Petition for Writ of Certiorari — Hercules Inc. v. United States

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(\) Supreme Court, U.&

| FILED

941557 MAR 2 1 1995

ONMCB40F THE CLERK

IN THE

Supreme Court Of Che United States

OCTOBER TERM, 1994

HERCULES INCORPORATED,

Petitioner,

UNITED STATES OF AMERICA,

Respondent.

Petition For Writ Of Certiorari

to The United States Court Of Appeals

for The Eighth Circuit

PETITION FOR A WRIT OF CERTIORARI

E. A. Simpson, Jr.,

Counsel of Record

Y. Robert Denham, Jr.

W. Gordon Hamlin, Jr.

LeeAnn Jones

Powell, Goldstein, Frazer & Murphy

Sixteenth Floor

191 Peachtree Street, N.E.

Atlanta, Georgia 30303

(404) 572-6600

Counsel for Petitioner

Hercules Incorporated

Balmar Legal Publishing Services, Washington, D.C. (202) 682-9800

QUESTIONS PRESENTED

1. Having invoked the authority of the Defense Produc-

tion Act, 50 U.S.C. app. §§ 2061, et seg., during the Vietnam

War to appropriate the entire production capacity of Hercules

Incorporated’s (“Hercules”) Jacksonville, Arkansas, manufac-

turing facility to produce the government-invented defoliant

Agent Orange, may the United States now require Hercules to

bear by itself the cost of cleaning up the manufacturing facility,

and thereby shift that cost of the Vietnam War to Hercules?

2. May the United States avoid all responsibility for

cleaning up the substances that were generated by the Agent

Orange production that the United States compelled Hercules to

undertake, even though the United States had the authority to

require Hercules to alter its means of disposing of the substances

and by contract required Hercules to take some measures to

control the release of the substances, but now retroactively

contends that the measures employed by Hercules to prevent

releases were inadequate?

3. During the Vietnam War the United States used rated

orders and a directive pursuant to the Defense Production Act,

50 U.S.C. app. §§ 2061, et seq., to compel Hercules to produce

the government-designed defoliant Agent Orange for the United

States from raw materials acquired through the exercise of

government authority under the Defense Production Act. Based

upon those actions, and others, is the United States liable,

pursuant to the Coniprehensive Environmental Response, Com-

pensation, and Liability Act of 1980, as amended, 42 U.S.C. §§

9601, et seq. (“CERCLA”), as a person who “arranged” for the

disposal of the “hazardous substances” that the Agent Orange

production process generated at Hercules’ manufacturing facil-

ity?

4. The United States used rated orders and a directive

pursuant to the Defense Production Act during the Vietnam

War: (a) to compel Hercules to devote its entire manufacturing

‘3

capacity to produce the government-designed defoliant Agent

Orange for the United States; (b) to enable Hercules to obtain

otherwise-unavailable raw materials that Hercules could use

only to produce Agent Orange; (c) to prohibit Hercules from

meeting its obligations to commercial customers; (d) to impose

upon Hercules otherwise-inapplicable health and safety stand-

ards that included standards for worker exposure to materials

generated in the manufacturing process; (e) to direct Hercules

not to obtain product registration and not to use labels and

warnings that otherwise would have been required under federal

law for a product such as Agent Orange; and (f) to place

inspectors on-site to ensure compliance with worker health and

safety, quality control, testing, labelling, and shipping require-

ments imposed upon Hercules by the United Siates. Based upon

those actions, and others, is the United States liable pursuant to

CERCLA as an “operator” of the manufacturing facility at the

time of the disposal of the “hazardous substances” generated in

Agent Orange production?

5. Section 707 of the Defense Production Act, 50 U.S.C.

app. § 2157, provides that no person shall be held liable for

damages or penalties for any act or failure to act resulting

directly or indirectly from compliance with an order issued

pursuant to the Act. Under that provision, is Hercules immune

from liability for environmental clean-up costs resulting directly

or indirectly from Hercules’ compliance with the rated orders

and directive issued pursuant to the Act that required Hercules

to produce Agent Orange for the United States?

6. Is Hercules entitled to indemnity from the United

States for liability for environmental clean-up costs incurred by

Hercules resulting directly or indirectly from Hercules’ compli-

ance with the rated orders and directive issued pursuant to the

Defense Production Act that required Hercules to produce

Agent Orange for the United States?

LIST OF PARTIES

The parties to the proceedings in the United States Court

of Appeals for the Eighth Circuit were as follows:

(1) Appellant Hercules Incorporated (a wholly

owned subsidiary, Copenhagen Pectin A/S, a Danish

corporation, in turn owns a 40 per cent share of Genu

Products Philippines, Inc., a Philippines corporation;

the other 60 per cent of Genu Products is owned by

individuals, but the shares are not traded on any

market);

(2) Appellee The United States of America:

(3) Appellant Arkansas Department of Pollution

Control and Ecology;

(4) Appellant Vertac Chemical Corporation (no par-

ent and no publicly traded subsidiaries or affiliates):

(5) Appellant Uniroyal Chemical, Ltd. (Parent: Uni-

royal Chemical Company, Inc.).

TABLE OF CONTENTS

Pages

QUESTIONS PRESENTED .........ec6. i

ee ee I a's kk ee Re le eee ill

py Boe iss 6 ly... re Vv

PETITION FOR A WRIT OF CERTIORARI .... |

ee eet SnD l

GROUNDS FOR JURISDICTION ......... 2

PI ae ee eae we a Cte ee oe 2

osAtpm: OF THECASE............ 5

Hercules’ compelled production of

Pe: a 5 Oa es 6 be ae ee 8

The United States’ environmental

enforcement activity. ............ 15

BASIS FOR FEDERAL JURISDICTION

aa EGGes SARS SCE GARE ot te 16

REASONS FOR GRANTING THE WRIT ..... 16

PE a a a ve eee ee oe 19

ee re erry ae 19

Immunity and implied indemnity under the

Defense ProductionAct........... 29

EE kd ce ek oe ia 31

TABLE OF AUTHORITIES

Cases Pages

Armstrong v. United States, 364 U.S. 40 (1960) . . 28

Cadillac Fairview/California, Inc. v. United States,

41 F.3d 562 (Oth Cir. 1994) .......4.. 23

CPC Int’l, Inc. v. Aerojet-General Corp., 759 F.

Supp. 1269 (W.D. Mich. 1991) ........ 23

FMC Corp. v. United States Dep’t of Commerce,

29 F.3d 833 (3d Cir. 1994) (en banc) . 18, 25, 26, 27, 28

FMC v. United States Dep't of Commerce, 786 F.

Supp. €71 (2D. Pa. 1992) 2. we ee 26

General Electric Company v. AAMCO Transmis-

sions, Inc., 962 F.2d 281 (2d Cir. 1992) ... 24

Yercules Incorporated v. United States, 24 F.3d

188 (Fed. Cir. 1994), petition for cert. filed, 63

U.S.L.W. 3388 (No. 94-818) ......... 30, 31

In re Agent Orange Prod. Liab. Litig., 597 F. Supp.

740 (E.D.N.Y. 1984), aff'd, 818 F.2d 145 (2d

EY so i ae ee Sk a ee ee 10

Kaiser Aetna v. United States, 444 U.S. 164, 100

S.Ct. 383, 62 L.Ed.2d 332 (1979) ...... 28

Kelley v. Thomas Solvent Co., 727 F. Supp. 1532

ve eS | rae ee 22

Levin Metals Corp. v. Parr-Richmond Terminal Co.,

781 F. Supp. 1454 (N.D. Cal. 1991) ..... 21

Loretto v. Teleprompter Manhattan CATV Corp.,

a SRE « vw ee 028 818 Oe 8 28

Louisiana-Pacific Corporation v. ASARCO Incorpo-

rated, 24 F.3d 1565 (9th Cir. 1994),

cert. denied, 115 S. Ct. 780 (1995) ...... 24

Cases Pages

Lucas v. South Carolina Coastal Council, 112 S.Ct.

ar ara ee an ee 28

New York v. Shore Realty Corp., 759 F.2d 1032 (ist

OP A ikea dig ig ee 21

Northwestern Mut. Life Ins. Co. v. Atlantic Research

Corp., 847 F. Supp. 389 (E.D. Va. 1994)... 22

Nurad, Inc. v. Hooper & Sons Co., 966 F.2d 837

(4th Cir.), cert. denied, 113 S. Ct. 377 (1992) 22

Perkins v. Lukens Steel Co., 310 U.S. 113 (1940) . 27

Riverside Market Devel. Corp. v. International Bidg.

Prods., Inc., 931 F.2d 327 (5th Cir. 1991),

cert. denied, 112 S. Ct. 636 SPE tag ares 21

Robertshaw Controls Co. v. Watts Regulator Co.,

807 F. Supp. 144 (D. Me. a re eee 22

Sidney S. Arst Co. v. Pipefitters Welfare Educ. Fund,

25 F.3d 417 (7th Cir. 1994)... ....~.... 21

U.S. v. Fleet Factors Corp., 901 F.2d 1550 (11th

Cir. 1990), cert. denied, 498 U.S. 1046 (1991) 22

United States of America v. Vertac Chemical Corpo-

ration, ___F.3d___ (8th Cir. ee «ws as ]

United States v. Aceto Agric. Chem. Corp., 872 F.2d

oe ee 20, 23, 24

United States v. Arrowhead Refining Co., 829 F.

Supp. (D. Minn. 1992) ............ 20

United States v. Bliss, 667 F. Supp 1298 (E.D. Mo.

i MR Ee ER ee er ee 23

United States v. Carolina Transformer Co., 978 F.2d

on OU, POND . wk eke cd: 22

Vii

Cases Pages

United States v. Causby, 328 U.S. 256 (1946) . . . 28

United States v. Dart Indus., Inc., 847 F.2d 144

a er ee eee 27

United States v. Gurley, 43 F.3d 1188 (8th Cir. 1994) 20, 22

United States v. New Castle County, 727 F. Supp.

oo | re eee ee 25, 27

United States v. Northeastern Pharmaceutical &

Chemical Co., Inc., 810 F.2d 726 (8th Cir.

1986), cert. denied, 484 U.S. 848 (1987) . . . 19, 20, 24

United States v. Vertac Chemical Corp., 841

F. Supp. 884 (E.D. Ark. 1993) ........ 2

United States v. Vertac Chemical Corporation,

Civil Action Nos. LR-C-80-109, LR-C-80-

110, in the United States District Court for

the Eastern District of Arkansas, Western

LP ere ee ee 1

United States v. Ward, 618 F. Supp. 844 (E.D. N.C.

SE acho hie 00s oe ek 24

Statutes

Se eae 8 kk a nes ee oe eee Om 2

es a A ko ee ee 84 eee 16

CERCLA § 101, 42 U.S.C.§9601......... 3, 4, 22

CERCLA § 106, 42 U.S.C. § 9606......... 17

CERCLA § 107,42 U.S.C.$9607......... de Se AT be

COAALA S$ 196, 42 UBL. O9GIS «ee ee 16, 17

CERCLA § 120, 42 U.S.C. §9620......... 3

Vili

Pages

Comprehensive Environmental Response,

Compensation, and Liability Act of 1980, as

amended, 42 U.S.C. §§ 9601, et seq.

CRE Pie cua On passim

Defense Production Act, 50 U.S.C. app.

ee re a ee passim

Defense Production Act, Section 101(a), 50

MA OOD. SPOT. wc 4

Defense Production Act, Section 707, 50

Vaan MO GZS? 2. cw ke ck 11, 4, 29, 30, 31

Federal Insecticide, Fungicide, and Rodenticide Act,

7US.C. § 136, et seg. (“FIFRA”) ...... 12

Renegotiation Act of 1951, 50 U.S.C. app. § 1211) 12

Solid Waste Disposal Act, Section 1004(3), 42

te: I en 4

Walsh-Healey Public Contracts Act, 41 U.S.C.

§§ 35, et seq. (“Walsh-Healey Act”) ..... 14, 27

Miscellaneous

Brief Amicus Curiae of the Chamber of Commerce

of the United States of America in Support of

the Petitioners, Hercules v. United States

RP ce ee 31

Defense Contract Audit Agency, Guidance Paper on

Environmental Costs (October 14, nn 7

General Accounting Office, DOD Environmental

Cleanup, GAO/NSIAD-92-253FS

Os ek el ced w ec 7

Pages

S. Rep. No. 1599, 82d Cong., 2d Sess. (1952), re-

printed in 1952 U.S.C.C.A.N. 1789,

SE a acs See oe ee oe ee ee 30

IN THE

Supreme Court Of The United States

OCTOBER TERM, 1994

No. 94-

HERCULES INCORPORATED

Petitioner,

UNITED STATES OF AMERICA,

Respondent.

Petition For Writ Of Certiorari

to The United States Court Of Appeals

for The Eighth Circuit

PETITION FOR A WRIT OF CERTIORARI

Hercules Incorporated (“Hercules”), hereby petitions for a

writ of certiorari to review the judgment and opinion of the

United States Court of A>peals for the Eighth Circuit, entered

in this action on January 31, 1995.

PREVIOUS OPINIONS

A reprinted copy of the opinion of the United States Court

of Appeals for the Eighth Circuit, entered January 31, 1995,

reported as United States of America v. Vertac Chemical Cor-

poration, ___ F.3d ____ (8th Cir. 1995), is attached hereto as

Appendix A.

A reprinted copy of the Order entered October 7, 1993, in

United States v. Vertac Chemical Corporation, Civil Action

Nos. LR-C-80-109, LR-C-80-110, in the United States District

Court for the Eastern District of Arkansas, Western Division, is

attached hereto as Appendix B.

A reprinted copy of the Memorandum Opinion and Order

of the District Court entered October 12, 1993, reported as

United States v. Vertac Chemical Corp., 841 F. Supp. 884 (E.D.

Ark. 1993), is attached hereto as Appendix C.

A reprinted copy of the Judgment of the District Court,

entered March 3, 1994, is attached hereto as Appendix D.

GROUNDS FOR JURISDICTION

This Court has jurisdiction pursuant to 28 U.S.C. § 1254

to review by writ of certiorari the judgment of the United States

Court of Appeals for the Eighth Circuit dated January 31, 1995,

which is the subject of this Petition.

STATUTES

1. CERCLA Section 107(a), 42 U.S.C. § 9607(a):

Notwithstanding any other provision or rule of law,

and subject only to the defenses set forth in subsection

(b) of this section —

(2) any person who at the time of disposal of

any hazardous substance owned or operated any

facility at which such hazardous substances were

disposed of,

(3) any person who by contract, agreement, or

otherwise arranged for disposal or treatment . . .

of hazardous substances owned or possessed by

such person, by any other party or entity, at any

facility . .. owned or operated by another party

or entity and containing such hazardous sub-

stances .. . shall be liable for—

(A) all costs of removal or remedial action

incurred by the United States Government

or a State . . . not inconsistent with the

national contingency plan;

(B) any other necessary costs of response

incurred by any other person consistent

with the national contingency plan... .

CERCLA Section 101(21), 42 U.S.C. § 9601(21):

The term “person” means an individual, firm, corpo-

ration, association, partnership, consortium, joint

venture, commercial entity, United States Govern-

ment, State, municipality, commission, political sub-

division of a State, or any interstate body.

CERCLA Section 120(a)(1), 42 U.S.C. § 9620(a)(1):

Each department, agency, and instrumentality of the

United States (including the executive, legislative,

and judicial branches of government) shall be subject

to, and comply with, this chapter in the same manner

and to the same extent, both procedurally and substan-

tively, as any nongovernmental entity, including li-

ability under section 9607 of this title. Nothing in this

section shall be construed to affect the liability of any

person or entity under sections 9606 and 9607 of this

title.

CERCLA Section 101(20)(A), 42 U.S.C. § 9601(20)(A):

The term “owner or operator’ means ... (ii) in the

case of an onshore facility or an off-shore facility, any

person owning or operating such facility .. . .

5. CERCLA Section 101(29), 42 U.S.C. § 9601(29):

The term[ } “disposal” . . . shall have the meaning

provided in section 1004 of the Solid Waste Disposal

Act [42 U.S.C. § 6903].

6. Solid Waste Disposal Act, Section 1004(3), 42 U.S.C.

§ 6903(3):

The term “disposal” means the discharge, deposit,

injection, dumping, spilling, leaking, or placing of

any solid waste or hazardous waste into or on any land

or water so that such solid waste or hazardous waste

or any constituent thereof may enter the environment

or be emitted into the air or discharged into any

waters, including ground waters.

7. Defense Production Act, Section 101(a), 50 U.S.C. app.

§ 2071 (a):

The President is hereby authorized (1) to require that

performance under contracts or orders (other than

contracts of employment) which he deems necessary

or appropriate to promote the national defense shall

take priority over performance under any other con-

tract or order, and, for the purpose of assuring such

priority, to require acceptance and performance of

such contracts or orders in preference to other con-

tracts or orders by any person he finds to be capable

of their performance, and (2) to allocate materials and

facilities in such manner, upon such conditions, and

to such extent as he shall deem necessary or appropri-

ate to promote the national defense.

