Hercules Inc. v. United States

PETITIONER:Hercules Inc.
RESPONDENT:United States
LOCATION:Seminole Tribe

DOCKET NO.: 94-818
DECIDED BY: Rehnquist Court (1986-2005)
LOWER COURT: United States Court of Appeals for the Federal Circuit

CITATION: 516 US 417 (1996)
ARGUED: Oct 30, 1995
DECIDED: Mar 04, 1996

ADVOCATES:
Carter G. Phillips – Argued the cause for the petitioners
Carter Phillips – for petitioners
Edward C. DuMont – Department of Justice, argued the cause for the United States, supporting the respondent

Facts of the case

During the 1960s, the United States government contracted with several chemical manufacturers, including Hercules Incorporated and Wm. T. Thompson Company, to manufacture the herbicide known as Agent Orange. After health problems arose, Vietnam veterans and their families began filing lawsuits against the manufactures. The manufacturers incurred substantial costs defending, and then settling, the claims. The manufactures then filed suit under the Tucker Act to recover such costs from the Government on theories of contractual indemnification and warranty of specifications provided by the government. Ultimately, the Court of Appeals rejected the theory of implied warranty of specifications and the theory of implied promise to indemnify for liabilities incurred in performing the contracts. The appellate court also held that, by settling, the manufactures had voluntarily assumed liability for which the Government was not responsible.

Question

May the chemical manufacturers of Agent Orange recover costs incurred from defending and settling third-party tort claims arising out of their performance of Government contracts from the Government on alternative theories of contractual indemnification or warranty of specifications provided by the Government?

William H. Rehnquist:

We’ll hear argument now in Number 94 818, Hercules, Incorporated v. United States.

Mr. Phillips.

Carter G. Phillips:

Mr. Chief Justice, and may it please the Court–

This is a case about simple fairness.

The petitioners were compelled under the threat of civil and criminal penalties to produce Agent Orange.

They were required to produce it according to precise specifications commanded by the United States Government.

The specifications ensured that dioxin would be produced, which the United States knew, and the Government also knew, and the court of appeals expressly found that dioxin is an extremely hazardous substance.

Petitioners knew none of these facts, and the United States knew them and declined to divulge any of that information to the United States… or, excuse me, to the petitioner.

The Agent Orange that was produced by the petitioners was done so in strict conformity to the requirements of the United States, and the United States then used it in unheard of concentrations and exposed thousands of American military and others to the risks that arise from the dioxin.

Antonin Scalia:

Who can’t recover against the United States.

Carter G. Phillips:

Who cannot recover against the United States?

Antonin Scalia:

I mean, I really find your simple fairness argument a little hard to take in this field.

I mean, if there’s anybody who’s been done out of simple fairness, it’s the soldiers who were injured by this thing, and they can’t sue, so haven’t we abandoned simple fairness in this field?

Carter G. Phillips:

No.

I think it’s a question of–

Antonin Scalia:

Should we be outraged that the companies cannot pass on their liability, when the injured parties themselves can’t recover?

Carter G. Phillips:

–Well, at least some portion of the injured parties, of course, are taken care of by veterans benefits programs, and that was a decision the court made a long time ago with respect to the–

Antonin Scalia:

Sure, the companies had golden parachutes, too, or something else, but that’s a different question, whether they can get moneys–

Carter G. Phillips:

–But the… as I understand the theory, Justice Scalia, the quid pro quo for depriving soldiers of the ability to go against the United States on a tort theory was because they have other remedies, and therefore the Court interpreted the Tort Claims Act not to prove… not to allow recovery.

That says nothing, though, about what ought to be the relationship between the contractors and the United States.

It seems to me quite clear that in defining that relationship you have to look to the basic law of… the basic Federal common law, and what rules make sense there.

William H. Rehnquist:

–Well, but it’s been established for a long time, Mr. Phillips, that he who deals with the Government must turn square corners.

That is, it’s not a matter of equity, or something like that, it’s a matter of waiver of sovereign immunity, which is always strictly construed.

Carter G. Phillips:

That’s absolutely correct, Your Honor, but there’s no question in this case that there’s been a waiver of sovereign immunity.

The lodgings that were filed with the Court demonstrate the existence of a contract.

The Tucker Act expressly waives sovereign immunity for all contract claims.

We’re simply trying to ascertain the broad outlines of what’s within those contracts based on principles this Court has long followed in terms of when do you imply either indemnification agreements or warranties based on the relationship between the parties and the course of conduct between the parties.

The litigation in this particular case arose in the wake of the initial settlements that were done by the petitioners after they were sued by the… those who had been exposed to Agent Orange.

Ruth Bader Ginsburg:

Mr. Phillips, with respect to that, suppose this case had developed that Judge Pratt’s acceptance of the Government’s contractor defense had stuck, that there had been no change of district judges, and he had entered that judgment, an appeal is taken, and the companies are concerned about how the court of appeals would resolve the Government contractor defense, so they settle, precisely the terms that we have before us here.

They settle, and then they want to be reimbursed by the Government for the cost of that settlement.

Ruth Bader Ginsburg:

Would they have a claim then?

Carter G. Phillips:

Yes, Your Honor, I believe they would have a claim.

They would unquestionably have a claim under an implied indemnification theory, because it is well settled under standard contract rules that if you are indemnified against losses, that whatever losses arise out of your course of conduct, assuming you’re an innocent party, are recoverable.

Ruth Bader Ginsburg:

But the loss in what I’ve described to you is their decision, their uncertainty whether their victory in the district court will prevail.

That’s… they don’t want to take a chance on losing on appeal.

They’ve won in the district court, and yet you say that the Government would be responsible under the contract.

Carter G. Phillips:

Yes, Your Honor, under an implied indemnification, which is either a variant of Spearin, or a concept that you ought to take directly from Ryan Stevedoring, where the nature of the relationship between the parties demonstrates the kind of control that we’re talking about here, where you have compelled production, you have precise specifications, and you have superior knowledge.

In that situation, you would ordinarily… in an ordinary agency relationship you would immediately assume indemnification, and that–

Ruth Bader Ginsburg:

But if the law is as a Government contractor you have a complete defense to the tort action, if that’s what the law is, and then the manufacturers say, yes, we urge that that was the law, it was accepted by the court that that was the law, but we know those courts of appeals are not reliable, so we’re going to settle rather than risk a reversal.

Carter G. Phillips:

–As I understand the standard rules of damages in an indemnification arrangement, the fact that you had to expend moneys under any circumstances is recoverable against the indemnitor.

Now, the question is, were the expenditures reasonable?

That is, has the indemnitee in some sense squandered the assets of the indemnitor?

Now, in your hypothetical, you could argue that you’re getting close to that, because in some situation where you have an absolute slam dunk winner, it may be that it would be inappropriate to settle.

In the facts of our case, obviously, that’s not what we faced.

We didn’t have a guaranteed defense, and we weren’t even being supported by the United States as part of that process.

