Texaco Puerto Rico, Inc. v. Department of Consumer Affairs

UNITED STATES COURT OF APPEALS
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
FOR THE FIRST CIRCUIT

No. 94-2076

TEXACO PUERTO RICO, INC., ET AL.,
Plaintiffs, Appellees,

v.

DEPARTMENT OF CONSUMER AFFAIRS, ET AL.,
Defendants, Appellants.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO

[Hon. Jose Antonio Fuste, U.S. District Judge]

Before

Selya, Circuit Judge,

Coffin, Senior Circuit Judge,

and Cyr, Circuit Judge.

Lynn R. Coleman, with whom Pedro R. Pierluisi, Secretary of

Justice, Roberto Ruiz Comas, Director, Federal Litigation

Division, Dep't of Justice, Richard L. Brusca, Matthew W.S.

Estes, Laura A. Ingraham, and Skadden, Arps, Slate, Meagher &

Flom were on brief, for appellants.

Alan M. Grimaldi, with whom Jerrold J. Ganzfried, Patricia

G. Butler, Howrey & Simon, William Estrella, and Ricks P. Frazier

were on brief, for appellee Texaco Puerto Rico, Inc.
Donald B. Craven, with whom James P. Tuite, Anthony F.

Shelley, James R. Lovelace, Alvaro I. Anillo, Miller & Chevalier,

Chtd, Luis Sanchez Betances, Jaime Sifre Rodriguez, Miguel P.

Cancio Bigas, and Sanchez Betances & Sifre were on brief, for

appellee Esso Standard Oil Co. (P.R.).
Ana Matilde Nin, with whom Rafael Perez-Bachs, Gilberto J.

Marxuach-Torros, and McConnell Valdes were on brief, for appellee

Shell Co. (P.R.) Ltd.

July 19, 1995

SELYA, Circuit Judge. In 1986, the Puerto Rico
SELYA, Circuit Judge.

Department of Consumer Affairs (DACO) took a small, tentative

step toward regulating the profit margins of gasoline

wholesalers. The wholesalers treated this move as a declaration

of war. They mounted a courtroom counteroffensive and succeeded

in obtaining an injunction against the enforcement of DACO's

embryonic regulation. Following a series of pitched battles that

stretched from San Juan to Boston to the banks of the Potomac and

back again, DACO emerged victorious.

Long after the injunction had been vacated, DACO

purposed to exact tribute from the vanquished. Specifically, it

sought restitution from the wholesalers based on the "excess"

profits that they allegedly earned while shielded by the

injunction. The district court declined to grant the envisioned

spoils. We affirm.

I. BACKGROUND
I. BACKGROUND

This is presumably the final skirmish in a decade-long

conflict. Other jousts are chronicled in a series of published

opinions. See, e.g., Puerto Rico Dep't of Consumer Affairs v.

Isla Petroleum Corp., 485 U.S. 495 (1988) (Isla III); Tenoco Oil

Co. v. Department of Consumer Affairs, 876 F.2d 1013 (1st Cir.

1989); Isla Petroleum Corp. v. Puerto Rico Dep't of Consumer

Affairs, 811 F.2d 1511 (Temp. Emer. Ct. App. 1986) (Isla II);

Texaco Puerto Rico, Inc. v. Mojica Maldonado, 862 F. Supp. 692

(D.P.R. 1994) (TPR II); Texaco Puerto Rico, Inc. v. Ocasio

Rodriguez, 749 F. Supp. 348 (D.P.R. 1990) (TPR I); Isla Petroleum

2

Corp. v. Department of Consumer Affairs, 640 F. Supp. 474 (D.P.R.

1986) (Isla I). Given the detail contained in these earlier

opinions, we believe that a condensed summary of the hostilities

will suffice for the nonce.

From 1973 forward, the federal government imposed price

controls on the sale of petroleum and petroleum products. See 15

U.S.C. 751-760h (as amended). At the time federal controls

ended in early 1981, the regulatory scheme limited wholesalers'

gross profit margins (GPMs) on the sale of gasoline to 8.6 cents

per gallon.1 See Tenoco, 876 F.2d at 1015 (recounting history

of federal regulatory policy). Although bureaucrats are reputed

to abhor a vacuum, DACO an arm of Puerto Rico's government

empowered by local law to regulate prices and profit margins in

order to protect consumers, see P.R. Laws Ann. tit. 3, 341b

(1982) did not immediately impose its own controls.