8. Defense Production Act, Section 707, 50 U.S.C. app.

§ 2157:

No person shall be held liable for damages or penalties

for any act or failure to act resulting directly or indi-

rectly from compliance with a rule, regulation or order

issued pursuant to this Act, notwithstanding that any

such rule, regulation, or order shall thereafter be de-

clared by judicial or other competent authority to be

invalid.

STATEMENT OF THE CASE

This case involves the convergence of two powers of

government: the power of government to force its citizens to

assist their country in time of war and the power of government

to force its citizens to clean up the environment. At issue is the

degree of responsibility that the United States must bear when

a citizen’s compliance with the government’s wartime orders

results in environmental conditions that the government later

orders to be cleaned up.

Conflicting demands that the government placed upon

Hercules by orders separated in time by nearly two decades form

the basis for this Petition. Underlying the case are unsettled

legal questions concerning the scope of liability under CERCLA

and the scope of protection that the United States extends to its

contractors when the United States compels them to produce

strategically important goods during time of war under the

authority of the Defense Production Act. Through this Petition,

Hercules asks this Court to remove the inconsistency of inter-

pretation and application of these laws that have developed in

the District Courts and the Courts of Appeals, and to afford

Hercules relief from the punishment that the rulings below, if

allowed to stand, will inflict upon Hercules for complying with

the government’s wartime orders.

The courts below in this case have absolved the United

States from any responsibility for its role in creating the condi-

tions at the Vertac Superfund site in Jacksonville, Arkansas, that

the government now contends needs to be cleaned up under

CERCLA. Those courts have shifted to Hercules costs of the

Vietnam War that properly should be borne by the United States,

by finding that Hercules should pay the entire cost of cleaning

the site of materials that were generated by Agent Orange

manufacturing operations that the government compelled Her-

cules to conduct, as well as the entire cost of cleaning up

materials for which others are responsible — and by finding that

the government should have no responsibility whatsoever.

In the 1960s, decision-makers at the highest levels of the

United States government made the determination that prose-

cuting the Vietnam War was critical to the interests of this

nation, and that the defoliant Agent Orange, which had been

developed by the United States military, was critical to the

success of the United States in that war. (JA,! Tab 19, #] 56-81).

Based upon those determinations, the United States ordered

Hercules to devote its entire herbicide-manufacturing capacity

to the production of Agent Orange — a product that was unlike

any Hercules ever made for a private customer — knowing that

the production would generate a contaminant known as dioxin.

Hercules could not legally refuse the orders, and complied with

them.

More than a decade later, Congress made the determina-

tion, embodied in CERCLA, that the national interest requires

many sites where disposal of hazardous substances? historically

occurred to be cleaned up. A key element of that statutory

program required parties who had engaged in activities that

resulted in a clean-up requirement to pay clean-up costs, even

though the activities when conducted were lawful, were scien-

tifically responsible, and fully complied with the accepted prac-

tices of the time.

| “JA” refers to the Joint Appendix filed in the proceedings before the

United States Court of Appeals for the Eighth Circuit.

2 “Hazardous substances” meant nothing to Hercules or anyone else

until 1980, when CERCLA first defined such substances and keyed liability

to their release or disposal. This Petition refers to hazardous substances as

CERCLA now defines them.

co Nt inl

The United States decided that the manufacturing plant

Hercules had used in the 1960s to produce Agent Orange, but

leased in 1971 and sold in 1976, needed to be cleaned up. The

government seeks to hold Hercules liable for the clean-up of

hazardous substances that were generated by Hercules’ govern-

ment-compelled manufacture of Agent Orange at the plant.

There is no suggestion that Hercules’ activities were un-

lawful or irresponsible. Indeed, the record shows that Hercules

took steps to prevent the leaks, spills, and other releases that are

inevitable in manufacturing operations and promptly cleaned up

any that occurred. CERCLA does not afford a defense to

liability to either private parties or the government for such

diligence, however.

The court below incorrectly construed CERCLA’s liability

provisions and incorrectly restricted the protections afforded

contractors under the Defense Production Act. As a result, the

court approved the United States’ improper attempt to shift to

Hercules one of the costs of prosecuting the Vietnam War which

properly should be borne by the United States.

Ironically, if Hercules still owned the Jacksonville facility

and used it to manufacture goods to deliver to the United States

under government contract, the government likely would allow

the costs to clean up the historical conditions at the site to be

passed on to the government under present-day Department of

Defense (“DOD”) policies.3_ The inconsistent policy that the

government advocates in this case would therefore have the

> See Defense Contract Audit Agency, Guidance Paper on Environ-

mental Costs (October 14, 1992) (Appendix E): “Environmental costs are

normal costs of doing business and are generall y allowable costs if reasonable

and allocable. . . Environmental costs include . . . costs to clean up prior

contamination . . . including legal costs.” The General Accounting Office

estimated in June, 1992, that DOD had reimbursed contractors a total of about

$59 million in environmental costs. General Accounting Office, DOD

Environmental Cleanup, GAO/NSIAD-92-253FS (June 26, 1992) (Appen-

dix F).

effect of penalizing Hercules merely for no longer using this site

for DOD contract activities.

Hercules respectfully urges this Court to issue a writ of

certiorari and reverse the Eighth Circuit’s decision.

Hercules’ compelled production of Agent Orange

During wartime, the United States possesses extraordinary

authority to compel private manufacturers to produce goods that

the government considers to be essential for the war effort.

Manufacturers receiving such orders must comply, even if it

means that they cannot meet their contractual obl: gations to their

customers and must abandon the commercial mai ket because of

their obligation to comply with the government’s demands. If

companies fail to comply, the government may impose civil and

criminal sanctions and effectively take over the production

facilities through the use of mandatory injunctions. Defense

Production Act, 50 U.S.C. app. §§ 2061, et seq.

The government’s demands for Agent Orange for the Vi-

etnam War doomed to failure Hercules’ attempt to develop a

commercial herbicide business. Indeed, the United States re-

jected Hercules’ request for relief from the government’s Agent

Orange orders so that Hercules could meet the needs of its

commercial customers. Instead, after Hercules initially sought

some Agent Orange business, the government increased its

demand to the point that it required Hercules to devote its entire

manufacturing capacity to Agent Orange. Thus, when the

United States in December, 1968, abruptly canceled its Agent

Orange orders that it had forced Hercules to accept, Hercules’

commercial business had been irreparably damaged, causing

Hercules to shut down the plant and abandon the herbicide

business shortly thereafter.

The government’s decision to use defoliants in Vietnam

marked the culmination of DOD research and experimentation

that began during World War II, when the United States military

had sought to develop aerial spraying of herbicides as a strategic

weapon. By removing the canopy of foliage from forests or

jungles, enemy positions could more easily be detected and

destroyed. The enemy’s food crops could also be destroyed.

(JA, Tab 19, Ff 15-23).

After experimenting with a large number of herbicide

“agents,” DOD settled on Agent Orange as its defoliating agent

of choice for use in Vietnam. That agent consisted of equal parts

of the undiluted n-butyl esters of 2,4-D* and 2,4,5-T ,° which

DOD had concluded by 1951 were the most effective agents for

crop destruction. (JA, Tab 19, $¥ 24, 73-74). DOD also knew,

from its years of study and experimentation, of the toxic effects

of an impurity of Agent Orange, TCDD or dioxin,® that DOD

had identified by 1957. (JA, Tab 19, 4] 38-54).

Thus, when the United States ordered Hercules to produce

Agent Orange, it knew that the Agent Orange manufacturing

process necessarily would result in the generation and release of

what are now classified as hazardous substances, including

dioxin. (JA, Tab 19, ] 38-54, 139). By invoking its authority

under the Defense Production Act to require Hercules to produce

vast quantities of Agent Orange, the United States subjected

Hercules to the risks, whether then known or not, that would

result from that production. One of those risks —- which neither

the United States nor Hercules could have foreseen at the time

— was that the United States would someday require then-un-

detectable concentrations of dioxin in soil, on buildings, and in

* 24-Dis 2,4-dichlorophenoxyacetic acid, a weed killer.

2,4,5-T is 2,4,5-trichlorophenoxyacetic acid, a brush killer.

. TCDD, or 2,3,7,8-tetrachlorodibenzo-para-dioxin, today is considered

to be the most toxic isomer of a family of chemicals known generally as

dioxins. “Dioxin,” as used in this Petition, refers to TCDD. TCDD is

produced in minute amounts when 2,4,5-T is produced. In contrast to the

wealth of knowledge accumulated by the United States, Hercules first learned

of the impurity dioxin in February, 1965.

process equipment to be cleaned up.’ With the passage of

CERCLA and its enforcement by the United States that risk

became a reality.

Around the same time that the United States decided to use

herbicides for military purposes in Vietnam, Hercules coinci-

dentally entered the commercial herbicide business as a com-

plement to its agricultural chemicals business. In late 1961,

Hercules bought Reasor-Hill Corporation’s Jacksonville plant

(which comprised a small part of the Arkansas Ordnance Plant

that DOD had used for the manufacture of munitions from the

1930s through World War I) and associated equipment. Little

more than two years later, however, DOD’s demand for Agent

Orange to defoliate the jungles of Vietnam swiftly eliminated

the possibility that Hercules’ planned commercial herbicide

business could succeed.

In June, 1964, the United States issued the first of what

would be 14 orders over a period of less than four years for a

total of 2,755,047 gallons of Agent Orange.® (JA, Tab 19,

{Y 95). These were no ordinary orders, however. The United

States ordered a product that Hercules had never before made,

and never made thereafter for any customer other than the

United States. The product was designed by the United States

and made to the specifications demanded by the United States.

(JA, Tab 19, F¥ 98, 123).

The United States’ orders to Hercules also differed from

ordinary contracts in that Hercules could not refuse them. The

United States issued all of its orders for Agent Orange from

1964-1968 as DO-rated orders under the Defense Production

Act. In re Agent Orange Prod. Liab. Litig., 597 F. Supp. 740,

7 Not only could passage of such a retroactive law not be foreseen, but

the concentrations of dioxin in dust and soil at the plant could not even have

been detected using test methods that were available in the 1960s.

8 The United States paid Hercules a total of about $15 million for all of

the Agent Orange Hercules produced. Present estimates of clean-up costs

total more than ten times that amount.

—aEEEEEEEEEEEEEEee

9 Min

844 (E.D.N.Y. 1984), aff'd, 818 F.2d 145 (2d Cir. 1987).

Hercules would have been subject to civil and criminal penal-

ties, as well as mandatory injunctions, if it had not complied with

DOD’s demands. (JA, Tab 19, | 83).

Unlike the rest of Hercules’ herbicide products, which

consisted of formulations having only a few percent active

ingredient, such as 2,4-D or 2,4,5-T, in a mixture of inert

ingredients, Agent Orange was full strength herbicide designed

by the military to be sprayed from aircraft over vast areas of

jungle. (JA, Tab 19, ¥ 123). It had no commercial market. (JA,

Tab 19, ] 123). It was far too potent for agricultural use. More-

over, it was designed to drift widely to maximize coverage. That

trait aided the military goal of defoliating large tracts of jungle

and cropland, but would have caused disastrous consequences

for farmers and Hercules’ other commercial customers, who

depended upon the ability to apply herbicide products to their

own property without killing or damaging their neighbors’ crops

or other foliage.

In addition to supplying exact specifications for the com-

position of Agent Orange, the United States supplied many other

specifications and military standards touching upon nearly

every aspect of production. (JA, Tab 19, ¥¥ 24, 31-34, 36, 98,

99). The United States left virtually no detail of the transactions

to Hercules’ discretion. Controls that the United States imposed

upon Hercules included:

« The United States specified the composition of Agent

Orange, which DOD had developed.

¢ The United States specified the tests and test methods that

it required Hercules to use to prove to the United States that

Hercules’ Agent Orange had the composition and quality

specified by the United States. (JA, Tab 19, J 98-99).

« The United States dictated the price that it would pay for

Agent Orange, and retained the right to renegotiate the

contracts if it believed Hercules was making “excess prof-

its.” (JA 02168, exh. 53, { 11, incorporating Renegotiation

Act of 1951, 50 U.S.C. app § 1211).

The United States required Hercules to use the priority

rating system in Hercules’ orders to all of its raw materials

suppliers. (JA, Tab 19, J 86; JA 02132-33; JA 03303).

The United States waived import duties on materials that

Hercules had to import to meet its Agent Orange produc-

tion requirements because of domestic shortages. (JA,

Tab 19, ¥ 112).

The United States promulgated precise requirements for

the packaging, labelling, storing, and shipping of the fin-

ished Agent Orange, including the size and location of the

orange stripe on the drums that identified the contents as

Agent Orange and the precise manner in which drums of

Agent Orange could be placed into rail cars for shipment.

(JA, Tab 19, { 128).

The United States sent inspectors to the plant on a near-

daily basis to ensure compliance with the government’s

requirements. If an inspector found that Hercules had not

complied with its obligations in any way, the United States

directed Hercules to correct the non-compliance. (JA,

Tab 19, ¥¥ 91-93).

The United States prohibited Hercules from seeking or

obtaining registration of Agent Orange under the Federal

Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C.

§ 136, et seg. (“FIFRA”), which would have been required

if Hercules had produced Agent Orange as a commercial

product. The United States ordered Hercules not to put

warnings or use instructions on Agent Orange containers

which would have been required under FIFRA. (JA,

Tab 19, ¥ 130).

The government’s consistently increasing demands for

Agent Orange cuiminated on March 24, 1967, when the

United States issued a directive to Hercules which required

Hercules to divert its entire production capacity of 2,4,5-T

to Agent Orange. (JA, Tab 19, ¥¥ 76-80, 102).

The directive required Hercules to provide the government

with detailed monthly reports regarding production, total

shipments, shipments against rated orders, and end-of-the-

month inventory accounting of 2,4,5-T and 2,4-D. (JA,

Tab 19, #f 102-103).

Because of Hercules’ equipment configuration, the re-

quirement for Hercules to devote its entire 2,4,5-T manu-

facturing capacity to Agent Orange likewise diverted all

2,4-D production capacity to Agent Orange, thereby pre-

cluding all commercial sales. (JA, Tab 19, F¥ 82-88, 102-

105).

When Hercules could still not produce enough Agent Or-

ange to satisfy the demand of the United States, the United

States required Hercules to expand its plant Capacity, and

issued a rated order with priority ratings to help Hercules

acquire new equipment. (JA, Tab 19, #{ 100-101, 115).

This rated order violated the government’s own regulations

that rated orders could not be used for Capital equipment.

Hercules’ increased production Capacity was devoted to

Agent Orange production.

A shortage of TCB,? the essential raw material required

for the manufacture of 2,4,5-T, impaired Hercules’ ability

to meet government demands for Agent Orange. The

United States issued directives directly to TCB manufac-

turers to supply Hercules with sufficient TCB to produce

Agent Orange in the quantities that the United States

required. (JA, Tab 19, | 113).

TCB is the shorthand notation for 1,2,4,5-tetrachlorobenzene. Hercu-

les did not manufacture TCB.

¢ Hercules could not use TCB and other raw materials ac-

quired through the use of directives, rated orders, or duty

waivers for any purpose other than the manufacture of

Agent Orange for the government without subjecting itself

to criminal or civil penalties. (JA, Tab 19, ¥¥ 83, 112).

¢ Because of the United States’ demands, Hercules could not

satisfy its contractual requirements to existing customers,

much less develop new ones. The United States rejected

Hercules’ request for some relief from the government’s

rated orders so that it could satisfy its pre-existing commer-

cial commitments. (JA, Tab 19, FJ 104-105).

¢ The United States’ use of rated orders subjected Hercules

involuntarily to the health and safety requirements of the

Walsh-Healey Public Contracts Act, 41 U.S.C. §§ 35, et

seq. (“Walsh-Healey Act”). Hercules otherwise would not

have been subjected to such standards, since general occu-

pational health and safety regulations had not yet been

imposed upon industry at the time. The health and safety

requirements placed in the contracts covered plant condi-

tions which might affect safety, including releases and

spills of materials, clean-up of materials to which workers

could be exposed, and “housekeeping” practices, which

included disposal activities. (JA, Tab 19, f] 151-156).

e During two inspections conducted pursuant to the Walsh-

Healey Act, the United States’ inspectors undoubtedly

observed Hercules’ disposal practices, and the government

now admits that it knew or should have known about

Hercules’ disposal activities. (JA, Tab 19, ff 126, 139,

157, 160). Presumably, the inspectors could have ordered

Hercules to take corrective action.

The March 1967 directive, the rated order contracts, the

near-constant presence of government inspectors at the plant,

and contract provisions inserted pursuant to the Walsh-Healey

Act gave the United States virtually unlimited control over

Hercules’ production. Indeed, the military commandeered not

only all of Hercules’ manufacturing capacity at the Jacksonville

plant, but the entire domestic capacity for producing 2,4,5-T, as

well. Apart from World War II, this may be the only instance

in United States history in which an important commercial

product has been completely removed from the market to meet

military requirements. (JA, Tab 19, 7 81).

The United States’ environmental enforcement activity

Nearly a decade after Hercules first leased the plant to

Vertac Chemical Corporation (“Vertac”) the United States,

through the Environmental Protection Agency (“EPA”), sued

Vertac and Hercules. The United States contended that Hercu-

les had contaminated the site through the activities that the

United States, through DOD, had ordered Hercules to carry out.