The other portion of why an indemnification fits neatly into this whole arrangement is that under standard indemnification law the Government would, as an indemnitor, be in a position to step into the shoes of the indemnitee and therefore take over the defense, and if, under those circumstances the Government wanted to ensure 1) that no settlements would go forward that they hadn’t approved of, they could exercise that right, but they would have to take over the defense under those circumstances.

But it seems to me that that’s just standard indemnification law as it would apply in the facts of this particular case.

Now, with respect to breach of warranty, the issue is a little less clear because the causation requirement between a breach of warranty and the particular damages is less clearly supported by the position that you’re entitled not only to recover anything that you spend in consequence of a judgment, but that you’re also entitled to any settlement that you reasonably enter into.

I think part of the reason why it’s less clear is because you don’t have the indemnitor there to protect itself, and under those circumstances, the courts take, I think, a much harder look at whether or not the particular damages were caused by the particular breach.

But here, we’re dealing with a situation of summary judgment, and we’ve not had an opportunity to prove any of those relationships under the circumstances in this case, and I’m confident that if we get back to the claims court and we can demonstrate that the specifications create both breaches of warranty and breaches… and that the… and indemnification rights, we’ll be able to demonstrate under the traditional common law rules that otherwise would apply precisely how the damages ought to flow.

David H. Souter:

Did you allege that you had been compelled within the meaning of section 101, that you had been compelled to produce this stuff?

Carter G. Phillips:

Yes, we did allege that we had been compelled to produce under… that there were orders entered under section 707 of the defense production–

David H. Souter:

Why should we get into indemnification when you had a defense under 707 by virtue of the compulsion?

Carter G. Phillips:

–Well, I mean we argued that we–

David H. Souter:

I mean, leaving aside whatever under other circumstances might or might not be implied, doesn’t your allegation, if it is accepted, entitle you to a defense and, therefore, why should we get into implying indemnification that you don’t need?

Carter G. Phillips:

–Well, I’ve two answers to that.

First of all, we tried that defense and it didn’t succeed.

We asserted in the Agent Orange litigation that we should not be held liable, that we should be held harmless, as the provisions seemed to indicate, and were told that it only swept to the extent of the priority, and protections against the priority of contracts, not from the rest of the damages that would flow from performance of the particular contract, so it may–

David H. Souter:

Should you be excused from litigating your position on that?

In other words, I don’t know how that will ultimately play out, but it seems to me you have a strong argument.

David H. Souter:

Should we excuse you for carrying that issue as far as you can, and go to the convenience of implying this indemnification so that you don’t have to bother to litigate your 707 position?

Carter G. Phillips:

–Let me step back for a second in terms of the sort of convenience of an indemnification, because I think it’s quite clear that that’s not a matter of convenience, it’s a matter of the basic way of interpreting the relationship between the parties under these particular circumstances.

David H. Souter:

Well, regardless of whether you call it a convenience or not, if, to the extent that we are going to do any implying here, or find an implication, why should we find an implication when, on your own allegations, you have a defense under 707 and, secondly, why shouldn’t you have to litigate that point?

Carter G. Phillips:

Well, we did litigate that point up to the stage where we faced a 40 billion claim, and at that point we blinked.

I think that is a perfectly reasonable litigating judgment.

David H. Souter:

It may be reasonable, but if we have to choose between allowing you to blink at the expense of an indemnification which, in fact, may not be necessary, or may not have proven to be necessary even on your own theory had you pursued your defense, why should we prefer you to the Government?

Carter G. Phillips:

Well, I think the basic reason is that the Government contractor whose entire enterprise is controlled exclusively by the United States is an innocent party to this entire proceeding, and as between an innocent party and a not innocent party in an implied indemnification arrangement, it’s Hornbook law that you favor the innocent party.

David H. Souter:

Well, but my difficulty is, your argument seems to be proving, if I accept it, that you do have a defense under 707 and the question is, who should be, in effect, relieved from establishing this.

Carter G. Phillips:

Well, you know, the other side of that is that when we argued this, the United States did not come in and argue that we were entitled to protection under section 707.

They didn’t view that as a defense.

We’ve never been… never got the benefit of the Government supporting our particular position.

David H. Souter:

Well, by the same token… I don’t know the answer to this, but did you request the Government to take part in the settlement?

Did you request the Government to take a position?

Carter G. Phillips:

Well, absolutely.

From day 1 we sought the Government’s assistance throughout this litigation, and failed to–

Antonin Scalia:

Well, I assume it follows from your position that if you would… if the Government would have to contribute to your settlement you would also logically have a claim against the Government if you didn’t settle and ultimately won.

You’d have a claim against the Government for your attorney’s fees, I suppose.

Carter G. Phillips:

–Yes, Your Honor.

I believe that that’s standard indemnification law.

Antonin Scalia:

Well, my goodness, why is that?

I mean, even people who are prosecuted criminally by the Government and expend, you know, hundreds of thousands of dollars to defend themselves and are ultimately found innocent do not have a claim for indemnification against the Government.

Carter G. Phillips:

I understand that, Justice Scalia, but those people also don’t have a contractual relationship with the Federal Government.

Antonin Scalia:

Yes, but whether it’s reasonable to imply that term in a contract with the Government surely is colored by the fact that the Government doesn’t even pay off when it’s prosecuted you wrongfully and you have to expend hundreds of thousands of dollars to defend yourself.

Carter G. Phillips:

Justice–

Antonin Scalia:

Would the same Government who doesn’t pay you off in that situation likely have entered into an implied contract with you to pay you off in what seems to me the much less heinous situation that you’re complaining about?

Carter G. Phillips:

–Well, it’s difficult for me to–

Antonin Scalia:

This is a different Government you’re talking about, it seems to me.

Carter G. Phillips:

–But I mean, under ordinary indemnification rules, Justice Scalia, the party who has the power to compel, the party who has the power to require compliance, and the party who has superior knowledge and who allows the innocent contractor to engage those kinds of expenses is entitled to be indemnified.

Antonin Scalia:

But this party is the Government.

The average party is not a party who has sovereign immunity, and what terms are implied in a contract with the Government surely is… ought to be colored by the fact that the Government usually doesn’t pay people off for litigating.

Carter G. Phillips:

Well, let me suggest there are two answers to that.

First of all, essentially it seems to me the same argument would have been… could have been made and probably was made in Spearin, and this Court nevertheless implied warranties arising out of the course of conduct between the parties and, therefore, it seems to me the same argument that was available there didn’t prevent the Government contractor from being protected.

Ruth Bader Ginsburg:

Between the parties have you got any case in the Spearin line where, not the parties to the immediate contract was involved, but where Spearin was successfully invoked to recover money paid to third party tort claimants, as here?

Carter G. Phillips:

The two closest cases on point in that regard are the Traveler’s Insurance case out of the Federal Circuit and the… or is it… I’m sorry, maybe the Third Circuit, and the Williams McWilliams case that we cited.

