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Hercules Inc. v. U.S.

Decided: May 4, 1994.

HERCULES INCORPORATED, PLAINTIFF-APPELLANT,
v.
THE UNITED STATES, DEFENDANT-APPELLEE. WM. T. THOMPSON COMPANY, PLAINTIFF-APPELLANT, V. THE UNITED STATES, DEFENDANT-APPELLEE.



Appealed from: United States Court of Federal Claims. Judge Yock

Before Plager, Clevenger, and Schall, Circuit Judges.

Schall

SCHALL, Circuit Judge.

In these consolidated appeals, Hercules Incorporated (Hercules) and Wm. T. Thompson Company (Thompson), respectively, appeal the April 2 and April 22, 1992 judgments of the United States Claims Court.*fn1 In those judgments, the court dismissed Hercules' and Thompson's complaints after granting the motions of the United States for summary judgment.*fn2 Hercules and Thompson, who are chemical manufacturers, had sought to recover the sums they contributed to a fund established in connection with the settlement of a district court class action tort suit brought against them and other companies by and on behalf of individuals who were exposed to a defoliant known as "Agent Orange" during the Vietnam War. Hercules and Thompson also had sought to recover the attorney fees and expenses incurred in that litigation.*fn3 Finding no error in the Claims Court's decisions, we affirm the judgments.

BACKGROUND

The following facts are not in dispute:

A. Historical

In the mid to late 1960s, Hercules and Thompson were members of a group of chemical companies that manufactured Agent Orange for the United States military. Agent Orange is a blend of equal parts of 2,4-Dichlorophenoxyacetic Acid (2.4-D) and 2,4,5-Trichlorophenoxyacetic Acid (2,4,5-T), both of which are phenoxy herbicides. Hercules, Inc. v. United States, 25 Cl. Ct. 616, 618 (1992). Depending on its method of production, Agent Orange may contain varying amounts of 2,3,7,8 Tetrachlorodibenzo-p-dioxin (dioxin), an extremely toxic substance. Id. The military used Agent Orange during the Vietnam War to defoliate large areas of forest so that Viet Cong and North Vietnamese troops could not hide beneath the foliage from view of aircraft. The military mixed the Agent Orange produced by the various chemical companies and stored the mixture in large drums. Id. at 619. During the relevant period, the government and the military had considerable knowledge of hazards associated with 2,4,5-T and dioxin. In re "Agent Orange" Prod. Liab. Litig., 565 F. Supp. 1263, 1266 (E.D.N.Y. 1983).

Hercules began producing phenoxy herbicides containing 2,4,5-T in 1961. Hercules, 25 Cl. Ct. at 619. It produced Agent Orange for the government between May 8, 1964, and May 20, 1968, pursuant to fifteen separate contracts. Id. The military supplied the formula and specifications for manufacturing Agent Orange, with which Hercules complied. Id. In its complaint in the Claims Court, Hercules alleged that it manufactured and supplied Agent Orange pursuant to the Defense Production Act of 1950, 50 U.S.C. 4 app. § 2061-2170 (1964) (hereinafter, DPA).*fn4 In 1965, Hercules learned of the health risks associated with 2,4,5-T and changed its method of production to eliminate dioxin from its product. Id.; In re "Agent Orange", 565 F. Supp. at 1274. From 1966 to 1970, Hercules' product was not measurably contaminated with dioxin. Id.

Thompson produced phenoxy herbicides containing 2,4,5-T and 2,4-D in the 1950s and 1960s. Thompson, however, originally declined to bid on the government's solicitation to chemical manufacturers for the production of Agent Orange. Wm. T. Thompson Co. v. United States, 26 Cl. Ct. 17, 20 (1992). In due course, however, the government invoked the DPA and required Thompson to supply Agent Orange pursuant to two contracts dated April 19, 1967, and May 24, 1968. In re "Agent Orange", 565 F. Supp. at 1272. Between September 1967 and January 1969, Thompson supplied Agent Orange to the military. Id. There is no evidence that Thompson was aware of the health risks associated with Agent Orange. Id. at 1273. As in the case of Hercules, the government provided the formula and specifications for Agent Orange without any input from Thompson.

