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Lockheed Martin Corp. v. United States

United States District Court, D. Columbia.

April 24, 2014

LOCKHEED MARTIN CORPORATION, Plaintiff,
v.
UNITED STATES, Defendant

Decided April 22, 2014

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For Lockheed Martin Corporation, Plaintiff: Raymond B. Ludwiszewski, LEAD ATTORNEY, David Fotouhi, Justin A. Torres, Michael K. Murphy, Stacie B Fletcher , GIBSON, DUNN & CRUTCHER, L.L.P., Washington , DC.

For United States of America, Defendant: John E. Sullivan, LEAD ATTORNEY, U.S. DEPARTMENT OF JUSTICE, Enrd / Environmental Defense Section, Washington , DC; Erica M. Zilioli, Jessica O'Donnell, Justin D. Heminger, William D. Johnson, UNITED STATES DEPARTMENT OF JUSTICE, Environmental & Natural Resources Division, Washington , DC; James Garlin Gentry, U.S. DEPARTMENT OF JUSTICE, Environmental Defense Section, Washington , DC; Jennifer E. Powell, Madeline P. Fleisher, U.S. DEPARTMENT OF JUSTICE, Washington , DC.

For United States of America, Counter Claimant: John E. Sullivan, LEAD ATTORNEY, U.S. DEPARTMENT OF JUSTICE, Enrd / Environmental Defense Section, Washington , DC; Erica M. Zilioli, Jessica O'Donnell, Justin D. Heminger, William D. Johnson, UNITED STATES DEPARTMENT OF JUSTICE, Environment & Natural Resources Division, Washington , DC; Jennifer E. Powell, U.S. DEPARTMENT OF JUSTICE, Washington , DC.

For Lockheed Martin Corporation, Counter Defendant: Raymond B. Ludwiszewski, LEAD ATTORNEY, David Fotouhi, Michael K. Murphy, GIBSON, DUNN & CRUTCHER, L.L.P., Washington , DC.

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MEMORANDUM OPINION

ELLEN SEGAL HUVELLE, United States District Judge.

Lockheed Martin Corporation brings this action against the United States under the Comprehensive Environmental Response, Compensation, and Liability Act (" CERCLA" ), 42 U.S.C. § 9601 et seq., for recovery of past and future response costs to remediate the environmental contamination caused by its corporate predecessor's operation of three rocket motor-production facilities -- Redlands, Potrero Canyon, and LaBorde Canyon -- in California from 1954 to 1975. Both parties admit to being liable as potentially responsible parties (" PRPs" ) for the contamination at the three facilities under CERCLA § 107(a). The Court held a twelve-day bench trial from February 10 to March 14, 2014, to determine the equitable allocation of response costs between the parties. Having considered the evidence, the controlling law, and all relevant equitable factors, the Court has determined that an equitable allocation for the past response costs for all three facilities is 0% liability to the United States and 100% liability to Lockheed. In contrast, the Court will equitably allocate future response costs between the parties differently for each facility: 29% to the United States and 71% to Lockheed for the Redlands facility; 24% to the United States and 76% to Lockheed for the Potrero Canyon facility; and 19% to the United States and 81% to Lockheed for the LaBorde Canyon facility.

TABLE OF CONTENTS

BACKGROUND

I. History of the Sites

A. Government contracts for solid propellant rockets at the Sites

B. Solid propellant rocket operations at the Sites

C. General waste disposal practices at the Sites

II. Cleanup of the Sites

A. Redlands facility

1. Trichloroethylene

2. Perchlorate

B. Potrero Canyon facility

C. LaBorde Canyon facility

III. Lockheed's indirect recovery of response costs through U.S.-government contracts

A. The Federal Acquisition Regulations

B. The Discontinued Operations Settlement Agreement (" DOSA" )

C. Lockheed's treatment of response costs for the Sites under the DOSA

IV. Procedural history

A. Related actions while the CERCLA statute of limitations was tolled

B. The government's partial motion for summary judgment

C. Trial on equitable allocation

LEGAL FRAMEWORK

FINDINGS OF FACTS AND CONCLUSIONS OF LAW

I. Sources of contamination at the Sites

A. Redlands facility

1. Perchlorate

2. Trichloroethylene

B. Potrero Canyon facility

C. LaBorde Canyon facility

II. Traditional equitable allocation

A. Limited value of certain equitable factors

1. Waste attributable to each party

2. Parties' relative benefits from waste disposal activities

3. Degree of cooperation

4. The government's ownership of waste

5. The government's ownership of facilities

6. Knowledge of risk of pollution from AP and TCE

7. Violation of California water quality laws

8. Ability to pay

9. Indemnification provisions

B. LPC exercised significantly more control than the government over the day-to-day hazardous waste disposal operations at the Sites

C. The government acquiesced in many of LPC's disposal operations at the Sites

D. Some of LPC's disposals at the Sites violated internal LPC rules or government requirements

E. Conclusion under traditional equitable allocation

III. Effect of indirect recoveries on equitable allocation

A. Lockheed's recovery of past response costs would unfairly burden the taxpayer Lockheed's recovery of future response costs would not unfairly burden the taxpayer

CONCLUSION

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BACKGROUND[1]

I. HISTORY OF THE SITES

The environmental contamination that underlies this action arose from the operation of solid propellant rocket production facilities by Lockheed Propulsion Company (" LPC" )[2] at three locations in Redlands and Beaumont, California -- the Redlands facility, the Potrero Canyon facility, and the LaBorde Canyon facility (collectively the " Sites" ) -- between 1954 and 1975.

A. Government contracts for solid propellant rockets at the Sites

LPC researched, developed, and manufactured state-of-the-art solid propellant rocket technologies at the Sites in support of military and scientific programs critical to the United States' Cold War efforts. (Roman Decl. ¶ ¶ 21, 23.) Government interest in the development of solid propellant rocket technologies grew significantly in the 1950s following the Soviet Union's successful nuclear tests in 1949 and the Sputnik launches in 1957. ( Id. ¶ ¶ 19, 24-25.)

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Rocket motors using solid propellants offered, at a lower cost, several benefits over their liquid-based counterparts -- greater safety, operational readiness, and reliability. ( Id. ¶ 24, 27.) The Eisenhower administration's decision to initiate the development of several large missile programs and to prioritize the research and development of solid propellants created the market for a private solid propellant industry. ( Id. ¶ 33.) As the only purchaser of advanced solid propellant rockets at the time, the United States held monopsonistic control over the solid propellant industry. (Trial Tr. 65-66 (Roman); Roman Decl. ¶ ¶ 5, 34.)