Those are two court of appeals cases that applied Spearin directly and said there’s no reason to restrict Spearin and the basic implied warranties that are embodied in Spearin to be cut off based simply on contract performance when to do so is to expose these individuals to greater harms, and basically–

Ruth Bader Ginsburg:

Were they third party tort claimants?

Carter G. Phillips:

–Yes.

In the one case a person fell off of a tower that had been improperly built according to Government specifications.

William H. Rehnquist:

Well, I don’t read Spearin to say that the law of implied warranties is… or indemnity is just going to be incorporated bag and baggage into every deal with the United States.

Carter G. Phillips:

Well, I don’t read that–

William H. Rehnquist:

Spearin is a fairly limited case on its facts.

Carter G. Phillips:

–Well, the one thing that Spearin says, and I think this applies just as well with the warranty as it does with the… excuse me, with the indemnification as with the warranty, the contractor will not be responsible for the consequences of defects in the specifications.

That’s the rule of law that Spearin announced and, interestingly, it derived that rule from a series of State court cases applying just general common law principles, that it’s a settled rule that you are not held responsible for defects that the Government foists upon you.

And in this case, to go back to the implied warranty component of the case, the defect that we were dealing with was that a process that, if you followed exactly what the Government commanded you to do under the contract, would create dioxin, and everyone concedes that dioxin is an extremely hazardous substance, and it was that dioxin that the United States then used to defoliate the jungles of Vietnam and expose thousands of people to injury.

Anthony M. Kennedy:

Mr. Phillips, how does the Defense Production Act work?

Suppose you were ordered to produce this.

Could you say, well, we’ll negotiate the contract.

Now, we want an indemnity clause in the contract.

Did you have that option, that choice?

Carter G. Phillips:

We could ask for that, yes.

Anthony M. Kennedy:

And does the Government have to give it to you?

I mean, how does this work?

If they’re making you do something–

Carter G. Phillips:

Well, we don’t have any leverage at that point.

I mean, we can ask for indemnification, but they can say, we’re not going to put in an express indemnification provision.

Anthony M. Kennedy:

–Well, can they force you to proceed then anyway?

Carter G. Phillips:

Yes, of course they can.

Either that, or you can face civil or criminal penalties, but it doesn’t seem like a good option.

And you will recall in the Thompson facts, which I think are the most compelling facts you could possibly have, they had given up producing these kind of herbicides.

They were then ordered to produce them.

Carter G. Phillips:

Mr. Thompson came to the Defense Department and begged not to have to do this, and was told no, and that was after they had refused to make a proposal to bid on the particular manufacture.

Stephen G. Breyer:

Just following up on Justice Kennedy, what happens if… how do they fix the price?

Suppose the company says, we don’t want to produce this thing.

They say, you have to.

How do they decide what the price is?

Carter G. Phillips:

The Government asks the contractor to provide them with cost information, and they build that in, and then they set a price.

You’ll notice the price of the–

Sandra Day O’Connor:

Who sets the price, the Government?

Carter G. Phillips:

–The United States sets the price They set… and then–

Sandra Day O’Connor:

Did you allege… excuse me.

Would you be here at all if the petitioners had an option to enter into the agreement?

Carter G. Phillips:

–I think you would still have a specifications argument, and you would still have a superior knowledge argument, but I do agree that the underlying compulsion that forces us to the table in the first instance provides the strongest argument in my mind with respect to implied indemnification.

Sandra Day O’Connor:

Certainly this Court would not have to adopt any theory that would extend beyond the compulsion–

Carter G. Phillips:

No, and in fact–

Sandra Day O’Connor:

–combination.

Carter G. Phillips:

–In fact, Justice O’Connor, this Court doesn’t have to adopt a theory that extends beyond the combination of compulsion and compelled specifications and superior knowledge as a combination.

Sandra Day O’Connor:

Right.

Carter G. Phillips:

Because all three of those uniquely fit into the facts of this particular case in which–

Sandra Day O’Connor:

Is this case sort of a sport, because in most instances the lower courts are going to find that the companies have a full defense?

Carter G. Phillips:

–Under section 707?

No.

Sandra Day O’Connor:

Well, under… under the law that allows the contractors to have a defense to third party claims.

Boyle–

Carter G. Phillips:

Well, there are a number of cases in which the lower courts have in fact held in that manner.

On the other hand, this particular case went the other way.

It’s far from clear to me that–

Sandra Day O’Connor:

–But is this kind of a sport in that regard?

I mean, I would think that in most instances the Boyle rule would protect the contractor in these circumstances.

Carter G. Phillips:

–Well, that… you see, my theory on Boyle is… I mean, the Government argues that Boyle is rendered superfluous by the provision of a contract remedy here, and I think that’s wrong on two counts.

First of all, I think consistent with the way the Court analyzed the relationship between tort claims and contract claims in Hatzlachh, in Hatzlachh you recall, that was the case of an implied bailment agreement and there was also a tort claims immunity, and there was also the right to go against individual officers in order to recover, and the Court said the availability of that remedy in no way undermined the ability to get a contract remedy and, therefore, under the facts of our case, the availability of a “remedy Boyle” shouldn’t in any way deprive us of what otherwise would be a valid contract remedy.

Carter G. Phillips:

I think the logic of Hatzlachh applies here directly, but I also think the importance of Boyle is that it require… is that if we’re right, and we are entitled to be indemnified under these circumstances, what that means is that the Government’s exposure to liability will be significantly reduced.

We should win most of these cases, and the Government should act responsibly to recognize its role as a putative indemnitor and come to our defense in situations in which these issues arise.

Antonin Scalia:

Except that it will always pay your attorney’s fees, and that’s why this case, on the way you present it, is not a fluke.

Even when your client wins, as it ought to in the lower courts, your client will have a claim against the United States for whatever it cost to defend those suits, successfully or unsuccessfully.

Carter G. Phillips:

Absolutely, Justice Scalia.

That’s the nature of–

Antonin Scalia:

It’s not a fluke.

This will come up all the time now.

Whenever the suit is brought, money expended will be ultimately taken out of the United States’ pocket.

Carter G. Phillips:

–Unless the United States exercises its role as an indemnitor and takes over the defense of the claim, in which case it doesn’t lose anything as a consequence of that.

William H. Rehnquist:

That’s another result which is… you know, you can say the… or, it’s quite different, because ordinarily, in any sort of litigation, to recover attorney’s fees against the Government there has to be an express statutory provision for it.

Carter G. Phillips:

We’re not attempting to get the Government to pay us attorney’s fees in this particular litigation.

We’re talking about attorney’s fees as damages arising out of third party litigation and that kind of damages is quite common, and… I’m sorry.

William H. Rehnquist:

Yes, but you have to look at the whole picture, it seems to me, just as Justice Scalia says you have to look at the whole picture when you’re saying the Government doesn’t indemnify people wrongly prosecuted under criminal law.

You may have a different theory that can be distinguished, but it fits in oddly with the way the Government treats a lot of other people.

Carter G. Phillips:

But the point… and I think the reason why it’s different is that the Government has a unique relationship with contractors.