B. The Agent Orange Litigation

Starting in 1979, numerous tort actions were filed by Vietnam veterans and their families against the various chemical manufacturers who produced Agent Orange for the government, including Hercules and Thompson. The tort actions alleged that the veterans' exposure to dioxin contained in Agent Orange produced by the chemical companies had caused various health problems for the plaintiffs, such as cancer, miscarriages, and birth defects. The Judicial Panel on Multi-District Litigation consolidated these tort actions in the United States District Court for the Eastern District of New York, under the heading MDL No. 381. The court certified a class comprising all veterans claiming injuries who had served in or near Vietnam between 1961 and 1972, pursuant to Fed. R. Civ. P. 23(b)(3). The certified class also included the veterans' spouses, parents, and children (born before January 1, 1984) directly or derivatively injured as a result of the veterans' exposure. In re "Agent Orange" Prod. Liab. Litig., 506 F. Supp. 762, 787-92 (E.D.N.Y. 1980). Plaintiffs were allowed to "opt out" of the Rule 23(b)(3) class by May 1, 1984. Id. As discussed below, nearly 300 of the plaintiffs opted out.

Hercules and Thompson, along with several other defendant manufacturers, moved for summary judgment in the district court on the ground that, because of their status as government contractors, the government contractor defense shielded them from liability for any injuries to the veterans or their families allegedly caused by exposure to Agent Orange. In re "Agent Orange", 565 F. Supp. at 1265.*fn5 In a previous pretrial order, the district court had defined the contours of the government contractor defense as follows:

[A] defendant in this case will be entitled to judgment dismissing all claims against it based on that defendant's having supplied "Agent Orange" to the government pursuant to a contract, if the defendant proves:

1. That the government established the specifications for "Agent Orange";

2. That the "Agent Orange" manufactured by the defendant met the government's specifications in all material respects; and

3. That the government knew as much or more than the defendant about the hazards to people that accompanied use of "Agent Orange."

Id. (quoting In re "Agent Orange" Prod. Liab., 534 F. Supp. 1046, 1055 (E.D.N.Y. 1982)).

On May 20, 1983, the district court granted summary judgment for Hercules and Thompson, along with two other manufacturers of Agent Orange, finding that they met the requirements of the "government contract defense." Id. at 1273, 1274. In so ruling, the district court framed the "central issue" as whether the third element of the government contractor defense had been established, i.e., "whether the government knew as much as or more than the contracting defendant about the hazards to people that accompanied the use of 'Agent Orange.'" Id. at 1265.

With respect to Hercules, the district court concluded that because its "product was dioxin-free, Hercules had no knowledge of harm from dioxin contamination caused by its product and thus did not know more than the government about hazards associated with the use of its product." Id. at 1274.

In Thompson's case, the district court concluded that although the evidence established that Thompson may have had "knowledge of possible health hazards related to the manufacture of Agent Orange[, the evidence did not establish] knowledge in Thompson of hazards to users." Id. at 1273 (emphasis supplied). In contrast, the district court believed that "it [was] clear by 1967, when Thompson first contracted to manufacture Agent Orange, the government had a significant amount of knowledge about dioxin . . . and its association with . . . health problems." Id.

Hercules' and Thompson's victory in the district court proved to be short-lived, however. After summary judgment was entered in their favor and in favor of the other two Agent Orange manufacturers -- but before a judgment of dismissal was entered -- the case was transferred to another Judge in the Eastern District of New York. In November of 1983, the transferee Judge reconsidered the issue and denied the summary judgment motions of Hercules and Thompson. See In re "Agent Orange" Prod. Liab. Litig., 597 F. Supp. 740, 753 (E.D.N.Y. 1984).

On May 7, 1984, the date that trial would have begun in the class action suit, the parties reached a settlement. The settlement called for the creation of a $180 million settlement fund, with each defendant contributing to the fund in proportion to its percentage of the total volume of Agent Orange produced, with a factor for the level of dioxin in the particular manufacturer's product. In re "Agent Orange", 597 F. Supp. at 748. Hercules' share of the settlement was about ten percent, valued at $18,772,568. Thompson's share was around two percent, amounting to $3,096,597. In its opinion approving the settlement, the district court noted that the plaintiffs would have had extreme difficulty proving that their injuries resulted from exposure to dioxin present in the Agent Orange. In re "Agent Orange", 597 F. Supp. at 782.