Unlike Hercules, which kept the plant in good repair to prevent

releases from the process areas into the environment, Vertac had

allowed the plant to deteriorate. It is now known that leaks and

spills of materials became widespread during Vertac’s operation

of the plant. A Consent Decree was entered in this case in

January, 1982, requiring Vertac alone to clean up the site.

Vertac abandoned the site in February, 1987, leaving be-

hind its Consent Decree obligations, more than 3,000 drums of

waste generated in the ?,4,5-T manufacturing process (“T-

waste”), and more than 25,000 drums of waste from the 2,4-D

process (“D-waste”’). In addition to the drums, Vertac left

behind — i.e., “disposed of” — a staggering array of hazardous

substances in the process equipment, tanks, piping, and other

vessels. The deterioration of these structures create the threat

that the hazardous substances will be released into the environ-

ment. The abandoned and decaying buildings add a physical

danger.

With Vertac in receivership and its assets depleted, the

United States now seeks to force Hercules to pay for the entire

cost of cleaning up the Vertac site, even though most of the

problems at the site are attributable to Vertac’s operations and

pose a hazard today only because Vertac abandoned the site and

the 1982 Consent Decree. At the same time, the United States

ignores the reality that the United States itself directed Hercules’

activities which form the basis for the liability EPA alleges.

Moreover, despite the unrefuted evidence in the record that the

environmental harm at the Vertac site is divisible, the United

States EPA has taken the position that the harm is not divisible,

and that Hercules is jointly and severally liable for all costs of

clean-up at the Vertac site. Upon motion by the United States,

the trial court entered summary judgment against Hercules on

that issue, but the order is not yet appealable.

Thus, as the case stands now, Hercules finds itself in the

position of having been held entirely liable for the clean-up of

the Vertac site, largely because it obeyed the wartime orders of

the United States.

BASIS FOR FEDERAL JURISDICTION

IN THE DISTRICT COURT

The District Court had jurisdiction pursuant to 28 U.S.C.

§ 1331 and 42 U.S.C. § 9613.

REASONS FOR GRANTING THE WRIT

Inconsistent, unpredictable judicial interpretations of

CERCLA’s liability provisions have turned environmental liti-

gation and administrative enforcement proceedings into a high

stakes gamble, as this case illustrates. Because of the uncer-

tainty, parties against whom CERCLA claims are made cannot

accurately predict whether they are subject to liability for clean-

up costs, or whether others are liable for a share of the costs.

The lack of uniformity places these parties on the horns of

a dilemma. On one hand, the inconsistent interpretations of

CERCLA liability provisions, together with the massive poten-

tial liability that may result from a finding of CERCLA liability,

encourages parties to litigate their liability and that of others.

On the other hand, CERCLA inflicts extraordinary penalties

upon parties who decline to fund or undertake a clean-up, and

are thereafter found to be liable.! Those consequences may

cause parties who are uncertain of their liability because of

inconsistent judicial interpretations to comply with government

demands to undertake or fund clean-ups, even though they have

a good faith basis for believing they are not liable. When the

government is also potentially liable, as it is in this case, uniform

and predictable applications of CERCLA principles are espe-

cially important to dispel the perception that CERCLA’s liabil-

ity rules are applied more leniently to the government than they

are to private parties.

The Eighth Circuit compounds the problem resulting from

the inconsistent judicial interpretations of CERCLA’s liability

provisions by its restrictive reading of the immunity provision

of the Defense Production Act — which on its face is not

restricted in any way. If allowed to stand, the court’s ruling

would put defense contractors which were compelled to produce

strategically important goods for the United States military at

7 2 person who, without sufficient cause, willfully violates, or fails or

refuses to comply with, an order issued under CERCLA § 106(a), 42 U.S.C.

§ 9606(a), is subject to fines of up to $25,000 for each day of violation or

failure to comply. CERCLA § 106(b)(1), 42 U.S.C. § 9706(b)(1). The

non-complying person is also subject to liability for the costs of clean-up as

well as punitive damages of up to three times the costs that are incurred by

Superfund. CERCLA §§ 107(a), 107(c)(3), 42 U.S.C. §§ 9607(a),

9607(c)(3). Since federal courts have no jurisdiction to review the remedy

that EPA selects or the propriety of orders issued under Section 106 (a) until

EPA chooses to bring an action to recover costs under Section 107 or to

enforce an order under Section 106 (a), or until the responsible party complies

with the order and seeks to make a claim against the Superfund under Section

106 (b), the pressure upon a party to comply with an EPA order is intense.

CERCLA § 113(h), 42 U.S.C. § 9613(h).

risk of incurring millions of dollars in CERCLA liability result-

ing from their compliance with government orders.!!

Unlike contractors today, who build environmental costs

into their contract prices with the government,!? during the

Vietnam War contractors could not have foreseen that a statute

passed more than a decade later would retroactively impose

hundreds of millions of dollars in liability upon them because

they obeyed government orders. The Eighth Circuit has shifted

those costs of waging war from the government to the contrac-

tors.

This Court has not construed the “operator” and “arranger”

liability provisions of CERCLA that are at issue in this case.

Likewise, this Court has not determined the level of protection

that the Defense Production Act affords contractors which are

required to comply with the government’s rated orders. This

case reflects the inconsistency and conflict in lower courts’

rulings in these areas. Indeed, the result ordered by the Eighth

Circuit is directly contrary to the result in a case that the

government itself represented to the Third Circuit “involve[s]

the same or similar issues to those presented in [the FMC ]

appeal.” FMC Corp. v. United States Dep’t of Commerce, 29

F.3d 833, 846 (3d Cir. 1994) (en banc). Both the government

and industry need the Court’s direction on these matters.

'l In this case alone, EPA estimates that cleanup costs may exceed $150

million.

See supra note 3 and accompanying text.

ARGUMENT

CERCLA liability

Rarely, if ever, has a single statute had the sweeping effect

on American industry, business, banking, and real estate that

CERCLA has had. Overnight, CERCLA created billions of

dollars in potential liability for conditions that had resulted from

practices that at the time were legal and scientifically reasonable.

The magnitude of CERCLA liability is matched only by

the uncertainty of application of its liability provisions. The

Statute provides no guidance on standards to be applied to

“operator” and “arranger” liability. CERCLA defines an “op-

erator” of a facility as a person who “operates” the facility. The

statute does not attempt even such a circular definition of an

“arranger” for disposal of hazardous substances. It merely

provides that a person who “by contract, agreement, or other-

wise” arranges for disposal of hazardous substances at a facility

is liable as an “arranger.” Perhaps unsurprisingly, no uniform

or predictable standards have emerged in the case law for

“operator” or “arranger” liability determinations under CER-

CLA. The opinion of the Court of Appeals in this case empha-

sizes the conflicts in the cases which address these issues.

As it pertains to CERCLA liability (i.e., setting aside

Defense Production Act immunity and indemnity), this case

turns upon whether a “person” who contractually imposes some

control over the disposition of hazardous substances, and who

has the statutory and contractual authority to do more, can avoid

clean-up liability by doing nothing while disposal occurs. In

previous cases, the Eighth Circuit itself ruled that “{iJ]t is the

authority to control the handli..g and disposal of hazardous

substances that is critical under the [CERCLA] statutory

scheme.” United States v. Northeastern Pharmaceutical &

Chemical Co., Inc., 810 F.2d 726, 743 (8th Cir. 1986), cert.

denied, 484 U.S. 848 (1987) (“NEPACCO’”) (emphasis sup-

plied). Those who had the authority to control, even absent

contract provisions like those in the Agent Orange contracts,

would not be allowed in the Eighth Circuit “to simply ‘close

their eyes’ to the method of disposal” of hazardous substances.

United States v. Aceto Agric. Chem. Corp., 872 F.2d 1373, 1382

(8th Cir. 1989). Instead, such persons would be held liable for

the clean-up that the disposal made necessary.

Thus, corporate officers who had the authority to control

the corporation’s hazardous substances disposal, but did not act,

could be held liable. NEPACCO, supra. So, too, could a

company which supplied the raw material to a formulator for

conversion into a finished product to be returned to the supplier,

knowing that waste would inherently be generated in the proc-

ess. The Eighth Circuit in 1989 found that the ownership by the

customer of the raw material, work in process, and finished

product evidenced the critical authority to control the disposal

of hazardous substances, even though no contract provision

addressed the disposal issue. Aceto, supra. In short, a party who

“retain[s] the authority to control the handling and disposition

of a hazardous substance and, by failing to act, in effect, de-

cide[s} upon the disposition by negative personal involvement”

is liable under CERCLA. United States v. Arrowhead Refining

Co., 829 F. Supp. 1078, 1091 (D. Minn. 1992), citing

NEPACCO, 810 F.2d at 743. Now, in its decision below, the

Eighth Circuit has allowed the government itself to “close its

eyes” and avoid liability.

Further, the Eighth Circuit, in an opinion issued barely a

month before its decision in this case, acknowledged that its rule

as to operator liability directly conflicts with the rule in other

circuits concerning the extent, if any, to which authority must

be exercised by a party in order for that party to be liable as an

operator. See United States v. Gurley, 43 F.3d 1188, 1192-93

(8th Cir. 1994). The Eighth Circuit summarized the conflict in

court decisions as follows:

Federal courts have struggled with these two con-

cepts when addressing the question of whether an

individual may be found liable as an “operator” under

§ 9607(a)(2). In some circuits, a plaintiff must prove

that an individual defendant had actual responsibility

for, involvement in, or control over the disposal of

hazardous waste at a facility. See Sidney S. Arst Co.

v. Pipefitters Welfare Educ. Fund, 25 F.3d 417, 421

(7th Cir. 1994) (holding that plaintiff must allege that

individual defendant “directly and personally en-

gaged in conduct that led to specific environmental

damage at issue”); Riverside Market Devel. Corp. v.

International Bldg. Prods., Inc., 931 F.2d 327, 330

(5th Cir.) (holding that proper focus is “the extent of

[individual] defendant’s personal participation in the

alleged wrongful conduct”), cert. denied, 112 S. Ct.

636 (1991); New York v. Shore Realty Corp., 759 F.2d

1032, 1052 (1st Cir. 1985) (holding that individual

defendant was “operator” because he was “in charge

of the operation of the facility”); see also Levin Metals

Corp. v. Parr-Richmond Terminal Co., 781 F. Supp.

1454, 1457 (N.D. Cal. 1991) (“an individual cannot

be liable as an ‘operator’ under CERCLA Section

107(a)(2) [42 U.S.C. § 9607(a)(2)]} unless that indi-

vidual actually participates in the operation of the

facility at which hazardous substances are disposed

of, exercised control over the company immediately

responsible for the operation of that facility, or is

otherwise intimately involved in that company’s op-

erations’).

On the other hand, in one circuit, a plaintiff can

succeed by proving less than that; an individual de-

fendant “‘need not have exercised actual control in

order to qualify as [an] operators under § 9607(a)(2),

so long as the authority to control the facility was

present.”” United States v. Carolina Transformer

Co., 978 F.2d 832, 836-37 (4th Cir. 1992) (emphasis

added) (quoting Nurad, Inc. v. Hooper & Sons Co.,

966 F.2d 837, 842 (4th Cir.), cert. denied 113 S. Ct.

377 (1992)); see also Northwestern Mut. Life Ins. Co.

v. Atlantic Research Corp., 847 F. Supp. 389, 397

(E.D. Va. 1994) (holding that individual defendant

may be liable if he has “the ‘authority to control’

activities on the facility”); Robertshaw Controls Co.

v. Watts Regulator Co., 807 F. Supp. 144, 152-53 (D.

Me. 1992) (holding that liability is proper if individual

defendant had authority such that he “could have

prevented the hazardous waste discharge’’); cf. Kelley

v. Thomas Solvent Co., 727 F. Supp. 1532, 1543-44

(W.D. Mich. 1989) (stating that court should “weigh

the factors of the corporate individual’s degree of

authority” but also should consider “evidence of re-

sponsibility undertaken and neglected”’).

Gurley, 43 F.3d at 1192-93 (emphasis in original).

The Eighth Circuit in Gurley sided with the courts which

have decided that authority to control the disposal of hazardous

substances is not sufficient for operator liability. As the court

acknowledged, however, other courts have decided to the con-

trary.'3 When cost recovery actions for a single facility may be

'3 Authority to control has been the determinative factor for CERCLA

liability in other contexts, as well. In U.S. v. Fleet Factors Corp., 901 F.2d

1550 (11th Cir. 1990), cert. denied, 498 U.S. 1046 (1991), a lender which

became involved in certain management activities at a facility was held liable

for costs. Although the decision wrned on the application of the “security

interest exemption” to liability as an “owner” under CERCLA, found in 42

U.S.C. § 9601(20)(A), its analysis is remarkably similar to that used in

“operator” liability cases. Although the lender did involve itself in decisions

regarding disposal practices, the court specifically found that such actual

control was not necessary. The court held that evidence that the lender “could

affect” disposal decisions if it chose to do so gave rise to liability. 901 F.2d

at 1557-58.

brought in more than one circuit, therefore, the choice of forum

could govern whether the inaction of a party with the power and

authority to control disposal at that facility will result in liability.

On the record of this case, the United States without

question would be liable if the standard were authority to

control, since the government’s authority to control under the

Defense Production Act was complete. Even under the standard

that the Eighth Circuit has now adopted, however, the record,

which was largely stipulated in the District Court, demonstrates

that the District Court and the Court of Appeals erred in finding

that the government’s exercise of control was not sufficient to

cause the government to be liable under CERCLA.

The court just as easily could have pointed out a similar

conflict as to the degree of control that must be exercised before

arranger liability will attach. In Aceto, there was no allegation

that the defendants actually exercised any control over the

formulating activities of the formulator. That, in fact, was the

point: the arrangement was such that the defendant could have

exercised control, but did not, thereby allowing the site to

become contaminated. !4

Some courts have followed this reasoning, others have not.

See, e.g., Cadillac Fairview/California, Inc. v. United States, 41

F.3d 562, 565 (9th Cir. 1994) (“Liability is not limited to those

who own the hazardous substances, who actually dispose of or

treat such substances, or who control the disposal or treatment

process.”); CPC Int’l, Inc. v. Aerojet-General Corp., 759 F.

Supp. 1269, 1279 (W.D. Mich. 1991) (Constructive possession

and authority to control disposition of hazardous substances is

sufficient for arranger liability.); United States v. Bliss, 667 F.

Supp 1298, 1306 (E.D. Mo. 1987) (Broker held liable as an

arranger because it had the authority to control the place and

The “disposal” which gave rise to liability in Aceto was primarily

routine leaks, spills, and other releases of substances that occurred in the

manufacturing process. The same kind of “disposal” forms the principal

basis for the United States’ claim against Hercules.

manner of disposal; corporate officials were liable because they

had ultimate authority for decisions regarding disposal and

actively participated in the arrangement for the transportation of

hazardous substances.); United States v. Ward, 618 F. Supp.

884, 894-95 (E.D. N.C. 1985) (Corporate officer who was

personally involved in the decision to dispose of hazardous

substances was liable as an arranger even if he did not know

where waste would be disposed.); Louisiana-Pacific Corpora-

tion v. ASARCO Incorporated, 24 F.3d 1565 (9th Cir. 1994)

(Seller of by-product is liable as arranger for disposal even

though it did not select the facility where the by-product was

disposed.); General Electric Company v. AAMCO Transmis-

sions, Inc., 962 F.2d 281 (2d Cir. 1992) (Lessor with economic

power over lessee is not liable as an arranger for lessee’ s disposal

of hazardous substances unless it gave itself contractual author-

ity over the disposition of such hazardous substances.). Now

the Eighth Circuit has contradicted itself on the point in this case.

CERCLA makes liable a person who “arranged for dis-

posal or treatment” of “hazardous substances owned or pos-

sessed” by that person. The Eighth Circuit previously opined

that “[rjequiring proof of personal ownership or actual physical

possession of hazardous substances . . . would be inconsistent

with the broad remedial purposes of CERCLA.” NEPACCO,

810 F.2d at 743. Yet the court tried to distinguish this case from

the “arrangement” in Aceto by noting that the government in this

case did not own the raw material that it caused to be supplied

to Hercules, and did not physically possess that raw material. In

Aceto the same court found that ownership by the “arrangers”

was relevant only insofar as ownership carried with it the

authority to control the raw material, work in process, and

finished product. In this case, however, the United States had

far more authority than did the suppliers/customers in Aceto to

control the raw materials, work in process, and finished product,

all of which the United States “possessed.” The government

exercised its power to require the raw materials suppliers to sell

the scarce raw material to Hercules. Hercules could lawfully

use the raw material only for the government. All work in

process resulting from the raw material was required to be used

in the manufacture of finished product for the government. The

United States exercised dominion and control over the raw

material, work in process, and finished product, and therefore

possessed!> those materials. The government arranged for the

disposal of the hazardous substances that it knew would be

generated in the use of those materials that the government

required.

Furthermore, although it purported to agree with the Third

Circuit’s en banc decision in FMC, and although the United

States included this case on a list of cases that the government

represented “involve the same or similar issues to those pre-

sented in [the FMC] appeal,” FMC, 29 F.3d at 846, the Eighth

Circuit emphasized immaterial fact differences between this

case and FMC in arriving at a contrary result. The court failed

to apprehend that the two cases are indistinguishable on the

factors that formed the basis for the Third Circuit’s ruling that

the United States was liable.