By 1985, the GPMs of gasoline wholesalers in Puerto

Rico ranged from 6.9 to 16.76 per gallon. In early 1986, world

oil prices plummeted but the price of gasoline in Puerto Rico

(both wholesale and retail) failed to follow suit. The Puerto

Rico legislature, ostensibly concerned that the oil companies

were taking unfair advantage, imposed an excise tax on crude oil

and refined petroleum products. In connection with the new tax,

DACO promulgated an administrative order under date of April 23,

1A GPM represents the difference between the sales price and
the seller's acquisition cost. The latter cost includes the
price of the gasoline plus excise taxes, but excludes operating
costs. See Tenoco, 876 F.2d at 1015.

3

1986. The order prohibited wholesalers from passing the tax

through to retailers. It also froze wholesale and retail

gasoline prices at their March 31, 1986 levels.

When, thereafter, world oil prices soared, the price

freeze forced several wholesalers to sell gasoline at prices

below their acquisition costs. Since large oil companies are not

in business to lose money, a coterie of wholesalers (including

the trio that appear as appellees here) wasted little time in

asking the federal district court to enjoin enforcement of the

April 23 order. Moving with equal celerity, the district court

scheduled a trial on the merits for May 21, 1986. See Fed. R.

Civ. P. 65(a)(2) (authorizing the district court to "order the

trial on the merits to be advanced and consolidated with the

hearing on the application [for preliminary injunction]"). On

May 20, DACO reshuffled the cards; it rescinded the price freeze

and issued what it called a "temporary" order that harked back to

the former, federally inspired ceiling and established, in lieu

of the thawed freeze, maximum GPMs of 8.6 per gallon for

petroleum wholesalers. The May 20 order also scheduled a public

hearing for June 2 to "receive comments from all interested

persons on the adequacy of this Temporary Order and on any

modifications that should be made to attain a situation where

primary reliance can be placed on competitive market forces to

maintain fair margins at all levels of distribution and fair

prices for the consumer."

This maneuver did not derail the litigation. The

4

district court merely switched tracks, trained its sights on the

May 20 edict, and went forward with a three-day bench trial. On

June 4 roughly ten days after the trial ended the court

enjoined enforcement of the May 20 order on federal preemption

and other constitutional grounds. See Isla I, 640 F. Supp. at

515.

DACO appealed the preemption ruling to the Temporary

Emergency Court of Appeals (TECA), see 15 U.S.C. 754(a)(1)

(granting TECA exclusive jurisdiction over claims arising

directly under the Emergency Petroleum Allocation Act of 1973),

and appealed the remaining rulings (e.g., the invalidation of the

order on due process and takings grounds) to this court. We

stayed proceedings pending consideration of the preemption

ruling. TECA affirmed that ruling, see Isla II, 811 F.2d at

1519, but the Justices reversed, holding that federal law did not

forbid state regulation of gasoline prices. See Isla III, 485

U.S. at 499-501. This court then took up DACO's concurrent

appeal and vacated the district court's injunction as premature.

See Tenoco, 876 F.2d at 1024.

On June 27, 1989 (the day after we issued our mandate

incinerating the district court's injunction), DACO promulgated

an interim order establishing a maximum GPM of 11 per gallon,

effective forthwith. Its final order, issued on November 30,

1989, adopted a ceiling of 13 per gallon. That order withstood

a vigorous constitutional challenge by the wholesalers. See TPR

I, 749 F. Supp. 348.

5

An ensuing period of unaccustomed tranquility ended

abruptly in mid-1992 when DACO again took up the cudgels. It

issued a so-called remedial order in which it sought to recoup

almost $250,000,000 in profits exceeding an 8.6 per gallon GPM

that it estimated three wholesalers Texaco Puerto Rico, Inc.,

Esso Standard Oil Co. (P.R.), and the Shell Company (Puerto Rico)

Ltd. (appellees here) had earned during the three-year life

(June 1986 to June 1989) of the errant injunction.2 The

wholesalers quickly repaired to the district court and requested

protection from the remedial order. Before the court could act,

DACO issued a revised remedial order. Under its terms, a

wholesaler could choose between paying a refund based on a

retrospective GPM of 13 per gallon for the injunction period or

paying one based on whatever profit margin would have allowed it

to achieve an annual return on assets equal to the average return

on assets for the electric utility industry, plus one percent,

during the same period.

