaker 02: A, tries to get, you know, undercircling, get the United States to pay, and I take it on your reading of the statute, they would not be able to, A, would not be able to recover against you, is that, against B, is that right? [00:59:20] Speaker 05: they would not be able to recover against other PRPs if the United States has already paid. [00:59:24] Speaker 02: So they would not be able to recover against a responsible party. [00:59:27] Speaker 05: Right. [00:59:27] Speaker 05: But the federal acquisition regulation requires them to go after other circular parties if they're charging response costs to the United States. [00:59:33] Speaker 02: It may require them to go against them, but the statute under your reading would not permit them to, right? [00:59:39] Speaker 05: Right. [00:59:39] Speaker 05: So what we would say is they are required to fulfill that obligation before they start charging the United States [00:59:44] Speaker 05: costs under contract. [00:59:45] Speaker 02: Was there something in the FAR that says the order in which things have to be done? [00:59:48] Speaker 02: They could file their lawsuit and immediately lose under if we read the statute the way he wants to read it. [00:59:55] Speaker 05: they would only lose if the United States had already reimbursed those costs in their contracts. [00:59:59] Speaker 02: Right. [01:00:00] Speaker 02: Would the United States be able to slow up the reimbursement? [01:00:03] Speaker 02: It doesn't seem to be the case. [01:00:05] Speaker 02: It seems to be the case that it's done as we go by on the contract. [01:00:08] Speaker 05: As I stand here, I can't think of any rule that would require them to seek CERCLA from other parties first, except for the economic incentives that they themselves cite in their brief, suggesting that it's better for their government customers to have lower contract prices and for them to be able to recover under CERCLA first. [01:00:25] Speaker 02: Well, their point is, I guess, different government contract government agencies. [01:00:33] Speaker 02: If they get 100% from one government agency, they'll still be able to offer cheaper to another government agency. [01:00:38] Speaker 05: That's right, but it's still the same government that's paying, and that's a critical point here. [01:00:43] Speaker 05: The result of Lockheed's theory of how this should work is that the United States will end up paying more, even if their particular individual agency clients pay less. [01:00:53] Speaker 05: That's not a theory that is designed to protect the United States. [01:00:56] Speaker 02: But it extends also to their non-government agency clients, right? [01:00:59] Speaker 05: Yes. [01:00:59] Speaker 05: So they're saying, please charge the United States more so that we can give both the United States and our other customers discounts. [01:01:07] Speaker 05: And that's not something that the circle requires. [01:01:09] Speaker 05: For that reason, the district court's judgment should be reversed. [01:01:12] Speaker 02: Thank you. [01:01:12] Speaker 02: Take the matter under submission. [01:01:13] Speaker 02: Thank you both.