Upon settlement of the class action, the defendant manufacturers, including Hercules and Thompson, moved for summary judgment against the nearly 300 plaintiffs who had opted-out of the class action suit. These opt-out plaintiffs were those who had voluntarily chosen not to be part of the certified Rule 23(b)(3) class, and who consequently did not share in the $180 million settlement fund. In support of the summary judgment motion, the defendant manufacturers argued that they were entitled to judgment

because of each plaintiff's conceded inability to identify the individual manufacturer of the Agent Orange to which a given veteran was exposed, inapplicability of any alternative theory of liability that would overcome that inability, the government contract defense, and inability of any plaintiff to prove that his or her injuries were caused by Agent Orange.

In re "Agent Orange" Prod. Liab. Litig., 611 F. Supp. 1223, 1229 (E.D.N.Y. 1985), aff'd, 818 F.2d 187 (2d Cir. 1987), cert. denied, 487 U.S. 1234 (1988). The district court granted summary judgment for the manufacturers primarily on the ground that the plaintiffs had failed to present credible evidence of a causal link between exposure to Agent Orange and the plaintiffs' alleged injuries. Id. at 1259-60. As a secondary basis, the district court held that the defendant companies were insulated from liability by the government contractor defense as it was "clear from the record . . . that the government knew as much as, or more than, the defendant chemical companies about the possible adverse health effects of Agent Orange as it was used in Vietnam." Id. at 1263. This secondary ground for summary judgment was identical, of course, to the ground upon which summary judgment had been granted in favor of Hercules and Thompson two years earlier, before the case was transferred.

The United States Court of Appeals for the Second Circuit affirmed both the settlement with the Rule 23(b)(3) class, In re "Agent Orange" Prod. Liab. Litig. MDL No. 381, 818 F.2d 145 (2d Cir. 1987), and the grant of summary judgment in favor of the defendant manufacturers against the opt-out plaintiffs. In re "Agent Orange" Prod. Liab. Litig., 818 F.2d 187 (2d Cir. 1987), cert. denied, 487 U.S. 1234 (1988). The Court of Appeals affirmed the grant of summary judgment against the opt-out plaintiffs solely on the basis of the government contractor defense (referred to as the "military contractor defense" by the Second Circuit), and did not address the other grounds for summary judgment advanced by the district court. Id. at 189.

C. The Claims Court Proceedings

In 1990, Hercules and Thompson each brought an action in the Claims Court against the United States, seeking (i) indemnification for their respective contributions to the settlement fund in the 1984 class action settlement, and (ii) legal fees and expenses incurred in the Agent Orange litigation. Hercules, 25 Cl. Ct. at 620. The actions were grounded in Hercules' and Thompson's respective contracts with the government for the production of Agent Orange.

Hercules' complaint, filed June 8, 1990, asserted that it was entitled to recover from the government under any one of the following four theories:

1. Superior Knowledge -- The government allegedly breached an implied-in-fact contractual obligation by withholding from Hercules the government's superior knowledge concerning the unprecedented military use of Agent Orange by the government and the possible health risks attendant with such use.

2. Good Faith -- The government allegedly breached an implied-in-fact contractual obligation to exercise good faith and not increase Hercules['] costs by using Agent Orange in Southeast Asia in an unprecedented military manner that failed to avoid potential health risks.

3. "Reverse" Warranty -- The government allegedly breached an implied-in-fact contractual obligation to exercise due care in using Hercules' Agent Orange. Specifically, Hercules alleged that the government had a duty to use the Agent Orange it purchased from Hercules in a manner reasonably calculated to avoid potential health risks and to take adequate precautions and safeguards or provide identification of active ingredients and adequate warnings and instructions concerning the proper use of and exposure to Agent Orange.