The wholesalers were not mollified. They challenged

the revised remedial order and, on April 1, 1993, DACO rescinded

it. This hasty retreat did not restore the peace, for the agency

simply attacked on a different front. It revivified the court

action originally instituted by the oil companies and filed a

motion for restitution seeking an award equal to the excess

profits that the wholesalers would have been forced to disgorge

2We refer to the three oil companies collectively as "the
wholesalers," and individually as "Texaco," "Esso," and "Shell."

6

but for the pendency of the improvidently issued injunction.

Following a tumultuous period of discovery, see, e.g., infra Part

III (discussing certain disputed discovery rulings), and a three-

week bench trial, the court denied the motion for restitution on

September 9, 1994. SeeTPR II, 862F. Supp.at 709. DACO nowappeals.

II. THE MERITS
II. THE MERITS

Our analysis of the merits is partitioned into four

segments. We discuss the nature of restitution, parse the

decision below, limn the standard of review, and, finally,

examine the record to determine whether the denial of restitution

can be upheld.

A. The Nature of Restitution.
A. The Nature of Restitution.

In its motion, DACO sought restitution based upon the

hoary adage "that a party against whom an erroneous judgment or

decree has been carried into effect is entitled, in the event of

a reversal, to be restored by his adversary to that which he has

lost thereby." Arkadelphia Milling Co. v. St. Louis S.W. Ry.

Co., 249 U.S. 134, 145 (1919). We agree with this tenet, but

caution that it tells only half the tale. Restitution is not a

matter of right, but a matter of sound equitable discretion. See

Atlantic Coast Line R.R. Co. v. Florida, 295 U.S. 301, 310

(1935); Democratic Central Comm. v. Washington Metro. Area

Transit Comm'n, 485 F.2d 786, 825 (D.C. Cir. 1973); Restatement

of Restitution 142, cmt. a, at 568 (1937). Because restitution

is a creature of equity, a claimant can prevail only by showing

that it will offend "equity and good conscience" if the other

7

party is permitted to retain the disputed funds. Atlantic Coast

Line, 295 U.S. at 309. Put another way, restitution is a remedy

ex gratia that a court will withhold when "the justice of the

case does not call for it . . . ." Id. at 310; accord Williams

v. Washington Metro. Area Transit Comm'n, 415 F.2d 922, 941-47

(D.C. Cir. 1968), cert. denied, 393 U.S. 1081 (1969).

This emphasis on the particulars of each individual

case is consistent with the central feature of equity

jurisdiction: "the ability to assess all relevant facts and

circumstances and tailor appropriate relief on a case by case

basis." Rosario-Torres v. Hernandez-Colon, 889 F.2d 314, 321

(1st Cir. 1989) (en banc); see also Hecht Co. v. Bowles, 321 U.S.

321, 329 (1944) ("The essence of equity jurisdiction has been the

power . . . to mould each decree to the necessities of the

particular case."); Lussier v. Runyon, 50 F.3d 1103, 1110 (1st

Cir. 1995) (stating that "the hallmarks of equity have long been

flexibility and particularity"), petition for cert. filed (U.S.

June 5, 1995) (No. 94-1979).

Claims for restitution arising out of the vacation or

reversal of a judgment are tested by the same standards as other

claims for restitution. See Atlantic Coast Line, 295 U.S.at 310;

see also Restatement, supra, 74, at 302-03 ("A person who has

conferred a benefit upon another in compliance with a judgment,

or whose property has been taken thereunder, is entitled to

restitution if the judgment is reversed or set aside, unless

restitution would be inequitable . . . ."). This approach

8

obtains in respect to both public and private actions, and, thus,

applies when, as now, a restitutionary claim arises out of an

errant injunction barring enforcement of a governmental

regulation. See, e.g., Arkadelphia, 249 U.S. at 145 (ordering

restitution by a regulated company that charged more during an

injunction period than the rate ultimately deemed lawful);

Williams, 415 F.2d at 941-47 (similar); see also United States v.

Morgan, 307 U.S. 183, 197-98 (1939).

B. The Decision Below.
B. The Decision Below.

The district court predicated its denial of DACO's

motion for restitution on alternative grounds. In the first

place, the court determined that there was no benefit to be

restored as the wholesalers had not profited from the injunction.