LPC was one of the largest participants in that industry, and as a contractor, it developed or manufactured rockets for eight major Cold War programs: the Vanguard artificial satellite, the Explorer artificial satellite, the Nike-Zeus anti-ballistic missile system, Project Mercury, the Apollo Program, the Large Solid Propellant Motor Program, the TAGBOARD reconnaissance drone, and the Short Range Attack Missile (" SRAM" ) program. (Roman Decl. ¶ ¶ 7, 35.) President Eisenhower designated four of these programs -- Vanguard, Nike-Zeus, Mercury, and Apollo -- as of the " highest national priority." ( Id. ¶ ¶ 7, 23.)

As described by three aeronautics scholars, " [t]he brief life of the Lockheed Propulsion Company was marked by rather modest, but notable historical and technical achievements in solid rocket development." (PX0088 at 14.) LPC contributed to four major Cold War space programs both as a developer and manufacturer of solid propellant rocket motors. In the 1950s, LPC developed and manufactured the third-stage motor for the Vanguard satellite program and loaded solid propellants into motors for the Explorer satellite program. Following the first of many successful launches into orbit in 1958, both Vanguard and Explorer were foundational space race programs. (Roman Decl. ¶ ¶ 8, 36-37.) LPC later developed and manufactured launch escape motors for Project Mercury, the United States' first manned space program. The escape motors -- critical for the safety of the astronaut in the event of an emergency during a launch -- had a 100% reliability rate over numerous tests and missions. ( Id. ¶ ¶ 10, 40-41.) Finally, LPC developed and manufactured the launch escape and pitch control motors for the Apollo manned lunar exploration program. The motors were part of the space capsule for eight Apollo lunar missions, including Apollo 8, the first manned orbit of the moon in December 1968, and Apollo 11, the first manned lunar landing in July 1969. ( Id. ¶ ¶ 11, 42-43.)

From 1958 to 1974, LPC also researched, developed, and tested large solid propellant motors for NASA and the Department of Defense (" DOD" ). Large solid propellant motors were necessary to generate enough thrust to lift large vehicles into space. Under the Large Solid Propellant Motor Program, LPC designed, fabricated, and tested the first 120-inch and 156-inch solid propellant motors and contributed to numerous technological advances later incorporated by competitors in the Space Shuttle and ballistic missile programs. For instance, the " Lockseal" device developed by LPC as a solution to solid propellant rocket thrust vector control became a mainstay in the solid propellant rocket industry. ( Id. ¶ ¶ 12-13, 44-45.)

LPC also contributed as a developer and manufacturer to the conventional Cold War arms race. LPC developed the second-stage motor for the Nike-Zeus missile, a surface-to-air missile designed to destroy incoming nuclear warheads. The Nike-Zeus missiles were successfully tested in 1958 and 1959. ( Id. ¶ ¶ 38-39.) LPC

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also developed and produced forty-five motors for the then-highly classified TAGBOARD reconnaissance drone program in the late 1960s. LPC designed motors capable of allowing the unmanned drone to reach an altitude and speed that would ignite the drone's ramjet. Once the ramjet ignited, the drone could reach speeds in excess of Mach 3 and photograph an area sixty miles wide and 3000 miles long in a single flight. The government ultimately discontinued TAGBOARD in 1971 for technical and political reasons. ( Id. ¶ ¶ 49-50; see also PX0088 at 13.)

LPC's largest contracts, however, were for the SRAM program. The SRAM was a nuclear-armed air-to-ground missile designed for use on the aerial front lines in the case of an American invasion into Soviet territory. (Roman Decl. ¶ 51.) LPC developed and manufactured a revolutionary two-pulse solid propellant rocket motor, which enabled an individual SRAM to shut down and then restart mid-flight. This innovation created the possibility for three distinct flight profiles and an " omni-directional" striking capability for each missile. ( Id. ¶ ¶ 51, 54, 70-71; see also Trial Tr. at 68 (Roman).)

The Air Force developed the technical requirements for the SRAM program in the spring of 1964. (Roman Decl. ¶ 53) The Air Force Rocket Propulsion Lab (" AFRPL" ) initiated SRAM research and development contracts with LPC, as well as several of its competitors, that same year. (Trial Tr. at 1340-41 (Dull).) LPC was the only contractor to successfully demonstrate the feasibility of a two-pulse motor during its research and development contracts. (Roman Decl. ¶ 54.) In 1966, Boeing won the development contract for the SRAM program (Trial Tr. at 1339, 1341 (Dull)) and awarded the subcontract for the development of the propulsion system -- i.e., the solid propellant rocket motor -- to LPC. (Roman Decl. ¶ 55.)

Numerous technical difficulties and rocket failures plagued the SRAM program. (Trial Tr. at 1341 (Dull); Roman Decl. ¶ ¶ 56-60.) The September 1969 initial qualification tests for the SRAM motor were unsuccessful. (Roman Decl. ¶ 61.) Shortly thereafter, Boeing and LPC filed a $54.2 million claim against the Air Force asserting that the SRAM propulsion system requirements were " unattainable" and " grossly impracticable." The Air Force settled the claim for $20 million before it could be adjudicated. ( Id. ¶ 63.)

Setbacks notwithstanding, the Air Force deemed the SRAM motor fit for production in 1971. The Air Force awarded Boeing the first production contract, and Boeing awarded LPC a one-year production subcontract worth $27.6 million. ( Id. ¶ 64.) The Air Force awarded Boeing four more production contracts, and Boeing and LPC entered into four additional production subcontracts between 1972 and 1975. During that period, LPC produced 1500 SRAM solid propellant rocket motors and completed 107 consecutive successful test fires. (Trial Tr. at 1395-96 (Dull); Roman Decl. ¶ 68.) Each SRAM was 150 inches long, nearly 18 inches in diameter (s ee Trial Tr. at 1337 (Dull)), and carried a thermonuclear weapon with a yield of approximately 170 kilotons, roughly ten times the yield of the atomic bomb the United States dropped over Hiroshima during World War II. (Roman Decl. ¶ 69.) Thus, a B-52 bomber with the capacity to carry 20 SRAMs had a destructive power equivalent to 200 Hiroshima bombs. ( Id. )

In light of decreased government focus on solid propellant rocketry for defense and space exploration purposes, LPC ceased its operations in the summer of 1975 at the end of its fifth SRAM subcontract. ( Id. ¶ 68.) Nonetheless, SRAMs --

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all of which contained solid propellant motors produced by LPC -- remained a mainstay in the United States' arsenal through the 1980s and were considered critical to the deterrent effect of the United States' strategic bomber force. ( Id. ¶ ¶ 70-72.) Even twenty years after the first successful SRAM test firing, the Soviet Union had not developed an air defense system capable of neutralizing the omni-directional capabilities of SRAMs provided by LPC's two-pulse rocket system. ( Id. ¶ 71.)