They enter into a special relationship, and while it is true that there’s a general maxim of law that you have to deal in straight corners when you contract with the Government, there’s also a rule of law that says that the Government, when it enters into a contract with private individuals, tends to assume the same obligations as private individuals.

Ruth Bader Ginsburg:

Could you have built… in setting the price of this contract, the question that Justice O’Connor and Justice Breyer were asking about before, you’re compelled to make the contract with the Government, but could you have put in as a cost the cost of insuring against potential tort liability?

Carter G. Phillips:

We can put in… we don’t put in the costs.

We submit what we think our costs are and the Government sets the price, and the Government is free to exclude that as a legitimate cost if it chooses to do so.

We don’t have any leverage, Justice Ginsburg, in dealing with the price term.

That term is set by the Government, just as every other term in this contract is set–

David H. Souter:

In your view–

–Does that argue against the… the theory that this is somehow implied in fact, do you concede that if you get what you want the basis upon which you get it is going to be totally divorced from any concept of implied in fact?

Carter G. Phillips:

–No, not in the way that term is used in the context of an existing contract.

The difference between an implied in law contract that is not subject to the Tucker Act is one like the Baltimore and Ohio Railroad case the Government cites, where you provide a benefit to the Government without any agreement, and then you seek to be reimbursed on a quantum meruit theory.

This Court and the Federal Circuit has consistently held that that’s the implied in law contract for which there is no Tucker Act sort… excuse me, waiver.

With respect to a situation where, here we have an existing agreement, then you can imply the terms to that agreement based on the relationship between the parties, and I can–

David H. Souter:

Well, certainly not based upon any theory–

Carter G. Phillips:

–Oh, no–

David H. Souter:

–that assumes that, in fact, this was implicit in the agreement that they actually made.

Carter G. Phillips:

–Right, and the argument is that under ordinary contract principles involving indemnification, the underlying assumption is, is that the party who has control will indemnify the party who is innocent and is exposed to particular injury.

David H. Souter:

But is that general rule, taking it on its face, plausible in the very case that you are arguing in which you are acting under compulsion?

The… whatever plausibility that may have, whatever justifiability that may have as a general rule, I suppose is premised on the assumption that you have two parties who are capable of deciding whether or not… each of them are capable of deciding whether or not to deal with the other, and yet the very premise of your argument and of your claim here is that you do not have that option, and hence it raises the question why these plausible implications in other circumstances should be imported into this one.

Carter G. Phillips:

Well, I have not seen from the Government a persuasive argument why anything in the nature of the relationship between the United States and the petitioners should cause the Court to deviate from what the ordinary rules of contract interpretation would be.

And the three arguments the Government put forward are that this will interfere with the tort claims remedies, and this Court specifically rejected that in Hatzlachh, saying, we look at contract as a contract issue, we look at torts as a tort issue, is there a contract situation here?

If that’s all you’re looking at, then we look to ordinary principles of Federal common law contract law, and those principles, it seems to me, say that when you have compulsion and specifications and superior knowledge that there ought to be indemnification.

And when the defect… remember, we were compelled to make a product that was inherently dangerous.

That’s the defect.

That creates a warranty, and that creates another contract right.

Stephen G. Breyer:

Is there a general principle that underlies… do you have a lot of experience in Government contracts, a certain–

Carter G. Phillips:

Not an extraordinary amount of experience, no, Your Honor, I’m sorry.

Stephen G. Breyer:

–Then maybe you can’t answer this, but what I’m looking for is, it seems to me that these things… there’s a superior knowledge claim.

There’s a Spearman claim.

That there’s a this case claim or there’s a that case claim is really an example of a more general principle that there is somehow thousands and thousands of Government contracts, and sometimes in silences in those millions of different Government contracts that arise in millions of different circumstances courts will imply terms that don’t appear there in writing, and they’ll take into account all kinds of things, including the fact that the Government is at issue.

What I’m looking for is the general principle, because it seems to me that’s what you’re looking for here.

You have very unique circumstances, and you want some kind of term implied that will get you the reimbursement, and what I’m looking for is a place where it’s written, or a case where it’s written as to what are the general principles that might lead someone here to imply a term that, where the Government doesn’t cooperate with you, or, you know, all the things–

Carter G. Phillips:

Right.

Stephen G. Breyer:

–you say, they… there’s a promise to pay.

Carter G. Phillips:

Justice Breyer, I think it comes out of just straight indemnification law.

The rules of indemnification say we should be protected.

If there are no questions, I’d–

Anthony M. Kennedy:

I have one other question.

Did you ever allege at any point that there was a taking, or you think that this doesn’t arise to that?

Carter G. Phillips:

–There was an allegation of a taking in the Thompson complaint, but until we are not compensated under the contract theories, there wouldn’t be a basis for saying we had not received just compensation yet, but there is a takings issue that underlies all of this.

William H. Rehnquist:

Thank you, Mr. Phillips.

Mr. DuMont, we’ll hear from you.

Edward C. DuMont:

Thank you, Mr. Chief Justice, and may it please the Court–

In our view, there are three related reasons why petitioner’s implied warranty claim in this case should fail.

Let me touch on them briefly.

Edward C. DuMont:

I think the Court has already touched on them.

First, judicial implication of what amounts here to an open ended indemnity against third party product liability claims brought years after performance is completed under the contract would be unreasonable as a matter of straightforward contract interpretation.

Second, it would be unnecessary, because even on petitioner’s view of the facts, because of the existence of the Government contractor defense to tort liability, there is no unfairness here in this kind of situation, and third, it would be unwise, because it would permit exactly the kind of cost shifting to the Government that this Court has held would impermissibly undermine the Government’s retention of immunity from suit for exercise of its discretionary functions.

Now, we start out by saying what we all know here.

There’s nothing written in these contracts about a warranty or indemnity running from the Government to the suppliers.

In fact, the only thing you’ll find if you look at those contracts is a warranty running from the supplier to the Government that the product would be free of defects in manufacture and design.

Leaving that aside, we all recognize that what… and even petitioners recognize what they have to establish here is a contract implied in fact, or a contract term implied in fact, and yet what we’ve heard, as the Court has pointed out, is an argument for a contract implied at law, an argument that it is unfair to do what was done here, an argument that the Government compelled them to do certain things… I mean, if you push that argument to its extreme, you eliminate the contract entirely, and so their argument–

Sandra Day O’Connor:

Let me ask you this.

Suppose you win here, can Thompson assert a valid takings claim?

The company was compelled, over its objection, to produce this substance for the Government.

It had no choice.

Edward C. DuMont:

–I wouldn’t want to comment on the validity of the claim.

They could assert–

Sandra Day O’Connor:

Well–

Edward C. DuMont:

–I think, the claim.

Sandra Day O’Connor:

–and do you… does any logical reason occur to you why they wouldn’t prevail on the claim?

Edward C. DuMont:

I have two answers.

1) I think it would be a much better claim than the claim they have raised here.

2) The context of this, of course, is requiring citizens to do things in time of war that help the Government in prosecuting its war effort.