4. Implied Warranty of Specifications -- The government allegedly breached an implied-in-fact contractual obligation "to establish specifications and requirements for Agent Orange sufficient to make Agent Orange adequate and suitable for the unprecedented intended and actual military use to which it was put in Southeast Asia.

Under each of its different theories of liability, Hercules alleged that the government's breach of its contractual obligations caused Hercules to sustain increased expenses of performance and incur substantial money damages in connection with the Agent Orange cases and that Hercules was entitled to contractual indemnification there for.

Thompson's complaint, filed May 7, 1990, and amended October 23, 1990, asserted that it was entitled to recover against the government under any one of three contractual theories, two of which were substantially identical to two of Hercules' theories of liability: superior knowledge by the government, and an implied warranty of specifications. As a third alternative theory of liability, Thompson contended that the government breached an implied-in-fact contractual obligation to indemnify Thompson for losses arising from its compelled production of Agent Orange under the DPA.

In each case the government moved to dismiss the complaint, or, in the alternative, for summary judgment as a matter of law. Hercules, 25 Cl. Ct. at 620; Wm. T. Thompson, 26 Cl. Ct. at 22. The Claims Court granted the government's motions for summary judgment and dismissed both cases. In so ruling, the court held that the superior knowledge doctrine only applied in situations where the government possessed vital knowledge that affected contract "performance costs or duration of performance." Hercules, 25 Cl. Ct. at 623; Wm. T. Thompson, 26 Cl. Ct. at 24. Because Hercules' and Thompson's increased costs were the result of post-performance litigation and were not connected to contract performance, the Claims Court concluded, the superior knowledge doctrine could not be expanded to encompass their claims. Id. Similarly, the Claims Court found that Hercules' good faith theory could not withstand summary judgment because it was "another performance-related doctrine" that could not be extended to matters occurring "at some distant point in the future" after contract performance. Hercules, 25 Cl. Ct. at 623.

With regard to Hercules' reverse warranty argument, the Claims Court held that such an implied-in-fact reverse warranty never arose because the circumstances surrounding the sale of Agent Orange could not support a factual inference that Hercules and the government had "actually come to a meeting of the minds and taken upon themselves [the] corresponding obligations and liabilities" of the alleged reverse warranty. Hercules, 25 Cl. Ct. at 624.

Turning to the warranty of specifications theory, the Claims Court held that even assuming that such a warranty arose, the plaintiff-manufacturers had failed to prove "that this warranty wasbreached by the Government and that this breach caused [them] to suffer the type of damages recoverable in contract." Hercules, 25 Cl. Ct. at 625-26; Wm. T. Thompson, 26 Cl. Ct. at 25. Addressing first the portion of the damages claim which consisted of the payments into the settlement fund, the court set forth two separate reasons that it believed prevented Hercules and Thompson from proving that they were "actually subjected to tort liability by third parties because of [their] manufacture of Agent Orange for the Government's military use." Hercules, 25 Cl. Ct. at 626; Wm. T. Thompson, 26 Cl. Ct. at 26. "First," the Claims Court stated, "dioxin has never been scientifically proven to cause the injuries that the veterans alleged, and second, the [plaintiff-manufacturers were] protected from liability to the veterans in any event under the Government contractor defense. . . ." Id.

Regarding the type of damages sought, the Claims Court, citing Hadley v. Baxendale, 9 Ex. 341, 156 Eng. Rep. 145 (1854), and Northern Helex Co. v. United States, 207 Ct. Cl. 862, 524 F.2d 707, 721 (Ct. Cl. 1975), cert. denied, 429 U.S. 866, 50 L. Ed. 2d 146, 97 S. Ct. 176 (1976), stated that "it is axiomatic that . . . damages [arising from contract breaches] are limited to those that were reasonably foreseeable at the time the parties formed the contract." Hercules, 25 Cl. Ct. at 627-28; Wm. T. Thompson, 26 Cl. Ct. at 27-28.

From this proposition, the court reasoned that

the facts may support an implied warranty of specification, but they cannot be stretched so far as to support the theory that the parties came to a meeting of the minds that there would be an indemnification agreement between them if the implied ...


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