B. Solid propellant rocket operations at the Sites

While the parties dispute what happened on a day-to-day basis with respect to operations at the Sites, particularly relating to the disposal of the hazardous substances, many of the background facts are undisputed.

LPC began its rocket motor production operations at the nearly 500-acre Redlands facility in 1954 when it leased the facility from the City of Redlands. (USX15; see also USX11.0020-21.) Between 1958 and 1962, LPC acquired the parcels comprising the much-larger 9,100-acre Potrero Canyon and 2,500-acre LaBorde Canyon facilities located near Beaumont, California. (USX12.0044.)[3] Lockheed researched and manufactured solid propellant rockets at the Redlands facility from 1954 to 1975. (USX11.0018-20.) LPC used the Potrero Canyon facility for manufacturing solid propellant rockets, testing rocket motors, and washing out defective rocket motors for re-use from 1958 to 1974. (Sterrett Decl. ¶ 213; USX12.0046.) LPC used the LaBorde Canyon facility for assembling small rocket motors, testing rocket motors, and washing out defective motors for reuse from 1958 to 1974. (Sterrett Decl. ¶ 214; USX13.0011-12.)

The design, testing, and production processes for LPC's contracts followed a general protocol. The government provided requirements regarding the performance, dimensions, and interface points of the solid propellant rocket motor. (Trial Tr. at 78 (Oppliger).) From those specifications, LPC's engineering analysts manipulated the composition of the propellant and the physical design of the propellant grain within the rocket casing to achieve desired rocket performance. ( Id. at 78-79.) LPC engineers then designed the rocket casing and casing insulation based on the characteristics of the propellant grain design. ( Id. at 80.) From there, LPC began the iterative process of testing subscale (and eventually to-scale) rockets against the government-provided specifications. ( See id. at 80-83.)

Although LPC's applications of solid propellant rocket technology were state-of-the-art, solid propellant rocket motors themselves are " simple units" with " no moving parts." (PX91 at 934.) A solid propellant rocket " motor consists of an encased energy supply, which is a combustible mixture of all of the elements required for the generation of propulsive energy" -- it is self-contained and ready to fire when it leaves the factory. ( Id. )

A solid propellant is composed of three basic components -- an oxidizer and two fuels, a " rubber-like binder" and powdered

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aluminum. ( Id. at 935.) Because solid propellant combustion occurs in the closed environment of a rocket's core, a solid propellant requires much more oxidizer than fuel. ( Id. at 955.) The oxidizer used by LPC consisted of precise proportions of ground and unground ammonium perchlorate (" AP" ). LPC used several grinders at the Sites to grind raw AP down from 200 microns in diameter (unground) to precise sizes of less than eight microns in diameter. ( Id. ) LPC combined the ground and unground oxidizer with a fuel slurry in a large mixing machine to produce a homogenous fluid propellant. ( Id. at 958.)

LPC then " cast" the fluid propellant into the rocket motor case under vacuum conditions, and " cured" the rocket by heating the cast for nearly a week to " stiffen[] it into a rubbery, shape-retaining mass." ( Id. at 935, 961.) LPC produced these solid propellant motors in short, cylindrical segments that could be joined to complete the rocket motor. ( Id. at 940.) Once the nozzle and igniter were added, the rockets were ready for either testing or shipment. ( Id. at 938.)

Aside from providing the initial specifications for a particular solid propellant rocket motor, the government played several additional roles in the design, testing, and production of a rocket.[4] First, as a government contractor or subcontractor, LPC had to comply with any military and federal specifications incorporated in a particular contract. (PX1057 ¶ ¶ 13-14 (Speer Decl.).) Deviation from government specifications required government review and approval. ( Id. ¶ 14.) Second, LPC's contracts often incorporated by reference specific safety and production manuals. ( See Trial Tr. at 941 (Nagle); see also, e.g., PX0001-0003, 0005, 0007, 0009.) The manuals provided guidance for best practices regarding safety and production processes. Although LPC was not required to comply with all aspects of the referenced and applicable manuals, LPC was required to comply with, or to seek a waiver or deviation from, any directives in the manuals that used the words " shall" or " must." ( See Trial Tr. at 439 (Delaney); id. at 941 (Nagle); PX0007 § 102). Waivers or deviations, however, were commonly sought and granted. (Trial Tr. at 941 (Nagle); see, e.g., PX400.)

Specifications aside, the government had limited input into LPC's technical development of solid propellant rocket motors under government contracts. In the mid-1960s, the government adopted the so-called Total System Performance Responsibility (" TSPR" ) for the SRAM contracts, meaning that the prime contractor -- Boeing -- and its subcontractor --LPC -- had " total system responsibility to build th[e SRAM] without any more direction from the Air Force." (Trial Tr. at 1338 (Dull); see USX222.0003.) " The Air Force provide[d] a statement of work, what [it] want[ed] to be built, and a system spec that goes into technical details" regarding performance, but it did not " dictate the design" of the rocket. (Trial Tr. at 1338 (Dull).)

Given the technical complexity of the SRAM program, LPC held daily early morning meetings to discuss pertinent program details. ( See Trial Tr. at 86 (Oppliger).) Government representatives from the Air Force Systems Program Office (" SPO" )[5] and the AFRPL attended these

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meetings, as well as other technical interchange meetings scheduled by Boeing, only on invitation by Boeing. ( Id. at 1341, 1345-47 (Dull).) Although the frequency of these meetings increased over time due to the repeated rocket motor failures that plagued SRAM, government representatives at the meetings were instructed not to provide direction, but to only " observe, take notes, and report back to . . . supervisors." ( Id. at 1347-48.) Even at SRAM's preliminary design review, which included high-ranking officials from LPC, Boeing, and the Air Force, the Air Force representatives attended only " as observers to witness the progress at [LPC] at that time." ( Id. at 1349.) Waste disposal practices were not discussed at these technical meetings. ( Id. at 1352.)

At the beginning of its SRAM development subcontract, LPC formed the SRAM Propulsion Program Review Committee to provide LPC monthly guidance on meeting the SRAM program's technical and schedule objectives. (PX0571 at 443.) The Committee was initially comprised of Lockheed Aircraft Corporation employees who did not generally work for LPC at the Sites. ( Id. ) In early 1968, pending the commencement of SRAM rocket motor test firing, LPC , with the permission of Boeing, expanded the Committee to include several outside experts, including Boeing engineers, scholars, and Donald Ross, " Mr. Solid Rocket," from the AFRPL. ( Id. at 444, 446; see Trial Tr. at 1369-70 (Dull).) Although Mr. Ross was generally an " observer" under the TSPR (Trial Tr. at 1370 (Dull)), he provided some technical input to LPC through the Committee. ( See PX0571 at 0439.) LPC promptly implemented many of the improvements recommended by the expanded Committee. ( See Roman Decl. ¶ 60.)

