No. 94-818 In the Supreme Court of the United States OCTOBER TERM, 1995 HERCULES, INCORPORATED, ET AL., PETITIONERS V. UNITED STATES OF AMERICA ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT BRIEF FOR THE UNITED STATES DREW S. DAYS, III Solicitor General FRANK W. HUNGER Assistant Attorney General PAUL BENDER Deputy Solicitor General EDWARD C. DuMONT Assistant to the Solicitor General DAVID S. FISHBACK ALFRED MOLLIN MICHAEL T. McCAUL BURKE M. WONG Attorneys Department of Justice Washington, D.C. 20530 (202)514-2217 ---------------------------------------- Page Break ---------------------------------------- QUESTION PRESENTED Whether military supply contracts between petitioners and the United States included an implied-in-fact obliga- tion under which petitioners are entitled to reimbursement by the United States for costs incurred in litigating and settling product liability claims brought by third parties. (I) ---------------------------------------- Page Break ---------------------------------------- Table of Contents Opinions below . . . . 1 Jurisdiction . . . . 1 Statutory provisions involved . . . . 2 Statement . . . . 3 Summary of argument . . . . 11 Argument: I. The government never made or breached a promise that its orders for Agent Orange would not give rise to product liability lawsuits brought by third parties . . . . 13 A. No court has recognized an implied warranty that government contract specifications are free from "defects" unrelated to the cost or difficulty of performance under the contract . . . . 13 B. This Court should not create an implied war- ranty of the sort sought by petitioners . . . . 17 C. The government contractor defense addresses the situation of military contractors in a manner that protects both the government's tort immunities and the legitimate interests of manufacturers and tort plaintiffs . . . . 20 1. The contours of the government contrac- tor defense . . . . 21 2. Recognition of an implied warranty in the circumstances of this case would be both redundant and counterproductive . . . . 24 3. Petitioners' objections to reliance on the government contractor defense do not justify the result they seek in this case . . . . 26 D. Petitioners could not show that the govern- ment breached any warranty that might be implied . . . . 31 (III) Page ---------------------------------------- Page Break ---------------------------------------- IV Argument-Continued: Page II. The Defense Production Act does not establish an implied agreement to indemnify government contractors. . . .34 A. Section 707 of the DPA shields contractors only from liability to customers whose orders are displaced or delayed by the priority ac- corded government orders under Section 101 . . . . 34 B. Whatever the proper scope of Section 707, it creates no implied contractual indemnity by the government . . . . 38 Conclusion . . . . 43 TABLE OF AUTHORITIES Cases: "Agent Orange" Product Liability Litigation, In re: 506 F. Supp.762(E.D.N.Y.1980) . . . . 3, 4, 28 565 F. Supp.1263(E.D.N.Y.1983 ) . . . . 4, 28 580 F. Supp. 1242 (E.D.N.Y. 1984), manda- mus denied, 733 F.2d 10, appeal dismissed, 745 F.2d 161 (2d Cir. 1984) . . . . 5, 29 597 F. Supp. 740 (E.D.N.Y. 1984), aff'd, 818 F.2d 145 (2d Cir. 1987), cert. denied, 484 U.S. 1OO4 (1988) . . . . 4, 5, 6, 28, 29, 32, 36, 38, 39 611 F. Supp. 1221 (E.D.N.Y. 1985), aff'd in part, rev'd in part, 818 F.2d 204 (2d Cir. 1987) . . . . 7 611 F. Supp. 1223 (E.D.N.Y. 1985), aff'd,818 F.2d 187 (2d Cir. 1987), cert. denied, 487 U.S. 1234 (1988) . . . . 6-7, 22, 28, 33 611 F. Supp. 1396 (E. D.N.Y. 1985), aff'd in part, rev'd in part, 818 F.2d 179 (2d Cir. 1987), cert. denied, 487 U. S. 1234 (1988 ). . . . 6 818 F.2d l45 (2d Cir. 1987), cert. denied, 484 U.S. 1004 (1988) . . . . 5, 6, 28, 33 818 F.2d 187 (2d Cir.1987), cert. denied, 487 U.S. 1234 (1988) . . . . 22, 28 818 F.2d 194 (2d Cir.1987) . . . . 21 818 F.2d 204 (2d Cir.1987) . . . . 18-19 , 20, 24, 28 8181 F.2d 210 (2d Cir.1987), cert. denied, 484 U.S. 1004 (1988) . . . . 21 ---------------------------------------- Page Break ---------------------------------------- v Cases-Continued: Page Aircraft Crash Litigation, Frederick, Maryland, May 6, 1981, In re, 752 F. Supp. 1326 (S.D. Ohio 1990), aff'd sub nom. Darling V. Boeing Co., 935 F.2d 269 (6th Cir. 1991) . . . . 38 All Maine Asbestos Litigation, In re: 575 F. Supp. 1375 (D. Me. 1983) . . . . 27 581 F. Supp. 963 (D. Me. 1984), aff'd, 854 F.2d 1328 (Fed. Cir. 1988) . . . . 14 Alyeska Pipeline Service Co. V. Wilderness Society, 421 U.S. 240 (1975) . . . . 30 American Legion V. Derwinski, 54 F.3d 789 (D.C. Cir. 1995) . . . . 33 Assumption by Government of Contractor Liabil- ity to Third Persons-Reconsideration, In re, 62 Comp. Gen. 361 (1983) . . . . 39-40 Atlas Corp. v. United States, 895 F.2d 745 (Fed. Cir. 1990) . . . . 14 Baltimore & O.R.R. V. United States, 261 U.S. 592 (1923) . . . . 14 Boruski V. United States, 803 F.2d 1421 (7th Cir. 1986) . . . . 27, 30 Boyle United Technologies Corp., 487 U.S. 500 (1988) . . . . l9, 22, 23, 24, 25, 37, 41 Bynum v. FMC Corp., 770. F.2d 556 (5th Cir. 1985), . . . . 27, 30 California-Pacific Utilities Co. V. United States, 194 ct. cl. 703 (1971) . . . . 39 Casabianca V. Casabianca, 428 N.Y.S.2d 400 (Sup. Ct. 1980) . . . . 27, 30 Dalehite V. United States, 346 U.S. 15 (1953) . . . . 21 Eastern Air Lines, Inc. V. McDonnell Douglas Corp., 532 F.2d 957 (5th Cir. 1976) . . . . 38 Feres V. United States, 340 U.S. 135 (195(3) . . . . 18, 21 GAF Corp. V. United States, 932 F.2d 947 (Fed. Cir. 1991), cert. denied, 502 U.S." 1071 (1992) . . . . 17 Hansen V. Johns-Manville Prods. Corp., 734 F.2d 1036 (5th Cir. 1984), cert. denied, 470 U.S. 1051 (1985) . . . . 27 Hatzlachh Supply Co. V. United States, 444, U.S. 460 (1980) . . . . 14 ---------------------------------------- Page Break ---------------------------------------- VI Cases-Continued: Page Helene Curtis Indus., Inc. v. United States, 312 F.2d 774 (Ct. Cl. 1963) . . . . 17 Hollerbach V. United States, 233 U.S. 165 (1914 ). . . . 42 Ivy V. Diamond Shamrock Chemicals Co. (In re "Agent Orange" Product Liability Litigation), 996 F.2d 1425 (2d Cir. 1993), cert. denied, 114 S. Ct. 1125 (1994) . . . . 28,33 Izumi Seimitsu Kogyo Kabushiki Kaisha V. U.S. Philips Corp., 114 S. Ct. 425 (1993) . . . . 17 Johns-Manville Corp. V. United States, 12 Cl. Ct. 1 (1987), vacated, 855 F.2d 1571 (Fed. Cir. 1988) . . . . 39 Johns-Manville Sales Corp. V. United States, 622 F. Supp. 443 (N.D. Cal. 1985) . . . . 41 Kleemann V. McDonnell Douglas Corp., 890 F.2d 698 (4th Cir. 1989), cert. denied, 495 U.S. 953 (1990) . . . . 20 Koutsoubos V. Boeing Vertol, 755 F.2d 352 (3d Cir.), cert. denied, 474 U.S. 821 (1985) . . . . 30 Laburnum Construction Corp. V. United States, 325 F.2d 451 (Ct. Cl. 1963) . . . . 16 Landgraf V. McDonnell Douglas Helicopter Co., 993 F.2d 558 (6th Cir.), cert. denied, 114 S. Ct. 553 (1993) . . . . 30 Lewis V. Babcock Indus., Inc., 985 F.2d 83 (2d Cir.), cert. denied, 113 S. Ct. 3041 (1993) . . . . 30 Lockheed Aircraft Corp. V. Unitcd States, 460 U.S. 190 (1983) . . . . 19 Lopez v. A.C. & S., Inc., 858 F.2d 712 (Fed. Cir. 1988), cert. denied, 491 U.S. 904 (1989) . . . . 14,17 Luria Brothers & Co. V. United States, 369 F.2d 701 (Ct. Cl. 1966) . . . . 16 Michigan Wisconsin Pipeline Co. V. Williams- McWilliams Co., 551 F.2d 945 (5th Cir. 1977). 42 Mitchell V. Lone Star Ammunition, Inc., 913 F.2d 242 (5th Cir. 1990) . . . . 27 Nicholson v. United Technologies Corp., 697 F. Supp. 598 (D. Corm. 1988) . . . . 30 Ordnance Research, Inc. V. United States, 609 F.2d 462 (Ct. Cl. 1979) . . . . 16 ---------------------------------------- Page Break ---------------------------------------- VII Cases-Continued: Poorvu v. United States, 420 F.2d 993 (Ct. Cl. 1970). . . .15 Related Asbestos Cases, In re, 543 F. Supp. 1142 (N.D. Cal. 1982) . . . . 27 Ryan Stevedoring Co. V. Pan-Atlantic Steamship COrP., 350 U.S. 124 (1956) . . . .41 Sanner V. Ford Motor Co., 364 A.2d 43 (Super. Ct. Law Div. 1976), aff'd, 381 A.2d 805 (Super. Ct. App. Div. 1977), cert. denied, 384 A.2d 846 (N.J. 1978) . . . . 27, 30 Sea-Land Serv., Inc. v. United States 919 F.2d 888 (3d Cir. 1990), cert. denied, 500 U.S. 941 (1991) . . . .19, 22 Smith V. Xerox Corp., 866 F.2d 135 (5th Cir. 1989) . . . . 30 Space Age Eng'g, Inc. v. United States, 4 Cl. Ct. 739 (1984) . . . . 41 Stencel Aero Eng'g Corp. V. United States, 431 U.S. 666 (1977) . . . . l8, 22, 30 Stout V. Borg-Warner Corp., 933 F.2d 331 (5th Cir.), cert. denied, 502 U.S. 981 (1991) . . . . 30 Sutton V. United States, 256 U.S. 575 (1921) . . . . 40 Tate V. Boeing Helicopters, 55 F.3d 1150 (6th Cir. 1995) . . . . 30 Thigpen v. Roberts, 468 U.S. 27 (1984) . . . . 31 Tillett v. J.I. Case Co., 756 F.2d 591 (7th Cir. 1985) . . . . 30 Travelers Insurance Co. v. United States, 493 F.2d 881 (3d Cir. 1974) . . . . 42 United States V. Gaubert, 499 U.S. 315 (1991) . . . . 21 United States V. Johnson, 481 U.S. 681 (1987 ). . . . 21 United States V. Spearin, 248 U.S. 132 (1918) . . . .14, 15 United States V. Vertac Chemical Corp., 46 F.3d 803 (8th Cir.), cert. denied, 115 S. Ct. 2609 (1995) . . . . 20, 36, 38 Yearsley v. W.A. Ross Constr. Co., 309 U.S. 18 (1940) . . . . 27 Statutes, regulations and rule: Anti-Deficiency Act, 31 U.S.C. 1341 (1988 & Supp. V 1993) . . . .. 2, 8 ---------------------------------------- Page Break ---------------------------------------- VIII Statutes, regulations and rule-Continued: Page 31 U.S.C. 1341(a) (1) (B) (1988 & Supp. V 1993) . . . . 18,39 Comprehensive Environmental Response, Com- pensation, and Liability Act of 1980, 42 U.S.C. 9601 et seq. . . . 18 42 U.S.C. 9619 (1988& SUPP. V 1993) . . . . 18 Defense Production Act of 1950, 50 U.S.C. App. 2061 et seq . . . .7 101, 50 U.S.C. APP. 2071 (1988 & Supp. V 1993) . . . . l3, 35 101(a), 50 U.S.C. App. 2071 (a) (1988 & Supp. v 1993) . . . . 2, 10,35 101(a) (1), 50 U.S.C. App. 2071 (a) (1) (1988 & Supp. V 1993) . . . . 34 707, 50 U.S.C. APP. 2157 . . . . passim Federal Employees' Compensation Act, 5 U.S.C. 8116 (c) . . . . 19 Federal Tort Claims Act, 28 U.S.C. 1346(b) and 2671 et seq. . . . 19 28 U.S.C. 1346 (b) . . . . 21 28 U.S.C. 2680(a) . . . . 21 Second War Powers Act of 1942, ch. 199, 301, 56 Stat. 177 . . . . 37 42 U.S.C. 2210 (d) . . . . 18 42 U.S.C. 2210 (h) . . . . 18 50 U.S.C. 1431 . . . . 18, 40 Exec. Order No. 10,789, 3 C.F.R. 72 (Supp. 1958) (reprinted at 50 U.S.C. 1431 note) . . . . 40 Armed Servs. Procurement Reg. No. 43 (1959), 32 C.F.R. Pt. 17 (Supp. 1960) . . . . 40 32 C.F.R. 17.206 (b) . . . .40 Fed. R. Civ. P. 54 (6) . . . . 4 Miscellaneous: H.R. Conf. Rep. No. 3042, 81st Cong., 2d Sess. (1950) . . . . 37 H.R. Rep. No. 2759, 81st Cong., 2d Sess. (1950) . . . . 37 S. Rep. No. 2250, 81st Cong., 2d Sess. (1950) . . . . 37 S. Rep. No. 1599, 82d Cong., 2d Sess. (1952) . . . . 