See TPR II, 862 F. Supp. at 705-06. This determination rested

upon a finding that DACO failed to show that it would have

regulated wholesalers' GPMs during the relevant period but for

the improvidently issued injunction. See id. at 702-06. In the

second place, the court determined that, even assuming that the

injunction conferred an economic benefit, "the balance of

equities" did not require "a disgorgement of profits earned six

to eight years ago." Id. at 706.

This latter determination rested upon an analysis of

five equitable factors. First, based on evidence regarding the

competitiveness of the gasoline market and earnings in other

industries, the court found that the wholesalers "did not benefit

disproportionately from the lack of regulation." Id. at 707.

9

Next, the court found DACO guilty of "unreasonable delay" in

seeking restitution. Id. Third, the court concluded that DACO

exhibited bad faith with regard to Texaco, Esso, and Shell. See

id. Fourth, the court determined that DACO's actions during the

injunction period had lulled the wholesalers into believing that

DACO would not demand restitution. See id. at 708. Finally, the

court thought that the public interest did not favor a

restitutionary order. See id.

C. Standard of Review.
C. Standard of Review.

Appellate review often calls into play a blend of

rules. So it is here. We review the factual findings that

undergird the trial court's ultimate determination only for clear

error. See Lussier, 50 F.3d at 1111; Reilly v. United States,

863 F.2d 149, 163 (1st Cir. 1988). In contrast, the trial

court's articulation and application of legal principles is

scrutinized de novo. See Cumpiano v. Banco Santander P.R., 902

F.2d 148, 152 (1st Cir. 1990). Thus, "to the extent that

findings of fact can be shown to have been predicated upon, or

induced by, errors of law, they will be accorded diminished

respect on appeal." Dedham Water Co. v. Cumberland Farms Dairy,

Inc., 972 F.2d 453, 457 (1st Cir. 1992).

The main event evokes a different criterion. We review

a district court's ultimate decision to grant or withhold an

equitable remedy for abuse of discretion. See, e.g., Lussier, 50

F.3d at 1111; Rosario-Torres, 889 F.2d at 323. Overall, the

abuse-of-discretion standard is deferential, see, e.g., Dopp v.

10

Pritzker, 38 F.3d 1239, 1253 (1st Cir. 1994), and "not appellant-

friendly," Lussier, 50 F.3d at 1111. The solicitude extended by

a reviewing court takes into account that the trial judge, "who

has had first-hand exposure to the litigants and the evidence, is

in a considerably better position to bring the scales into

balance than an appellate tribunal." Rosario-Torres, 889 F.2d at

323. For this reason, the court of appeals ordinarily will not

find an abuse of discretion unless perscrutation of the record

provides strong evidence that the trial judge indulged a serious

lapse in judgment. See id.

We inspect the voluminous record with these precepts in

mind to ascertain whether the denial of DACO's motion for

restitution is sustainable.

D. Discussion.
D. Discussion.

The court below began with the question of benefit, and

treated that question as a discrete inquiry. See TPR II, 862 F.

Supp. at 700. But this approach tends to put the cart before the

horse. A court mulling a restitutionary remedy must almost

always perform an equitable assay. Rather than isolating the

question of whether the targeted party received a benefit (and if

so, the likely extent thereof), we think it is preferable in the

first instance to incorporate that question into the assay

proper, unless, of course, the state of the evidence is such that

the court can conclude with minimal effort that no benefit has

been received. If, however, the factual situation is more cloudy

and speculative, it ordinarily will prove a more fruitful use of

11

judicial energies to fold the issue of benefit into the wider

issue of equity. Thus, the probability or improbability of

whether DACO would have regulated wholesalers' profits during the

injunction period can initially be conceived as a relevant,

though not dispositive, equitable factor. More precise findings

as to the incidence and effect of any benefit can then be

pinpointed as part of a calculation anent damages if restitution

is ultimately found to be a condign remedy in a particular

situation.

With this preface, we turn to an examination of the

judgment below. For ease in reference, we treat each group of

factual findings as a separate integer in the equitable equation.

The methodologic innovation that we have described introducing

the question of whether the wholesalers benefitted from the

injunction (and if so, to what extent) into the assay proper

does not require remand. The lower court made detailed factual

findings on the question of benefit, and we can easily align

those findings along the preferred legal matrix. See Societe des

Produits Nestle v. Casa Helvetia, Inc., 982 F.2d 633, 642 (1st

Cir. 1992); United States v. Mora, 821 F.2d 860, 869 (1st Cir.