In 1970, at the request of the SPO, the AFRPL reviewed the design of the SRAM rocket motor, the test firing results, and LPC's tooling and manufacturing processes and internal procedures, to ensure that LPC " w[as] ready for production" and to " document the things that needed to be completed" before SRAM rocket motor production could begin. (Trial Tr. at 101, 104-05 (Oppliger); see also Trial Tr. at 1356 (Dull); PX0577 at 110.) Pursuant to this review, the AFRPL provided eight recommendations to Boeing regarding LPC's readiness for SRAM rocket motor production. ( See PX0577 at 115-18.) These recommendations ranged from the procedural -- recommending that Boeing conduct a First Article Contractual Inspection following the eight test motor firings -- to the prudent -- suggesting that LPC's engineering work force could be reduced by fifty percent once development ended and production began. ( Id. at 116, 118.) Although the government recommendations did not bind either Boeing or LPC (Trial Tr. at 1376-77 (Dull)), LPC ultimately adopted many of them. ( Id. at 106 (Oppliger).)

The government's quality assurance presence at the Sites was much larger than its technical development presence described above. Although LPC had its own safety and quality control inspectors ( id. at 128), both Boeing (as prime contractor for SRAM) and the Defense Contract Administration Service (" DCAS" ) had offices at the Redlands facility and had the " right[]" to " roam the production floor and see anything they wanted to see and watch anything they wanted to watch." ( Id. at 90-92, 94, 110-11.) DCAS officials, Boeing officials, and LPC engineers reviewed the process specifications and manufacturing process standards before production could begin and inspected the processes once underway.

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( Id. at 90.)[6] DCAS officials determined which steps in the production process they wanted to inspect and, in theory, a production process could not proceed beyond a dedicated inspection point until a DCAS official had inspected and " stamped off" the process. ( Id. at 90-92.)

During the SRAM development and production contracts, DCAS had between four and five full-time representatives and Boeing had around twenty full-time employees stationed at the Redlands facility. (Trial Tr. at 111 (Oppliger); id. at 1346, 1357 (Dull).) By comparison, LPC had around four hundred employees at the Redlands facility. (Trial Tr. at 139 (Oppliger); PX1202 at 133.)

The frequency and quality of inspections at the Sites varied over time. " The amount and kind of inspection to be performed by the Government [wa]s at the discretion of DCAS." (USX270.) In its 1970 review of the SRAM Rocket Motor, the AFRPL criticized all three parties -- LPC, Boeing, and DCAS -- for practicing a laissez-faire " 'call us and we'll come and inspect'" approach to inspecting production processes. (PX577 at 117, 151-52; cf. PX576 at 48-49, 81.) The AFRPL therefore concluded that that the SRAM program had " not been receiving the on-station witnessing of work that the program has and continues to deserve" (PX577 at 151-52) and suggested that SPO recommend to Boeing and DCAS to " re-evaluate their inspection philosophy and inspection operations with a view to substantially increasing their on-station witness of work operations besides work results." ( Id. at 117; see also Trial Tr. at 1375-76 (Dull).) After this review, both inspection points and the frequency of inspections increased at the Sites as the first SRAM production contract got underway. (Trial Tr. at 138 (Oppliger).) Nonetheless, DCAS continued to " lean[] on Boeing for engineering judgment and decisions essential to the quality assurance function." (USX221.0004.)

In addition to their daily quality assurance inspections, DCAS representatives also occasionally undertook safety inspections at the Sites. ( See, e.g., PX476-77, 482-84.)[7] However, these inspections were limited to safety risks involving fires and explosions inherent in the production, testing, and disposal of propellants and did not address safety risks regarding environmental pollution. ( See, e.g., Trial Tr. at 87 (Oppliger).)

C. General waste disposal practices at the Sites

Solid propellant rocket motor research, design, testing, and production processes produce myriad and voluminous waste streams including waste propellant (used, unused, and defective), waste solvents containing propellants, and scrap motors. ( See PX457 at 801.) As a result, disposal of waste was " regarded as an integral part of solid propellant rocket operations." (PX0009 § 7-1.1.)

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During its operations of the Sites, LPC used several organic solvents -- including trichloroethylene (" TCE" ) and 1,1,1-trichloroethane (" TCA" ) -- to clean the equipment used to produce the solid propellant rocket motors. At the Redlands facility, AP and propellant-laden wastewaters, AP and propellant-laden solvents, and solvents in general, were first piped, pumped, or transported via drums to " evaporation pits." (Trial Tr. at 669 (Feenstra); Feenstra Decl. ¶ ¶ 50-51.) These shallow, concrete-lined basins allowed the organic solvents and water to evaporate, leaving behind a residual sludge containing large amounts of AP. ( See Trial Tr. at 700 (Feenstra).)

LPC ultimately disposed of most of its propellant wastes -- including sludge taken from evaporation pits -- by burning them in earthen " burn pits" at the Redlands and Potrero Canyon facilities. (Feenstra Decl. ¶ ¶ 51, 156.) In some instances, propellant wastes were disposed of off-site at Camp Irwin -- a military facility in the Mojave Desert (now Fort Irwin). ( See id. ¶ 42; PX431; PX440.)

An exception to disposal-by-burning existed, however, for defective rocket motor casings. Rather than burning the entire rocket motor -- and ruining the expensive metal casing -- LPC often attempted to reuse the motor casing by removing the propellant with water. In the 1950s, LPC did this by " soaking out" the scrapped rocket motors in evaporation pits at the Redlands facility. (Feenstra Decl. ¶ ¶ 47, 152; see also PX429.) Later, LPC began " hogging out" defective rocket motors at the Potrero Canyon facility using high-pressure water jets to remove the propellant from the motor casing. ( See Trial Tr. at 393 (Delaney); USX49.0068.)

II. CLEANUP OF THE SITES

As of the beginning of the trial, Lockheed had incurred environmental response costs for the Sites totaling nearly $287 million. Lockheed estimates it will incur another $124 million in future response costs for the Sites. ( See Meyer Decl. ¶ 50 fig. 29.) Because each facility has a distinct operational and cleanup history, the Court considers them separately below.