37 ---------------------------------------- Page Break ---------------------------------------- In the Supreme Court of the United States OCTOBER TERM, 1995 No. 94-818 HERCULES, INCORPORATED, ET AL., PETITIONERS v. UNITED STATES OF AMERICA ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT BRIEF FOR THE UNITED STATES OPINIONS BELOW The opinion of the court of appeals (Pet. App. la-46a) is reported at 24 F.3d 188. The opinions of the United States Claims Court (now the Court of Federal Claims) (Pet. App. 47a-80a, 82a-115a) are reported at 25 Cl. Ct. 616 and 26 CL Ct. 17. JURISDICTION The judgment of the court of appeals was entered on May 4, 1994. Petitions for rehearing were denied on July 7, 1994. Pet. App. 117a-120a. On September 26, 1994, the Chief Justice extended the time within which to file a petition for a writ of certiorari to and including November 4, 1994, and the petition was filed on that date. The jurisdiction of this Court rests on 28 U.S.C. 1254(1). (1) ---------------------------------------- Page Break ---------------------------------------- 2 STATUTORY PROVISIONS INVOLVED Section 101 (a) of the Defense Production Act of 1950, 50 U.S.C. App. 2071 (a) ( 1988 & Supp. V 1993), pro- vides in pertinent part: The President is hereby authorized ( 1 ) to require that performance under contracts or orders (other than contracts of employment) which he deems nec- essary or appropriate to promote the national defense shall take priority over performance under any other contract or order, and, for the purpose of assuring such priority, to require acceptance and performance of such contracts or orders in preference to other contracts or orders by any person he finds to be capable of their performance. Section 707 of the Defense Production Act of 1950, 50 U.S.C. App. 2157, provides: No person shall be held liable for damages or pen- alties for any act or failure to act resulting directly or indirectly from compliance with a rule, regula- tion, or order issued pursuant to this Act * * *, notwithstanding that any such rule, regulation, or order shall thereafter be declared by judicial or other competent authority to be invalid. No person shall discriminate against orders or contracts to which pri- ority is assigned or for which materials or facilities are allocated under title I of this Act [50 U.S.C. App. 2071-2076] or under any rule, regulation, or order issued thereunder, by charging higher prices or by imposing different terms and conditions for such orders or contracts than for other generally com- parable orders or contracts, or in any other manner. The Anti-Deficiency Act, 31 U.S.C. 1341 ( 1988 & Supp. V 1993), provides in pertinent part: (a) (1) An officer or employee of the United States Government * * * may not- ---------------------------------------- Page Break ---------------------------------------- 3 (A) make or authorize an expenditure or obligation exceeding an amount available in an appropriation or fund for the expenditure or obligation; or (B) involve [the] government in a contract or obligation for the payment of money before an appropriation is made unless authorized by law. STATEMENT 1. Between 1964 and 1968 the United States pur- chased substantial quantities of the defoliant Agent Orange from several herbicide manufacturers, including petitioners. Pet. App. 3a; C.A. App. 464-482, 573-618. The defoliant was produced in accordance with govern- ment specifications and was used, as the manufacturers were aware that it would be, in lighting the Vietnam War. See Pet. App. 49a-50a, 84a-85a. The procurement con- tracts contained no warranty or indemnification provi- sions. Id. at 19a n.8. Depending on how it is produced, Agent Orange may contain a by-product known as dioxin.1. Pet. App. 3a. Beginning in 1979, a number of Vietnam veterans and their families sued the manufacturers of Agent Orange, including petitioners, seeking compensation for injuries allegedly caused by exposure to the defoliant, and in particular to dioxin, during the war. The manu- facturers, in turn, filed a variety of third-party claims against the government. See In re "Agent Orange" Prod- uct Liability Litigation, 506 F. Supp. 762, 769 (E.D.N.Y. 1. The courts below made no findings about the emergence, over time, of concerns about the possible hazards of dioxin. There is no question, however, that the larger manufacturers of Agent Orange developed considerable knowledge in that regard. Indeed, petitioner Hercules altered its production methods to eliminate dioxin following a meeting called by Dow Chemical Company in 1966. The government was not informed of that meeting. Pet. App. 4a, 49a-50a & n.5. ---------------------------------------- Page Break ---------------------------------------- 4 1980). Despite the ensuing litigation and years of in- vestigation and controversy, it has never been established that exposure to dioxin in Agent Orange caused the vari- ous injuries alleged by the plaintiffs in those actions. See, e.g., Pet. App. 7a-8a, 48a n.2, 64a-65a, 83a n.2, 97a-98a; In re "Agent Orange" Product Liability Litiga- tion, 597 F. Supp. 740, 782-795 (E.D.N.Y. 1984) (opinion approving settlement). The Agent Orange cases were consolidated in the Eastern District of New York. In 1980 Judge Pratt dis- missed all third-party claims against the United States, ruling that contract claims were not properly before the court, and that tort claims were barred by principles of governmental immunity. In re "Agent Orange", 506 F. Supp. at 769-782. The same decision suggested that the private defendants might be protected by the "gov- ernment contractor] defense," but declined to enter sum- mary judgment on that ground pending discovery on the relevant factual issues. Id. at 792-797. The government contractor defense generally shields contractors from tort liability for injuries caused by products manufactured for the government so long as the contractor followed de- tailed government specifications, knew no more than the government about any hazards involved, and did not withhold from the government any information relevant to those hazards. See, e.g., Pet. App. 5a-6a, 21a-22a. In 1983 Judge Pratt (now sitting by designation, after his appointment to the court of appeals in 1982) granted motions for summary judgment in favor of petitioners and two other manufacturers, based in large part on the government contractor defense. Pet. App. 4a-6a; In re "Agent Orange" Product Liability Litigation, 565 F. Supp. 1263, 1275 (E.D.N.Y. 1983). He deferred entry of final judgments, however, pending final action on class certification. See 565 F. Supp. at 1277; see also Fed. R. Civ. P. 54(b). Shortly thereafter Judge Pratt withdrew from presiding over the proceedings, and the case was reassigned to Chief Judge Weinstein. ---------------------------------------- Page Break ---------------------------------------- 5 Chief Judge Weinstein reconsidered and denied peti- tioners' motions for summary judgment, and set the case for trial. See Pet. App. 7a, 36a n.2. Shortly thereafter, at the manufacturers' request, he also reconsidered Judge Pratt's 1980 order dismissing the manufacturers' third- party claims against the government. He reinstated those claims in part, and suggested that he might submit all of them to an advisory jury. In re "Agent Orange" Product Liability Litigation, 580 F. Supp. 1242, 1256 (E.D.N.Y. 1984). On the eve of trial, the private parties entered into a settlement calling for a total payment of $180 million, to which each defendant contributed based on its share of the total volume of Agent Orange produced, adjusted for the level of dioxin in its product. Pet. App. 7a. The United States was not a party to the settlement, took no part in the settlement discussions, and expressed no view on the applicability of the government contractor defense in the settled cases. See id. at 114a-115a; In re "Agent Orange" Product Liability Litigation, 818 F.2d 145, 160 (2d Cir. 1987), cert. denied, 484 U.S. 1004 ( 1988). Petitioner Hercules' share of the settlement payment was approximately $18.8 million; petitioner Thompson's share was approximately $3.1 million. Pet. App. 7a. The district court issued an extensive opinion approv- ing and justifying the settlement. In re "Agent Orange", 597 F. Supp. at 740-898. The court emphasized the in- adequacy of proof that Agent Orange actually harmed any of the plaintiffs (id. at 775-795, 782, 816-817), and discussed the availability of the government contractor defense as a potential bar to the manufacturers' liability (id. at 845-850).2. In affirming the settlement, which it characterized as "essentially a payment of nuisance value" by the defendants, the Second Circuit observed that the ___________________(footnotes) 2. The court rejected the manufacturers' argument that recovery was barred by Section 707 of the Defense Production Act, 50 U.S.C. App. 2157. In re "Agent Orange", 597 F. Supp. at 843-845. ---------------------------------------- Page Break ---------------------------------------- 6 district court "clear[ly] * * * viewed the plaintiffs' case as so weak as to be virtually baseless." 3. In re "Agent Orange", 818 F.2d at 151, 171, aff'g 597 F. Supp. 740 (E.D.N.Y. 1984). Nearly 300 plaintiffs opted out of the Agent Orange settlement. Pet. App. 7a. Chief Judge Weinstein sub- sequently granted summary judgment against these non- Settling plaintiffs, "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," and alternatively because "the defendant companies were insulated from liability by the government contractor defense." 4. Id. at 8a, citing In re ___________________(footnotes) 3. In characterizing the settlement, the court of appeals noted that while the absolute amount involved "seems extraordinary," the suit involved some 240,000 potential claimants alleging a variety of rela- tively serious injuries. 818 F.2d at 151; see also id. at 181-182. The settlement provided for cash payments to only a minority of claimants; the estimated maximum individual payments were ap- proximately $12,000 (over ten years) for totally disabled claimants and $3,000 for survivors of deceased claimants. See id. at 151; In re "Agent Orange" Product Liability Litigation, 611 F. Supp. 1396, 1418, 1421 (E.D.N.Y. 1985). The Agent Orange Veterans' Payment Program created by the settlement has advised us in- formally that it received approximately 100,000 claims for pay- ment under the settlement, of which approximately 45,000 have been granted and approximately 35,000 remain pending. 4. During the opt-out litigation, the United States argued that the applicability of the government contractor defense in those cases should not be resolved on a pending motion for summary judgment. See J.A. 34-71; see also Pet. App. 104a, 113a-115a. The government did not question the availability of the defense in ap- propriate circumstances. Rather, the government argued (i) that the manufacturers, which had convinced the district court to rein- state their claims against the government, could not at the same time invoke the government contractor defense, which rests on the came principles of immunity invoked by the government in opposi- tion to the manufacturers' claims (J.A. 36-39) ; (ii) that the con- tractor defense should not apply to claims of negligent manufac- ture of defective goods under government contracts (J.A. 52-57) ; ---------------------------------------- Page Break ---------------------------------------- 7 "Agent Orange" Product Liability Litigation, 611 F. Supp. 1223, 1259-1260, 1263 (E.D.N.Y. 1985). In re- lated rulings, the district court and the Second Circuit also finally rejected all third-party tort claims by the defendant manufacturers, including petitioners, against the government. See In re "Agent Orange" Product Li- ability Litigation, 611 F. Supp. 1221, 1222-1223 (E.D.N.Y. 1985), aff'd in part, rev'd in part, 818 F.2d 204 (1987). 2. In 1990, each petitioner filed a breach-of-contract action against the United States in the Claims Court (now the Court of Federal Claims), seeking reimburse- ment for the costs of litigating and settling the Agent Orange litigation. See Pet. App. 9a; J.A. 5-32. Both petitioners alleged that the government had made and breached an implied warranty of specifications with re- spect to Agent Orange. J.A. 14-15, 29; see Pet. App. 9a-10a. Petitioner Thompson also contended that the government had an implied obligation to indemnify Thompson because Thompson's manufacture of Agent Orange was compelled by the government under the Defense Production Act of 1950 (DPA), 50 U.S.C. App. 2061 et seq. J.A. 29-30; Pet. App. 10a. 5. ___________________(footnotes) and (iii) that there were remaining factual issues, requiring at least further discovery, with respect to each element. of the defense. Those factual issues included whether the government "established the specifications" for Agent Orange with respect to the presence of dioxin (J.A. 39-41, 57-64) ; whether the Agent Orange produced by the various manufacturers met the government's specifications (J.A. 64) ; and whether particular manufacturers were aware of possible product hazards of which they failed to inform the gov- ernment (J.A. 65-71). 