The Third Circuit based its holding in FMC on the “con-

clusion that the leading indicia of control were present, as the

government determined what product the facility would pro-

duce, the level of production, the price of the product, and to

whom the product would be sold.” FMC, 29 F.3d at 843. As

the Third Circuit observed in FMC, “every day [Hercules] did

what the government ordered it to do.” Jd. at 844.

'S Because neither CERCLA nor its legislative history provides guid-

ance as to the meaning of such terms as “operator,” “arranger,” “owner,” or

“possessed,” some courts have referred to dictionary definitions. See, e. g.,

United States v. New Castle County, 727 F. Supp. 854, 873 n. 41 (D. Del.

1989). Webster’s Third New International Dictionary (1986) defines “pos-

Sess,” in part, as “furnish - used with of or with,” “have a right to,” and “seize

or gain control of.” The United States both “furnished” raw material and had

a “right to” and “control of” the work in process and finished product made

from that raw material.

Here, no less than in FMC, the government determined

what product that facility would produce (Agent Orange), the

level of production (as much as Hercules could produce, to the

exclusion of all else, including commercial products), the price

of the product (no “excess profits”), and to whom the product

would be sold (the government itself). Indeed, absent govern-

ment demands, Hercules would never have rnade Agent Orange.

The court below found it to be significant that Hercules bid

on the first of the Agent Orange contracts. Nevertheless, any

significance that could be attached to that fact disappears in light

of the reality that Hercules thereafter had no choice but to

produce Agent Orange in amounts that caused it to lose its

commercial business. Once a soldier volunteers for duty, he

loses all discretion and must obey orders, regardless of the

consequences. Likewise, once the government issued even the

first rated order, it brought all of the government’s power to bear

upon Hercules, and Hercules could not refuse to perform, re-

gardless of the consequences.

Furthermore, there is nothing in the FMC decisions to

suggest that American Viscose resisted having its plant con-

verted to the manufacture of high tenacity rayon,!© or that it was

unwilling to receive the major increase in business that resulted

from the government’s need for high tenacity rayon. In addi-

tion, unlike Agent Orange, which had no commercially useful

application, the high tenacity rayon that American Viscose

manufactured for use in military aircraft and truck tires would

no doubt have been suitable for civilian aircraft and truck tires,

as well. From the standpoint of CERCLA liability, the relevant

consideration is the degree of control, not whether the control

initially was invited.

16 The conversion was accomplished simply by changing the gears of

the plant’s machines and the speed of the spinning wheels. FMC v. United

States Dep't of Commerce, 786 F. Supp. 471, 474 (E.D. Pa. 1992) (Finding

of Fact 29).

—oOOOoeeee eee

In this case, no less than in FMC, the government supplied

raw materials and equipment for Hercules to use in Agent

Orange manufacture for the government. Without the use of

government authority, Hercules would not have been able to

obtain TCB or other essential raw materials. Hercules could not

lawfully have used those raw materials acquired through gov-

emmment power, or the work in process derived from those raw

materials, for any manufacturing other than Agent Orange for

the government. Without the use of government authority,

Hercules could not have accelerated the delivery of equipment

that was necessary to meet the government’s demands for

increased production.

In this case, no less than in FMC, the government knew

that generation of substances that are now classified as hazard-

ous substances would occur in the production process, and that

an increase in production would automatically increase the

amount of such substances generated. The government devel-

oped the specifications for Agent Orange, was familiar with the

properties of its component parts, knew about the substances

that would be generated in its production, and knew that some

of the component parts and substances generated were toxic.

The government controlled Hercules in ways that were not

cited in FMC, as detailed in the Statement of the Case. Impor-

tantly, the government contractually directed Hercules how to

manage toxic materials by subjecting Hercules to health and

safety standards that did not apply to industry generally at the

time.!7

'7 Because the Walsh-Healey Act imposed health and safety standards

only on government contractors, the United States exercised contractual, not

regulatory, power in imposing those standards. Perkins v. Lukens Steel Co.,

310 U.S. 113 (1940). Accordingly, United States v. Dart Indus., Inc., 847

F.2d 144 (4th Cir. 1988), and United States v. New Castle County, 727 F.

Supp. 854 (D. Del. 1989), upon which the court below relied, have no

applicability to this case.

In this case, no less than in FMC, to conclude that the

government was not an operator “would create a precedent

completely out of harmony with the case law on what makes a

person an operator under CERCLA.” FMC, supra, 29 F.3d at

845. The lack of harmony between this case and FMC, and

between this case and other cases deciding operator and arranger

liability, justifies review by this Court.

Furthermore, the effect of the decisions of the courts below

amounts to a taking of Hercules’ property. The price for Agent

Orange that the government required Hercules to accept did not

reflect the true cost of the product, since it included nothing for

the eventual clean-up of the manufacturing facility. Hercules is

therefore being asked to bear a disproportionate share of the

costs of a product produced in support of the Vietnam War, and

therefore costs that should be borne by the public.!8

If allowed to stand, the decision below will also lead to an

inequitable division of environmental costs. Parties, both gov-

ernment and private, who had authority to control disposal

18 Since the Takings Clause of the Fifth Amendment is “designed to bar

Government from forcing some people alone to bear public burdens which,

in all faimmess and justice, should be borne by the public as a whole,”

Armstrong v. United States, 364 U.S. 40, 49 (1960), takings cases are

instructive. In such cases, this Court has required property owners to be

compensated for intrusions of far less consequence than the intrusion upon

Hercules’ property of substances that resulted from the government’s Agent

Orange orders. Regulations that compel a property owner to suffer a physical

invasion of his property entitle the property owner to be compensated

“without case-specific inquiry into the public interest advanced in support of

the restraint.” Lucas v. South Carolina Coastal Council, 112 S.Ct. 2886,

2893 (1992). “In general (at least with regard to permanent invasions), no

matter how minute the intrusion, and no matter how weighty the public

purpose behind it, we have required compensation.” Id., citing Loretto v.

Teleprompter Manhattan CATV Corp., 458 U.S. 419 (1982) (television cable

attached to building); United States v. Causby, 328 U.S. 256 (1946) (intrusion

of airspace by low-flying aircraft); Kaiser Aetna v. United States, 444 U.S.

164 (1979) (navigational servitude imposed on private marina).

practices, but instead “closed their eyes” to those practices, will

have no responsibility for clean-up.

The United States undeniably had the power to direct

Hercules to operate its Agent Orange manufacturing facility in

a fashion to protect the environment. It exercised its power over

Hercules in virtually every aspect of Hercules’ operation. Yet

the United States did not attempt to alter Hercules’ disposal of

substances that the United States now claims must be cleaned

up. The District Court and the Court of Appeals have approved

of that abdication of responsibility by the United States.

Immunity and implied indemnity under the Defense

Production Act

Section 707 of the Defense Production Act, 50 U.S.C. app.

§ 2157, is unequivocal on its face. It provides:

No person shall be held liable for damages or penalties

for any act or failure to act resulting directly or indi-

rectly from compliance with a rule, regulation or order

issued pursuant to this Act, notwithstanding that any

such rule, regulation, or order shall thereafter be de-

clared by judicial or other competent authority to be

invalid.

50 U.S.C. § 2157. Hercules contends that this section means

what it says. If Hercules is liable under CERCLA, it is for an

“act or failure to act resulting directly or indirectly from com-

pliance with” the rated orders and the directive issued by the

United States to Hercules under the Defense Production Act.

Through Section 707, the United States provides immunity for,

and therefore an implied indemnity against, CERCLA liability.

Section 707 is clear and unambiguous. Nothing in the

language of the statute suggests that the immunity granted by

Section 707 is limited to contract claims by commercial custom-

ers of the manufacturer which receives a rated order. Section

707 does not except environmental liability, and nothing in

CERCLA retroactively repealed the immunity. Contractors

should not be forced to examine the legislative intent of either

Section 707 or any statutory obligations that defense contracts

impose upon contractors to determine whether they are pro-

tected when the statutes themselves are unambiguous.

Without any independent analysis, however, the Eighth

Circuit adopted the opinion of the two judges of the Federal

Circuit who found that the immunity provision applied only to

contract liability which might result from an inability to perform

contracts because of the obligations imposed by rated orders.

Hercules Incorporated v. United States, 24 F.3d 188 (Fed. Cir.

1994), petition for cert. filed, 63 U.S.L.W. 3388 (No. 94-818).

Hercules submits that such a conclusion cannot be justified, and

that the dissenting judge in Hercules was correct when he

opined:

[I1]f Congress intended to limit the sweeping scope of

the hold harmless provision to contract performance

only, Congress could have [done so] . . . It is difficult

to imagine more “clear and unequivocal” terms than

actually used by Congress: “No person shall be held

liable for damages or penalties for any act or failure

to act resulting directly or indirectly from compliance

with a rule, regulation, or order issued pursuant to this

Act...” 50 U.S.C. app. § 2157 (1964). The law as

well as the circumstances support the Government’s

liability.

Id., at 210 (Plager, J., dissenting) (emphasis in original).

Indeed, the legislative history supports this interpretation.

The Senate Report of the 1952 amendment to the Act stated that

Section 707 “protects a person from liability, under contract or

otherwise, as the result of compliance with the act or regulations

issued under the act.” S. Rep. No. 1599, 82d Cong., 2d Sess.

(1952), reprinted in 1952 U.S.C.C.A.N. 1789, 1818-19 (empha-

sis supplied).!9

As this case and Hercules demonstrate, potential non-con-

tract liability can far exceed any potential contractual liability

to disappointed customers. Confining Section 707 to contract

claims, as the Federal Circuit and Eighth Circuit would do,

would eliminate that section as a source of meaningful protec-

tion to contractors who comply with rated orders.

This Court has before it a Petition for a Writ of Certiorari

to review the Federal Circuit decision in Hercules. Hercules

respectfully urges to Court to review the scope of immunity and

indemnity protection that the Defense Production Act provides

to contractors by reviewing this case, as well.

CONCLUSION

Two major public policy initiatives are at stake in this case.

First, it is vital that the country have the means of compelling

industry to provide material that the military needs in time of

war. At the same time, this nation has an interest in ensuring

that contractors who are compelled to produce goods for the

military are protected from liability that results from their com-

pliance with the government’ s orders, so that the costs of waging

war are not imposed unfairly on only some of the country’s

citizens.

Second, it is vital that liability for the staggering costs of

cleaning up the environment be imposed predictably, uniformly,

and as fairly as the statute permits. Otherwise, the public will

lose confidence in the government's ability to achieve the goals

that Congress set for it by adopting CERCLA.

19 The history of the Defense Production Act in general and Section 707

in particular is described in detail in Brief Amicus Curiae of the Chamber of

Commerce of the United States of America in Support of the Petitioners in

Hercules, at 4-10.

This Court can provide direction that is necessary to ad-

vance both goals by granting this Petition and issuing a writ of

certiorari.

Respectfully submitted,

E. A. Simpson, Jr.,

Counsel of Record

V. Robert Denham, Jr.

W. Gordon Hamlin, Jr.

LeeAnn Jones

POWELL, GOLDSTEIN, FRAZER & MURPHY

Sixteenth Floor

191 Peachtree Street, N.E.

Atlanta, Georgia 30303

(404) 572-6600

Counsel for Petitioner

Hercules Incorporated

‘ FT OAS oe k Reley Lae en ee res 2 ip ecsbas, 40

A-1l

UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

Nos. 94-1946/1956/1960/2006

United States of America‘,

Plaintiff-Appellee,

Vertac Chemical Corporation,

Defendant-Appellant.

Hercules, Incorporated;

Uniroyal Chemical, Limited:

Defendants.

Standard Chlorine of Delaware.Inc..

Third Party-Defendant.

Arkansas Department of Pollution

Control and Ecology,

Plaintiff,

Vertac Chemical Corporation;

Defendant-Appellant.

Hercules, Incorporated,

Defendant.

Appeals from the United States District Court

for the Eastern District of Arkansas

Submitted: November 14, 1994

Filed: January 31, 1995

*Title per counsel. Because of multiple cross-, counter- and third- -party

issues, caption is 106 pages long. Full caption is on file with the Clerk’s

Office of the Eighth Circuit Court of Appeals in St. Louis. MO.

A-2

Before McMILLIAN, WOLLMAN and HANSEN,

Circuit Judges.

McMILLIAN, Circuit Judge.

Vertac Chemical Corp. (Vertac), the Arkansas Department

of Pollution Control and Ecology (ADPCE), Hercules, Inc.

(Hercules), and Uniroyal Chemical, Ltd. (Uniroyal) (collec-

tively appellants), appeal from an interlocutory order entered in

the United States District Court! for the Eastern District of

Arkansas denying their motions for summary judgment and

granting a cross-motion for summary judgment brought by the

United States of America. United States v. Vertac Chem. Corp.,

841 F. Supp. 884 (E.D. Ark. 1993) (Vertac). For reversal,

appellants argue that the district court erred in holding that the

undisputed facts establish as a matter of law that the United

States cannot be held liable as either an operator or an arranger

within the meaning of § 107(a) of the Comprehensive Environ-

mental Response, Compensation, and Liability Act of 1980

(CERCLA), 42 U.S.C. § 9607(a). Hercules additionally argues

that the district court erred in holding that it is not entitled to

immunity under § 707 of the Defense Production Act of 1950

(DPA), 50 U.S.C. app. § 2157, or implied indemnity from the

United States. For the reasons discussed below, we affirm the

order of the district court.

Background

This case began as a cost recovery action brought by the

United States under CERCLA against numerous potentially

responsible persons associated with a former herbicide manu-

facturing facility located in Jacksonville, Arkansas (the Jackson-

ville facility). The present appeal arises from motions for

summary judgment filed by Vertac, ADPCE, and Hercules, and

1 The Honorable George Howard, Jr., United States District Judge for

the Eastern District of Arkansas.

ithe ada Re nteehstabled

A-3

across-motion for summary judgment filed by the United States.

By memorandum opinion and order dated October 12, 1993, the

district court granted the United States’ motion and denied the

motions brought by Vertac, ADPCE, and Hercules. Vertac, 841

F. Supp. 884. This appeal followed.?

Undisputed Facts

The following summary of facts is largely taken from the

district court’s statement of undisputed facts.3 See id. at 886-88.

During the late 1950s, Reasor-Hill Corp. owned and operated

the Jacksonville facility, where it manufactured, among other

things, chemical herbicides known as 2,4-D4 and 2,4,5-T.5 In

December of 1961, Hercules purchased the Jacksonville facility

from Reasor-Hill. In 1964, in response to contract solicitation

proposals published by the United States, Hercules submitted

and won competitive bids to supply the United States with an

herbicide known as Agent Orange, to be used as a defoliant in

Vietnam. Hercules began producing Agent Orange, a mixture

2 The United States asserts that this court lacks jurisdiction to consider

Uniroyal’s arguments on appeal because Uniroyal failed either to join in the

other appellants’ motions for summary judgment or to oppose the United

States’ cross-motion for summary judgment. We note, however, that Uni-

royal did “adopt by reference pursuant to Rule 10(c) of the Federal Rules of

Civil Procedure the responses of the State [of Arkansas], Vertac and Dow to

the Motion for Summary Judgment of the United States.” See Appellee’s

Supplementary Appendix at 139. That adoption is sufficient to confer

appellate jurisdiction, and we have considered Uniroyal’s arguments to the

extent they are within the proper scope of issues on appeal.

3 Appellants do not argue that the district court erred in stating the

undisputed material facts. Rather, they maintain that the district court erred

in applying the law.

4 2,4-D is 2,4-dichlorophenoxyacetic acid.

5 2,4,5-T is 2,4,5-trichlorophenoxyacetic acid. The manufacture of

2,4,5-T creates a by-product known as TCDD or dioxin.

A-4

of the butyl esters of 2,4-D and 2,4,5-T, at the Jacksonville

facility.

From 1964 through 1968, Hercules produced and supplied

Agent Orange to the Department of Defense (DOD) under rated

contracts or orders and directives issued pursuant to the DPA,

50 U.S.C. app. § 2061 et seq. The DPA provides, among other

things, that the President has authority to designate a contract or

order as a “rated order” which shall take priority over the

performance of any other contract or order, on grounds that it is

deemed necessary or appropriate to promote the national de-

fense. Rated orders may also require the suppliers of a govern-

ment contractor to give the government contractor similar

priority. A “directive” is an official action taken by the Depart-

ment of Commerce (DOC) under its regulations. It requires a

person to take an action or to refrain from taking an action and

may take precedence over a rated or unrated contract, to the

extent stated in the directive. The rated orders and directives

issued to Hercules were subject to rules promulgated by the

Business and Defense Services Administration, a unit of DOC.

The rated contracts contained standardized government

contract terms and conditions. The contract specifications,

which governed matters such as physical properties of the

product, packaging, labeling, and quality control, were mainly

developed by the United States Army. Hercules and other

manufacturers were allowed some input regarding the contract

specifications. While DOD allowed Hercules limited opportu-

nities to negotiate and modify the terms of the contract specifi-

cations, the specifications remained substantially dictated by

DOD.