Now, the Government required a lot of people to go to Vietnam and use Agent Orange.

Sandra Day O’Connor:

I don’t see what that has to do with whether it’s a valid takings claim or not.

Edward C. DuMont:

Well, only this, that, you know–

Sandra Day O’Connor:

I mean, the Government compelled them to do it against their will.

Edward C. DuMont:

–Only this–

Sandra Day O’Connor:

They lost their company, everything.

Edward C. DuMont:

–That might prove to be a valid claim.

It is not a valid resistant… it is not a valid answer to the Government’s ability to compel you to do military service, that you are being forced into involuntary servitude.

It is not necessarily a taking of your property for the Government to contract with you on commercially reasonable terms to produce a product–

Sandra Day O’Connor:

Yes, but–

Edward C. DuMont:

–at a normal price.

Edward C. DuMont:

Now, remember that… excuse me, but just… remember that these are products that these companies produced for the commercial market.

Agent Orange is not a magical thing.

Sandra Day O’Connor:

–And Thompson had given up production of this.

They were not producing it.

They were compelled to produce it by a Government order.

Edward C. DuMont:

Thompson is, in that regard, different, very different from Hercules, that’s true.

Stephen G. Breyer:

Are you finished?

Edward C. DuMont:

Quite, sir.

Stephen G. Breyer:

Okay.

If the city council passed a regulation that made a house owner put out some kind of paint or something in the garage and he said, no, I don’t want to do it, I don’t want to do it… you have to do it… and then everybody sues the house owner, wouldn’t the court sort of strain at an interpretation that said, oh, the house owner has to pay the whole thing, the city council’s off free, that you just have to do these things.

It incurred tremendous liability.

They’ll take your house away.

Wouldn’t you at least look to see if the statute couldn’t be interpreted differently?

Edward C. DuMont:

Well–

Stephen G. Breyer:

The answer’s yes, right?

Edward C. DuMont:

–to the extent I understand–

Stephen G. Breyer:

Okay.

Then my question is… I mean, that was the sort of set up.

The question is, that being so, why wouldn’t the Federal Circuit and the court of claims and everybody else involved in interpreting contracts also try to interpret a contract in a way that suggests the Government will not try to stick a person with such an unfair result.

And that’s just a way… I don’t know whether it falls in a Spearman category or an Ex Cello category or some other category, but at least, wouldn’t you interpret a Government contract normally where it’s open to it to suggest that there is a way of reading this contract to stop people from having to go to the Takings Clause in order to prevent some kind of tremendously unfair result, even if it’s unique and, therefore, if that’s so, why shouldn’t we send it back to see if there is such a thing here, or to see if the facts warrant it, and it seems to me on the issue that we took this for you basically conceded error.

I mean… those are all my questions.

[Laughter]

Edward C. DuMont:

–Well, I’m not sure I can sort them out, but let me try to direct my answer to one of them, which is the notion of wouldn’t it be reasonable to interpret the contract in light of all the surrounding circumstances.

Well, I think our answer to that is, of course one interprets a contract in light of the surrounding circumstances.

A contract implied in fact is one that is taken not out of the court’s views of what is just or right, but out of what it believes the parties might reasonably have… either did agree to through their course of contract or their words, or might reasonably have agreed to, and there’s obviously a gray area.

There are some cases where no one had any contemplation of a particular situation.

Now, when we get to that in a Government contract, whatever the rule would be in the case of an ordinary contract between private parties, when we get to a Government contract, there are particular reasons for believing the Government would not have agreed to any such thing, any kind of indemnity such as petitioners are seeking.

First of all, there’s the Anti Deficiency Act.

Congress has made it very clear for 180 years that they do not want Government officials, Government officers entering into obligations on behalf of Congress that have open ended liability, go beyond current appropriations, and can stick the United States with huge, uncertain bills.

Antonin Scalia:

But just stop… isn’t that an argument against all implied terms in Government contracts?

Edward C. DuMont:

There is definitely a gray area there.

It could be–

Antonin Scalia:

It’s not a gray area at all.

I mean, the argument proves much too much.

It means you cannot have any implied terms.

Edward C. DuMont:

–Well, the issue was not raised in Spearin.

If the Court would like to revisit Spearin on that basis, I think that might be a good idea, but the answer is that what the lower courts have tried to do with that is say, look, there’s a difference between breach of contract in which the officer had the authority to enter into the contract, and we’re talking about breach damages which are relatively reasonably bounded by what the original contract was about, what the original appropriation was about and so on.

There’s a difference between that and an open ended sort of indemnity provision.

That’s the line the Federal Circuit has drawn, which, of course, is the court that is primarily charged in the claims court, the courts that are primarily charged with making sense out of this area.

Now, the other thing I would point out, when the Government… when Congress decides it wants to give indemnities, it does so specifically, and with great care 50 U.S. Code section 1431 provides for indemnities in exactly the kind of situations that we’re talking about here with defense contracts, gives the Secretary of Defense, the President, broad authority to enter into contracts without regard to normal terms like the Anti Deficiency Act, but it requires procedures.

Now, petitioners never asked for it.

Those procedures weren’t complied with.

They don’t even allege that there was an indemnity under that provision.

Well, if there wasn’t–

William H. Rehnquist:

What provision is that you’re relying on, Mr. DuMont?

Edward C. DuMont:

–That’s 50 U.S. Code section 1431.

Thank you.

Edward C. DuMont:

And it’s discussed at some length in our brief at page 40, footnote 23.

There is another provision just… I could go on, but there’s another provision… this one is not cited in our brief… 10 U.S. Code section 2354, which happens to have to do with military R&D contracts.

If you look at that one, you’ll see again a kind of careful structure.

It looks like an indemnity, it talks like an indemnity, and Congress put it there specifically.

Now, the Government does not impliedly agree to indemnify people for open ended liabilities.

Now, another reason why, and this, I think, goes back to your point about, when we’re interpreting a contract with the Government we think about what the Government might have had in mind, and in this case the Government would have had in mind that it is immune from tort liability for injuries that allegedly arise from the exercise of its discretionary functions.

Now, the Court made it very clear in Boyle that the discretionary function exemption in tort law covers design decisions for military equipment.

Now, we’re not saying, under Hatzlachh, that that precludes the Court from reading this contract to include an indemnity or warranty provision, but it strongly suggests to us that the Government would not have wanted to enter in, sub silentio, to a warranty provision that would have completely vitiated that important immunity.

Stephen G. Breyer:

But I take it that their basic point, in the lower courts, was yes, yes, that’s quite right, but you see, here we are trying to look at an implied, is there a term to reimburse us implied in fact, and we argue the Government had superior knowledge as to the danger.

We look at indemnity contracts and tell you that indemnitors normally are liable when they won’t take over a lawsuit and then they force the other person to go and litigate it, though they could come in and run it the way they think it should be run.

Look at that policy, and look at the policy of 707, and when you put all those things together, you will see there’s some kind of implied term here.

