21 April 2003, Washington, D.C. - A federal court in Washington, D.C. handed the refining industry a substantial victory last week in its ongoing challenge to the Department of Defense's longstanding imposition of illegally low prices for government purchases of military fuel. In La Gloria Oil and Gas Co. v. The United States, the U.S. Court of Federal Claims reaffirmed its prior holding that DOD's military fuel prices were "plainly inconsistent" with the law.

"This week's decision is part of a broad-based industry initiative seeking recovery of over $2.5 billion in fuel underpayments by DOD since the 1980's," explains La Gloria Oil counsel Keith Burt, a lawyer in the Washington, D.C. office of Mayer, Brown, Rowe & Maw. "It extends the period for which refiners may recover underpayments into the late 1990's."

Currently, 25 oil refiners are pursuing claims against DOD, and Mr. Burt represents 20 of them, including three of the four largest oil companies in the world.

"This is the most significant decision in the ongoing litigation since DOD was ordered to refund $60 million in illegal underpayments to the Pride Companies in 2000," added Mr. Burt, who also served as plaintiff's counsel in that decision.

In last week's proceedings, DOD argued that it had obtained a waiver of the law, effective as of 1994. However, the court held the waiver invalid, ruling that the DOD improperly obtained the waiver and then failed to disclose its existence to refiners. The La Gloria decision represents that first time a court has struck down as illegal the government's attempt to obtain a waiver from the regulations controlling how the government contracts.

DOD has also asserted that it was justified in setting fuel prices based on indexes prohibited by federal regulations because the regulations did not provide "satisfactory alternatives" for pricing fuel. DOD asserted that it made "good business sense" for DOD not to follow the law.

The court rejected DOD's defense, holding that DOD "offered no principled reasons" for disregarding the law. The court stated that DOD "appears to have benefited from its market position [as the sole purchaser of military fuel] with its resort to self-help measure to circumvent" the law. The court also noted that DOD's own documents showed that DOD used illegal prices in order to "shift risk off the government and onto the contractor."

This criticism follows earlier findings by a federal court of appeals in a similar case brought by Phoenix Petroleum. There, the court found that DOD's "behavior carries the overtones of unclean hands that makes us reluctant to make this court an abettor of iniquity."

For more information, please contact:
Keith Burt
Partner
202 263 3208