The rated contracts also subjected Hercules to the terms of

the Walsh-Healey Act, 41 U.S.C. § 35. Under the Walsh-Healey

Act, Hercules was required to meet certain health and safety

standards. Regulations under the Walsh-Healey Act gave the

Department of Labor authority to conduct random inspections

—— ee

A-5

at the Jacksonville facility, which it did on two occasions during

the period Hercules was producing Agent Orange.

In 1967, the United states issued a directive ordering Her-

cules to accelerate its production and delivery of Agent Orange.

As a result, Hercules devoted all of its efforts at the Jacksonville

facility to producing Agent Orange. When Hercules was still

unable to meet the United States’ production demands, it con-

tracted for the foreign importation of 2,4,5-T and 2.4-D. The

government facilitated this importation by waiving import du-

ties, pursuant to 10 U.S.C. § 2383, which provided for duty-free

treatment of emergency war materials purchased abroad.

None of the raw materials used by Hercules for the produc-

tion of Agent Orange was ever owned or directly supplied by

the United States. The United States did, however, issue direc-

tives to Hooker Chemical (Hooker), to ensure Hooker’s supply

of tetrachlorobenzene (TCB) to Hercules and other producers of

Agent Orange. The United States also did not hold any financial

ownership interest in the land, buildings, tools, machinery, or

equipment used by Hercules during the time Hercules was

producing Agent Orange. In fact, Hercules protected certain

aspects of its Agent Orange production process as proprietary

information. No representative of the United States ever hired,

fired, disciplined, managed, or trained any Hercules personnel

who worked on the production of Agent Orange.

The United States knew or should have known that the

production of Agent Orange produced wastes. Some of the

wastes generated by the production of 2,4,5-T contained haz-

ardous substances, including dioxin. The rated contracts be-

tween Hercules and the United States did not address the manner

in which Hercules was to handle wastes generated by the pro-

duction of Agent Orange. Hercules chose to bury wastes gen-

erated by the production of 2,4,5-T on-site, which had been its

practice before it began producing Agent Orange for the United

States. Hercules chose to bury the wastes without consulting

A -6

representatives of DOD or DOC. The United States did not take

part in designing, performing, or supervising activities related

to the handling, treatment, or disposal of wastes while Hercules

owned and operated the Jacksonville facility.

Hercules profited from its sales of Agent Orange to the

United States under the rated contracts. After Hercules stopped

supplying Agent Orange to the United States, it continued to

produce and sell to commercial customers other products manu-

factured with the use of 2,4-D and 2,4,5-T.

Discussion

We review a grant of summary judgment de novo. The

question before the district court, and this court on appeal, is

whether the record, when viewed in the light most favorable to

the non-moving party, shows that there is no genuine issue as to

any material fact and that the moving party is entitled to judg-

ment as a matter of law. Fed. R. Civ. P. 56(c); see. e.g., Celotex

Corp. v. Catrett, 477 U.S. 317, 322-23 (1986); Anderson v.

Liberty Lobby, Inc., 477 U.S. 242, 249-50 (1986); Get Away

Club, Inc. v. Coleman, 969 F.2d 664, 666 (8th Cir. 1992); St.

Paul Fire & Marine Ins. Co. v. FDIC, 968 F.2d 695, 699 (8th

Cir. 1992). Where the unresolved issues are primarily legal

rather than factual, summary judgment is particularly appropri-

ate. Crain v. Board of Police Comm’rs, 920 F.2d 1402, 1405-06

(8th Cir. 1990). In the present case, the district court held as a

matter of law that, under the undisputed facts of the case, the

United States cannot be held liable as either an operator or an

arranger under 42 U.S.C. § 9607(a)(2) and § 9607(a)(3). Vertac,

841 F. Supp. at 890. The district court also held as a matter of

law that Hercules is not entitled to immunity under the DPA or

implied indemnity from the United States. Jd. at 891. We agree.

a Peter

Operator Liability

Under CERCLA, there are four classes of responsible

persons who may be held liable for response costs incurred by

the United States or another person. 42 U.S.C. § 9607(a). One

class includes persons who operated a facility at the time haz-

ardous substances were disposed of at the facility. Jd.

§ 9607(a)(2) (owners and operators of facility at time of dis-

posal). This court recently addressed the legal standards for

determining an individual’s operator liability under § 9607(a)(2)

in United States v. Gurley, No. 93-2699 (8th Cir. Dec. 28, 1994)

(Gurley). We determined under the facts of that case that an

individual’s actual exercise of control over the waste disposal

activities conducted at a dump site resulted in personal liability

under CERCLA. Id., slip op. at 5-11.

In the present case, we consider the legal standards for

determining the government’s operator liability under

§ 9607(a)(2), which we view as similar to corporate liability.

As noted in Gurley, slip op. at 5-7, the statute itself does not

provide much guidance; it simply imposes liability upon “any

person who at the time of disposal of any hazardous substance

owned or operated any facility at which such hazardous sub-

stances were disposed of.” 42 U.S.C. § 9607(a)(2). The Third

Circuit, however, recently addressed this precise issue and held

that the United States was an operator under CERCLA ina case

involving similar, but not identical, facts to those of the present

case. FMC Corp. v. United States Dep’t of Commerce, 29 F.3d

833 (3d Cir. 1994) (en banc) (FMC).§ Upon review, we agree

with the Third Circuit’s conclusion that operator liability may

result from actual or substantial control exercised by one entity

Over the activities of another. Jd. at 843-45. Determining

whether an entity has exerted such actual or substantial control

6 FMC Corp. v. United States Dep't of Commerce, 29 F.3d 833 (3d Cir.

1994) (en banc) (FMC), had not been decided at the time the district court

rendered its decision in the present case.

A-8

requires a fact-intensive inquiry and consideration of the totality

of circumstances. /d. at 845. In the present case, we hold that

the United States cannot be held liable as an operator under

CERCLA because it did not exercise actual or substantial con-

trol over the operations at the Jacksonville facility.

In FMC, the Environmental Protection Agency brought a

CERCLA action against potentially responsible persons seek-

ing response costs for cleaning up hazardous substances at a

facility in Front Royal, Virginia (the Front Royal facility). The

owner of the site, FMC corporation (FMC), sought contribu-

tion from the United States pursuant to 42 U.S.C. § 9613(f).

FMC alleged that the United States was liable as an owner,

operator, and arranger under 42 U.S.C. §§ 9607(a)(2) and

§ 9607(a)(3) because the War Production Board (WPB)’ ex-

ercised control over the manufacture of high tenacity rayon at

the Front Royal facility during the 1940s. Following a bench

trial, the district court held that the United States was liable as

an owner, operator, and arranger. On appeal, the Third Circuit

affirmed, discussing only the United States’ liability as an

operator.® 29 F.3d at 843-45. The Third Circuit applied an

“actual control” test for operator liability as set forth in its

decision in Lansford-Coaldale Joint Water Auth. v. Tonolli

Corp., 4 F.3d 1209 (3d Cir. 1993) (corporate liability). FMC,

29 F.3d at 843.

Under the “actual control” test, the Third Circuit consid-

ered whether the United States had exercised “substantial con-

trol” over the production of high tenacity rayon at the Front

Royal site. That standard in turn required, at a minimum, “active

involvement in the activities” at the Front Royal facility. Jd.

Based upon the specific facts of the case, the Third Circuit

7 The War Production Board was later subsumed within the Department

of Commerce.

8 By an evenly divided vote, the Third Circuit also affirmed, without

discussion, the district court’s holding that the United States was liable as an

arranger under § 9607(a)(3). FMC, 29 F.3d at 845-46.

A-9

concluded that the United States had exercised actual control

over the activities at the Front Royal facility during the relevant

time frame. The Third Circuit reasoned as follows:

In our view, it is clear that the government had

“substantial control” over the facility and had “active

involvement in the activities” there. The government

determined what product the facility would manufac-

ture, controlled the supply and price of the facility’s

raw materials, in part by building or causing plants to

be built near the facility for their production, supplied

equipment for use in the manufacturing process, acted

to ensure that the facility retained an adequate labor

force, participated in the management and supervision

of the labor force, had the authority to remove workers

who were incompetent or guilty of misconduct, con-

trolled the price of the facility’s product, and control-

led who could purchase the product. While the

government challenges some of the district court’s

findings, it simply cannot quarrel reasonably with the

court’s conclusions regarding the basic situation at the

facility. In particular, the government reasonably

cannot quarrel with the conclusion that the leading

indicia of control were present, as the government

determined what product the facility would produce,

the level of production, the price of the product, and

to whom the product would be sold.

Id.

A key fact in FMC was that American Viscose, the owner

of the Front Royal facility at the time high tenacity rayon was

manufactured, had been ordered by the WPB to convert its

facility to production of high tenacity rayon, rather than the

regular textile rayon it had been producing. /d. at 836. In other

words, American Viscose itself did not choose its product; “the

government determined what product the facility would pro-

A-10

duce.” Jd. at 843. Thus, the United States was directly and

entirely responsible for introducing a new manufacturing proc-

ess at the Front Royal facility. That manufacturing process

generated hazardous substances that were disposed of on-site.

Moreover, the United States implemented the required plant

conversion by leasing government-owned equipment and ma-

chinery and contracting with a third party to install the equip-

ment at the Front Royal plant. /d. at 837. By contrast, in the

present case, Hercules elected to bid for the Agent Orange

government contracts. To the extent Hercules had to change its

operations to produce Agent Orange, as opposed to other herbi-

cides using 2,4-D and 2,4,5-T, those changes resulted from its

own decision to seek the government’s wartime business. Ver-

tac, 841 F. Supp. at 886, 890.

Another important fact in FMC was that the United states

“exerted considerable day-to-day control over American Vis-

cose” during the relevant time period. FMC, 29 F.3d at 844.

For example, the United States participated in managing and

supervising workers, and even appointed a full-time repre-

sentative to reside at Front Royal to address problems at the

facility concerning manpower, housing, community services,

and other related matters. Jd. at 837. By contrast, in the present

case, no representative of the United States ever managed or

supervised any Hercules personnel during the relevant time

period. Vertac, 841 F. Supp. at 888. Upon review, we hold that

it cannot genuinely be disputed that the United States was never

actively involved on a regular basis in, and thus never exerted

substantial control over, operations at the Jacksonville facility

while Hercules was producing Agent Orange. Moreover, the

facts that Hercules was required to comply with the worker

health and safety regulations under the Walsh-Healey Act, and

that on two occasions inspectors visited the Jacksonville plant

to investigate such compliance, are insufficient bases for impos-

ing CERCLA liability on the United States as an operator of the

facility. See, e.g., United States v. Dart Indus., Inc., 847 F.2d

A-ll

144 (4th Cir. 1988) (state environmental agency not an owner

or operator of waste site under CERCLA despite allegations that

agency issued permits for waste storage, performed inspections,

and failed to effectuate a cleanup); United States v. New Castle

County, 727 F. Supp. 854, 867-70 (D. Del. 1989) (state’s

regulation of hazardous waste site insufficient to establish op-

erator liability where state did not have a financial or proprietary

interest in the site and did not actively participate in daily

management and operations of the site).

{n sum, the United States was not sufficiently involved,

directly or indirectly, in the activities that took place at the

Jacksonville facility to constitute actual or substantial control.

Accordingly, we hold that, under the facts of the present case,

the United States cannot be held liable as an operator of a facility

under § 9607 (a)(2).

Arranger Liability

CERCLA also imposes liability for response costs on “any

person who by contract, agreement, or otherwise arranged for

disposal or treatment. . . of hazardous substances owned or

possessed by such person, by any other party or entity, at any

facility owned or operated by another party or entity and con-

taining such hazardous substances.” 42 U.S.C. § 9607(a)(3).

This court addressed the legal standards for finding arranger

liability under CERCLA in United States v. Northeastern Phar-

maceutical & Chem. Co., 810 F.2d 726 (8th Cir. 1986)

(NEPACCO), cert. denied, 484 U.S. 848 (1987), and United

States v. Aceto Agric. Chems. Corp., 872 F.2d 1373 (8th Cir.

1989) (Aceto). Appellants argue that the United States is an

arranger under NEPACCO and Aceto because it had authority

to control, and did control, many aspects of the production of

Agent Orange. Upon review, we agree with the district court’s

analysis of this issue.

A-12

Liability under § 9607(a)(3) requires, among other things,

that the hazardous substances be “owned or possessed by” the

person who arranged for the disposal. In NEPACCO, we ex-

plained that “[iJt is the authority to control the handling and

disposal of hazardous substances that is critical under the statu-

tory scheme. . . . We believe requiring proof of personal own-

ership or actual physical possession of hazardous substances as

a precondition for liability under CERCLA § 107(a)(3), 42

U.S.C. § 9607(a)(3), would be inconsistent with the broad

remedial purposes of CERCLA.” 810 F.2d at 743. NEPACCO

involved a question of whether or not a corporate employee

could be found to have “owned or possessed” hazardous sub-

stances within the meaning of § 9607 (a)(3) by virtue of his

specific responsibilities within the corporation, his knowledge

of the hazardous nature of substances with which he was dealing,

and the specific actions he took. In the present case, we must

consider whether or not the United States “owned or possessed”

hazardous substances within the meaning of § 9607(a)(3) by

virtue of its statutory authority under the DPA and the Walsh-

Healey Act, its presumed knowledge that the production of

Agent Orange was generating hazardous wastes, and the specific

actions it took to facilitate Hercules’ production of Agent Or-

ange. Appellants maintain that the United States constructively

possessed the hazardous substances disposed of at the Jackson-

ville facility because the United States had the authority to

control, and did control, the product made at the facility and the

raw materials necessary to make that product. We disagree.

To begin, we note that a governmental entity may not be

found to have owned or possessed hazardous substances under

§ 9607(a)(3) merely because it had statutory or regulatory

authority to control activities which involved the production,

treatment or disposal of hazardous substances. Our holding in

NEPACCO, when read in the context of the facts of the case,

certainly does not suggest such a broad interpretation. In

NEPACCO, we concluded that a corporate employee construc-

A - 13

tively possessed the hazardous substances at issue because he,

“actually knew about, had immediate supervision over, and was

directly responsible for arranging for the transportation and

disposal of the NEPACCO plant’s hazardous substances.” 810

F.2d at 743. In the present case, by contrast, the United States

did not immediately supervise, or have direct responsibility for,

the transportation or disposal of any hazardous substances gen-

erated at the Jacksonville facility. Vertac, 841 F. Supp. at

887-88.

Appellants maintain, however, that they are not merely

relying on the United States’ regulatory powers as a basis for

asserting arranger liability under NEPACCO. They contend that

it is the additional contractual relationship between Hercules and

the United States, as governed by the DPA, that gives rise to the

latter’s liability as an arranger. We again disagree. As stated

by the district court, “there is no dispute that Hercules actively

sought Agent Orange contracts by participating in competitive

bidding and that it made a profit from each contract.” Vertac,

841 F. Supp. at 890. Moreover, “the relationship between the

United States and the contractor under the DPA is one of buyer

and seller, except that the buyer (i.e., the United States) has the

power to require the seller to perform the contract and to give it

priority over other contracts.” Jd. Finally, Hercules was given

opportunities to negotiate some terms of the contract specifica-

tions and, as a result, some of those terms were changed or

modified. Id. at 886. Thus, while NEPACCO certainly suggests

that circumstances may exist where a government contract

involves sufficient coercion or governmental regulation and

intervention to justify the United States’ liability as an arranger

under CERCLA,’ the undisputed facts in the present case do

not support such a finding.

9 Of. FMC, 29 F.3d at 845-46 (affirming without discussion the district

court’s ruling that the government was liable as an arranger under CERCLA).

A-14

Appellants rely, in the alternative, on this court’s decision

in Aceto. In Aceto, the appellants, pesticide manufacturers,

argued that they could not be liable as arrangers of hazardous

waste disposal where the wastes were generated by an inde-

pendent contractor whom they had hired to formulate technical

grade pesticides into commercial grade pesticides. The com-

plaint alleged that the appellants owned the technical grade

pesticides used in the formulation, the work in process, and the

resulting commercial grade product. 872 F.2d at 1378. On

appeal, this court affirmed the district court’s denial of the

appellants’ motion to dismiss, noting that the appellants actually

owned the hazardous substances, as well as the work in process.

Id. at 1381-82. In other words, the complaint alleged that,

throughout the production process, the appellants retained actual

ownership of the hazardous substances in question. Therefore,

a claim of arranger liability had been sufficiently alleged, even

though the appellants were never actually involved in the treat-

ment or disposal of the hazardous wastes. /d. at 1382.

Appellants in the present case argue that Aceto applies

because the United States (1) supplied the raw materials to

Hercules for the production of Agent Orange by issuing direc-

tives to Hooker requiring Hooker to supply TCB to Hercules,

giving Hercules authority to enter rated contracts with its sup-

pliers, and waiving import duties for some of Hercules’ foreign

suppliers, and (2) constructively possessed the hazardous sub-

stances and the work in process by having the authority to

control the supply of TCB, Hercules’ production process, and

the end product.