5. Both petitioners also alleged breach of an implied obligation to divulge superior knowledge of intended uses and risks. In addi- tion, petitioner Hercules alleged breach of implied obligations to act in good faith and to exercise due care in the use of Agent Orange. Pet. App. 9a-10a. The courts below rejected those conten- tions. Id. at 15a-16a, 25a-27a, 56a-60a, 91a-92a. Petitioners did not renew those claims in their petition for certiorari. See Pet. i, 10-19; U.S. Br. in Opp. 5 n.3, 10 n.7; see also note 11, infra. ---------------------------------------- Page Break ---------------------------------------- 8 The Claims Court granted summary judgment in favor of the United States." The court concluded (Pet. App. 64a-68a, 96a-99a) that, even if a warranty of specifica- tions were implied, petitioners could not prove the ex- istence of damages caused by a defect in the government's specifications because prior proceedings had established that the tort plaintiffs could not show that they had been harmed by Agent Orange. The court also held (id. at 67a-68a, 99a-100a) that there could have been no breach of any warranty of specifications "because the manu- facturer, under the circumstances alleged, was protected from liability by the Government contractor defense." Id. at 68a, 100a. Moreover, to the extent that peti- tioners' claims depended on implied indemnities in their government contracts, they were barred by the Anti- Deficiency Act, 31 U.S.C. 1341 (1988 & Supp. V 1993), which provides that officers and employees of the United States may not normally authorize expenditures in ex- cess of funds previously appropriated by Congress. Pet. App. 78a-79a, 102a-103a. The Claims Court also rejected (Pet. App. 100a-102a) petitioner Thompson's argument that a contractual in- demnity should be implied on the basis of the Defense Production Act.7. Section 707 of that Act, 50 U.S.C. App. 2157, provides in part that "[n]o person shall be held liable for damages or penalties for any act or failure to act resulting directly or indirectly from compliance with a rule, regulation, or order issued pursuant to [the DPA]." The court held that Section 707 provides a de- ___________________(footnotes) 6. While petitioners correctly note (Br. 10) that no discovery was taken in the Claims Court actions, they fail to add that the parties presented to the court undisputed documents and testimony from the extensive discovery conducted in the Agent Orange tort litigation, See, e.g., C.A. App. 263-421. 7 Petitioner Hercules did not rely on the DPA before either the Claims Court or the Federal Circuit. See Pet. App. 14a, 28a; J.A. 14-19 (complaint). ---------------------------------------- Page Break ---------------------------------------- 9 fense to actions claiming breach of non-government con- tracts adversely affected by the priority accorded to gov- ernment orders under the DPA, not an indemnity for tort damages paid to third parties injured by products manu- factured under government contracts. Pet. App. 101a. Finally, the court determined that petitioners' claims were fundamentally inconsistent with the- government con- tractor defense. Pet. App. 68a-78a, 104a-115a. The court agreed with the government (id. at 75a-76a, 110a- 11 la) that the purpose of the defense-to insulate gov- ernment procurement decisions from considerations of potential future tort liability-would be subverted by allowing a contractor to require government reimburse- ment of tort damages that the contractor could have avoided by invoking the defense. The court also agreed (id. at 76a-77a, 11la-l13a) that petitioners could have invoked the government contractor defense to avoid all liability in the Agent Orange class action, just as they invoked it to avoid liability to the plaintiffs who opted out of the class-action settlement. 3. The court of appeals consolidated petitioners' cases and affirmed. Pet. App. 1a-33a. The court agreed (id. at 18a-19a & n.8 ) that scientific proof of dioxin-related injuries was "sparse," and that, in any event, "the facts would have to be stretched" to conclude that the govern- ment had made and breached any implied warranty that would permit petitioners to recover their litigation and settlement costs. The court chose to rest its decision, however, on the ground that petitioners "cannot prove that their damages were caused by the government's alleged breach * * * because [petitioners] were pro- tected from liability to the Agent Orange plaintiffs by the government contractor defense." Id. at 19a-20a. Ob- serving that petitioners "successfully argued on three separate occasions that the government contractor defense shielded them from liability for the veterans' tort claims," the court concluded that "there can be no serious doubt ---------------------------------------- Page Break ---------------------------------------- 10 that had the class action Agent Orange litigation pro- ceeded to termination, no liability would have been im- posed" against them. Id. at 23a. Petitioners made a voluntary decision to settle rather than to press their defense in litigation; their contributions to the settlement fund resulted from that decision, not from any breach of a contractual duty by the government. Ibid. The court of appeals also rejected (Pet. App. 28a- 33a) petitioner Thompson's argument that Section 707 of the Defense Production Act created an implied contractual commitment by the government to indemnify DPA con- tractors for losses arising from tort suits brought by third parties. Like the Claims Court (and the district court that approved the class action settlement ), the court con- cluded (Pet. App. 33a) that Section 707's protection "extends no further than the risk imposed by" Section 101 (a) of the DPA, which authorizes the President to require that performance under defense contracts "take priority over performance under any other contract or order." 50 U.S.C. App. 2071 (a) ( 1988 & Supp. V 1993 ). The court thus interpreted Section 707 to pro- vide only "a defense for a DPA contractor against a suit by a non-government customer in the event that the DPA contractor is forced to breach another contract to fulfill the government's requirements." Pet. App. 29a. "Ac- cordingly, invocation of the DPA by the government * * * did not give rise to an implied-in-fact contractual obligation * * * to indemnify Thompson for its contribu- tion to the Agent Orange settlement fund." Id. at 33a. Judge Plager dissented. Pet. App. 34a-46a. In his view, the uncertain scope of the government contractor defense at the time of the Agent Orange settlement under- mined the majority's conclusion that petitioners suffered no damages because they would have faced no liability if they had refused to settle. Id. at 35a-40a. Judge Plager would also have read Section 707 of the DPA as a gen- eral "hold harmless" provision, under which the govern- ---------------------------------------- Page Break ---------------------------------------- 11 ment was required to indemnify petitioner Thompson for any damages, including tort liability to third parties, aris- ing out of Thompson's production of Agent Orange. Pet. App. 43a 45a. Believing that there were "a number of unresolved fact and law issues," Judge Plager would have remanded the case with instructions to hold a full trial. Id. at 40a. SUMMARY OF ARGUMENT This is an action for breach of warranty. As the Claims Court properly recognized, however, there was never any warranty that would have allowed for recovery in the circumstances of this case; and if there had been, petitioners could not have proved that it was breached. The courts below therefore properly entered judgment for the government. 1. Petitioners concede that their contracts with the government contained no express warranty or indemnity provisions. They therefore rely on a "warranty of safe design" that they assert was "implied in fact" in the con- tractual relationship. That claim is patterned on the principle that, when the government provides detailed specifications to be followed by a contractor, it is pre- sumed to warrant that those specifications do not contain latent errors or defects that will make performance im- possible or more difficult than the contractor would rea- sonably have anticipated. No court, however, has ever extended that theory beyond the realm of increased diffi- culties or expenses in contract performance to find that the government warrants that its specifications will pro- duce a product free of any alleged "defect" that might be the basis for a tort claim by a third party. Nor is there any reason for this Court to adopt such an exten- sion. The implied warranty that petitioners propose wouId not be a reasonable construction of the parties' intentions, and it would severely undercut the govern- ---------------------------------------- Page Break ---------------------------------------- 12 ment's unquestioned immunity from tort liability for its design decisions or other discretionary functions. Petitioners contend that, if the Court does not adopt the rule they advocate, contractors may be "compelled" to manufacture goods to government specifications, and then unfairly be left to bear what should be the govern- ment's liability if those specifications turn out to be "de- fective." Any such concern is adequately addressed by the government contractor defense, which protects con- tractors from unwarranted tort liability. There is no rea- son to supplement that tort-law doctrine with a new implied contractual warranty. Such a warranty would be redundant, and it would undermine the operation and goals of the government contractor defense. Finally, even if this Court were to recognize an "im- plied warranty" of the sort petitioners seek, it would not avail petitioners in this case. As the Claims Court cor- rectly held, petitioners cannot show that there was any defect in the specifications provided by the government for the manufacture of Agent Orange. Those specifi- cations called for petitioners to combine, in particular proportions and concentrations, herbicidal compounds that petitioners already manufactured for the commercial market. Nothing in the government's orders controlled the way petitioners produced those compounds, or re- quired that they contain dioxin. (Indeed, petitioner Hercules eventually took unilateral steps that succeeded in eliminating dioxin from its Agent Orange. ) Moreover, after 16 years of litigation, every court that has con- sidered the matter has agreed with petitioners that there is no proof that dioxin in Agent Orange caused any of the injuries claimed by the plaintiffs in the tort litigation that petitioners chose to settle. The lack of any proof of defect or causation would be fatal to petitioners' con- tentions here, even if a warranty were to be implied. 2. Petitioner Thompson also contends that this Court should imply a warranty or indemnity extrapolated from Section 707 of the Defense Production Act of 1950 ---------------------------------------- Page Break ---------------------------------------- 13 (DPA), 50 U.S.C. App. 2157. Section 101 of the DPA permits the United States to require that manufacturers sell their products to the government for military use, even if those sales prevent the manufacturer from honor- ing orders from or contracts with its commercial cus- tomers. Section 707 protects suppliers from liability for "damages or penalties for any act or failure to act result- ing directly or indirectly from compliance with" such requirements. Every court that has interpreted Section 707 has agreed with the courts below that its protection extends only to precluding liability for breaches of contractual or other duties to nongovernment customers whose orders are displaced or delayed by compliance with a DPA order. Moreover, whatever the scope of Section 707 as a defense to actions against a government supplier, noth- ing in the DPA suggests that it was intended to create a right of indemnity against the government for any lia- bility the supplier might incur despite the existence of that defense. ARGUMENT I. THE GOVERNMENT NEVER MADE OR BREACHED A PROMISE THAT ITS ORDERS FOR AGENT ORANGE WOULD NOT GIVE RISE TO PRODUCT LIABILITY LAWSUITS BROUGHT BY THIRD PARTIES A. No Court Has Recognized An Implied Warranty That Government Contract Specifications Are Free From "Defects" Unrelated To The Cost Or Difficulty Of Performance Under The Contract This is an action for breach of contract. Petitioners have never maintained, however, that their contracts with the government for the supply of Agent Orange included any express warranty or indemnity provisions. See, e.g., ---------------------------------------- Page Break ---------------------------------------- 14 Pet. Br. 16-17; Pet. App. 19a n.8.8. They argue instead (Br. 17-31) that their supply contracts included an im- plied "warranty of safe design" (Br. 17) that the gov- ernment breached by specifying the basic chemical com- position of Agent Orange (see Br. 13). Petitioners allege, as they must, that that warranty is one implied "in fact."9. They therefore bear the burden of showing that such a warranty represents a reasonable reflection of the parties' original intentions-i.e., that recognizing it would "simply enforce[] the agreement between the par- ties" (Pet. Br. 29). Compare Baltimore & 0.R.R. v. United States, 261 US. 592,597-598 (1923 ). Petitioners base their argument on a line of cases beginning with this Court's decision in United States v. Spearin, 248 U.S. 132 (1918). Spearin involved a con- tractor who agreed to build a dry-dock according to detailed plans provided by the Navy. The plans called for the contractor to relocate a sewer in a specific manner, which he did. An error in the Navy's plan of the existing sewer caused the relocation to be unsatisfactory, leading ___________________(footnotes) 8. Several of the contracts themselves are reproduced at pages 464-481 and 573-618 of the joint appendix filed in the court of appeals. Because the reproductions are often difficult to read, the best available copies of one contract with each petitioner have been separately lodged with the Court. Although bound under joint cover with the contracts, the extensive transcript of dis- covery proceedings in the Agent Orange tort litigation (which were not presented to the courts below in this case) were lodged by petitioners alone. 