A. Redlands facility

TCE [8] and perchlorate [9] are the principal contaminants driving the cleanup costs relating to the Redlands facility. Due to a combination of hydrogeologic factors around Redlands, the majority of the TCE and AP disposed of during LPC's operations is no longer located at the facility. (Sterrett Decl. ¶ 44.) Rather, the substances percolated through the soil and

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into the groundwater and have travelled downgradient to form the " Redlands plumes," [10] approximately four miles away. ( See generally id. ¶ ¶ 29-45; see also Trial Tr. at 286-87 (Blackman).) Because the plumes are " detached" from the Redlands facility, environmental investigation of the facility cannot demonstrate a " direct connection" between specific locations (and thus production activities) at the facility and the plumes. (Sterrett Decl. ¶ 52.) That is, simply by looking at the plumes and the facility, one cannot reliably discern where in the facility the TCE or perchlorate originated.

1. Trichloroethylene

The California Department of Health Services first discovered the Redlands TCE plume in 1980. (PX1677 ¶ 1.) Throughout the 1980s, several municipal wells were shut down after testing revealed TCE concentrations above the California drinking water maximum contaminant level of 5 µ g/L. ( Id. ¶ 3.)[11] Lockheed began investigating the plume in the early-to-mid 1980s, concluding in 1985 that a local airport, and not LPC's activities at the Redlands site, was the " most likely source" for the TCE. ( Id. ¶ 12.) Notwithstanding that conclusion, the Santa Ana Regional Water Quality Control Board instructed Lockheed to conduct further investigations into its operations at the Redlands site. ( Id. ) Lockheed and the Board continued investigating the Redlands facility as a potential source for the TCE plume into the early 1990s. ( Id. ¶ ¶ 13-32.)

By October 1992, Lockheed argued that continued investigations into the Redlands facility would be fruitless because whatever TCE might have been disposed of at the facility had either volatized or dispersed through the porous soil and formed the detached Redlands TCE plume. ( Id. ¶ 33.) In November, the Board informed Lockheed that it had concluded the Redlands facility was the source of the Redlands TCE plume and that it would order Lockheed to investigate and cleanup the plume. ( Id. ¶ 34.) Lockheed replied that it would consider proposing to the Board a remediation plan that would negate the need for any order and thereafter undertook a detailed study of the Redlands TCE plume. ( Id. ¶ ¶ 34-35.)

On May 6, 1993, Lockheed denied responsibility for the plume, informing the Board that " it was [its] position that there was not substantial evidence to indicate that Lockheed was the source of the TCE contamination in the [Redlands plume], and that Lockheed, therefore, was not in a position where they could justifiably utilize stockholders' funds in conducting any additional work." ( Id. ¶ 36.)[12] The Board responded on January 28, 1994, by issuing its first Cleanup and Abatement Order for the Redlands TCE plume. The Order required, inter alia, that Lockheed submit a workplan for using groundwater monitoring wells to define the plume and based on data gathered from those wells, submit and implement plans to first contain and then remediate the plume. ( Id. at 10-11; see also Trial Tr. at 286-87 (Blackman).) On that same day, the Board also issued

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an " investigative order" requiring Lockheed to conduct groundwater and subsurface soil investigations at the Redlands facility. (PX1678 at 10; see also Trial Tr. at 285 (Blackman).) On April 22, 1994, after discussions with Lockheed, the Board modified its initial Cleanup and Abatement Order by removing the requirement that Lockheed implement any remedial actions for the plume while investigations were still ongoing. (PX1679 at 10-11; see also Trial Tr. at 295-96 (Blackman).) Lockheed continued to deny responsibility for the Redlands TCE plume ( see USX653 (January 1994 letter from Lockheed to Board)), but otherwise complied with the 1994 Orders and worked with the Board to develop an acceptable remediation plan. (Trial Tr. at 296-99 (Blackman).)

2. Perchlorate

In late April 1997, following a breakthrough in testing methodologies for perchlorate ( see Trial Tr. at 301-03 (Blackman)), the California Department of Health Services discovered perchlorate levels in several wells within the Redlands TCE plume that exceeded California's provisional drinking water standard of 18 µ g/L. (PX1685 ¶ ¶ 3-4.)[13] The Board connected LPC's use of AP at the Redlands facility -- and in particular the waste disposal practices -- with the Redlands perchlorate plume. ( Id. ¶ ¶ 3, 5.) The Board accordingly issued a Cleanup and Abatement Order requiring Lockheed to investigate and then develop and implement a remedial action plan for the Redlands perchlorate plume. ( Id. at 2.) Lockheed appealed the Order, but complied during the appellate process. (Trial Tr. at 337 (Blackman).) Because the Redlands facility was " the only source of [AP] in the" watershed, Lockheed eventually accepted responsibility for the Redlands perchlorate plume. ( See id. at 307.) Further, after the discovery of the perchlorate plume, Lockheed " began to realize that the TCE, which was fully enveloped in the perchlorate plume, must have also come from the" Redlands facility as well. ( Id. at 308.)

Since that time Lockheed has complied with all orders of the Board regarding investigation, containment, and remediation of the Redlands plumes, including working with water purveyors ( e.g., surrounding municipalities) to reduce TCE and perchlorate concentrations to acceptable levels and to drill new wells for drinking water supplies. ( Id. at 314-17; USX11.0023-26.) Among other remedial steps, Lockheed treated from select wells TCE-laden groundwater with granular activated carbon and AP-laden groundwater with an ion exchange resin. ( See Trial Tr. at 319-20 (Blackman); USX11.0041-42.)[14]

Although Lockheed has removed large amounts of TCE and perchlorate from the Redlands plumes, concentrations remain at levels that will require continued treatment that may " go on for many decades." (Trial Tr. at 321 (Blackman).) As of 2011, Lockheed had incurred over $231 million in response costs for the Redlands plumes.[15]( See Meyer Decl. ¶ 50 fig. 29.) Response costs for the Redlands plumes

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also make up the lion's share of the more than $25 million in response costs at the Sites from January 1, 2012 to February 10, 2014, and are expected to comprise the majority of the projected $125 million in future costs for the Sites. (Trial Tr. at 1188 (Lockheed counsel); cf. Meyer Decl. ¶ 50 fig. 29.)

B. Potrero Canyon facility

Although TCE, TCA-related compounds,[16] and polychlorinated biphenyls have been found in the soil and groundwater at the Potrero Canyon facility, perchlorate is the principal contaminant of concern at the facility. (Sterrett Decl. ¶ ¶ 22.) Unlike at the Redlands facility, the contamination at the Potrero Canyon facility is not detached, so the perchlorate contamination is traceable to specific locations at the facility. (Feenstra Decl. ¶ 155; Sterrett Decl. ¶ 216.)