We agree with the district court’s determination under

Aceto that the United States did not supply the raw materials to

Hercules and did not own or possess the raw materials or the

work in process. See Vertac, 841 F. Supp. at 888-89. Although

the United States took steps to facilitate Hercules’ acquisition

of TCB, the United States was never actively involved in

SOR |

A-15

supplying Hercules with any such raw materials. Nor did the

United States own or have any financial interest in any of

Hercules’ suppliers. Cf FMC, 29 F.3d at 837 (government built

and retained ownership of sulfuric acid plant adjacent to facility

to assure adequate supply of sulfuric acid). The facts simply do

not support the conclusion that the United States actually or

constructively supplied Hercules with its raw materials. It also

cannot reasonably be inferred that the United States construc-

tively owned or possessed the raw materials or the work in

process that generated hazardous wastes at the Jacksonville

facility. As previously discussed, the undisputed facts establish

that the United States’ actual involvement in the operations of

the Jacksonville facility was sporadic and minimal.

Accordingly, we hold that, under the facts of the present

Case, the United States cannot be held liable under CERCLA as

an arranger of hazardous waste disposal under § 9607(a)(3).!0

Hercules’ immunity and indemnity arguments

Hercules additionally argues On appeal that it is immune

from CERCLA liability arising out of its performance of the

Agent Orange contracts and that the United States has an implied

duty to indemnify Hercules. The district court rejected these

arguments in its summary judgment order without discussing its

reasons. Vertac, 841 F. Supp. at 891. Upon careful review of

the undisputed facts and the arguments presented on appeal, we

affirm the district court’s decision.

Hercules bases its immunity argument on § 707 of the

DPA, 50 U.S.C. app. § 2157, which provides:

No person shall be held liable for damages or

penalties for any act or failure to act resulting directly

10 Our conclusions that the United States is neither an operator nor an

arranger under CERCLA obviates the need to address the United States’

sovereign immunity arguments.

A- 16

or indirectly from compliance with a rule, regulation,

or order issued pursuant to this Act [sections 2061 to

2071 of this Appendix], notwithstanding that any

such rule, regulation, or order shall thereafter be de-

clared by judicial or other competent authority to be

invalid. No person shall discriminate against orders

or contracts to which priority is assigned or for which

materials of facilities are allocated under title I of this

Act [sections 2071 to 2076 of this Appendix] or under

any rule, regulation, or order issued thereunder, by

charging higher prices or by imposing different terms

and conditions for such orders or contracts than for

other generally comparable orders or contracts, or in

any other manner.

Hercules argues that the language of § 707 is clear and unambi-

guous and that nothing in its language supports an interpretation

that would exclude Hercules’ CERCLA liability, or any other

liability, arising out of its performance of the Agent Orange

contracts. In response, the United States argues that the lan-

guage of § 707 is not clear and unambiguwus and that the

interpretation advanced by Hercules would have the absurd

result of allowing a government contractor to violate the laws

with impunity, so long as it is performing a rated contract.

In Hercules, Inc. v. United States, 24 F.3d 188, 203-04

(Fed. Cir. 1994) (Hercules), the Federal Circuit was similarly

required to examine the scope of the immunity provided by

§ 707. The Federal Circuit considered the relationship between

§ 707 and § 101(a) of the DPA, 50 U.S.C. app. § 2071(a), which

authorizes the President to designate certain government con-

tracts for priority over other contracts when necessary or appro-

priate to promote the national defense. Noting, as a general rule,

that statutory provisions enacted together must be read harmo-

niously, the Federal Circuit reasoned “[t]o hold that section 707

protects contractors against a risk which is greater than that

A-17

created by the statute with which it operates would violate this

rule.” 24 F.3d at 204. Accordingly, the Federal Circuit con-

cluded “the protection afforded by section 707 of the DPA

extends no further than the risk imposed by section 101(a) of the

DPA.” Id. We agree. Accordingly, we hold in the present case

that § 707 does not shield Hercules from liability it may have

under CERCLA arising out of its performance of the Agent

Orange contracts because such immunity would exceed the risk

imposed by § 101(a).!! Accord United States v. General Dy-

namics Corp., 1988 U.S. Dist. LEXIS 17256 (N.D. Tex. June 9,

1988) (§ 707 immunity does not apply to liability under the

Clean Air Act).

Hercules separately argues that it is entitled to indemnity

from the United States arising out of Hercules’ immunity under

§ 707, the United States’ waiver of immunity, and the United

States’ liability under CERCLA. Because Hercules is not enti-

tled to immunity under § 707, its implied indemnity argument

must also fail. In light of our interpretation of § 707, it cannot

genuinely be disputed that the United States never implicitly

promised to indemnify Hercules for the type of liability at issue

in the present case. See Hercules, 24 F.3d at 204 (government’s

use of DPA to issue rated orders for production of Agent Orange

did not create an implied-in-fact contractual obligation that

government must indemnify contractor for tort liability to third

parties).

Accordingly, we hold that Hercules is not entitled to im-

munity under § 707 of the DPA or implied indemnity from the

United States.

1] “We agree that § 707 “provid{es] a defense for a DPA contractor

against a suit by a non-government customer in the event that the DPA

contractor is forced to breach another contract to fulfill the government’s

requirements.” Hercules, Inc. v. United States, 24 F.3d 188, 203 (Fed. Cir.

1994). However, we do not comment on the extent to which § 707 might

provide immunity under other circumstances not presented in this case.

A-18

For the foregoing reasons, the order of the district court is

affirmed.

A true copy.

Attest:

CLERK,

U.S. COURT OF APPEALS,

EIGHTH CIRCUIT.

B- 1]

IN THE UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF ARKANSAS

WESTERN DIVISION

Civil No. LR-C-80-109

UNITED STATES OF AMERICA

Plaintiff

VERTAC CHEMICAL CORP.. ET AL.

Defendants

Civil No. LR-C-80-110

ARKANSAS DEPARTMENT OF POLLUTION

CONTROL AND ECOLOGY

Plaintiff

VERTAC CHEMICAL CORP., ET AL.

Defendants

ORDER

As set forth in previous order, this case is set for trial

beginning November 1, 1993. A number of parties have re-

quested a jury trial. Other parties have objected, arguing that

the parties are not entitled to a jury trial on the issues pending.

The Court has reviewed the submissions and will grant the

request for a jury trial. A twelve-person jury will be empaneled,

and will decide those issues which are properly to be decided by

the jury and will act as an advisory jury with respect to the other

issues. F.R.Civ.P. 39(c),!

| The Court need not decide now which issues should be resolved by

the jury.

B-2

The Court has also reviewed the various trial plans submit-

ted by the parties and will adopt the plan offered by the United

States, et al.2 The Court is persuaded that this plan is best suited

to deal with the multiple claims and parties to this action. Thus,

the trial will begin with any claims the United States has against

Hercules.3

The Court has reviewed the motions for summary judg-

ment regarding the liability of the United States under CER-

CLA. The Court finds that the United States is not liable under

Sections 107(a)(2) or 107(a)(3) with regard to the production of

Agent Orange. Thus, the motions for partial summary judgment

of Vertac, ADPC&E and Hercules against the United States are

denied. The motion of the United States against Vertac, Arkan-

sas, Hercules, Dow, Uniroyal, Velsicol and BASF is granted. A

more detailed memorandum opinion setting forth the Court’s

reasoning will be forthcoming.

Several parties have inquired as to the necessity of Local

Rule 21 pretrial conference information sheets. The parties are

directed to file a modified pretrial conference information sheet

which contains a summary of the claims of the parties and a brief

description of the facts and law that forms the basis for the

claims. The information sheet shall be filed by October 20,

1993.

Accordingly, Vertac’s and ADPC&E’s motion for partial

judgment against the United States on CERCLA liability (docu-

ment number 1170) is denied; Hercules’ motion for partial

2 The Court recognizes that the United States opposes a request for a

jury trial. Thus, the United States’ proposal is modified to the extent the

Court has determined that the case will be tried before a jury, sitting either

as the fact finder or in an advisory capacity.

3 The Court will be issuing a ruling on the United States’ motion for

partial summary judgment against Hercules regarding CERCLA liability

before the pretrial conference.

B-3

summary judgment as to the claims against the United States

(document number 1339) is denied; the United States’ motion

for summary judgment against Vertac, et al. (document number

1403) is granted; Hercules’ and Uniroyal’s motions for trial by

jury (document numbers 1650 and 1652) is granted; the trial

plan proposal submitted by the United States, et al. is adopted.

IT IS SO ORDERED this 7th day of October, 1993.

Ls/

George Howard, Jr.

UNITED STATES DISTRICT JUDGE

C-1

IN THE UNITED STATES DISTRICT COURT

EASTERN DIVISION OF ARKANSAS

WESTERN DIVISION

Civil No. LR-C-80-109

UNITED STATES OF AMERICA

Plaintiff

¥.

VERTAC CHEMICAL CORP., ET AL.

Defendants

Civil No. LR-C-80-110

ARKANSAS DEPARTMENT OF POLLUTION

CONTROL AND ECOLOGY

Plaintiff

VERTAC CHEMICAL CORP., ET AL.

Defendants

MEMORANDUM OPINION AND ORDER

In the present case, the State of Arkansas and Vertac along

with Hercules have filed motions for summary judgment asking

that the United States be held liable under the Comprehensive

Environmental Response, Compensation, and Liability Act of

1980 (“CERCLA"), 42 U.S.C. §9601 et seq. for its role in the

production of Agent Orange.! In response, the United States

has filed a motion for partial summary judgment asking that the

Court find that it is not liable.

1 The State of Arkansas and Vertac filed a Joint motion for summary

judgment against the United States. The State and Vertac will be referred to

collectively as Vertac.

C-2

Hercules and Vertac argue that the United States is liable

as an operator under section 107(a)(2) and an arranger under

section 107(a)(3) of CERCLA. They argue that the United

States’ liability arises from the government’s authority under the

Walsh-Healey Act, 41 U.S.C.§35 et seq. and the Defense Pro-

duction Act of 1950 (“DPA”), 50 U.S.C. app. §2061 et seg.

during the time the United States purchased Agent Orange from

Hercules for use in the Vietnam war.? The facts are basically

not in dispute, and the relevant ones are set forth below.

SUMMARY OF UNDISPUTED FACTS

Hercules purchased the assets of Reasor-Hill corporation

in December, 1961. Reasor-Hill began producing 2,4-D esters

and amines in 1955, and 2,4-5-T in 1957. During the period

December 1961 through the fall of 1971, Hercules owned and

operated the herbicide production facility at Marshall Road in

Jacksonville, Arkansas (the “Jacksonville facility.”) Shortly

after taking over the Jacksonville plant in 1961 and prior to

entering into the rated contracts fo: the supply of Agent Orange,

Hercules began burying wastes generated from Reasor-Hill’s

operations.

From 1964 through 1968, Hercules produced Agent Or-

ange for the United States at the Jacksonville facility. Agent

Orange is a mixture of the buty] esters of 2,4,5-trichlorophenoxy

acetic acid (“2,4,5-T”)and 2,4-dichlorophenoxyacetic acid

(“2,4-D"). Hercules produced Agent Orange for the United

2 The United States used various herbicides for defoliation and crop

destruction spraying in Vietnam beginning in 1962. After 1964, Agent

Orange, a 50-50 mixture of the n-butyl esters of 2,4-D and 2,4,5-T was one

of the most widely used herbicides. “As the war in Vietnam escalated in the

mid- 1960s, so too the use of herbicides expanded. In 1967, the peak year for

herbicide spraying in South Vietnam, 1,687,758 acres were sprayed—85%

for defoliation purposes and 15% for crop destruction.” In re Agent Orange

Product Liability Litigation, 597 F. Supp. 740, 777 (E.D.N.Y. 1984)

C-3

States pursuant to rated contracts and directives issued under the

DPA.

The DPA authorizes the President to require that perform-

ance under contracts or orders (other than contracts of employ-

ment) which he deems necessary or appropriate to promote the

national defense shall take priority over the performance under

any other contract or order, and further authorizes the President

to require the acceptance and performance of such contracts or

orders in preference to other contracts or orders by any person

he finds capable of performing the contracts. The DPA allows

for a penalty to be levied against a private manufacturer in an

amount of up to $10,000.00 and imprisonment of up to one year

for willful failures to perform any act required by the DPA or

any regulation or order under the DPA. 50 U.S.C. §2073.

“Rated orders” are contracts or purchase orders that have

a priority rating. There are two levels of priority ratings. The

“DX” rating is the higher level of priority rating. The “DO”

rating is the lower level of priority rating. Where there is a

conflict between the performance of a rated order and an unrated

order, the rated order takes precedent.

“Directives” are official actions taken by the Department

of Commerce (“DOC”) under its regulations. A directive re-

quires a person to take an action or to refrain from taking an

action. A directive takes precedence over both rated orders and

unrated orders to the extent that such preference is stated in the

directive.

Hercules submitted competitive bids, including sales

prices, in response to the contract solicitation proposals publish-

ed by the United States pertaining to Agent Orange. Hercules

supplied Agent Orange to the Department of Defense (“DOD”’’)

pursuant to rated contracts and directive issued under the DPA.

These rated contracts and directives were subject to rules prom-

ulgated by the Business and Defense Services Administration

(“BDSA”), a primary organizational unit of DOC.

C-4

The rated contracts between DOD and Hercules contained

standardized government contract terms and conditions set forth

in standardized “DO Forms.” DOD provided opportunities to

Hercules to negotiate at least some of the terms of the contract

specifications pertaining to Agent Orange. As a result of these

negotiations, DOD changed or modified the terms of various

contract specifications.

Hercules made a profit for performing each rated contract

for the supply of Agent Orange. Under the Agent Orange

contracts, from June of 1964 to May of 1968, Hercules shipped

over 2.7 million gallons of Agent Orange to the United States

for use in the Vietnam War.

The specifications for Agent Orange were developed by

the United States Army. At times, the government received

input concerning some specifications from the other services

and manufacturers of Agent Orange, including Hercules. Some

of these specifications included information regarding physical

properties, packing, and quality control instructions. Under

several of the contracts for the supply of Agent Orange, Hercules

was required to produce Agent Orange under other military

specifications.

In March, 1967, the BDSA issued a directive under the

DPA to Hercules requiring Hercules to accelerate the delivery

of Agent Orange to the United States to a monthly rate of 65,000

gallons beginning April 3, 1967. This monthly rate constituted

all of the Jacksonville facility’s production Capacity.

The directive told Hercules that the tetrachlorobenzene

(“TCB”) it needed to produce Agent Orange for the United

States could be obtained by placing DO rated orders on Hercu-

les’ TCB suppliers, including Hooker Chemical. In connection

with the March, 1967 directive, the BDSA told Hercules to

inform the BDSA immediately if Hercules had any difficulty

obtaining the raw material it needed to produce the Agent

Orange.

C-5

Hercules was unable to meet the production demands

placed upon it by the Directive and at the same time maintain

its share of the commercial 2,4-D market. Hercules contracted

for the import or 2,4,5-T and 2,4-D in order to comply with its

contracts with the government. The government facilitated

these imports of 2,4,5-T and 2,4-D by waiving, pursuant to 10

U.S.C. §2383 (providing for duty-free treatment of emergency

war materials purchased abroad), all import duties usually

charged on the shipment of goods from abroad. These imports

could be utilized on the Agent Orange contracts (but only on

those contracts), thereby freeing up some 2,4-D production.

The United States did not directly supply Hercules with

TCB or any other raw material. The United States did not own

or physically possess any TCB or any other raw material which

Hercules obtained, by the placement of rated orders, from

Hooker Chemical Corporation or any other supplier.

The United States, beginning in 1967, issued directives to

Hooker requiring Hooker to supply the necessary raw materials

for the production of Agent Orange to the suppliers, including

Hercules.

The United States held no financial ownership interest in

the land, buildings, tools, machinery or equipment used by

Hercules during the period of time in which Hercules produced

Agent Orange. Hercules considered parts of its process, includ-

ing the toluene extraction process, for the production of Agent

Orange as proprietary information.

The active ingredients for 2,4,5-T and 2,4-D sold to the

Department of Defense (“DOD”)were the same as those con-

tained in some commercial 2,4,5-T and 2,4-D products. How-

ever, the 2,4,5-T and 2,4-D products sold commercially by

Hercules were sold in a diluted form. The product sold to the

government was sold in an undiluted form.

C-6

After termination of the contracts with DOD for the supply

of Agent Orange, Hercules manufactured and sold various for-

mulations of esters and salts of 2,4,5-T and 2,4-D to commercial

customers.

The United States admits that the production of Agent

Orange generates wastes and that it knew or should have known

that. The parties also agree that many of the wastes generated

by Hercules from the production of 2,4,5-T sold to DOD and to

commercial customers contained “hazardous substances”

within the meaning of CERCLA. Hercules buried wastes gen-

erated from the production of 2,4,5-T sold to DOD and to

commercial customers at the Jacksonville facility. These wastes

are still located at the facility.

There is no dispute that the contracts did not require

Hercules to bury the wastes or to handle them in any particular

manner. Hercules made the decision to bury the wastes at the

Jacksonville facility, without consulting with DOD or DOC

personnel. Furthermore, the DOD or DOC took no part in

designing, performing, or supervising activities relating to the

handling, treatment or disposal of wastes during the time Her-

cules owned and operated the Jacksonville facility.