9. The Claims Court's jurisdiction to enforce contracts against the government extends only to obligations that are either express or implied in fact, and not to obligations that are "implied in law. " Hatzlachh Suppl y Co v. United States, 444 U.S. 460, 465 n.5 (1980) ; see also, e.g., Lopez v. A.C. & S., Inc., 858 F.2d 712, 714-715 (Fed. Cir. 1988), cert. denied, 491 U.S. 904 (1989) ; Atlas Corp. V. United States, YM F.2d 745, 754 (Fed. Cir. 1990) ; In re All Maine As- bestos Litigation, 581 F. Supp. 963, 972 (D. Me. 1984), aff'd mem., 854 F.2d 1328 (Fed. Cir. 1988) (Table). ---------------------------------------- Page Break ---------------------------------------- 15 to additional costs and a dispute over completion of the contract. Id. at 133-135. The contractor sued, and this Court upheld a judgment in his favor for costs and lost profits. Id. at 138-139. Noting that the con- tractor had no knowledge of the inaccuracy in the plans and that his independent investigation of the site was adequate under the circumstances (id. at 134135), the Court held that the government's "insertion [into the contract specifications] of the articles prescribing the char- acter, dimensions and location of the sewer imported a warranty that, if the specifications were complied with, the sewer would be adequate." Id. at 137. Spearin holds that, if the government provides detailed information or specifications on which it expects or re- quires a contractor to rely, if an error in those specifica- tions makes performance under the contract more difficult than the contractor reasonably anticipated, and if the government knew more than the contractor about the part of the specifications that proves to have been inaccurate, then a court may properly infer an agreement between the parties that the government would bear any resulting increase in the cost of performance. Later cases in the Spearin line, including all those cited by petitioners (Pet. Br. 17-18), have likewise always involved claims that an error or defect in the government's specifications led to some unforeseen problem in the performance of the con- tract itself. Thus, in Poorvu V. United States, 420 F.2d 993 (Ct. Cl. 1970), the government agreed to lease space in a building that would be built to government specifications. Against the advice of the government's architect, the plans did not include pilings to stop the building from settling. It later proved necessary to install the pilings. The Claims Court ruled that Spearin applied, and held the govern- ment responsible for the cost of the pilings. Id. at 999-1000. Although the expenses in question arose after ---------------------------------------- Page Break ---------------------------------------- 16 the completion of initial construction, they related directly to the adequacy of the building for which the government had originally contracted, and they were incurred by the contractor under a maintenance contract that was part of the original agreement. SimiIarly, in Luria Brothers & Co. v. United States, 369 F.2d 701, 707-708 (Ct. Cl. 1966), a contractor recovered damages when the course of construction dis- closed that the specified foundations were inadequate, re- quiring significant additional construction time and ex- pense. Laburnum Construction Corp. V. United States, 325 F.2d 451, 457-458 (Ct. Cl. 1963), likewise involved construction delays and overruns caused by deficient speci- fications. Ordnance Research, Inc. v. United States, 609 F.2d 462, 479-480 (Ct. Cl. 1979), involved extra costs of performance resulting from explosions that occurred unexpectedly during the production of igniters for fire bombs.10. In this case petitioners do not claim that they were damaged because some error in the government's specifi- cations made the manufacture of Agent Orange more difficult or expensive than they expected. Nor do they claim that such a defect caused the product, although properly manufactured, to be unacceptable to the gov- ernment. Instead, they argue that the government should ___________________(footnotes) 10. Petitioners cite language from Ordnance Research tO suggest that lower courts have recognized a `"warranty of safe design" that is relevant to the facts of this case. Pet. Br. 17-18. In con- text, however, that, language refers only to specifications that make the manufacturing process itself unsafe, making it more difficult "to produce the (desired product in a satisfactory manner," and thus leading to "additional costs of performance." Ordnance Re- search, 609 F.2d at 479; see also id. at 480 (rejecting distinction between design flaws that interfere with production and those that lead to unacceptable end product). Indeed, we note that al- though the explosions at issue in Ordnance Research took at least one life, the claim was not for tort damages, but for "delay and increased costs" involved in completing performance under the contract See id. at 464, 481. ---------------------------------------- Page Break ---------------------------------------- 17 indemnify them for the costs of litigating and settling tort suits by third parties who claimed to have been injured by the government's use of the Agent Orange that peti- tioners produced. As both the Claims Court and the Federal Circuit recognized (Pet. App. 18a-19a & n.8, 65a-66a, 98a-99a), accepting that argument would re- quire a substantial expansion of the Spearin doctrine.11. B. This Court Should Not Create An Implied War- ranty Of The Sort Sought By Petitioner As noted above (see note 9, supra), any warranty "im- plied" into a government contract must represent the sub- stance of the parties' actual agreement. The proposition that the government will bear the cost of performance delays or difficulties attributable to errors or latent flaws in its own specifications, and not caused by any fault on the part of the contractor, is a reasonable estimate of the parties' original mutual intentions. The rule that peti- tioners advocate, on the other hand, requires the conclu- ___________________(footnotes) 11. In addition to relying on Spearin, petitioners Separately State (Br. 31-33) a "superior knowledge" theory for recovery. The only case cited in support of that theory involved damages for difficulties encountered in production and attributable to material omissions that made "a Government specification * * * in its context * * * actively misleading." Helene Curtis Indus., Inc. v. United States, 312, F.2d 774, 778 (Ct. Cl. 1963). Helene Curtis relied (ibid.) on Spearin and it is not clear that there is any practical difference, for purposes of this case, between a "superior knowledge" theory and the requirement under Spearin that the government have known more than the contractor about the defective element of its specifica- tions. To the extent there is any difference, petitioners waived their separate "superior knowledge" claim by not presenting it in their petition. See Pet. i, 10-19; U.S. Br. in Opp. 5 n.3, 10 n.7; Izumi Seimitsu Kogyo Kabushiki Kaisha v. U.S. Philips Corp., 114 S. Ct. 425, 427 n.5 (1993). To the extent that the arguments are the same, they fail for the reasons given in the text. See also Pet. App. 15a-16a, 55a-57a, 90a-92a; Lopez V. A.C. & S., Inc., 858 F.2d at 717-718; see also GAF Corp. v. United States, 932 F.2d 947, 949 (Fed. Cir. 1991), cert. denied, 502 U.S. 1071 (1992). ---------------------------------------- Page Break ---------------------------------------- 18 sion that the government initially agreed to indemnify petitioners for any costs they might incur because of allegations made by third parties, whether or not ever proven, concerning product "defects''t hat might (as here) have nothing to do with the cost or difficulty of produc- tion required by the supply contract. That conclusion is an unlikely one.12It would, by con- tract, vitiate governmental tort immunities that Congress and this Court have been careful to preserve. For example. as the court of appeals observed (Pet. App. 19a n.8). under Feres V. United States, 340 U.S. 135 (1950), the government is immune from tort liability for injuries to members of the armed services incident to their military service. In Stencel Aero Eng'g Corp. v. United States, 431 U.S. 666 (1977), this Court relied on that immunity to prohibit contractors from bringing a tort suit against the government seeking indemnity or contribution for tort damages imposed because of their manufacture, under government specifications, of allegedly defective military equipment. Allowing such indirect recovery against the government would undermine Feres' prohibition of direct suits by service members. Id. at 673-674; see, e.g., In re ___________________(footnotes) 12 Express agreements to indemnify a government contractor for open-ended liabilities are rare. See pages 39-40 & n.23, infra. Indeed, without invoking some specific statutory authorization, gov- ernment agents would not have had the authority to agree to the indemnity urged by petitioners. Compare, e.g., 42 U.S.C. 2210(d) and (h) (indemnification of nuclear contractors) ; 42 U.S.C. 9619 (1988 & Supp. V 1993) (President "may agree to hold harmless and indemnify" certain "response action contractors]" under Compre- hensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA)); and 50 U.S.C. 1431 (President may enter into defense contracts without regard to most normal statutory restrictions) with the Anti-Deficiency Act, 31 U.S.C. 1341(a)(1) (B) (1988 & Supp. V 1993) (no officer or employee may commit the government to any "contract or obligation for the payment of money before an appropriation is made unless authorized by law") ; see also Pet. App. 78a-80a, 101a-103a. ---------------------------------------- Page Break ---------------------------------------- 19 "Agent Orange" Product Liability Litigation, 818 F.2d 204, 208 (2d Cir. 1987) (affirming dismissal of manu- facturers' third-party claims against the government). The same reasoning applies if direct government liability is precluded by an exemption, such as that for discretionary functions, under the Federal Tort Claims Act. See id. at 209; see also Sea-Land Serv., Inc. v. United States, 919 F.2d 888, 892-893 (3d Cir. 1990), cert. denied, 500 U.S. 941 ( 1991); cf. Boyle V. United Technologies Corp., 487 U.S. 500, 511-512 ( 1988).13 In light of the govern- ment's immunity from tort liability for the injuries alleged by the plaintiffs with whom petitioners settled the Agent Orange litigation, it is, as the court of appeals remarked, "difficult to envision the circumstances under which a court could find an implied-in-fact agreement on the part of the government to provide the kind of [contractual] indemnity for which [petitioners] argue." Pet. App. 19a n.8. The warranty recognized in Spearin is driven in large part by the fact that when an error or defect in govern- ___________________(footnotes) 13 Compare Lockheed Aircraft Corp. V. United States, 460 U.S. 190 (1988 ), in which the Court held that the exclusive-remedy provi- sion of the Federal Employees' Compensation Act, 5 U.S. C. 8116 (c), did not bar a third-party tort indemnity action against the United States for injuries to a federal employee. Lockheed expressly de- clined to address the validity of the indemnity claim itself under ap- plicable state law. 460 U.S. at 197 n.8, 199. The Court distinguished Stencel Aero on the ground that " [t]he issue in Stencel * * * was whether the Government's waiver of sovereign immunity in the [FTCA] applied to an indemnity action based on an injury to a serviceman"; Stencel held that the government retained its im- munity from suit in both instances, because the Feres doctrine "precluded the [underlying] substantive claim without regard to any exclusive-liability provision." Lockheed, 460 U.S. at 197 n.8. The same reasoning applies in a case where the underlying claim is precluded by the discretionary function exception, as any claim baaed on military procurement decisions