I’m looking at it most favorably to them, and what I don’t see in the lower courts is a court, like the Fed Circuit, that ever passed on that, and I don’t see the facts in the record that would permit them to pass on it, and that’s why I’m back to thinking… indeed, what the Fed Circuit said is it, in footnote 8 it hinted that footnote… both footnote 8 and the other thing and 707 discussion seemed to turn on errors of law that you seem ready to admit are errors of law.

That is, the… this problem of the causation, and the problem of 707 being limited to just prioritization of contract, and I’m not positive you admit that, but you see, what I’m trying to get at is, don’t we have to send this whole thing back if we think those are errors of law?

Edward C. DuMont:

No, you don’t.

Now, I do want to be clear that I don’t believe we’ve conceded either of the points that you–

Stephen G. Breyer:

All right.

Edward C. DuMont:

–that you mentioned.

I mean, our position is that although an argument under 707 raised as a shield would certainly be a vastly stronger argument than the one they’ve raised here, it was… it’s been rejected by the three courts that have considered it, and we consider that to be the right answer.

Stephen G. Breyer:

I don’t mean it’s a shield.

They’re looking to the policy in order to decide whether, among other reasons, there is an implied in fact–

Edward C. DuMont:

I understand that’s what they’re trying to do here.

Now, I must say I agree with the implication of a question I believe was from Justice Souter, which is that, if anything, the existence of that shield provision in the Defense Production Act shows that Congress thought about this issue, and they resolved it by giving contractors a shield of whatever scope it turns out to be and there is, therefore, even less reason to think they authorized their contracting officers to enter into broad indemnities that would just simply get rid of the reason for having that shield provision in the first place.

Why should they bother to invoke that when they’ve got an indemnity from the Government?

Now, to your other point, petitioner’s counsel keeps talking about the law of indemnity as though it were perfectly clear that if this were a contract between private parties, an indemnity would be implied.

I’m not at all sure that that is correct, or that they have established that.

But in any event, if you look at any of the circumstances where the Government provides warranties and there’s an executive order after 50 U.S. Code 1431, which I mentioned before, that goes into great detail about how to do indemnities.

That’s one place you will find that they look like an indemnity clause in a sophisticated private contract.

That is, they give… they give an explicit indemnity, and then they give the indemnitor all sorts of rights to participate in the defense, or control of the defense.

Now, of course, there wasn’t anything like that here.

Now, they say they asked us to participate in the settlement.

That’s fine they asked us to do that, but we had no liability.

That was our position from the beginning, that we were not liable, and we effectively stood apart from the rest of that litigation until it was settled.

We did not participate in the settlement because we thought we had no liability.

I find that unremarkable, and I don’t know why it should be implied or inferred from that that we had made some sort of contractual commitment to pay them for whatever they decided to settle for.

I would have thought rather the reverse.

If we thought we were on the hook… if we’d ever thought we were on the hook, of course we would have been involved in that settlement.

Stephen G. Breyer:

–The reason would obviously be that you think they have a tremendously good defense called the Government contractor defense, and instead of you helping them make it, where they’re defendants with hundreds of other companies and there are whole companies at stake, 40 billion, instead of saying to the judge, judge, we think they’re right, instead, I guess you were silent, or maybe you said, judge, I think they’re wrong… I don’t know exactly what happened… but they think that’s very unfair, and in the context of the whole contract, you put… you understand the argument.

Edward C. DuMont:

I think I understand the argument.

I believe the argument, as you put it, is an argument of unfairness, and I believe that is not an argument that is cognizable under–

William H. Rehnquist:

Well, does the Government ordinarily come in when a contractor is raising a Government contractor defense in every court that he might raise it and say, we support this defense?

Edward C. DuMont:

–No, absolutely not, and when–

Stephen G. Breyer:

An indemnitor is not–

Edward C. DuMont:

–the question got to this Court, we participated in Boyle.

Stephen G. Breyer:

–But indemnitors normally do.

They’re given that opportunity.

It’s a normal thing, isn’t it?

Edward C. DuMont:

An indemnitor normally knows that it’s on the hook and therefore it takes over the defense, so that’s not remarkable.

But the question here is not what does an indemnitor do.

The question is, were we an indemnitor, and that is what petitioners sometimes seem to lose sight of, and their… our submission is that if you look at the way Government contracts have always been interpreted, the way Government indemnities have always been given and how Congress has considered them, you will find no basis on which to infer that the Government would have agreed to this term.

Now, I think you can also look at that, if you want to get back to the authorities, look at Spearin, look at the cases that preceded Spearin, which were about… well, there was another Brooklyn Navy Yard case.

That navy yard caused a lot of problems.

There was an excavation case with borings that were misrepresented in the Government’s specifications.

There’s a dam case where they were going to construct a dam, and the Government specifications said it’s backed with soft material and it turned out to be boulders and rocks.

There’s a stagecoach case where there was mail delivery in New York and–

Stephen G. Breyer:

And you’ve left out the case where, in fact, the product caused an explosion.

Edward C. DuMont:

–That’s not a Supreme Court case.

I’m talking about Supreme Court cases, cases that this Court has dealt with, and in fact the case that Justice Brandeis cited when he said it was okay to apply this term in the Spearin contract was a case called Kellogg, which was an implied warranty case, which had to do with a bridge builder who built the foundations for a bridge, and then he turned it over to a new contractor.

Well, it turned out the foundations weren’t correctly done, and the Court said, well, fine, as a matter of standard contract law we infer that when you built the foundations and turned them over for the purpose of building a bridge on top of them you were warranting that they were correctly made.

Well, there’s nothing remarkable about that.

Anthony M. Kennedy:

Is it your position… I take it it’s the Government’s position that if a high official in the Government, say the Attorney General, had looked at this litigation and said, this is terribly unfair to Thompson and Hercules, go in and help them out, that you would have had really… you would have told the Attorney General, look, we have no discretion, no authority to do that?

Would you have had any discretion to alleviate Hercules’ concern, Hercules’ plight?

Edward C. DuMont:

Just filed a brief saying the Government contractor defense should be recognized?

I assume we could have.

Anthony M. Kennedy:

That would be about as far as you could go, in your opinion?

Edward C. DuMont:

I assume we could have.

We were involved in the case, of course, because they had sued us, tried to implead us–

Anthony M. Kennedy:

Right.

Edward C. DuMont:

–for indemnity and contribution, which of course is the other aspect of the case.

Anthony M. Kennedy:

But your view is that the most you could have done was to have supported them with the Government contractor defense?

Edward C. DuMont:

Well, I’m not sure… aside from volunteering to cover their losses, I don’t know what else–

Anthony M. Kennedy:

Would you have the authority to do that?

Edward C. DuMont:

–I think we would not, without a special… without a special appropriation.

Anthony M. Kennedy:

Well then, your position is the only thing you could have done that you didn’t do was to file a helpful brief.

Edward C. DuMont:

That’s correct.

Ruth Bader Ginsburg:

And do I… I take it that you have candidly answered the question, could the manufacturers have negotiated for a provision that said, defendant indemnify, your answer says yes, they could have asked but we wouldn’t have given.