In addition, during the time Hercules owned and operated

the Jacksonville facility, the United States did not hire, fire,

discipline, manage or train any Hercules personnel who worked

in the Agent Orange production process.

“OPERATOR” AND “ARRANGER”

LIABILITY UNDER CERCLA

Vertac and Hercules assert that the United States is liable

as an operator under section 107(a)(2) of CERCLA. That

section imposes liability on “any person who at the time of

disposal of any hazardous substance owned or operated the

facility at which such hazardous substances were disposed of.”

42 U.S.C. § 9607(a)(2). Similarly, Vertac and Hercules assert

C-7

that the United States is liable as an arranger under section

107(a)(3) of CERCLA, which imposes liability on any person

who arranged for disposal of hazardous substances owned or

possessed by the person at any facility from which releases have

occurred. Their argument relies on the “authority to control”

they claim the United States had with regard to the disposal of

the wastes under the DPA and Walsh-Healey Act.

Under Section 107(a)(2), a non-owner of the property is

liable as an operator if the person either (1) actually participated

in the operations of the facility; or (2) actually exercised control

over, or was otherwise intimately involved in the operations of

the corporation immediately responsible for the operation of the

facility. Levins Metals v. Parr-Richmond Terminal, 781

F. Supp. 1454, 1456 (N.D. Cal. 1991).

Two alternative bases exist for arranger liability in this

context. In United States v. Northeastern Pharmaceutical &

Chemical Co. (“NEPACCO”), 810 F.2d 726, 743 (8th Cir.

1986), cert. denied, 484 U.S. 948 (1987), the court imposed

arranger liability on persons who actually controlled or had

authority over the disposal of hazardous substances even though

they did not own or physically possess them. Thus, arranger

liability could be imposed where the defendant had actual

authority to control the disposal of hazardous substances.

In the absence of actual involvement in the disposal of the

hazardous substances, arranger liability has been found where

the defendant retained ownership or control or the hazardous

substances throughout the production process that generated the

hazardous waste. In United States v. Aceto Agricultural Chemi-

cals Corp., 872 F.2d 1373 (8th Cir. 1989), the court denied a

motion to dismiss where the defendants—pesticide manufactur-

ers—had owned and possessed the hazardous substances prior

to arranging for disposal. The manufacturers contracted with

Aidex Corporation—a formulator of chemicals to blend and

package their pesticides. It was during Aidex’s handling of the

C-8

raw materials owned by the manufacturers that there were spills

of the materials at the Aidex.

The Eighth Circuit held that arranger liability could be

inferred where (1) the person owned the hazardous substances

or supplied them to another person who processed them and,

thereafter, disposed of at least some of the hazardous substances;

and (2) the person owned or controlled the hazardous substances

during the work in process; and (3) the generation and disposal

of hazardous substances were inherent in the production proc-

ess.3 See Jones-Hamilton v. Beazer Materials & Services, 959

F.2d 126, 131 (9th Cir. 1992) (arranger liability could be found

where defendant retained ownership of the materials it provided,

the materials provided included hazardous substances, and the

contract contemplated a small amount of spillage of the hazard-

ous materials).

Thus, to impose arranger liability on the United States

arising from its purchase of Agent Orange, Vertac and Hercules

must prove either (1) under NEPACCO, that the United States

had the actual authority over the disposal of hazardous sub-

stances at the Hercules plant, or (2) under Aceto that the United

States supplied the raw materials, and owned or controlled the

3 Dow, in its response to the cross motions for partial summary judg-

ment, argues that the United States has eliminated a third element in its

analysis of Aceto. That is, the United States construes Aceto as requiring

ownership of raw materials, the work in process, and the final products,

without any authority, involvement, or direction over the process resulting

in the disposal of hazardous substances, to be sufficient to confer arranger

liability. Dow contends that arranger liability under Acefo requires a finding

that defendants directed and controlled the process under which the hazard-

ous substances were generated.

The Court need not decide, at this time, whether the narrower standard

urged by Dow should be applied in this instance. The uncontested facts

reveal that the United States neither owned nor controlled the work in

process, and therefore, it is not liable even under the broader standard sought

by the United States.

C-9

work in process, and that the generation of hazardous substances

was inherent in the production process.

The undisputed facts in the case reveal that the United

States cannot be held liable as either an operator or an arranger.

There is no evidence that the United States actually participated

in the actual management or daily operations of the facility. The

United States neither supplied the raw materials used to make

Agent Orange nor did it own or possess the raw materials. It did

not dictate the manner in which the wastes were to be disposed

or nor did it in any way control the disposal of those wastes.

There is no dispute that Hercules’ contracts with the United

States subjected it to the terms of the Walsh-Healey Act. The

Act provides for government regulation of worker safety and

health practices. It provides that no part of a government

contract subject to the Walsh-Healey Act will be performed nor

will any of the materials, supplies, articles, or equipment to be

manufactured or furnished under the contract be manufactured

or fabricated in any plants or under working conditions which

are unsanitary or hazardous or dangerous to the health and safety

of the employees performing the contract.

Walsh-Healey inspectors visited the plant for the limited

_ purpose of investigating occupational safety and health hazards

that could potentially harm Hercules employees. The inspectors

did not assume any management or control over Hercules waste

disposal activities.

The Walsh-Healey Act did not give the Department of

Labor (“DOL”) inspectors any authority over Hercules’ disposal

of hazardous waste. The DOL had the authority only to issue

citations for worker health and safety violations. Indeed, the

DOL issued two Notices of Violation to Hercules. In October

of 1968, a DOL safety engineer found a number of safety

violations upon the inspection of the plant. The DOL issued a

“Notice of Violation” outlining the deficiencies. One month

later, an industrial hygienist with the DOL conducted a follow-

C-10

up inspection. Following his inspection, the DOL served Her-

cules with another “Notice of Violation.” Hercules responded

to both notices and took appropriate corrective measures to

remedy the problems.

Of import is that DOL had no authority to control the

manner in which the contractor remedied the problem. Thus,

even assuming that the inspector found problems with Hercules’

disposal of wastes, he or she could only issue a citation. The

manner in which Hercules dealt with the problem, or how it

intended to treat or dispose of its wastes, was left to its discretion.

The Court cannot find, based on the undisputed facts, that

the authority of the United States to regulate the working con-

ditions of the employees at the plant under the Walsh-Healey

Act gave the United States the authority to control the waste

disposal activities required for liability under CERCLA.

Hercules and Vertac argue that the DPA gave the United

States pervasive control over virtually all aspects of Hercules’

operations and business at the Jacksonville plant. Such an

attempt to inject the element of “substantial control” into per-

formance of contracts under the DPA must be rejected.

Section 101 of the DPA gives the President authority to

require companies to accept and perform any contracts and

orders that the President deems necessary or appropriate to

promote the national defense, and to require that companies give

priority to the performance of such contracts over the perform-

ance of other contracts or orders. 50 U.S.C. app. § 2071. The

DPA does not give the United States the authority to take over

the plant, or to control the contractor’ s operations and activities.

Rather, the relationship between the United States and the

contractor under the DPA is one of buyer and seller, except that

the buyer (i.e., the United States) has the power to require the

seller to perform the contract and to give it priority over other

contracts.

C- 11

Hercules also argues that it was compelled to perform the

Agent Orange contracts under the DPA. A similar argument

was rejected in Ryan v. Dow, 781 F. Supp. 934, 950 (E.D.N.Y.

1991). There, Agent Orange manufacturers (including Hercu-

les) sought removal to federal court of a tort action brought

against them by civilians in Vietnam during the war. While the

court recognized that the manufacturers of Agent Orange were

compelled to deliver the product to the United States, the court

stated, in relevant part:

They (the manufacturers] are being sued for formu-

lating and producing a product all of whose compo-

nents were developed without direct government

control and all of whose methods of manufacture were

determined by the defendants. ... The government

sought only to buy ready-to-order herbicides, not to

cause, control, or prevent the production of the un-

wanted byproduct, dioxin, which is the alleged cause

of plaintiffs’ injuries.

Furthermore, the Court cannot find under the circum-

stances that the degree of compulsion asserted by Hercules

existed. There is no dispute that Hercules actively sought Agent

Orange contracts by participating in competitive bidding and

that it made a profit from each contract. There is also no dispute

that Hercules sold herbicides similar to Agent Orange both prior

to and after the contracts with the government. See Ryan v. Dow

Chemical, 781 F. Supp. at 950 (“The government bought the

chemical components for Agent Orange and other defoliants as

existing products privately developed and used them in mixtures

which were derived from defendants’ standard recipes. Thus,

the ‘compulsion’ under which the defendants operated predomi-

nantly concerned marketing rather than design and manufac-

ture.”’)

Hercules and Vertac make much of the “authority” to

control. However, their attempt to impose liability on the

C-12

United States based merely on an “opportunity or ability to

control” Hercules’ waste disposal practices must be rejected. In

General Electric Co. v. Aamco Transmissions, Inc., 962 F.2d

281, 286 (2nd Cir. 1992), the court refused to accept a similar

argument. The court concluded “that it is the obligation to

exercise control over hazardous waste disposal, and not the mere

ability or opportunity to control the disposal of hazardous sub-

stances that makes an entity an arranger under CERCLA’s

liability provision.” The court further noted that courts holding

defendants liable as arrangers have found that the defendant had

some actual involvement in the decision to dispose of the waste.

“The most commonly adopted yardstick for determining

whether a party is an owner-operator under CERCLA is the

degree of control that party is able to exert over the activity

causing the pollution.” CPC International, Inc. v. Aerojet-Gen-

eral Corp., 731 F. Supp. 783, 788 (W.D. Mich. 1989) (finding

that “mere regulatory activities will not subject a state agency

to liability as an owner-operator.”’)

The Court finds that the United States did not have author-

ity over or involvement with Hercules’ operations and decisions

concerning the plant and the disposal of wastes. Such authority

or involvement cannot be conferred from either the Walsh-

Healey Act or the DPA. As such, the Court finds that the United

States is not liable as an arranger or operator under CERCLA

for its role in the production of Agent Orange.4

The Court has reviewed the remaining arguments asserted

by Hercules and Vertac and finds that they are without merit. In

particular, the Court finds that Hercules is not entitled to immu-

nity under section 707 of the DPA or to indemnity.

Accordingly, the motions for partial summary judgment of

Vertac and ADPC&E (document number 1170) and Hercules

4 The Court finds that questions of fact exist concerning the United

States liability as an “owner” for the Arkansas Ordnance plant during the

World War II period.

C-13

(document number 1339) are denied; the motion for summary

judgment against Vertac, et al. (document number 1403) is

granted.

IT IS SO ORDERED this 12th day of October, 1993.

UNITED STATES DISTRICT JUDGE

D-1

IN THE UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF ARKANSAS

WESTERN DIVISION

Civil No. LR-C-80-109

UNITED STATES OF AMERICA

Plaintiff

¥.

VERTAC CHEMICAL CORP., ET AL.

Defendants

Civil No. LR-C-80-110

ARKANSAS DEPARTMENT OF POLLUTION

CONTROL AND ECOLOGY

Plaintiff

VERTAC CHEMICAL CORP., ET AL.

Defendants

JUDGMENT

Pursuant to the Order entered this date, final judgment is

entered pursuant to Rule 54(b) on the claims against the United

States regarding production of Agent Orange, in particular, the

Order granting the United States’ motion summary judgment

and denying the motions for partial summary judgment of

Vertac, ADPC&E and Hercules.

IT IS SO ORDERED this Ist day of March, 1994.

és/ George Howard, Jr.

UNITED STATES DISTRICT JUDGE

D-2

IN THE UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF ARKANSAS

WESTERN DIVISION

Civil No. LR-C-80-109

UNITED STATES OF AMERICA

Plaintiff

Vv.

VERTAC CHEMICAL CORP., ET AL.

Defendants

Civil No. LR-C-80-110

ARKANSAS DEPARTMENT OF POLLUTION

CONTROL AND ECOLOGY

Plaintiff

Vv.

VERTAC CHEMICAL CORP., ET AL.

Defendants

ORDER

Pending before the Court is the motion of the Arkansas

Department of Pollution Control and Ecology (“ADPC&E” )and

Vertac for entry of a final judgment pursuant to Rule 54(b) of

the Federal Rules of Civil Procedure on the Agent Orange claims

against the United States.

On October 12, 1993, the Court granted the United States’

summary judgment motion on the Agent Orange CERCLA

liability claims. With the settlement between the ADPC&E,

Vertac and the United States of the non-Agent Orange claims,

all claims brought under CERCLA against the United States will

have been resolved. !

1 The settlement covers claims not related to the Agent Orange claims,

that is, the United States’ operation of an Army Ordnance Plant at the Vertac

D-3

No one disputes that all claims against the United States

have been resolved. Hercules opposes the entry of a Rule 54(b)

order. It contends that the request of Vertac and ADPC&E is

premature. It asserts that the Court should consider the issue of

appellate review at one time; that is, when all issues involving

the liability of all parties are resolved.

While Hercules’ argument ostensibly appears reasonable,

it must be rejected. Appellate review of the liability of various

parties may not be automatic. Review will need to be sought

under 28 U.S.C. §1292(b). Such review requires certification

by the Court, and acceptance by the appellate court. Thus,

appellate review of all liability issues at one time will not

necessarily be certain or assured.

The Court must determine whether certification of the

Agent Orange claims under Rule 54(b) is proper. In so doing,

the Court “must first determine that it is dealing with a ‘final

judgment.’ It must be a ‘judgment’ in the sense that it is a

decision upon a cognizable claim for relief, and it must be ‘final’

in the sense that it is ‘an ultimate disposition of an individual

claim entered in the course of a multiple claims action.’” Cur-

tiss-Wright Corp. v. General Electric Co., 446 U.S. 1, 7 (1980).

Here, the order granting summary judgment on the Agent

Orange claims meets the definition of a final judgment with

respect to the claims against the United States. It resolves the

United States’ liability under CERCLA for its role in the pro-

duction of Agent Orange.

Having found that the order pertaining to the production of

Agent Orange suffices as a final judgment, the Court must

determine whether there is any just reason for delay. In decidin g

whether there are no just reasons to delay, the court “must take

into account judicial administrative interests as well as the

Site during World War II; the United States’ transactions with Vertac during

the early 1970s; and various claims involving the Little Rock Air Force Base.

D-4

equities involved.” The Court may consider “such factors as

whether the claims under review were separable from the others

remaining to be adjudicated and whether the nature of the claims

already determined was such that no appellate court would have

to decide the same issues more than once even if there were

subsequent appeals.” Jd at 8. See also In re National Smelting

of New Jersey, Inc. Bondholders’ Litigation, 695 F. Supp. 796,

798 (D. N.J. 1988) (Curtiss-Wright suggests balancing of rela-

tive hardships. First, court must weigh relative prejudice that

nonmovant party would experience if certification granted

against hardship movant would fact if certification denied.

Second, court must determine whether certification would foster

the interest of sound judicial administration).

It appears that no hardship would result to the United States

or the other parties whose claims are yet to be resolved if

certification is granted. As stated above, all claims against the

United States as a responsible party under CERCLA have been

resolved. The Agent Orange claims are separate and inde-

pendent of other claims and will not require the appellate court

to consider the same legal or factual issues in a subsequent

appeal. Furthermore, the appellate court’s decision on the

Agent Orange claims could not be mooted by subsequent action

in the remaining phases of this litigation.

Vertac also argues that it will be prejudiced by a delay in

the appeal. While the court is of the opinion that its decision

was correct in granting the United States’ motion for summary

judgment, the Court recognizes that an early appellate review of

Vertac’s claim would be beneficial.

Accordingly, the motion for entry of final judgment under

Rule 54(b) on the Agent Orange claims against the United States

is granted. Judgment will be entered accordingly.

D-5

IT IS SO ORDERED this Ist day of March, 1994.

ls/ George Howard, Jr. __

UNITED STATES DISTRICT JUDGE

SEAL SEAL

DEFENSE CONTRACT AUDIT AGENCY

CAMERON STATION

ALEXANDRIA, VA 22304-6178

14 October 1982

PAD 730.31/92-6 92-PAD 163 (R)

MEMORANDUM FOR REGIONAL DIRECTORS,

DCAA DIRECTOR, FIELD DETACHMENT

SUBJECT: Audit Guidance on the Allowability of Environ-

mental Costs

The Director of Defense Procurement (DDP), determined

that environmental costs should be treated as normal business

expenses. The enclosed guidance paper on the allowability of

environmental costs was jointly developed with the office of the

Director of Defense Procurement. This guidance is based on the

current rules in effect. If new cost principles addressing envi-

ronmental costs are established, new audit guidance will be

issued at that time. The guidance in this paper should be applied

in auditing all incurred costs and forward pricing proposals.

DDP is separately distributing the guidance paper to the DoD

acquisition community.

Field audit office personnel should direct any questions

regarding this memorandum to personnel in the regional office.

If regional personnel are unable to answer or have questions of

their own, they should call Mr. H. Clyde Wray, Program Man-

ager, Accounting Policy Division, at (703) 274-6343.