1987).

1. Benefit. Because restitution is founded on the
1. Benefit.

concept of unjust enrichment, a court considering a request for

restitution must investigate the extent to which the target

"received a benefit." Restatement, supra, 1, cmt. a, at 12.

In a case such as this, the problems of proof are readily

12

evident. The regulation that the district court enjoined was

clearly labelled as temporary when promulgated, and the

injunction prevented further regulation (temporary or permanent).

Thus, DACO found itself, at trial, in an epistemological

quandary: it had to prove that, had the district court sent the

wholesalers packing, it (DACO) would have put into effect a more

durable regulation that would have capped GPMs at a level below

what the wholesalers actually earned during the pendency of the

injunction.

The district court found DACO's strivings inadequate to

this daunting task. In the court's view, DACO's adoption of

temporary margin controls in 1986 did not "evidence[] an intent

to implement a long-term regulatory plan" to curb profit margins,

but, instead, constituted "a short-term erratic response" to an

unprecedented situation. TPR II, 862 F. Supp. at 702. The court

stressed that the unique combination of exigent circumstances to

which DACO reacted soon dissipated, see id. at 702-03; that DACO

thereafter made an in-depth study of the desirability of

regulation, see id. at 704; and that, upon completion of the

study, DACO decided not to regulate, see id. On this basis, the

district court concluded that the stopgap measure would have been

abandoned when the exigency abated; that DACO would not have

implemented other GPM regulations during the June 1986 - June

1989 time frame; and that, therefore, the wholesalers received no

monetary advantage from the injunction. See id. at 707.

For the most part, this conclusion is adequately

13

anchored in the record. Later actions are often revelatory of

earlier intentions, see, e.g., United States v. Sutton, 970 F.2d

1001, 1007 (1st Cir. 1992) (holding that "challenged testimony,

though it centered around later-occurring events, was relevant to

show appellant's intent at an earlier date"); United States v.

Mena, 933 F.2d 19, 25 n.5 (1st Cir. 1991) (similar); see also

Dedham Water, 972 F.2d at 460 n.4 (applying principle in

affirming district court's findings in analogous circumstances),

and DACO's actions when freed from the specter of preemption

indicatequiteplainly thatlong-term regulationwasnot onthe agenda.

The United States Supreme Court decided Isla III on

April 19, 1988. Within days, DACO disseminated a press release

in which its Secretary, Pedro Ortiz Alvarez (Ortiz), crowed that

the Court had "restored to Puerto Rico the historic power to

regulate gasoline prices." Shortly thereafter, DACO commenced an

administrative proceeding to determine whether controls should be

introduced. To this end, it requested (and received) financial

data and other information from the wholesalers. It also sought

industry input as to whether the commonwealth should set either

price or margin controls on gasoline, and held public hearings

beginning in the fall of 1988 to consider the desirability of

controls, the problems that might arise incident to them, and the

reasonableness of existing profit margins in the industry.

In December, as the administrative proceeding wound

down, Esso's general manager, Charles Griffith, met with

Secretary Ortiz. According to Griffith, Ortiz informed him that

14

DACO had completed its study and decided against imposing

controls because "the market was behaving." Later that month, a

daily newspaper, El Nuevo Dia, published an article based on an

interview with Secretary Ortiz. The article reported that DACO

had elected "not to regulate gasoline prices and to instead adopt

`close supervision' of the industry." The newspaper quoted

Secretary Ortiz as conceding that the wholesalers had not earned

"excessive profits."

In January of 1989, Ortiz resigned. The new Secretary,

Jorge R. Ocasio Rodriguez (Ocasio), told Griffith that he was

aware of the earlier study and of his predecessor's conclusions,

and that he "intend[ed] to follow [Secretary Ortiz's] policies"

in regard to petroleum wholesalers. In fact, DACO did not adopt

controls until June 27, 1989 the day after the district court's

injunction had been lifted and then attributed the about-face

to newly emergent "erratic and unstable" price fluctuations in

the Puerto Rico market.

Noting this chronology of inaction laced with

reassurances, and remarking bits of trial testimony such as

Secretary Ortiz' oft-stated preference for a free market system,

the district court concluded that DACO's failure to impose any

controls for over a year after the Supreme Court's decision in

Isla III cleared the regulatory path demonstrated that it lacked

long-term regulatory intent, and that in all likelihood it would

not have regulated wholesalers' profits during the June 1986 -

June 1989 time frame even if the injunction had never issued.