Edward C. DuMont:

I don’t know what would have happened if they had tried to invoke the executive order that provides for indemnities in those kinds of circumstances.

I don’t know whether it would have been granted or not and, far as I know, they never asked for that.

Ruth Bader Ginsburg:

And how–

–The question was at the time of the contract, not–

Edward C. DuMont:

Well, I’m saying, at the time of the contract, if we had come to them and said we’re going to… we’d like you to do this contract… now, of course, we first went to Hercules and said we’d like bids, and they bid competitively to get these contracts.

Don’t forget that.

But in Thompson’s case, we went to them and said, we’d like you to make this.

They said, we really don’t want to.

We said, well, we really want you to, and we’re going to invoke our authority.

Now, they did negotiate the price term.

They came back to us and said, we can’t make money at the price you said you were willing to pay us, and so we adjusted that.

If they had come back to us and said, we are very concerned, we can’t get insurance, we’ve gone to the market, whatever they might have said, we need some indemnity because the California courts are doing strange things with tort law, we don’t know what’s going to happen in products liability, I don’t know what the Government would have said, but as far as I know they never made that request.

Ruth Bader Ginsburg:

–But if… the Government could have said, we won’t give you that term, and you still have to do the contract, which the law says–

Edward C. DuMont:

That’s right.

Ruth Bader Ginsburg:

–we can compel you.

What about the… if they had said, okay, we’re going to put into the price what it will cost us to insure against this potential tort liability.

Edward C. DuMont:

It’s completely clear that in costplus contracts the Government does recognize those prices.

In these fixed cost contracts, I’m not intimately familiar with how those prices are fixed, but my understanding is that that’s a legitimate item of overhead.

Your normal products liability insurance, your litigation expenses insurance is all part of your price.

If you say then well, we charge this price on the market for this stuff, and we need to get some more insurance, this is what we think our costs are going to be, I don’t see any reason why that wouldn’t have been taken into account.

Now, it is possible… it is possible, I suppose, the Government could have just adopted an entirely unreasonable position and said, we want you to make this stuff for us for 5 a barrel and it costs you 50.

I don’t know what the answer would be on those facts except that, again, if the Government starts ordering you to do things, then we are very, very far away from contracts to begin with, and implied in facts contracts.

If the Government is being perfidious, the last thing it’s going to do is start impliedly warranting that it’s going to hold you harmless from liability.

Now, if… the court might choose to try to impose that sort of liability, but that would be, I think, quite clearly a policy decision to impose liability under those circumstances.

David H. Souter:

You do concede, I take it, then, that the court below was wrong in limiting your… the Government’s authority to compel under 101 merely to compel priority of performance as opposed to performance, period.

Edward C. DuMont:

I believe our position is that we had the authority to compel performance, and there’s a series of safeguards, I believe, in the regulations–

David H. Souter:

Yes.

Edward C. DuMont:

–where you’re supposed to go to people who make it normally and if you can’t find them you can go to somebody else, that kind of thing, but ultimately, bottom line, yes, we had the authority to, to do that.

Edward C. DuMont:

Now, we’ve talked about why it’s unreasonable as a regular contract matter to imply this, and you’ve talked a little bit in colloquys with my colleague, developed a little bit why it’s unnecessary.

There is this Government contractor defense that does, in fact, provide a contractor in the… in petitioners’ situation as petitioners allege it to be with a defense to tort liability, so in fact they are not left holding the bag, and if the Court is concerned about the overall fairness of the legal framework, I think there is no real warrant for that concern precisely because of that defense.

Stephen G. Breyer:

What was your interpretation, I’m sorry, on 707?

You agree that the first… 2071(a) says the Government can say to Mr. Smith, Mr. Smith, you must produce Agent Orange, right?

Edward C. DuMont:

That’s right.

Stephen G. Breyer:

And when it says, no person shall be held liable for damages resulting indirectly from compliance, directly or indirectly, is that meant to insulate the contractor for damages that flow from Agent Orange being unreasonably dangerous, or something like that?

Edward C. DuMont:

Our position has been that it is not, and that’s the position that we’ve taken–

Stephen G. Breyer:

In other words, your position is that all that means is the only immunity it gives is immunity from some other person who had a different contract with the same producer saying you shouldn’t have bumped the Government’s contract ahead of mine, and nothing more?

Edward C. DuMont:

–It certainly provides that, and there may be some penumbral scope to it.

I think our fundamental position is, you have to look very carefully at what Congress had in mind when it did that, and there’s no indication that what they had in mind was giving a complete hold harmless… well, certainly not hold harmless, but a complete shield for any kind of liability that might come up.

After all–

Stephen G. Breyer:

So if, in fact, the Government ordered a person to produce something which was an explosive and it blew up the factory, and it hurt passers by, the Government would… they would be liable, the Government wouldn’t be liable.

Is that the view?

Edward C. DuMont:

–Well, again, I don’t want to pretermit inquiry into the scope of section 707 as a shield provision, but our general position–

Stephen G. Breyer:

But you’re saying the Government contractor defense makes it unnecessary, basically.

Edward C. DuMont:

–Our general position is that 707–

Stephen G. Breyer:

All right, but the Government contractor defense, in your view, where there’s an explosion because of the Government specifications means that the contractor cannot recover from the Government for passers by who are injured.

Edward C. DuMont:

–Well, it certainly falls… if the passers by are prevented from the Government… by the Government contractor defense, if it turns out that there was some–

Stephen G. Breyer:

Yes.

Edward C. DuMont:

–specific thing about the way we told them to make it–

Stephen G. Breyer:

Yes.

Edward C. DuMont:

–And the other–

Stephen G. Breyer:

Superior knowledge.

Edward C. DuMont:

–And the other criteria are met–

Stephen G. Breyer:

Yes.

Edward C. DuMont:

–then they are insulated from liability and we are insulated from liability, because we can’t be sued in the first place because, if that’s the ground of tort liability, then it comes within the discretionary function exemption.

Now, I think that points out… I’m sorry.

Well, I think that points out why… the fundamental difference between the Government contractor defense and petitioner’s theory as a sensible way of resolving this problem, because the Government contractor defense in those circumstances prevents liability on the part of the manufacturer if it’s really something that should have been the Government’s responsibility, but it also saves to the Government its immunity from that suit, so neither party is liable and a loss lies where it falls, which is the result of the tort immunity.

Now, under petitioner’s theory, on the contrary, what you get is a direct pass through.

The passer by does recover from the manufacturer, and the manufacturer then recovers from the Government, so the Government… so the manufacturer is now protected, but the public policy underpinnings for the Government contractor defense have now been vitiated, because the Government ends up paying the substantive liability, and as Justice Scalia pointed out, under any circumstances the attorney’s fees for defense of the tort action, so–

David H. Souter:

I guess I wasn’t paying attention a moment ago.

You’re saying now that the defense under 707 is narrower than the scope of the compulsion under 101, but the slack is made, the difference is made up by the Government contractor defense, so that if you combine 707 and the Government contractor defense, there will be a complete defense to whatever was compelled under 101, is that your position?

