Breach Cases Could Cost U.S. Government Billions
Cases involve oil leases and nuclear fuel, with a third potential area of suits involving Medicare contracts
The National Law Journal
September 8, 2008
The U.S. Court of Appeals for the Federal Circuit affirmed a $1 billion damages award by the U.S. Court of Federal Claims for the government's breach of oil and gas leases held by 11 companies -- what court watchers say may be the largest single award by the claims court in its 150-year history.
Also, in a trio of cases, a three-judge panel of the Federal Circuit resolved a crucial issue largely in favor of nuclear utilities in the spent-fuel battle with the government, which is likely to boost damages awards in the 40 to 50 cases still pending.
The nuclear industry estimates that the government -- whose liability has been established -- ultimately will face close to $50 billion in damages, but the government contends it is closer to $7 billion. Damages and costs continue to accrue while the government pursues a waste depository at the controversial Yucca Mountain, Nev., site.
Whichever dollar figure emerges, "this is a very, very big problem for the Department of Energy," said veteran government contracts litigator Jerry Stouck, partner in the Washington, D.C., office of Greenberg Traurig and counsel to four utilities in the recent Federal Circuit rulings.
And the first lawsuit in what will be a new wave of broken-contract litigation, predicts Stouck, was filed by his firm over Congress' recent enactment of legislation terminating bid-awarded contracts to 325 medical suppliers under the federal Medicare law.
The Federal Circuit has been pretty consistent in its view that the government is normally held to the same standards as a private party when it comes to contractual obligations, said Steven Rosenbaum, a partner at Washington, D.C.'s Covington & Burling, and winning counsel for the 11 oil and gas companies.
"There are exceptions, but in most circumstances, the court has been holding that one judges what the government promised to do pretty much as if it were a private party, and if the government doesn't abide by its obligations, the government is open to the same kind of contractual remedies," he said.
The Federal Circuit's consistency and the government's increasing vulnerability to very large contract claims can be traced to the U.S. Supreme Court decision in U.S. v. Winstar Corp., 518 U.S. 389 (1996). That ruling -- a breach-of-contract suit stemming from the savings and loan debacle -- and subsequent rulings by the justices established that the government is governed by the same rules as private parties in breach-of-contract disputes.
Rosenbaum's $1 billion victory in Amber Resources Co. v. U.S., nos. 2007-5047, -5082, stems from leases granted by the federal government between 1968 and 1984 to private companies to explore for and develop oil and gas resources in the outer continental shelf off the California coast. Because of court decisions interpreting a 1990 law, the government halted the exploration, at least temporarily. The lessees sued, claiming breach. The circuit panel held that they should be reimbursed the amount they paid for the leases decades ago.
"These are situations where the government is actually selling something to my clients -- mainly the opportunity to explore," Rosenbaum said. "The up-front payment in this arena is huge. One individual lease can go for $100 million. If you discover oil, you pay the government a percentage."
Rosenbaum, who filed the suit in 2002, said five leases remain unresolved.
In the trio of spent nuclear fuel decisions, the Federal Circuit was acting on the government's appeal of a $143 million award to three utilities; an appeal by Pacific Gas & Electric of a $43 million award as too low; and the government's appeal of a $40 million award to another utility.
Roughly 60 cases have been filed seeking damages and costs for storage facilities built by the utilities to hold spent nuclear fuel that the government was obligated to begin collecting on Jan. 31, 1998.
In the Pacific Gas decision, the Federal Circuit resolved "the primary disputed issue in this litigation over the past many years," said Greenberg's Stouck: What was the rate of acceptance -- how much fuel was the government to pick up each year under the contract?
The panel said the answer was essential to knowing whether the damages -- the cost of building storage -- was caused by the breach.
The court, looking to past government plans, set a standard very close to the utilities' recommended rate.
"Most of the utilities will be able show if [the Department of Energy] had been performing at that rate, the new facilities built could have been avoided," predicted Stouck, who represents Pacific Gas, whose appeal was argued by Carter Phillips, a partner at Sidley Austin.
Jay Silberg, a partner in Pillsbury Winthrop Shaw Pittman's energy section who has 20 cases, agreed. He, Stouck and others said it was past time for the government to begin settlement talks.
The court awards thus far have been for damages already incurred, noted Stouck. "But the Yucca mountain projected date is not earlier than 2020, so damages continue to run."
But a Department of Justice representative said department lawyers are considering whether to recommend further appeals (rehearing by panel or en banc) or certiorari to the Supreme Court in the oil and gas and spent nuclear fuel decisions.
Stouck has teed up what may be the next big wave of broken contract litigation with the firm's complaint in CardioSom v. U.S., No 1:08-cv-00533 (Fed. Cl.).
Congress in July explicitly terminated government contracts with 325 medical suppliers that bid to provide medical equipment and supplies to an estimated 3.6 million Medicare patients in 10 communities across the United States. The new competitive bidding program reportedly touched off intense lobbying, and Congress decided to revamp it.
CardioSom alleges it lost its investment in leases, personnel, inventory and other items in reliance upon the contract.
"You have a statute that expressly terminates the contracts," said Stouck. "I think that's a breach of contract under Winstar and its progeny. So far, we feel pretty good about liability, and the reliance damages are pretty straightforward." His suit is the first, but, he predicts comfortably, "There will be more."