Government Contracts Monitor

Captain America Would Be Proud: The Government Is Contractually Responsible For CERLA Costs Related To WWII Aviation Fuel Production

May 12, 2014

In a case reminiscent of some of themes raised in the recent Captain America movie franchise, a World War II problem comes to life in the Twenty-First Century and the U.S. Government is contractually obligated to pay to fix it in Shell Oil Company, et al., v. United States, No. 2013-5051 (Fed. Cir. April 28, 2014).

Shortly after the Pearl Harbor attack, the U.S. Government – through a variety of wartime government entities - entered into long term contracts with Shell Oil Company and other petroleum companies (the “Oil Companies”) for the production of high-octane aviation gas (“avgas”) to fuel military aircraft as part of the national war effort. At the start of World War II, the United States had insufficient avgas production capacity. The wartime contracts, while only providing slim profit margins, contained valuable cost-allocation provisions as incentives to the Oil Companies. Among those cost-allocation provisions were clauses that required the Government to pay (1) “any now existing taxes, fees, or charges . . . imposed upon [the Oil Companies] by reason of the production, manufacture, storage, sale or delivery of [avgas]” and, most importantly, (2) “any new or additional taxes, fees, or charges . . . which [the Oil Companies] may be required by any municipal, state, or federal law in the United States or any foreign country to collect or pay by reason of the production, manufacture, sale, or delivery of the [avgas].”

The process for producing avgas involved blending ordinary gasoline with various petroleum distillates and chemical additives. Sulfuric acid was extensively used as a catalyst in the production of avgas. Used sulfuric acid became alkylation acid and even more diluted sulfuric acid became “acid sludge.” While production facilities for avgas increased exponentially, the construction of waste disposal facilities for alkylation acid and acid sludge did not keep pace with production of those byproducts. As a result, the Oil Companies regularly dumped alkylation acid and acid sludge in landfills, including a site in Fullerton, California (“the McColl site”), throughout World War II.

In 1991, the United States and California brought Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) claims against Shell Oil and other Oil Companies. That litigation dragged out for over a decade, with the Oil Companies ultimately found jointly and severally liable for the acid waste they dumped. At that point, the Oil Companies filed a complaint in the U.S. Court of Federal Claims, seeking indemnification/reimbursement from the United States Government for the court-imposed CERCLA costs. The U.S. Court of Federal Claims granted the Government’s motion for summary judgment and dismissed the case. The Oil Companies appealed and the Federal Circuit reversed.

The Federal Circuit based its decision on the plain language of the 1942 and 1943 contracts that allocated to the Government the risks for “any new or additional taxes, fees, or charges . . . which [the Oil Companies] may be required by any municipal, state, or federal law in the United States or any foreign country to collect or pay by reason of the production, manufacture, sale, or delivery of the [avgas].” In short, the Federal Circuit ruled that the court-imposed CERCLA costs were a form of “new . . . charges” covered by the wartime contracts. The Court also ruled that the Anti-Deficiency Act was not a bar to the Oil Companies’ indemnification claims. In particular, these were wartime production contracts covered by the First War Powers Act of 1941 and its explicit language exempting such wartime contracts from the Anti-Deficiency Act. With these holdings, the Federal Circuit reversed the U.S. Court of Federal Claims and remanded the case for a trial on damages.

This case presents a unique and anachronistic set of facts and law related to World War II and the continuing environmental harms caused by wartime decisions. Captain American would be proud that the U.S. Government is required to abide by its wartime contracts and reimburse the Oil Companies for the environmental damage caused in order to meet the U.S. military’s insatiable need for high-octane aviation fuel throughout World War II.

Michael J. Schrier is the attorney responsible for the content of this article.