clearly would be. See Boyle, 487 U.S. at 511-512. ---------------------------------------- Page Break ---------------------------------------- 20 ment specifications makes contract performance more difficult than reasonably expected, the contractor gen- erally has no recourse other than to seek additional com- pensation under the contract. In this case, on the other hand, petitioners had available to them a government con- tractor defense that would have provided them with full protection against unwarranted tort liability to third par- ties. There is no reason to revise the law of government contracts in order to provide them with the additional protection of an implied warranty that does not fairly reflect the parties' agreement. C. The Government Contractor Defense Addresses The Situation of Military Contractor In A Manner That Protects Both The Government's Tort Immu- nities And The Legitimate Interests Of Manufac- turers And Tort Plaintiffs Petitioners contend (e.g., Br. 16-17) that if this Court does not adopt the rule they advocate, contractors may be "compelled" to manufacture goods to government speci- fications, and then unfairly be left to bear the costs of defense and settlement or liability if an injured plaintiff later alleges that those specifications were defective." The ___________________(footnotes) 14 Petitioners refer repeatedly to government "compulsion." See, e.g., Br. 12,16,33,37. For present purposes we accept as true the allegation that petitioner Thompson was, from the outset, an unwill- ing supplier of Agent Orange. But cf. J.A. 49 n.3; In re "Agent Orange", 818 F.2d at 209-210. Petitioner Hercules, on the other hand, initially "submitted and won competitive bids to supply the United States with * * * Agent Orange" in 1964. United States V. Vertac Chemical Corp., 46 F.3d 803, 806-807 (8th Cir.), cert. denied, 115 S. Ct. 2609 (1995) ; see also J.A. 41-43, 48-49. Assuming that petitioners are correct (Br. 4-5) that in 1967 the government compelled Hercules, by then an established supplier, to boost its production to satisfy increased military requirements, that hardly changes a voluntarily initiated procurement relationship into a "virtual takeover" by the government (Pet. 4). ---------------------------------------- Page Break ---------------------------------------- 21 government's immunity from tort liability for the harms allegedly caused to the plaintiffs in the Agent Orange class action is fixed by doctrines that petitioners do not challenge and that are not at issue in this case. While that immunity might, on its face, appear to create the possibility of unfairness to government contractors in un- usual circumstances, any such unfairness is, in fact, pre- vented by the availability of the government contractor defense. Invocation of that defense is fully compatible with the government's immunity, and also takes account of the legitimate interests of contractors and product- liability plaintiffs. 1. The contours of the government contractor defense When Congress permitted tort suits against the United States under the Federal Tort Claims Act (FTCA), see 28 U.S.C. 1346(b), it reserved two important spheres of sovereign immunity that are relevant to this case. First, this Court has held that Congress did not intend to waive the government's immunity with respect to tort suits by members of the armed forces for injuries incident to military service. Feres v. United States, 340 U.S. 135 ( 1950); United States v. Johnson, 481 U.S. 681 (1987). Second, Congress expressly reserved immunity from any claim based on the exercise of (or failure to exercise) any "discretionary function or duty." 28 U.S.C. 2680(a); see, e.g., Dalehite v. United States, 346 U.S. 15 ( 1953); United States V. Gaubert, 499 U.S. 315, 325 ( 1991). The United States successfully asserted these immunities as a shield to both direct and third-party liability in the Agent Orange tort litigation. See, e.g., In re `(Agent Orange" Product Liability Litigation, 818 F.2d 194, 199 (2d Cir. 1987), and 818 F.2d 210, 214-215 (2d Cir. 1987 ) (direct liability), cert. denied, 484 U.S. 1004 ( 1988); id. at 204, 206-208 (third-party liability). ---------------------------------------- Page Break ---------------------------------------- 22 The government's immunity from tort liability puts the government and contractors who manufacture military goods to government specifications in an unusual position. If the government designs and manufactures such goods for itself, it is protected from tort liability by Feres and the discretionary function exemption.15 On the other hand, if a contract manufacturer is sued for injuries allegedly caused by some tortious defect in a product designed by a customer other than the United States, it can normally implead the customer as a third-party de- fendant. If the customer is the government and the product is one for military use, however, impleading the government is impossible. See StenceI Aero Eng'g, supra; Sea-Land Serv., Inc., supra; cf. Boyle v. United Tech- nologies Corp., 487 U.S. at 512 ("It makes little sense to insulate the Government against financial liability for the judgment that a particular feature of military equip- ment is necessary when the Government produces the equipment itself, but not when it contracts for produc- tion."). Yet, if the product's design was, in fact, defective, any losses would properly be the government's responsi- bility. In the unusual case posited (whether or not realis- tically) by petitioners, in which the government requires performance and dictates both design and price (so that the contractor could not, for example, pass on to the government the cost of adequate insurance), the result could be substantive unfairness to the contractor. ___________________(footnotes) 15 As this Court has explained, "the selection of the appropriate design for military equipment * * * is assuredly a discretionary function within the meaning of [the FTCA]. It often involves not merely engineering analysis but judgment as to the balancing of many technical, military, and even social considerations, includ- ing specifically the trade-off between greater safety and greater combat effectiveness." Boyle, 487 U.S. at 511. With respect to government immunity in this case, see In re "Agent Orange" Product Liability Litigation, 818 F.2d 187, 191 (2d Cir. 1987), cert. denied, 487 U.S. 1234 (1988); 611 F. Supp. at 1263-1264. ---------------------------------------- Page Break ---------------------------------------- 23 The courts have responded to this concern by recogniz- ing a defense to tort actions brought against contractors by plaintiffs who claim to have been injured by products designed by and manufactured for the government. This Court confirmed the existence, basis, and contours of that defense in Boyle v. United Technologies Corp., supra. In Boyle, 487 U.S. at 512, the Court held that government contractors may not be held liable for design defects in military equipment when: (1) the United States approved reasonably precise specifications; (2) the equipment conformed to those specifications; and (3) the supplier warned the United States about the dangers in the use of the equipment that were known to the supplier but not to the United States. The Boyle Court explained that the first two of these conditions "assure that the design feature in question was considered by a Government officer, and not merely by the contractor itself." 487 U.S. at 511-512. Only under those circumstances does it make sense to extend to a contractor the protection from liability to which the gov- ernment itself is entitled under the discretionary function exception to the FTCA. The third condition is designed to give the contractor an incentive to disclose to the gov- ernment any information it might have or develop con- cerning risks that the government should take into account in making its design decisions. ld. at 512-513. In basing its holding on the government's immunity under the dis- cretionary function exception to the FTCA, the Boyle Court pointed out that the defense should cover suits by civilian plaintiffs as well as suits by service members. Id. at 510-511. The Court also made clear that the defense protects contractors only from liability for injuries caused by designs provided or approved by the government; it does not protect against liability for injuries caused by ---------------------------------------- Page Break ---------------------------------------- 24 items that the government purchases from a supplier's normal stock, or by manufacturing or other defects that were not required by the government's specifications. Id. at 509. 2. Recognition of an implied warranty in the cir- cumstances of this case would be both redundant and counterproductive The government contractor defense is carefully cali- brated to shield suppliers who follow government design specifications in good faith, without destroying their in- centives to take care in manufacturing and to develop and share with the government information relating to risks or hazards inherent in the government's designs. There is no reason to supplement that doctrine with an implied contractual warranty, particularly where such a warranty would undermine the operation of the government con- tractor defense itself. Petitioners' proposed warranty theory requires them to establish that they manufactured Agent Orange in com- pliance with precise design specifications devised and drafted by the government, and that the government knew more than they did about the part of the design that caused the alleged defect in the resulting product. See Pet. Br. 16-18; Pet. 12. If a contractor could establish the grounds for the existence of an implied warranty under that theory, it would also necessarily have estab- lished the elements of the government contractor defense recognized in Boyle (487 U.S. at 512) to any tort claim that might give rise to damages covered by the proposed warranty. Conversely, if a tort plaintiff suing a contractor succeeds in recovering damages despite the invocation of the government contractor defense, then the contractor would also be precluded from recovering from the gov- ernment under petitioners' proposed warranty. Compare In re "Agent Orange", 818 F.2d at 208-209 (applying ---------------------------------------- Page Break ---------------------------------------- 25 similar analysis in dismissing petitioners' third-party tort claims against the United States ). There is therefore no reason to embrace the new con- tract doctrine for which petitioners contend, because the government contractor defense already provides protec- tion in appropriate circumstances. As discussed above (see pages 14-15, supra), the contractor in Spearin faced unexpected costs of contract performance because of the government's faulty plans; absent an implied contractual warranty, he would have been forced to bear costs for which the government was properly responsible. Here, in contrast, the contractors face no loss that is attributable to the government. Because of the government contractor defense, they were protected from any liability that would have fallen on the government but for the latter's reser- vation of sovereign immunity with respect to its discre- tionary procurement decisions. On the other hand, if the government contractor defense did not preclude liability, that result would have been based on a finding that the liability-causing product defect resulted from their actions, rather than from a discretionary decision on the part of the government. Recognition of an implied warranty in addition to the government contractor defense is not only unnecessary, it would also undermine the functioning of the defense, which is designed to protect the tort immunity that Con- gress has reserved with respect to the government's dis- cretionary military procurement decisions. See Boyle, 487 U.S. at 511-513. Contractors are protected from tort liability for government designs primarily because, if they were not, such liability would ultimately be passed on to the government through higher contract prices, thus in- directly imposing on' the government liability that cannot be imposed directly. Id. at 511-512. Recognition of peti- tioners ` "implied warranty" theory, however, would have much the same effect by imposing such liability whenever ---------------------------------------- Page Break ---------------------------------------- 26 a contractor declines to advance, or settles in spite of, the available government contractor defense to tort liability. In many circumstances, the availability of petitioners' proposed warranty action would reduce or eliminate the contractor's incentive to assert or press the government contractor defense as a bar to liability in tort. It might instead be in the contractor's interest to cap its exposure by settling, rather than defending, the tort case, and then to sue the government for indemnification. If that in- demnification action were successful, the contractor would be as well off as if it had successfully asserted the gov- ernment contractor defense in the tort action, and it would have had to prove essentially the same facts. The public purpose of the defense would have been frustrated, however, because the government would have been forced to pay for tort injuries for which it could not have been held directly liable. A settling contractor whose contract- law indemnification action against the United States failed would also be no worse off than if it had litigated the tort action, because the same factors that led to the failure to obtain indemnity would presumably also have led to a failure to establish the government contractor defense. Such a contractor might, in addition, be substantially better off than if it had litigated the tort claims, because the tort settlement would have capped its potential lia- bility. In sum, petitioners' proposed new warranty would inappropriately give government contractors the power to protect themselves, at the government's expense, by cre- ating indirect governmental liability to plaintiffs who could not have recovered directly against the government. 