15

We believe the district court's finding that, during

the injunction period, DACO would not have adopted a permanent

regulation limiting profit margins to a level lower than those

actually earned by the wholesalers is sustainable on this record.

Still, DACO's assault on this determination possesses convictive

force in one respect. The district court focused almost

exclusively on DACO's actions from and after April of 1988 (when

the Supreme Court overruled TECA and gave the green light to

state regulation) in attempting to divine DACO's regulatory

intent dating back to mid-1986. This strikes us as a

sufficiently accurate barometer of long-term regulatory intent,

but fails to deal satisfactorily with the near term. The stopgap

order that DACO promulgated on May 20, 1986 would have remained

in effect for some period but for the injunction. Thus, even if

the district court's finding is accepted, some benefit however

small still might have accrued to the wholesalers by reason of

the district court's abrupt suspension of this order.

That said, DACO's proof does not permit us to quantify

that presumed benefit. Because DACO, as the claimant for

restitution, bears the burden of proving the conferral and extent

of a benefit, see Atlantic Coast Line, 295 U.S. at 309, this

failure of proof looms large.3 We do not suggest that

3DACO's estimate of the benefit received it says that the
wholesalers charged their customers anywhere from $64,500,000 to
$250,000,000 more during the injunction period than DACO would
have permitted is not only unproven but also deserves to be
taken with a good deal of salt. DACO whips up the lower of these
frothy figures by suggesting that, absent the injunction, it
would have limited the wholesalers' GPMs to a level no higher

16

uncertainty as to the extent of the benefit acts as an automatic

bar to DACO's claim for restitution, but for purposes of

equitable balancing, it neutralizes any advantage that DACO might

otherwise achieve on the question of benefit. In the last

analysis, then, this factor is a wash.

2. The Wholesalers' GPMs. The district court analyzed
2. The Wholesalers' GPMs.

the wholesalers' profit margins during the pendency of the

injunction and concluded that they "did not benefit

disproportionately from the lack of regulation." TPR II, 862 F.

Supp. at 707. DACO disputes the relevancy of this factor. It

argues that equity does not require there to be a

disproportionate benefit, but, rather, that restitution is

appropriate so long as the targeted party benefitted at all from

the erroneous injunction. In this view of the universe, the

reasonableness of the wholesalers' earnings is beside the point.

Once again, DACO's conception of equity is too

inelastic. "The mere fact that a person benefits another is not

of itself sufficient to require the other to make restitution

therefor." Restatement, supra, 1, cmt. c, at 13. As the

district court noted, a finding that the wholesalers' actual

profit margins were unreasonably high would assist in showing

that "the money was received in such circumstances that the

than 13 per gallon throughout the relevant period, and,
therefore, that any earnings above that plateau are the fruits of
the errant injunction. The higher figure is presumably derived
in the same way, but using a projected regulatory ceiling of 8.6
per gallon (the ceiling imposed in the May 20, 1986 temporary
order) for the entire three-year span. These gaudy claims enjoy
little or no record support.

17

possessor will give offense to equity and good conscience if

permitted to retain it." TPR II, 862 F. Supp. at 701 (quoting

Atlantic Coast Line, 295 U.S. at 309). The converse is equally

true: the fact that the wholesalers' profits were reasonable (or

unreasonably low, for that matter), tends to make the denial of

restitution more in keeping with equitable principles. Either

way, the reasonableness vel non of the wholesalers' profits is a

concinnous factor for inclusion in the court's equitable

balancing. See Restatement, supra, 74, cmt. c, at 305

(suggesting that a party who receives a benefit is not liable to

make restitution therefor unless the circumstances attendant to

receipt or retention of the benefit render its enjoyment

inequitable).

The district court based its assessment that the

wholesalers' earnings during the relevant period were reasonable

on a series of subsidiary findings. It gave weight to the fact

that the wholesalers' profits "were in line with profits earned

during the unregulated period after federal controls were

terminated, and before the 1986 regulation was enacted." TPR II,

862 F. Supp. at 706. It then performed a comparative analysis4

and verified that the wholesalers' returns "were in line with

various competitive industries and investment alternatives"

during the injunction period. Id. Last but not least, the court

4The court used as congeners such benchmarks as returns on
assets in the electric utility industry, returns on government
bonds, and returns on investments in the industrial distribution,
services, and fuel industries. See TPR II, 862 F. Supp. at 706.