The primary sources of perchlorate soil contamination at the Potrero Canyon facility are the Large Motor Washout Area and the Burn Pit Area (Sterrett ¶ ¶ 220-21),[17] with perchlorate levels as high as 302,000 µ g/kg and 171,000 μ g/kg, respectively. (USX12.0229-30.) The former Rocket Motor Production Area is a secondary source area, covering a much larger portion of the facility but with lower perchlorate soil concentrations (20,400 µ g/kg). ( Id. at 0229, 0244-45.) The Sanitary Landfill is also identified as a secondary source area, with soil perchlorate levels as high as 67,300 µ g/kg. (Sterrett Decl. ¶ 222; USX12.0233.)

The Burn Pit Area is the primary source of perchlorate groundwater contamination at the facility. (Feenstra Decl. ¶ 155; Sterrett Decl. ¶ ¶ 226-27; USX12.0237-38.) Secondary sources at the facility include the Rocket Motor Production Area and, to a lesser extent, the Large Motor Washout Area. (Feenstra Decl. ¶ 165; USX12.0237-38.)

In 1986, Lockheed conducted a historical study of the Potrero Canyon facility (along with the LaBorde Canyon facility) to better plan later investigations into environmental contamination. ( See USX49.0011.) Following that study and a 1989 Consent Order from the California Department of Health Services, Lockheed has undertaken further remedial investigations and some remedial actions at the facility, the most recent and relevant beginning in 2002. ( See USX12.0064-90.)

As of 2011, Lockheed had incurred nearly $21 million in response costs for the Potrero Canyon facility. ( See Meyer Decl. ¶ 50 fig. 29.) Further remedial actions are presently under evaluation. (Feenstra Decl. ¶ 154; see generally USX699.144-300.) As of 2012, the preferred remedial alternative for perchlorate-impacted soils at the facility is excavation and off-site removal. The preferred remedial alternative for perchlorate-contaminated groundwater at the facility hydraulic containment through the installation of a pump-and-treat system involving ex situ treatment of the groundwater, with the discharge of remediated water back into the ground or into local waterways. (USX699.0299-300.)

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C. LaBorde Canyon facility

The soil and groundwater at the LaBorde Canyon facility are also contaminated with perchlorate and, to a lesser extent, TCE. (Sterrett Decl. ¶ ¶ 25, 238.) As at the Potrero Canyon facility, groundwater contamination at LaBorde Canyon is not detached and is therefore traceable to specific locations of historic operations at the facility. ( Id. ¶ 235.) The primary sources of perchlorate at the facility are the Test Bay Canyons and the Waste Discharge Area. (Feenstra Decl. ¶ 167; Sterrett Decl. ¶ 239.) Perchlorate has been detected in soil at concentrations exceeding 100,000 µ g/kg and in groundwater at concentrations exceeding 100,000 μ g/L. (USX13.0236-38, .0241.)

As was the case at Potrero Canyon, Lockheed undertook a historical study of the LaBorde Canyon facility in 1986. ( See USX49.0011.) The California Department of Health Services issued a Consent Order requiring cleanup of contamination at the facility in 1989. (USX13.0012.) Lockheed completed remedial investigations and removal actions from 1990 to 1993, after which the California Department of Toxic Substances Control issued a " Report of Completion of Removal Action" stating that no further remedial action was necessary. ( Id. ; USX700.0037-38.) Groundwater perchlorate contamination was first detected at the facility in the early 1990s. (Feenstra Decl. ¶ 174.) However, the California Department of Toxic Substances Control did not reopen the facility for further assessment until 2003. (USX13.0012.) Since then, Lockheed has engaged in nearly ten years of remedial investigations. (USX13.0027-31.)

As of 2011, Lockheed had incurred over $10 million in response costs for the LaBorde Canyon facility. ( See Meyer Decl. ¶ 50 fig. 29.) Further remedial actions are currently under evaluation. (USX700.0148-206.) As of 2012, the preferred remedial alternative for the facility is limited shallow soil removal, plume containment, and institutional controls. ( Id. at 0191, 0215.)

III. LOCKHEED'S INDIRECT RECOVERY OF RESPONSE COSTS THROUGH U.S.-GOVERNMENT CONTRACTS

Lockheed has recovered and continues to recover its response costs for the Sites (and others sites like them) from its customers by allocating its cleanup expenses to its contracts as indirect costs. Because the U.S. government is by far Lockheed's largest customer, to date Lockheed has indirectly recovered [18] $208 million -- over 72% of its total past response costs for the Sites -- through indirect costs charged to U.S.-government (primarily DOD) contracts.[19] Because the U.S.-government share of Lockheed's business is larger than it was in the past, the percentage of total response costs for the Sites that Lockheed has recovered through U.S.-government contracts is expected to rise in the future.

This cost-recovery system has its foundation in the byzantine federal contracting

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regulations and was formalized, as to environmental response costs in particular, by the Discontinued Operations Settlement Agreement (" DOSA" ) signed by Lockheed and the U.S. Defense Contract Management Agency (" DCMA" )[20] in 2000. As a result of these regulations and the DOSA, the Court must decide, in determining the equitable allocation of response costs between the parties under CERCLA, what weight, if any, should be given to the fact that a government contractor (1) has already formally, though indirectly, " recovered" from the U.S. government a significant portion of its response costs through the pricing of its goods and services and (2) now seeks to directly recover from the U.S. government those same response costs under CERCLA. As the parties agree, this is an issue of first impression.[21] But before the Court can address that question, it must explain the relevant regulations and the DOSA, both of which complicate the resolution of this case.

A. The Federal Acquisition Regulations

Lockheed's cost-recovery system has an established basis in the complex Federal Acquisition Regulations (" FAR" ) that govern government contracting. Pursuant to the FAR, the government pays contractors both their " direct" and " indirect" costs, plus a profit. (Wright Decl. ¶ 84.) Direct costs are those costs related to a specific contract, such as materials and labor. See 48 C.F.R. § 31.202. Indirect costs are those costs not associated with a specific contract -- essentially overhead. See id. § 31.203. Profit factors are determined on a contract-by-contract basis. ( See Trial Tr. at 600-01 (Wright); id. at 1660-61 (Gatchel).) Across all contracts in 2013, Lockheed's operating margin ( i.e., pre-tax profit) was over 9.9%.[22]

The government will only reimburse a contractor for " allowable" indirect costs. An indirect cost is " allowable" if it is " reasonable," i.e., " it does not exceed that which would be incurred by a prudent person in the conduct of competitive business," 48 C.F.R. § 31.201-3(a), is " allocable," complies applicable accounting standards, and is not otherwise disallowed by regulation or contract. See id. § § 31.201-2, -4. Although not specifically allowable under the FAR, see generally id. § 31.205, environmental costs " are normal costs of doing business and are generally allowable costs if reasonable and allocable." (PX1862 § 7-2120.1 (Defense Contract Audit Agency Contract Audit Manual).)[23]

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Environmental cleanup costs at facilities no longer in operation are generally allocable as indirect costs. ( Id. ¶ 7-7120.7.) Attorneys' fees and legal costs incurred while pursuing a CERCLA action may also be treated as indirect costs. See 48 C.F.R. § 31.205-47.