3. Petitioners' objections to reliance on the govern- ment contractor defense do not justify the resalt they seek in this case Petitioners argue (Br. 20) that the Court should not rely on the existence of the government contractor de- ---------------------------------------- Page Break ---------------------------------------- 27 fense in this case, because the "status and parameters" of that defense were "uncertain" in 1984, when petition- ers settled the Agent Orange class actions. Any uncer- tainties in the law that may have existed in 1984, however, provide no basis for rewriting government con- tract law in 1995, when the relevant tort law questions have been settled in a way that makes petitioners' pro- posed warranty both unnecessary and unwise. In any event, there was in fact no relevant uncertainty in the law when the class action was settled. The government contractor defense had clear roots in this Court's decision in Yearsley v. W.A. Ross Constr. Co., 309 U.S. 18 (1940), and a number of courts applied it in one form or another (any of which would have provided adequate protection to peti- tioners) before this Court provided the definitive articula- tion in Boyle.16 ___________________(footnotes) 16 See Pet. App. 77a, 113a; Pet. Br. 20 and cases there cited; Sanner v. Ford Motor Co., 364 A.2d 43, 44-47 (Super. Ct. Law Div. 1976), aff'd, 381 A.2d 805 (Super. Ct. App. Div. 1977), cert. denied, 384 A.2d 846 (N.J. 1978); Casabianca v. Casabianca, 428 N.Y.S.2d 400 (Sup. Ct. 1980) ; Bynum v. FMC Corp., 770 F.2d 556, 577-578 (5th Cir. 1985) ; Boruski v. United States, 803 F.2d 1421, 1430 (7th Cir. 1986) ; see also Mitchell V. Lone Star Ammunition, Inc., 913 F.2d 242, 245 (5th Cir. 1990) (Boyle "had little effect on the existing law in this Circuit"). Petitioners cite (Br. 20) two cases for the proposition that some jurisdictions had rejected the govern- ment contractor defense entirely. Neither case supports that argu- ment. In Hansen V. Johns-Manville Prods. Corp., 734 F.2d 1096, 1045 (5th Cir. 1984), cert. denied, 470 U.S. 1051 (1985), the court, in the absence of relevant Texas cases, recognized a "government specification defense," but concluded that the defense would not apply in that case because only a small portion of the asbestos exposure involved was linked to government contracts. In re All Maine Asbestos Litigation, 575 F. Supp. 1375, 1377 (D. Me. 1983), denied the plaintiffs motion to strike the government contractor defense, noting that the plaintiffs had "not shown that Maine law would unequivocally reject such a defense." See also In re Related Asbestos Cases, 543 F. Supp. 1142, 1151-1152 (N.D. Cal. 1982) (recognizing a "government specification defense"). ---------------------------------------- Page Break ---------------------------------------- 28 Most important, the availability of the defense was clearly the law of the Agent Orange tort cases. As the Federal Circuit pointed out below (Pet. App. 22a), every court that participated in the tort litigation ulti- mately concluded, not only that the government contractor defense was available, but that it protected petitioners from liability. The district court initially granted sum- mary judgment for petitioners on that basis.17 Chief Judge Weinstein retracted that judgment after assuming responsibility for the case, see Pet. App. 7a, but he discussed the potential applicability of the defense in approving the class action settlement agreement, see 597 F. Supp. at 795-799, 843-850, and he later relied on its applicability in dismissing the claims of the plaintiffs who had opted out of the settlement. 611 F. Supp. 1263- 1264 ("Plaintiffs are unable to overcome defendants' gov- ernment contract defense."), The Second Circuit affirmed in each instance; indeed, it based its decision with respect to the opt-out plaintiffs solely on the government con- tractor defense. See 818 F.2d at 173-174 (settlement opinion) (defense a "final and in our view impossible, hurdle to surmount"); id. at 189-194 (opt-out opinion), 192 ("We need not define the precise contours of the defense because we believe that under any formulation * * * the defendants here were entitled to summary judgment."). See also id. at 209 (opinion on manufac- turers' third-party tort claims against the United States); Ivy v. Diamond Shamrock Chemicals Co. (In re "Agent Orange" Product Liability Litigation), 996 F.2d 1425, 1436-1437 (2d Cir. 1993), cert. denied, 114 S. Ct. 1125 ( 1994). The history of this litigation thus provides solid support for the Federal Circuit's conclusion that "there can be no serious doubt that had the class action Agent ___________________(footnotes) 17 See In re "Agent Orange", 506 F. Supp. at 796 (indicating willingness to invoke defense if elements were proved) ; In re "Agent Orange", 565 F. Supp. at 1272-1274 (granting judgment for petitioners). ---------------------------------------- Page Break ---------------------------------------- 29 Orange litigation proceeded to termination, no liability would have been imposed against [petitioners]" because of the government contractor defense. Pet. App. 23a. Petitioners argue that "litigation is inherently uncer- tain" (Br. 21), and that "[e]ven when a government contractor has every reason to expect to be vindicated by the government contractor defense, it still is possible for the defense to fail" (Br. 25). Those observations pro- vide no basis for imposing liability on the United States. It is clear that the government bore no liability to the Agent Orange tort plaintiffs, because of its tort im- munities.18 Petitioners, on the other hand, manufac- tured Agent Orange, and there were legitimate questions about their potential tort liability, including their knowl- edge about the hazards of dioxin, their choice of manu- facturing methods, their responsibility for the presence of dioxin in the Agent Orange that they produced, and the applicability of the government contractor defense to them in light of their knowledge and manufacturing decisions. See, e.g., J.A. 57-71. Dealing with such uncertainties and establishing the absence of legal liability are ordinary burdens of engag- ing in a manufacturing business, and petitioners suggest no basis for shifting those burdens to the government. If it were not for a change in judges in the district court (see ___________________(footnotes) 18 The government was, however, required to expend considerable resources establishing that proposition in the courts, including defending against the third-party tort claims brought against it by petitioners and other manufacturers. See, e.g., In re "Agent Orange", 597 F. Supp. at 257-258. Moreover, the district court's "repeated changes of heart" (Pet. Br. 21) affected the govern- ment as well as petitioners: The government had summary judg- ment in its favor partially revoked-at petitioned' behest-and was ordered to trial, with the prospect of an advisory jury to consider all possible claims against it. In re "Agent Orange", 580 F. Supp. at 1256. The government, however, declined to participate in the settlement for which petitioners now seek in- demnity, and its position was ultimately sustained by both the district court and the court of appeals. ---------------------------------------- Page Break ---------------------------------------- 30 Pet. App. 7a), petitioners would apparently have obtained summary judgment in their favor after initial discovery in the class action litigation, as numerous other contractors have in similar situations both before and after Boyle." When the initial grant of summary judgment was re- tracted, petitioners faced a choice whether to settle, as they did, or to continue to assert the absence of any liability, as did the government. Every available indica- tion is that, if they had taken the latter course, the courts were prepared to apply the government contractor defense so long as its factual predicates were satisfied. The risk of an unfavorable legal outcome in such a situation (see, e.g., Pet. Br. 18-19) is one either to be absorbed as a cost of doing business, or to be covered through the acquisition of insurance. Cf. Stencel Aero Eng'g, 431 U.S. at 674 & n.8. The same is true of attorneys' fees, which, in the absence of some specific legislative direction to the contrary, lie where they fall. See Alyeska Pipeline Service Co. v. Wilderness Society. 421 U.S. 240 (1975). Parties to a contract may reallocate these busi- ness risks through express indemnities. But the govern- ment agreed to no such reallocation in the contracts at issue here, and, for the reasons discussed above, there is ___________________(footnotes) 19 See, e.g., Tate V. Boeing Helicopters, 55 F.3d 1150, 1156 (6th Cir. 1995); Landgraf V. McDonnell Douglas Helicopter Co., 993 F.2d 558,564 (6th Cir.), cert. denied, 114 S. Ct. 553 (1993); Lewis v. Babcock Indus., Inc., 985 F.2d 83, 88-89 (2d Cir.), cert. denied, 113 S. Ct. 3041 (1993) ; Stout v. Borg-Warner Corp., 933 F.2d 331, 337 (5th Cir.), cert. denied, 502 U.S. 981 (1991); Kleemann v. McDonnell Douglas COrP., 890 F.2d 698, 700 (4th Cir. 1989), cert. denied, 495 U.S. 953 (1990) ; Smith V. Xerox Corp., 866 F.2d 135, 141 (5th Cir. 1989) ; Nicholson V. United Technologies Corp., 697 F. Supp. 598,604 (D. Conn. 1988); Boruski V. United States, 803 F.2d at 1430; Bynum v. FMC Corp., 770 F.2d at 577- 578; Tillett V. J.I. Case Co., 756 F.2d 591, 600 (7th Cir. 1985) ; Koutsoubos v. Boeing Vertol, 756 F.2d 352, 355 (3d Cir.), cert. denied, 474 U.S. 821 (1985) ; Casabianca V. Casabianca, supra; Sanner V. Ford Motor Co., 364 A.2d at 44-47. ---------------------------------------- Page Break ---------------------------------------- 31 no reason to believe that such a reallocation was implicit in the procurement relationship.20 D. Petitioners Could Not Show That The Government Breached Any Warranty That Might Be Implied Finally, even if the Court were to create an implied warranty for petitioners' benefit in the circumstances of this case, petitioners still could not recover. As the Claims Court pointed out (Pet. App. 64a-65a, 96a- 97a ), despite the "many and varied decisions regard- ing the veterans' suits against the herbicide manufac- turers" (id. at 65a,97a), no court has ever found credible evidence that exposure to Agent Orange caused any of the injuries complained of by the individual tort plaintiffs. That court therefore held that, even if peti- tioners were accorded the warranty they propose, they could not prove that it had ever been breached.21 We note, to begin with, that even if there were a demonstrable link between the tort plaintiffs' injuries and exposure to dioxin in Agent Orange, petitioners incor- ___________________(footnotes) 20 As noted above (see note 12, supra), express indemnity agree- ments in government procurement contracts are extraordinary. Petitioners have cited no statutory authorisation under which the government could have agreed to such an indemnity; and even if such authorization existed, it is implausible that