Edward C. DuMont:

–I think that’s probably right.

We ave–

David H. Souter:

No, is that your position?

Edward C. DuMont:

–Not in those terms, no.

David H. Souter:

Would you explain it to me again, then, because I guess I’m–

Edward C. DuMont:

Our position has been that they’re simply separate inquiries.

707 provides a shield of some scope for actions taken under compulsion under the DPA.

Now–

David H. Souter:

–But not everything that is compelled will be subject to that shield.

Edward C. DuMont:

–We think that’s right.

David H. Souter:

Okay.

Now, what about the difference?

Edward C. DuMont:

There need be no provision for the difference, but in fact, I think it’s probably right to say that because of the–

David H. Souter:

There need be in the sense that it’s a tough world, and that’s the way it goes.

Edward C. DuMont:

–That’s right.

The absence of any–

David H. Souter:

Okay.

Edward C. DuMont:

–gap filler would not be a reason for inferring an indemnity on the part of the Government in the contract.

David H. Souter:

But there is at least a partial gapfiller, right?

Edward C. DuMont:

There may be.

David H. Souter:

That’s the Government contractor defense.

Edward C. DuMont:

The Government contractor defense would presumably cover most of those things.

David H. Souter:

But it may not be a complete gapfiller.

Edward C. DuMont:

It may not be.

David H. Souter:

And one reason why it is not is that the conditions for applying 707 and the conditions for Government contractor defense are not the same.

Edward C. DuMont:

That’s correct.

David H. Souter:

You might… okay.

Edward C. DuMont:

That’s correct, right.

David H. Souter:

Now… well, no, never mind.

Edward C. DuMont:

Well, I think we’ve really covered the basic heads here, but–

Ruth Bader Ginsburg:

About the Government contractor defense, would you please remind me of how that played out?

Judge Pratt said, I accept that defense, and then there were some proceedings before Judge Weinstein where I understand the Government didn’t simply stand aside, but it argued affirmatively against the Government contractor defense.

Edward C. DuMont:

–It’s important to understand the sequence here.

Judge Pratt rendered summary judgment.

He withheld the final judgment in order to give the defendants the benefit of certifying the class before he entered it.

As it turned out, he then relinquished control of the case.

Judge Weinstein took over, and he simply revoked the prior summary judgment.

Now, as far as I understand it, he did not question the availability of the defense, he questioned whether it could be established without trial, so he revoked the summary judgment.

Now, he then… eventually the parties settled.

That case went away.

Now, he… Judge Weinstein at the same time, you have to understand, had revoked the summary judgment that had been granted to the Government on grounds of Feres and the discretionary function exception, so he was bringing everyone back in and saying, I’m going to send you to trial and we’re going to find out what happened here, and then we’ll sort out the legal issues after the trial.

Now, after the settlement, and after that litigation was effectively over, there was opt out litigation of the people who opted out of the class, and they brought… their proceedings were continuing, and those proceedings, at the behest of the manufacturers, including Thompson and Hercules, Judge Weinstein also went back on his ruling on the third party liability claim as to certain people who were not servicemen but were relatives of servicemen.

So in that context, we filed a motion saying, listen, if you are talking about a group of plaintiffs, and you’re telling us that the Government is not immune as a matter of tort law, then there’s no reason for the Government contractor defense.

You’ve kicked out the props on which the Government contractor defense rests.

And so if you’re going to do that to us, then it seems like you shouldn’t have the Government contractor defense for them.

That’s section 1 of our submission.

Now, section 2 of our submission is several reasons… and it’s in the Joint Appendix.

I commend it to you… several reasons why there might be factual issues about the applicability of the Government contractor defense, but no court in that action either Judge Pratt, Judge Weinstein, or the Second Circuit, ever suggested that there was doubt about the availability of a Government contractor defense if you established the factual prerequisites for its application, and I think that’s quite important.

Just to sum up, again, we think that it’s unreasonable as a matter of contract law to think that the Government would have agreed to this kind of indemnity.

It is unnecessary if a Feres justification is required because of the existence of the Government contractor defense and perhaps Section 707, and it would be quite unwise, because it would gut the Government’s immunities in a way that this Court specifically rejected in interpreting the Government contractor defense itself.

Thank you.

William H. Rehnquist:

Thank you, Mr. DuMont.

Mr. Phillips, you have 3 minutes remaining.

Carter G. Phillips:

Thank you, Mr. Chief Justice.

Let me begin with Judge Plager’s dissenting opinion in the court below that the law affords substantially more justice than the majority below conceded.

The United States at the podium here today did not defend the court of appeal’s decision on causation, and essentially did not defend the court of appeal’s interpretation of the Defense Production Act.

On that basis alone, you ought to vacate and send it back to allow us an opportunity to demonstrate the precise contours and the nature of the relationship between the indemnification and breach of warranty claims that we think this Court has already acknowledged and recognized can be readily implied in the ordinary contracts, and that ought to be applied–

Ruth Bader Ginsburg:

Mr. Phillips, that argument, if this were a court of error correction, if this were a court of appeals and errors, that might be a very sympathetic argument, but in terms of the question on which we granted certiorari, the law that we are making not for this peculiar case, but for the class of cases, how does that–

Carter G. Phillips:

–Justice Ginsburg, I would answer that by reference to Justice Breyer’s question, when he said that people who deal in Government contracts, and I’m not one of them, look at things like Spearin claims and Helene Curtis claims and other claims, and the truth is, what this Court ought to hold in the context of this case is that this is a Hercules and Thompson claim, where you have compulsion, and specifications, and superior knowledge all combined in one.

It is perfectly fair and just to imply within the contours of that contract that there will be an indemnification.

Stephen G. Breyer:

–I take it it isn’t that you’re asking that you’d like us to hold that, but I take it that technically you’d say the question is whether the Fed Circuit should have an opportunity to ask the district court to find the facts so that one can decide whether or not that should be so.

Carter G. Phillips:

I think, though, the Court could hold that if the facts are as I’ve described them to you–

Stephen G. Breyer:

But I don’t know–

Carter G. Phillips:

–and you have to assume that for summary judgment–

Stephen G. Breyer:

–All right.

Carter G. Phillips:

–I understand that, but the rule of law ought to be one in which we have an opportunity to recover, and that the remedy that the Government offers us, the Government contract defense as our sole opportunity to protect ourselves, was revealed as plainly in this case as it can be revealed is inadequate.

There are gaps.

It doesn’t cover everything, and in a situation where you have an innocent party and a controlling party and an indemnification arrangement on a Government contract or any other contract, the appropriate course is to find that the innocent party is indemnified and to hold the Government liable.

Under that theory of law, which I think applies here, I’d ask the Court to reverse and send it back for further proceedings.

Thank you, Your Honors.

William H. Rehnquist:

Thank you, Mr. Phillips.

The case is submitted.

The honorable court is now adjurned until tomorrow at ten o’clock.