Michael J. Thibault

Assistant Director

Policy and Plans

Enclosure:

Guidance Paper on Environmental Costs

DISTRIBUTION: C

E-2

Guidance Paper on Environmental Costs

Summary

Environmental costs are normal costs of doing business

and are generally allowable costs if reasonable and allocable.

Some environmental costs must be capitalized when the effort

improves the property beyond its acquisition condition or under

certain circumstances when the costs are part of the preparation

of the property for sale. If the environmental clean up efforts

resulted from contamination caused by contractor wrongdoing,

the clean up costs are not allowable. Clean up costs paid or

projected are usually only estimates of the contractor’s true net

costs after future recoveries. The costs should be treated as

contingent costs subject to FAR 31.205-7, Contingencies, and,

for costs paid and later recovered, 31.201-5, Credits.

Types of Environmental Costs

Environmental costs include costs to prevent environ-

mental contamination, costs to clean up prior contamination,

and costs directly associated with the first two categories includ-

ing legal costs.

Applicable Cost Principles

The costs incurred to clean up environmental contamina-

tion are considered to be rormal business expenses. The pri-

mary cost principles applicable to environmental costs are FAR

31.201-2, Allowability; 31.201-3, Reasonableness; and,

31.201-4, Allocability. Other cost principles applicable in spe-

cific circumstances include FAR 31.201-5, Credits: 31.205-3,

Bad Debts; 31.205-7, Contingencies; 31.205-15, Fines and Pen-

alties; and 31.205-47, Costs Related to Legal and Other Proceed-

ings.

E -3

Normal Business Expense

Normal business expenses are those expenses that an ordi-

nary, reasonable, prudent businessperson would incur in the

course of conducting a competitive for-profit enterprise. In the

context of environmental costs, normal business expenses are

measured by the actual costs incurred in the period. Not all

normal business expenses are allowable for Government con-

tract costing purposes. The costs must also be reasonable in

amount, allocable to Government contracts, and not be specifi-

cally unallowable under Government costs principle provisions.

Reasonableness

The key concept for reasonableness of environmental costs

(both preventive and remedial) is that the methods employed

and the magnitude of the costs incurred must be consistent with

the actions expected of an ordinary, reasonable, prudent busi-

nessperson performing non-Government contracts in a com-

petitive marketplace. A Government contractor should take

measures to prevent or reduce contamination which a prudent

businessperson would pursue to reduce its environmental costs.

Determination of reasonableness of clean up costs also

requires an examination of the circumstances of the contaminat-

ing events. Contractors should not be reimbursed for increased

costs incurred in the clean up of contamination which they

should have avoided. In order to be allowable, contamination

must have occurred despite due care to avoid the contamination,

and despite the contractor’s compliance with the law. Increased

costs due to contractor delay in taking action after discovery of

_ the contamination are not allowable. For forward pricing pur-

poses, the costs should be net of reasonably available recoveries

from insurance which would offset the clean up costs.

E-4

Allocability of Environmental Costs to Government Con-

tracts

Costs incurred to prevent environmental contamination

will generally be allocated as an indirect expense using a causal

or beneficial base. Costs to clean up environmexal contamina-

tion caused in prior years will generally be period costs. In

accordance with CAS 403 clean up costs should be allocated to

the segment(s) associated with the contamination which in turn

should allocate the costs to contracts as part of the segment

residual G&A costs under CAS 410.

Costs from a Contractor’s Previous Site

If costs arise from a site the contractor segment previously

occupied, the costs for clean up would usually be allocated to

the segment’s site where the work was transferred. However, if

the segment is closed with none of its former work remaining

within the company, the costs would generally not be directly

allocable to other segments of the business. There are many

possible variations for the cost accounting treatment of environ-

mental costs for a closed segment, depending on the facts of the

particular situation. Information we would consider includes:

1. Are any aspects of the closed segment’ s business being

continued by the remaining segments?

2. Is the site still owned by the contractor? If it is, what

is its current use?

3. If the site is not now owned by the contractor, what

were the terms of the sale in relation to environmental

costs? The contractor may have retained environmental

clean up liability in exchange for a higher sale price or the

buyer may have accepted full liability in exchange for a

lower purchase price.

Each closed segment case must be reviewed based on its own

facts to determine if the costs incurred for the closed segment

E-5

should be directly allocated to other segments, be allocated as

residual home office costs, or be treated as an adjustment of the

extraordinary costs associated with the closing of the segment.

Capitalization of Environmental Costs

Generally Accepting Accounting Principles in the Emerg-

ing Issues task Force (EITF) Issue No. 90-8 indicates that

environmental costs would normally be expensed in the period

unless the costs constitute a betterment or an improvement, or

were for fixing up property held for sale. Betterments and

improvements which exceed the contractor’s capitalization

threshold must be capitalized. Costs of fixing up a property for

sale are generally considered to be part of the sales transaction,

if realizable from the sale. It would be unreasonable for the

Government to accept as current period costs, expenditures

which increase the value of contractor assets; accordingly, these _

costs should be capitalized for Government contract costing

purposes. The EITF discusses situations where , *italization of

the expenditures may be appropriate.

First, cost incurred to clean up a site should be capitalized

if it improved the property beyond the original condition of the

property at acquisition. The costs incurred to restore a property

to its acquisition condition are generally expensed unless they

extend the property’s useful life. Second, costs incurred to fix

up property held for sale are to be capitalized, if such costs are

realizable from the sale. A contractor may be required to incur

contamination clean up costs far in excess of any amount

reasonably realizable upon sale. In the case of costs in excess

of realizable costs, the excess amounts are expensed or capital-

ized depending on whether they improved the property beyond

the property’s condition at acquisition. Third, costs incurred to

prevent future contamination would have an economic value in

more than one period and should be amortized over their useful

life. Capital assets purchased or constructed to prevent future

E -6

contamination must be capitalized consistent with CAS 404 and

GAAP.

Examples:

1. A contractor acquires property which was contami-

nated by a previous owner. Clean up costs are capitalized as an

improvement. Costs of ground and water clean ups are increases

to the book value of the land.

2. A contractor cleans up contamination from its own

operations since acquiring the property. If the property is being

held for continuing use, the costs are expensed as period costs.

3. If a contractor incurs $80 million dollars in costs to

clean up a site which is being held for sale and has a book value

of $50 million dollars, so that it can be sold for $500 million

dollars the $80 million is realizable and should be capitalized.

If the sale price had been $50 million, none of the $80 million

would be realizable and it should be expensed in the period.

4. Costs which benefit future periods by preventing fu-

ture environmental contamination should be capitalized and

written off over the future periods.

Responsibility for Clean Up as Potentially Responsible

Party

The environmental laws usually require each Potentially

Responsible Party (PRP) for contamination at a site to be

individually liable for the complete clean up of the site. The

allowable environmental cost should only include the contrac-

tor’s share of the clean up costs based on the actual percentage

of the contamination attributable to the contractor.

If the Government accepted cost based on ability to pay, a

Government contractor could end up billing a disproportionate

share of the clean up costs to Government contracts instead of

recovering the excess payments from other PRPs. If the Gov-

emment contractor pay a disproportionate amount, the funds

E-7

will just transfer from one Government appropriation to another,

with some PRPs not paying their share.

Where the contractor paid for more than its share of the site

clean up, the contractor receives a right of contribution (or

subrogation) against the other PRPs who did not make an

appropriate contribution to the clean up effort. If the contractor

pays out more than its share of clean up costs, it is up to the

contractor to exercise its contribution rights to collect the

amount over its share from the other PRPs who did not pay their

share.

If a contractor cannot collect contribution or subrogation

claims from other PRPs, the uncollected amounts are, in their

essential nature, bad debts. Bad debts and associated collection

costs, including legal fees, are unallowable costs (FAR 31.205-3

and 31.204(c)).

Insurance Recovery for Environmental Costs

The insurance industry does not currently consider envi-

ronmental contamination an insurable risk (at a reasonable cost)

in most circumstances. The major exception is a sudden acci-

dental contamination, such as an oil tanker spill resulting from

a collision. If such insurance is available and reasonably priced,

its cost would be allowable.

However, some courts have found that policies written

before the insurance industry began to exclude environmental

coverage do afford coverage for environmental damages. Any

insurance recoveries for a contamination clean up will be ap-

plied as credits against any costs which were or would be

otherwise allowable for that clean up effort.

Many environmental contamination events now generating

costs were insured, either under specific environmental impair-

ment or comprehensive general liability coverages, before the

insurance industry developed its current underwriting exclu-

sions. It is the earlier insurance policies which are the source of

E-8

the potential claims. Most insurance companies are contesting

the claims and when payments are made, they are based on

partial settlements or after lengthy legal battles. Where a claim

is possible and economically feasible, the contractor should

pursue it. In any case, the Government should inquire about the

existence of environment contamination policies and compre-

hensive general liability policies which do not contain environ-

mental clean up cost exclusions. The kind and amount of

policies in effect from the time of the contamination to the

current date are significant for the purposes of negotiating costs

and prices for Government contacts. The contractor’s support

for proposed clean up costs should include a description of any

insurance claim the contractor may have which could reduce the

ultimate liability. The amount and timing of these claims for

contract costing is a potential subject for negotiation which

should be addressed by the auditor and ACO.

Payments to Third Parties Due to Fault Based Liabilities

Examples of liability to third parties include health impair-

ment, property damage, or property devaluation for residents or

property Owners near a contaminated site. These third party

claims arise from legal theories of tort and trespass, and losses

from such claims would be unreasonable in nature for payment

on a Government contract. In the absence of a specific court

finding of tort or trespass by the contractor, the facts of each case

should be carefully examined to determine if the contractor

payments are none-the-less based on those or other fault based

legal theories.

Environmental Wrongdoing

If environmental clean up costs are the result of contractor

violation of laws, regulations, orders or permits, or disregard of

warnings for potential contamination, the clean up costs includ-

ing any associated costs, such as legal costs, would be unreason-

able and thus unallowable. Fines or penalties are expressly

E-9

unallowable under FAR 31.205-15 and any costs of legal pro-

ceedings where a fine or penalty could be imposed are covered

by FAR 31.205-47. (Note, the incurrence of clean up costs to

correct environmental contamination is not a penalty; it is a legal

obligation.) However, most of the laws do not require the

contractor to be guilty of violation to enforce contractor payment

for clean up costs. Therefore, it is rare for Government agencies

to bring criminal, or even administrative, charges for contami-

nation. Contractors should be requested to provide documents

sufficient to allow a determination as to how the contamination

occurred.

Advance Agreements

There are many areas of judgment involved in the determi-

nation of allowability for environmental costs. It is necessary

for the auditor and the ACO to coordinate closely during the

review. Advance agreements should be considered to facilitate

negotiations with the contractor.

Ideally, the Government wants to negotiate costs and prices

based on the net environmental costs after application of insur-

ance claims. At the time that environmental costs are being

incurred, it may not be possible to reasonably estimate what the

net costs will be. Even where it is settled that a contractor will

be required to clean up a prior contamination, it is rare that

projections of the costs necessary to complete the project can be

made with a reasonable degree of certainty. Due to the uncer-

tainty of the cost projections and the uncertainty of future

recoveries from the insurance companies, environmental clean

up costs are contingent costs subject to FAR 31.205-7 for both

incurred cost settlements and forward pricing. Acceptance of

the costs may require some form of agreement to protect the

Government's interest. Any agreement to accept costs for clean

up or the costs of insurance recovery efforts as current expenses

should also provide expressly for Government participation in

any insurance claim recoveries.

F-1

United States General Accounting Office

G AO Fact Sheet for Congressional

Requesters

June 1992 DOD

ENVIRONMENTAL.

CLEANUP

Information on

Contractor Cleanup

Costs and DOD

Reimbursements

[SEAL]

GAO/NSIAD-92-253FS

F-2

GAO

United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-246822

June 26, 1992

The Honorable John Conyers, Jr.

Chairman, Committee on Government

Operations

House of Representatives

The Honorable Barbara Boxer

House of Representatives

In response to your request, this fact sheet

provides information on the environmental

cleanup costs associated with the produc-

tion of military goods and Department of

Defense (DOD) reimbursements to large

defense contractors for such costs. In a

subsequent report, we will address the re-

sults of various case studies and other re-

lated issues.

Results in Brief

Although DOD does not collect informa-

tion on defense contractors’ past and future

cleanup costs or reimbursements, substan-

tial amounts of datz may be available to

DOD. Our inquiries to DOD’s Corporate

Administrative Contracting Officers for the

15 largest defense contractors indicated

most of them had at least partial information

on past and future cleanup costs. DOD is

Background

F-3

testing a program that could help collect

some of the data.

The data we obtained indicate that 10 con-

tractors have already incurred investigation

and initial cieanup costs totaling nearly

$300 million. As to future costs, we ob-

tained at least partial projections of cleanup

costs that, in total, range from $0.9 billion

to $1.1 billion.

Four of the 15 contractors reported receiv-

ing DOD reimbursements totaling about

$59 million. Future DOD payments to con-

tractors could increase significantly after

long-term cleanup efforts begin. Four con-

tractors have filed claims with DOD, and

others may file claims in the future.

The Environmental Protection Agency is

charged with implementing various envi-

ronmental laws. It has developed imple-

menting regulations that outline, for

example, cleanup requirements and selec-

tion and approval procedures for remedial

actions.

Some defense contractors are among those

being held financially responsible for the

environmental cleanup of sites used for the

production of military goods as well as sites

used to dispose of hazardous waste gener-

ated by the production of those goods. The

contractors may be able to pass the cost of

cleanup on to the federal government. The

Federal Acquisition Regulation, which

governs the allowability of costs under gov-

F-4

ernment contracts, does not specifically ad-

dress environmental cleanup costs. Gener-

ally, a cost is allowed under the regulation

if it meets criteria for reasonableness, allo-

cability, and compliance with cost account-

ing standards and contract terms.

DOD is currently developing an environ-

mental cost principle to provide more de-

finitive criteria for determining the

allowability of environmental cleanup

costs. Implementation of the cost principle

is not expected before the end of 1992.

Past and Future Substantial data on past and future environ-

Environmental

Cleanup Costs

mental cleanup costs may be available to

DOD. Our inquiries to 15 contracting offi-

cers showed that 10 individual contractors’

estimates of past costs ranged from

$0.8 million to $105 million and totaled

almost $300 million. Projections of future

cleanup costs from 9 of the 15 contractors

indicate that significant expenditures will

be necessary to complete long-term cleanup

efforts. Individual projections ranged from

$4.5 million to $305 million. In the aggre-

gate, future cleanup costs were estimated to

be between $0.9 billion and $1.1 billion.

Past cleanup expenditures have included

such activities as site investigations, miti-

gation of existing damage, and legal costs.

At least eight contractors expect expendi-

tures to increase significantly after full-

scale cleanup efforts are initiated. One

contractor, for example, advised us that it is

F-5

spending $9 million for investigation of one

site through 1992 and projected that another

$91 million would be needed to construct

and operate ground water treatment facili-

ties for full-scale cleanup of this site. Like-

wise, another contractor estimated that it

had spent $14 million on site investigation

and initial cleanup and estimated future

costs of $110 million to complete cleanup

efforts.

Two contractors reported future costs as a

range of possible costs, reflecting the diffi-

culty in making long-term cost projections

when environmental laws, cleanup stand-

ards, and technology are subject to change.

Because of these uncertainties, most cost

estimates are projected for only 2 to 4 years.

Only one contractor provided a long-term

estimate of 25 to 45 years.

These past costs and project: dns are conser-

vative because some contractors could pro-

vide only partial information. For example,

one contractor may be responsible for envi-

ronmental cleanup at 100 sites involved

with DOD contracts but could provide only

partial information on 29 of the sites in the

available time. Another contractor re-

ported cleanup costs for approximately 100

sites but was unable to isolate the costs for

sites involved with DOD contracts.

According to some contractor officials,

projected environmental cost information is

sensitive and public release of the informa-

tion could affect their business competitive-

F-6

ness or ongoing litigation with insurance

companies and others.

DOD does not have a system for collecting

past and projected environmental cleanup

costs that its contractors may claim. How-

ever, DOD is testing a Defense Corporate

Executive program, which could provide

more effective overview of corporate-wide

activities and costs, including those related

to environmental issues.

a a

DOD Payments

for Cleanup

Four of the 15 contractors reported that

DOD had made payments ranging from

$0.5 million to $51.8 million for at least part

of their cleanup costs. These payments to-

taled about $59 million. Future payments

to contractors may increase after the con-

tractors begin more extensive cleanup ef-

forts.

Further DOD payments could increase in

the future as more contractors seek reim-

bursement. Only 4 of the 15 contractors

have filed claims for reimbursement with

DOD, but others have not ruled out filing

claims in the future.

We requested information from DOD on

past and future environmental cleanup costs

and the amount of reimbursements ex-

pected to be made; however, DOD stated it

could not fulfill our request. We then con-

tacted DOD Corporate Administrative

F-7

Contracting Officers at the 15 largest de-

fense contractors of 1991, who in some

cases contacted contractor officials to pro-

vide the information requested. We did not

verify the cost information obtained for the

15 contractors. We conducted our work in

April and May 1992.

As you requested, we did not obtain fully

coordinated DOD comments on a draft of

this fact sheet. However, w

This text is long and has been trimmed here. Open the source document for the complete record.

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