it would have been invoked by implication, and not reduced to writing. Compare dis- cussion of 50 U.S.C. 1431 at pages 39-40 & n.23, infra. The absence of any indemnity agreement renders much of petitioners' discussion of rules developed in the context of such agreements, including rules concerning the "reasonableness" of settlement and the existence of "actual" or "potential" liability (Br. 22-28), of margi- nal relevance to the issue in this case, which is whether an in- demnity agreement should be implied at all. 21 The Federal Circuit indicated general agreement with the Claims Court's decision on this point, but it did not pass on the issue. Pet. App. 15a, 18a-19a. The conclusions of the courts that considered the Agent Orange tort litigation are clear, however. The Court could therefore affirm the judgment below on this ground, which the government raised and pressed in the court of appeals (see, e.g., Gov't C.A. Br. 37-47). See, e.g., Thigpen v. Roberts, 468 U.S. 27, 29-30 (1984) . ---------------------------------------- Page Break ---------------------------------------- 32 rectly take it as established (see Br. 13, 18 n.5) that the government's specifications for Agent Orange required them to produce a product containing dioxin. As the United States pointed out to the district court in New York in arguing that the government contractor defense issue in the opt-out cases should not be resolved on sum- mary judgment (J.A. 39-41; see page 6 n.4, supra), the government's orders for Agent Orange specified only the nature and proportions of its chemical components, herbicides known as 2,4,5-T and 2,4-D. See Pet. App. 3a. The orders mentioned nothing about dioxin, which is an impurity that may or may not be found in 2,4,5-T, depending on how the latter is produced. ibid.; see J.A. 40. Each manufacturer was free to use its own method for producing 2,4,5-T, which each petitioner also made for use in its commercial herbicides. See Pet. App. 3a- 4a. Indeed, when Hercules became concerned about dioxin levels in its Agent Orange, it changed its produc- tion methods to eliminate them. Id. at 4a. If this case were remanded for trial, it is therefore unlikely that petitioners would be able to show that the government's specifications for Agent Orange were "de festive." In addition, the courts that considered the merits of the Agent Orange tort litigation, like the Claims Court in this case, concluded that no link could be shown be- tween the tort plaintiffs' injuries and exposure to dioxin or Agent Orange. Chief Judge Weinstein, who expressed considerable sympathy for the veteran plaintiffs (see, e.g., In re "Agent Orange", 597 F. Supp. at 857), nonetheless approved settlement of their claims in part because he thought their case probably "without merit," ibid., in view of the fact that "an enormous scientific effort to be helpful on causation ha[d], from the plaintiffs' point of view, left the case at best open" (id. at 795). In later granting summary judgment against those plaintiffs who opted out of the settlement, the Chief Judge ob- served that "years of discovery and tens of millions of ---------------------------------------- Page Break ---------------------------------------- 33 dollars spent by the government and others on research ha[d] not yielded any competent evidence indicating a genuine issue of fact about causation." In re "Agent Orange", 611 F. Supp. at 1260. That conclusion was twice echoed by the Second Circuit. In re "Agent Or- ange", 818 F.2d at 171-173 (opinion approving settle- ment ), 193-194 (opinion approving dismissal of "opt-out" plaintiffs' claims ). Nor has the passage of time produced any new evidence that cal1s those courts' conclusions into question. See Ivy v. Diamond Shamrock Chemicals Co. (In re "Agent Orange" Product Liability Litigation], 996 F.2d at 1436-1437 (reviewing recent evidence and refus- ing to reopen settlement); American Legion v. Derwinski, 54 F.3d 789, 790 (D.C. Cir. 1995) (upholding VA's decision to terminate study of Agent Orange effects based on determination by Centers for Disease Control that "sampling problems made it unlikely that the investiga- tion would yield scientifically valid results"). In all previous Litigation, petitioners themselves have argued that the Agent Orange tort plaintiffs could estab- lish no causal connection between exposure to dioxin in Agent Orange and any of the injuries for which the plaintiffs sought compensation. If so, there is no way in which the government's specifications could have been "defective: even if the specifications had required the manufacture of compounds containing dioxin (which they did not ). Petitioners now argue that the specifications "were defective because they resulted in a product that contained dioxin, the substance that the Agent Orange plaintiffs claimed caused their injuries." Pet. Br. 13 (em- phasis added); see also id. at 9, 18. But government specifications certainly are not "defective" when they ac- tually caused or threatened no harm, merely because of allegations about cause and effect made by third parties in litigation (and ultimately rejected by every court to consider the question). ---------------------------------------- Page Break ------------------------------------------------------------------------- 34. II. THE DEFENSE PRODUCTION ACT DOES NOT ESTABLISH AN IMPLIED AGREEMENT TO IN- DEMNIFY GOVERNMENT CONTRACTORS Petitioners contend (Br. 33-41) that Section 707 of the Defense Production Act, 50 U.S.C. App. 2157, and the government's "compulsion" of petitioners' Agent Orange production under the DPA, together "create an implied-in-fact agreement to indemnify petitioners for the damages they suffered in the Agent Orange litigation." Petitioner Hercules did not advance that claim either in the Claims Court or in the court of appeals (see U.S. Br. in Opp. 20-21), and it is therefore properly before the Court only on behalf of petitioner Thompson. See Pet. App. 14a-15a, 28a. Both courts below correctly rejected Thompson's argument. Pet. App. 28a-33a, 100a-102a. A. Section 707 Of The DPA Shields Contractors Only From Liability To Customers Whose Orders Are Displaced Or Delayed By The Priority Accorded Government Orders Under Section 101 The court of appeals correctly held (Pet. App. 29a- 33a) that the language and statutory context of Section 707 show that it protects contractors from claims arising out of a DPA order's displacement of work for other customers, not from tort liability to parties who claim to have been injured by products manufactured for the gov- ernment. Section 101 (a) (1) of the DPA, 50 U.S.C. App. 2071 (a) (1) (1988 & Supp. V 1993) (emphasis added ), authorizes the President to require that performance under [defense] con- tracts or orders * * * shall take priority over per- formance under any other contract or order, and, for the purpose of assuring such priority, to require acceptance and performance of such contracts or orders in preference to other contracts or orders by any person he finds to be capable of their performance. ---------------------------------------- Page Break ---------------------------------------- 35 Thus, a party performing a contract under the DPA may be required to give government orders priority over other orders. That requirement, however, might subject the contractor to suit by other customers for breach of con- tract (or perhaps on some theory of interference with business advantage or other illegal or tortious conduct). To address that possibility, Section 707 (50 U.S.C. App. 2157) complements the core directive of Section 101 by providing that: No person shall be held liable for damages or pen- alties for any act or failure to act resulting directly or indirectly from compliance with a rule, regulation, or order issued pursuant to this Act * * *, notwith- standing that any such rule, regulation, or order shall thereafter be declared by judicial or other com- petent authority to be invalid. No person shall dis- criminate against orders or contracts to which pri- ority is assigned * * * under any rule, regulation, or order * * * by charging higher prices * * * or in any other manner. Construing these two provisions together, the court of appeals concluded (Pet. App. 31a-32a) that Congress did not intend Section 707 of the Act to confer an immunity broader than the risk imposed by Section 101. Thompson does not dispute that general proposition. See Pet. Br. 35-36. It contests only the court's further conclusion that "while the risk imposed by section 101 does include the possible need of a contractor to break its contracts with third parties in order to give preference to a DPA con- tract, it does not include the risk that the product pro- duced under the DPA contract will be inherently unsafe to users." Pet. App. 31a. The court's conclusion is supported by the language of Sections 101 (a) and 707, which refer repeatedly to the "priority" and "preference" to be accorded to DPA orders, but which say nothing about liability arising from the ---------------------------------------- Page Break ---------------------------------------- 36 character of the goods to be provided under the DPA contract, or about displacing the normal rules that would otherwise govern responsibility for the proper design and manufacture of those goods. As Chief Judge Weinstein noted in rejecting petitioners' Section 707 claim while approving the settlement of the underlying tort cases, there is generally "no logical connection between the com- pulsion of section 101 and the risk of injuries to those using or exposed to the contractor's product; the risk is something that all government contractors have in com- mon[,] and is already taken into account in the govern- ment contractor] defense." 597 F. Supp. at 845. Moreover, in Thompson's view the protection of Sec- tion 707 would apparently extend to any legal liability that a contractor might otherwise incur "by virtue of [its] performance of [a DPA] contract" (Pet. Br. 36), pre- sumably including liability for the violation of any law otherwise applicable to the contractor's (or the govern- ment's) operations or products. Compare United States v. Vertac Chemical Corp., 46 F.3d 803, 811-813 (8th Cir. ), cert. denied, 115 S. Ct. 2609 (1995) (rejecting petitioner Hercules' argument that Section 707 immunized it from liability under federal environmental law). While it is not inconceivable that Congress might enact such broad protection in some circumstances, it is extremely unlikely that it would do so in an ambiguous manner and without extensive consideration and debate. Cf. In re "Agent Orange", 597 F. Supp. at 845 ( "[I]t is unlikely that Con- gress would work such a major change in tort law with- out being explicit about it." ). Thompson's interpretation of Section 707 is therefore considerably more "strained" (Pet. Br. 36 n. 15 ) than that adopted by the court of appeals. The legislative history sheds little additional light on the meaning of Section 707. The Section's statutory pre- cursor explicitly limited its protection to "damages or penalties for any default under any contract or order" ---------------------------------------- Page Break ---------------------------------------- 37 resulting from compliance with a government production order. Second War Powers Act of 1942, ch. 199, 301, 56 Stat. 177. The DPA itself dropped that language, but the relevant committee reports provide no explanation for the change.22 When Congress amended Section 707 in 1952, the. Senate report noted that the provision "protects a person from liability, under contract or otherwise, as the result of compliance with the act," and "was included to encourage and assist people to comply with the act, even though it was recognized that common-law doctrines, such as frustration and impossibility of performance and the like, would cover many of the same cases." S. Rep. No. 1599, 82d Cong., 2d Sess. 29 (1952). The amend- ment deleted the word "his" from the phrase "resulting from [his] compliance," thus clarifying that "the protec- tion applies to cases where the liability is caused by the compliance of another person, for example, where a con- tractor is unable to carry out a contract because his sup- pliers are prohibited from making or shipping him the parts he needs to carry out the substance." Ibid. That change, and the Committee's explanation, make it clear that Section 707 was intended to provide broad protection against liability for government-caused disruptions in ex- isting business-customer relationships; they do not suggest that it was intended to go further