For a fixed-price contract, contractors attempt to predict the incurrence of indirect costs that will be allocated to that contract over its term. Because the price of the contract is fixed, the contractor benefits from a relatively higher return on its contract if it overestimates the total indirect costs; on the other hand, if the contractor underestimates the total indirect costs, it will receive a relatively lower profit on that contract. In contrast, in cost-reimbursement contracts the contractor is paid for all allowable direct and indirect costs allocated to the contract. Thus, over-or under-estimating indirect costs with regard to a cost-reimbursement contract does not pose the same potential for increased or reduced returns. ( Cf. Trial Tr. at 1660, 1679 (Gatchel).)

Even after the contractor has allocated indirect costs to specific contracts and has been paid for those costs pursuant to those contracts, the contractor must credit back to the government " either as a cost reduction or by cash refund" any " applicable portion of any income, rebate, allowance, or other credit relating to" those indirect costs " received by or accruing to the contractor." 48 C.F.R. § 31.201-5. For environmental cleanup costs in particular, this provision requires a contractor to credit back to its indirect environmental cost pool any recoveries for cleanup costs from insurance policies or other PRPs. (Wright Decl. ¶ 50.)

B. The Discontinued Operations Settlement Agreement (" DOSA" )

Lockheed and the DCMA recognized the allowability and appropriate accounting treatment of environmental remediation expenses as indirect costs when they signed the DOSA on September 6, 2000. (USX1033 at 10.) The DOSA formally allowed as indirect costs, inter alia, environmental response costs incurred for " discontinued operations," sites, or facilities that Lockheed closed, abandoned, or sold prior to January 1, 2000, including all three Sites at issue in this case. ( Id. ¶ ¶ 1.7-.8.)

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Under the DOSA, Lockheed collects its environmental response costs for discontinued sites in an accounting pool at the corporate level -- the Settled Discontinued Operations Pool (" DiscOps Pool" ).[24] ( Id. ¶ 2.4.) Environmental response costs in the DiscOps Pool are not charged to contracts immediately upon incurrence; instead, the costs for a given year are amortized over a five-year period. (USX407 at 5; Mateer Decl. ¶ 8.) Both parties benefit from amortization because it smoothes costs over time, thereby increasing predictability in multi-year contract prices and promoting uniformity and comparability in the measurements of contract costs. (Mateer Decl. ¶ 9; see generally PX1859 at 3-4.)

Lockheed " flows down" the allocable costs for a given year from the DiscOps Pool to its business units using a three-factor formula typically used in government contracting. (USX1033 ¶ 2.8; Wright Decl. ¶ 45.) It is the business units that then develop indirect rates, based partially on the DiscOps Pool, to use when bidding on and billing government contracts. (Wright Decl. ¶ 45; Mateer Decl. ¶ ¶ 10-12.) The percentage of Lockheed's indirect costs passed on to U.S.-government contracts roughly correlates with the U.S. government's share of Lockheed's business for a given year. (Wright Decl. ¶ 74.)

Thus, under DOSA, if Lockheed spent $10 million on environmental response costs at discontinued operations in the year 2005, it would amortize those costs over the next five years, and $2 million per year would flow down to its business units from 2006 to 2010. Assuming that U.S.-government contracts make up 80% of Lockheed's business, Lockheed would recover $1.6 million per year -- or $8 million total -- of the response costs through its government contracts. In addition, Lockheed would recover the remaining $400,000 per year -- or $2 million total -- in an identical manner from non-U.S. government contracts.[25]

The DOSA also provides that Lockheed " shall not realize a double recovery with regard to any Settled Discontinued Operations Costs," and to the extent that it does, it " will reimburse the United States for any such double recovery . . . under government contracts." (USX1033 ¶ 4.7.) Pursuant to this provision, and as required under 48 C.F.R. § 31.201-5, Lockheed credits to the DiscOps Pool any direct payment it receives for environmental remediation costs at its discontinued operations, whether in the form of insurance proceeds, settlements, or other recoveries. (Wright Decl. ¶ 50; Mateer Decl. ¶ 14.) Credits are treated the same as costs and are amortized over the five years following receipt of the payment. (Wright Decl. ¶ 51.) Therefore, credits represent a bottom line reduction to the DiscOps Pool, lowering the total indirect costs passed on to Lockheed's clients. Thus, again assuming that U.S.-government contracts make up 80% of Lockheed's business, the U.S. government would receive 80% of the benefit of any credits allocated to the DiscOps

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Pool in the form of reduced contract costs. ( See Wright ¶ 73-74; USX1009 at 154-55 (Reese Dep.).)

C. Lockheed's treatment of response costs for the Sites under the DOSA

To date, the DOSA and DiscOps Pool have functioned as intended. As to the three discontinued Sites in this case, Lockheed has incurred environmental response costs related to those Sites, allocated them to the DiscOps Pool, amortized them over five years, and passed them down to its business units for bidding and billing purposes. Because once individual costs enter the DiscOps Pool, they are not " tracked" or " followed" (as individual costs) down through the business unit or specific contracts, it is impossible to identify or trace response costs for the Sites to any particular government contract. ( See Mateer Decl. ¶ 13.) Nonetheless, it is clear that Lockheed has indirectly recovered, and continues to indirectly recover, response costs for the Sites from the U.S. government through the indirect costs charged to U.S.-government contracts. (Wright Decl. ¶ 57-59; USX407 at 4-5.) Indeed, Lockheed boasts that its " underlying tenet in pricing [its] contracts with the U.S. government" is its " ability to recover [its] costs . . . regardless of the type of contract." (USX407 at 4-5.)

As of December 31, 2013, Lockheed had indirectly recovered through its U.S.-government contracts more than $208 million -- or 72% -- of its estimated $287 million in total nominal response costs at the Sites. (Meyer Decl. ¶ 29 & fig. 5.)[26] In the future, this " effective government share" of response costs at the site is expected to rise because U.S.-government contracts will make up an even higher percentage of Lockheed's business than in the past. ( See Trial Tr. 581 (Wright); Meyer Decl. ¶ 82 & fig. 30; USX 402.0002.) Indeed, in the past few years, Lockheed's recovery rate through U.S.-government contracts has been approximately 87% (Wright Decl. ¶ 66), and it is predicted that this recovery rate will continue to fluctuate around that percentage in the near future. ( See Trial Tr. 591-93 (Wright); USX 402.0002.) Accounting for the increase in Lockheed's U.S.-government contract base, and considering the projected future cleanup costs for the Sites, the government's expert economist estimates that Lockheed will ultimately indirectly recover through U.S.-government contracts nearly 83% of its total nominal response costs at the Sites. (Meyer Decl. ¶ 30 & fig. 6.)