and immunize a DPA contractor for the violation of otherwise applicable legal duties relating to the manufacture of the product procured by the government. Cf. Boyle, 487 U.S. at 508-509 (dis- cussing contractor's appropriate responsibility in tort for product features not dictated by government design decisions). For these reasons, every court that has considered the matter has, like the courts below, rejected the argu- ___________________(footnotes) 22 See S. Rep. No. 2250, 81st Cong., 2d Sess. 11 (1950) ; H.R. Rep. No. 2759, 81st Cong., 2d Sess. 22 (1950) ; H.R. Conf. Rep. No. 3042, 81st Cong., 2d Sess. (1950). ---------------------------------------- Page Break ---------------------------------------- 38 ment that Congress intended the DPA's protection to sweep as broadly as Thompson claims. See United States v. Vertac Chemical Corp., 46 F.3d at 811-813; In re "Agent Orange", 597 F. Supp. at 845; Eastern Air Lines, Inc., v. McDonnell Douglas Corp., 532 F.2d 957, 997 (5th Cir. 1976); In re Aircraft Crash Litigation, Fred- erick, Maryland, May 6, 1981, 752 F. Supp. 1326, 1330 n.2 (S.D. Ohio 1990), and cases cited therein. To the extent the scope of Section 707 is relevant to the disposi- tion of this case, this Court should reach the same conclusion. B. Whatever The Proper Scope Of Section 707, It Creates No Implied Contractual Indemnity By The Government There is, however, no need for the Court to decide the precise scope of Section 707 in this case. No matter how broad the statute's protective sweep, Thompson's argument (Br. 37-40) that the statute supports finding an implied-in-fact agreement by the government to indemnify DPA contractors for the cost of litigating and settling product liability claims brought by third parties is wholly implausible. Whatever its scope, Section 707 is plainly intended only to provide a defense to liability in lawsuits brought against a DPA contractor (or, as the 1952 amendment makes clear, any party whose normal commercial activities have been impeded by another party's compliance with a DPA order). Indeed, petitioners raised Section 707 as a de- fense to liability in the Agent Orange class action litiga- tion. See In re "Agent Orange", 597 F. Supp. at 843- 845. They settled that action, however, thereby foregoing any opportunity to challenge on appeal the district court's ultimate rejection (ibid. ) of their interpretation of Sec- tion 707. Final approval of the settlement agreement mooted any question of the application of that Section to petitioners' situation. ---------------------------------------- Page Break ---------------------------------------- 39 Even Thompson admits (Br. 40) that its attempt to resurrect that question in this contract litigation is "strained." Neither Section 707 itself, nor its legislative history, says or suggests anything about indemnification by the United States. Thompson is therefore forced to argue (Br. 37, 39) that a government order under the DPA gives rise to an implied-in-fact indemnity agreement. As in the case of petitioners' proposed implied warranty, the Court may find such an implied-in-fact agreement only if it reflects the actual mutual intentions embodied in the parties' original agreement. See note 9, supra. Thomp- son cannot make that showing here. First, Congress provided whatever protection it thought appropriate for DPA contractors by enacting the shield provision of Section 707. There is no reason to think that Congress intended that explicit shield to be supple- mented with an implied governmental indemnity for cases in which Section 707 itself did not prevent the imposition of liability-whether because it was not invoked, because it was held not to cover the liability in question, or be- cause the contractor chose to forgo or compromise its Section 707 protection in setting a particular action. As noted above (see note 12, supra), when Congress intends to authorize indemnification agreements on the part of the government, it does so explicitly; indeed, if Congress does not give such explicit authorization, it has elsewhere ex- pressly prohibited government officials from entering into the sort of open-ended assumptions of liability that an indemnity entails. Anti-Deficiency Act, 31 U.S.C. 1341(a)(1)(B) (1988 & Supp. V 1993); see Pet. App. 10la-103a; see also Johns-Manville Corp. V. United States, 12 Cl. Ct. 1, 21-25 (1987), vacated on other grounds, 855 F.2d 1571 (Fed. Cir. 1988); California- Pacific Utilities Co. v. United States, 194 Ct. CL 703, 715 (1971 ), and cases there cited; In re Assumption by Gov- ernment of Contractor Liability to Third Persons-Re- ---------------------------------------- Page Break ---------------------------------------- 40 consideration, 62 Comp. Gen. 361 (1983 ).= Thus, as the court of appeals observed (Pet. App. 32a-33a), "if Congress had intended section 707 to impose upon the government the kind of liability asserted by Thompson, it would have said so in clear and unequivocal terms." Moreover, as in the case of petitioners' implied war- ranty argument, recognition of an implied indemnity based on the DPA would undermine the operation of the government contractor defense and the government's tort- law immunities. If petitioners' view prevailed, the costs of any lawsuit brought against a contractor providing a ___________________(footnotes) 23 Thompson argues ( Br. 40-41 ) that the indemnity it seeks "falls outside the scope" of the Anti-Deficiency Act because it "is not an express contractual provision" and "arises from the powers of the court," rather than from the "powers" (or agreement) `of any government agent. That candid description of petitioner's theory describes a provision that would be implied "at law," not the sort of implied-in-fact agreement that petitioner must allege in order for the courts to have jurisdiction over its "contract" claim against the government. See note 9, supra. In any event, as the Claims Court recognized (Pet. App. 102a), restrictions on the contracting authority of government agents apply to all con- tractual obligations, whether express or implied. See, e.g., Sutton v. United States, 256 U.S. 575, 580 (1921). Petitioner's elliptical attempt (Br. 41 n.18) to rely on the only statutory indemnification provision potentially relevant to the Agent Orange contracts, the authority conferred on the President in 50 U.S. C. 1431 to bypass `normal contracting rules in order to "facilitate the national de- fense," only underlines the fact that petitioner never sought or received an indemnity under that authority. See, e.g., ibid. ( re- quiring special approval for obligations in excess of $50,000); Armed Servs. Procurement Reg. No. 43 ("Extraordinary Con- tractual Actions to Facilitate the National Defense"). Par. 17-206 (ii) and (iii) (1959) ; 32 C.F.R. 17.206 (b) and (c) (SUpp. 1960) (CIA. App. 759-764) (contracts containing authorized provisions are to include statement of circumstances, justification, and find- ing that action will facilitate national defense) ; Exec. Order No. 10,789, 3 C.F.R. 72 (Supp. 1958) (reprinted following 50 U.S.C. 1431) (requiring (at Par. 6), inter alia, annual report to Congress of each action taken under authority of Section 1431). ---------------------------------------- Page Break ---------------------------------------- 41 product pursuant to the DPA would be passed through to the United States through indemnification, regardless of the culpability of the contractor. That result would not only vitiate the government's immunity, it would destroy the contractor's incentives, carefully preserved by this Court's decision in Boyle, 487 U.S. at 509-513, to con- duct its own operations carefully and to inform the gov- ernment of any product risks of which it is aware, The cases that Thompson cites (Br. 37-39) in support of its implied indemnity argument are largely inapposite to this case. In Ryan Stevedoring Co. V. Pan-Atlantic Steamship Corp., 350 U.S. 124,.133-134 (1956), for example, the Court held that a stevedoring contractor had breached its contractual obligation to stow cargo safely and competently, and that, it was therefore respon- sible for tort damages paid by the shipowner to one of the stevedore's employees because of an accident caused by the breach. In this case, petitioners allege a breach of contract by their customer, not their supplier; neither the "manufacturer's warranty of the soundness of its man- ufactured product" (id. at 133-134), nor any other obli- gation going to the "essence" of Thompson's performance under its supply contract (id. at 133), is at issue. Thompson also cites Space Age Eng'g, Inc. v. United States, 4 Cl. Ct. 739, 742 (1984), for the proposition that "reliance upon a statutory provision is a well- established basis for implied-in-fact contract actions against the United States"; but Space Age involved an implied condition of government bid requests that responses will be "fairly and honestly considered" (id. at 741), and the language Thompson quotes (Br. 38 n. 16) indicates that violation of a statute or regulation by a government pro- curement officer may be used to show breach of that im- plied obligation. No such violation is alleged here.24 ___________________(footnotes) 24 In Johns-Manville Sales Corp. V. United States, 622 F. SUPP. 443, 449-450 (N.D. Cal. 1985), which Thompson cites (Br. 39 n.17) to suggest that government control over a contractor's operations ---------------------------------------- Page Break ---------------------------------------- 42 Travelers Insurance Co. V. United States, 493 F.2d 881 (3d Cir. 1974), and Michigan Wisconsin Pipeline Co. v. Williams-McWilliams Co., 551 F.2d 945 (5th Cir. 1977), are more relevant to the issues in this case, but neither provides substantial support for the result that Thompson seeks. Travelers was a tort suit brought under the FTCA. The court dismissed the FTCA claims, but remanded the case because further factual development "might show contractual responsibility of the [govern- ment] so that there would be a basis for recovery under an implied contractual right to indemnification." 493 F.2d at 888. The court further suggested, however, that the district court might not even have jurisdiction to con- sider that theory of contractual liability. Ibid. The opin- ion's passing speculation about issues not before either it or the court whose decision it was reviewing carry little weight. Michigan Wisconsin was an admiralty case (551 F.2d at 949), and the court's opinion relies in part on tort principles. See, e.g., id. at 951-952 & n.5. The court there relied on this Court's pre-Spearin decision in Hol- lerbach v. United States, 233 U.S. 165 (1914), for the proposition that a contractor is entitled to recover excess costs of performance caused by affirmatively misleading representations made by the government in letting the contract; and it extended that proposition to hold the gov- ernment liable for damages caused by a contractor to the property of a third party. Michigan Wisconsin involved, however, a determination that the plans provided by the government to its dredging contractor amounted to an affirmative misrepresentation; and the damages involved were caused, as a result of that misrepresentation, during the actual performance of the contract. In the present ___________________(footnotes) could produce an implied indemnity, the court replied to the gov- ernment's jurisdictional objections by holding that the case before it was not a contract case, but rather one alleging tort liability under California law. ---------------------------------------- Page Break ---------------------------------------- 43 case, in contrast, the government's orders for Agent Orange contained nothing that could be construed as an affirmative misrepresentation, and the tort claims for the settlement of which Thompson seeks reimbursement arose years after successful completion of the contract. For all these reasons, the courts below correctly re- jected Thompson's attempt to assert an implied indemnity founded on Section 707 of the DPA. Any other result would plainly go far beyond what Congress has author- ized in the DPA and what the parties could have intended in their agreement. CONCLUSION The judgment of the court of appeals should be affirmed. Respectfully submitted. Drew S. DAYS, III Solicitor General FRANK W. HUNGER Assistant Attorney General PAUL BENDER Deputy Solicitor General Edward C. DUMONT Assistant to the Solicitor General DAVID S. FISHBACK Alfred MILLION Michael T. MISSAL Burke M. WONG Attorneys August 1995 * U.S. GOVERNMENT PRINTING OFFICE; 1995 387147 20110