Aside from its indirect recovery of over 72% of its response costs for the Sites through U.S.-government contracts to date, Lockheed has also allocated as an indirect cost and subsequently recovered (though not through the DiscOps Pool) a substantial portion of its legal fees and costs associated with bringing this action. The government's expert economist estimates that Lockheed indirectly recovered through government contracts, in nominal dollars, over 85% of the $7.35 million in legal fees and costs it incurred between 2007 and 2012. (Meyer Decl. ¶ ¶ 163-75.) Lockheed incurred an additional $3.2 million in legal fees and costs through November 2013 (Gov't Closing Presentation [Dkt. No. 144] at 245), and undoubtedly, it has incurred several million dollars more in fees and costs for the extensive pretrial preparation and trial briefing since December

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2013, the expert fees for the six experts who provided testimony at trial, and the fees and costs associated with the five counsel who attended a twelve-day trial. According to the government's expert economist, Lockheed will indirectly recover over 85% of its total legal fees and costs (presumably at least $10 million) through U.S.-government contracts. ( See Meyer Decl. ¶ 172.)

IV. PROCEDURAL HISTORY

A. Related actions while the CERCLA statute of limitations was tolled

Lockheed did not bring this action for recovery of response costs under CERCLA until 2008, fourteen years after it began remediation efforts at the Redlands facility. The parties, through Lockheed's in-house counsel and attorneys within the Environmental and Natural Resources Division of the Department of Justice, agreed to a tolling of the CERCLA statute of limitations, see 42 U.S.C. § 9613(g)(2), beginning in 1997. ( See PX1788, 1823, 1838, 1849, 2078.) These tolling agreements, specifically for the Redlands site, were in effect from January 27, 1997 to November 1, 2003. (PX 1788, 2078.) The parties renegotiated the agreements on a semi-annual basis during this time period, including negotiating a one-year extension of the tolling agreement on July 10, 2000 (PX1849), less than two months before Lockheed and the DCMA entered into the DOSA on September 6, 2000. (USX1033 at 10.)

Although the DOSA addressed environmental cleanup costs, it did not purport to settle CERCLA liabilities between Lockheed and the government. To the contrary, the DOSA explicitly provides that it " does not settle any claims, if any, arising under CERCLA." ( Id. ¶ 4.18.) Indeed, the DOSA implicitly recognized the potential coexistence of direct recoveries from the government under CERCLA and indirect recoveries from the government through costs charged to U.S.-government contracts. In particular, the parties devoted an entire section of the DOSA to the treatment of the January 20, 2000 Consent Decree signed by Lockheed and the Department of Justice in the Burbank CERCLA litigation.[27](USX1033 ¶ ¶ 3.1-.5.) In the Burbank Consent Decree, the United States agreed to pay Lockheed directly for over forty-four percent of past response costs and for fifty percent of most future response costs for the site. (PX1844 ¶ ¶ 3.1-.6, 4.1-.3.) While the Burbank Consent Decree acknowledged that Lockheed was already allocating " certain environmental remediation costs" to its discontinued operations pool, it did not purport to " resolve[]" the " allowability and allocability of these costs." ( Id. ¶ 2.14.) Nonetheless, the Consent Decree did specify that under no circumstance could the United States determine that the agreed-upon past costs were " not properly subject to payment under the terms of the Decree because the costs were previously reimbursed by the United States or another party through an overhead pool" like

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the discontinued operations pool. ( Id. ¶ 3.16.) To counterbalance that provision, the Consent Decree required that " Lockheed Martin shall not realize a double recovery with regard to any" response costs and " shall credit its continued operations pool with amounts received from the United States pursuant to this Decree in accordance with an agreement of Lockheed Martin and the United States." ( Id. ¶ 3.25.) The " agreement" encompassed the DOSA, wherein the parties agreed to disallow $80.6 million in costs related to the Burbank site and disallow $29 million in credits paid to Lockheed by the United States pursuant to the Burbank Consent Decree. (USX1033 ¶ ¶ 3.1-.3.)

During the tolling period, Lockheed was involved in several related matters. In 1993, a group of insurers sued Lockheed in state court in California, seeking a declaration that they were not required to defend or indemnify Lockheed for the costs of environmental remediation at multiple sites, including the Redlands facility. Procter v. Lockheed Corp., Case No. 731752, Complaint (Cal. S.Ct. May 27, 1993) (PX2070). The trial court ruled for the insurers, holding, inter alia, that Lockheed's indirect recovery of response costs through government contracts triggered the " government reimbursement exclusion" contained in the policies, and thus, the insurers were not required to defend or indemnify Lockheed. Procter v. Lockheed Corp., Case No. 731752, Statement of Decision Re: Phase II at 65-79 (Cal. S.Ct. Oct. 27, 2003) (PX2073). Prior to the entry of judgment, Lockheed sought declaratory relief in federal court to enjoin the state court's preliminary ruling. In that action, the government filed an application to intervene in support of Lockheed's position that indirect payments for response costs through government contracts does not reduce or eliminate insurance coverage under the government reimbursement exclusion. (PX2069 ¶ ¶ 25-26 (Porterfield Decl.).) The federal court dismissed Lockheed's action for lack of subject matter jurisdiction, and the state court entered final judgment on October 22, 2003. ( Id. ¶ ¶ 27-28.) Lockheed immediately appealed, and on November 22, 2005, the California Court of Appeal affirmed the trial court's decision. See Lockheed Corp. v. Cont'l Ins. Co., 134 Cal.App.4th 187, 35 Cal.Rptr.3d 799 (Cal. Ct. App. 2005). The Supreme Court of California denied Lockheed's petition for review on March 22, 2006, and the parties subsequently entered into a confidential settlement agreement whereby the insurers " bought back" the disputed policies. (Trial Tr. at 479 (Lockheed counsel); PX2069 ¶ 31 (Porterfield Decl.); PX2075-76.) The proceeds from that agreement were credited to the DiscOps Pool. (Trial Tr. at 1455-56 (Lockheed counsel).)

In 1995, Lockheed sued Seven W Enterprises, which at the time operated a manufacturing facility on a portion of the Redlands facility, for recovery of response costs incurred for the Redlands TCE plume. See Lockheed Martin Corp. v. Seven W Enterprises, 95-cv-6153, Complaint (C.D. Cal. Sept. 14, 1995). Pursuant to a confidential settlement in late 1996, Lockheed indemnified Seven W from future liability in exchange for a lump sum payment. Lockheed credited ...


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