18

observed that the wholesale market remained competitive

throughout the period, thus ensuring that margins were held to

acceptable levels. See id.

DACO suggests that these findings have a tenuous basis

in fact but this is a fairly typical rejoinder of a party

seeking to surmount the high hurdle of clear-error review. The

district court relied mainly on the testimony of four economists

presented as expert witnesses by the wholesalers. We have

studied their testimony (including the plethoric exhibits

associated therewith), and we are fully persuaded that, given

this evidence, the district court had a solid basis for finding

that, during the injunction period, the wholesale market in

Puerto Rico was staunchly competitive, and that the profits

earned by Texaco, Esso, and Shell were reasonable. Although

DACO's expert testified in a diametrically opposite vein,

choosing between experts in a jury-waived trial is principally

the business of the district court, not the court of appeals.

See, e.g., Keller v. United States, 38 F.3d 16, 25 (1st Cir.

1994). Consequently, we decline DACO's invitation to second-

guess the trial court's scorecard in respect to dueling

experts.5 See Anderson v. City of Bessemer City, 470 U.S. 564,

5The court below offered sound reasons for siding with the
wholesalers' experts. Equally as important, it viewed the
testimony of appellant's expert, Dr. Logan, "with some skepticism
in light of his intimate involvement with DACO," his former
employment by DACO's counsel, and his status as "the putative
author of the 13-cent regulation." TPR II, 862 F. Supp. at 706.

Though DACO cries foul due to the court's "gratuitous swipe" at
Dr. Logan's bona fides, such credibility determinations are the
prerogative indeed, the duty of the district judge in a bench

19

575 (1985) (explaining the virtual impregnability of a trial

judge's finding based on a reasoned decision to credit the

testimony of one witness over another).

3. Delay. In weighing the equities, the lower court
3. Delay.

found that "DACO's actions in seeking restitution have been

marked by unreasonable delay." TPR II, 862 F. Supp. at 707.

DACO asserts that the court's inclusion of this factor is

improper as a matter of law because it is the functional

equivalent of raising a laches defense against the government.

We do not agree.

It is true that laches ordinarily cannot be raised as a

defense against the government in an action brought to enforce a

public right or protect a public interest. See Illinois v.

Kentucky, 500 U.S. 380, 388 (1991) (noting that "the laches

defense is generally inapplicable against a state"); Block v.

North Dakota ex rel Bd. of Univ. and Sch. Lands, 461 U.S. 273,

294 (1983) (O'Connor, J., dissenting) (collecting authorities).

But the unavailability of laches as a defense does not mean that

the sovereign's dilatoriness in seeking an equitable remedy must

be totally disregarded by a chancery court. We explain briefly.

An equitable defense and an equitable factor are

conceptually and practically distinct. The divagation is subtle,

but significant. An equitable defense "bar[s] the cause of

trial. See, e.g., Anthony v. Sundlun, 952 F.2d 603, 606 (1st

Cir. 1991) (stating that appellate courts "ought not to disturb
supportable findings, based on witness credibility, made by a
trial judge who has seen and heard the witnesses at first hand").

20

action entirely, or bar[s] . . . the equitable remedy." 1 Dan B.

Dobbs, Law of Remedies 2.4(1), at 91 (2d ed. 1993). Moreover,

in evaluating an equitable defense, the court considers only the

plaintiff's conduct and is free to "deny all remedies if the

plaintiff does not meet equity's standards." Id. 2.4(5), at

108-09. In contrast, an equitable factor must always be weighed

in concert with other relevant factors. See id. at 109.

Moreover, as part of balancing the equities, the court "looks at

the conduct of both parties and the potential hardships that

might result from a judicial decision either way." Id. From a

practical standpoint, then, "[e]ven when an equitable defense

does not bar the claim, the total balance of equities and

hardships might do so." Id., 2.4(1), at 91.

Here, the district court explicitly disclaimed any

intent to apply the equitable doctrine of laches as a bar to

DACO's motion. See TPR II, 862 F. Supp. at 702 n.8. In its

search for the case's equitable epicenter, however, the court was

fully entitled to use delay as one of a number of factors bearing

on the outcome. This is precisely what Judge Fuste did, and

there is no principled basis for DACO's suggestion that he

mouthed the vocabulary of equitable balancing as a means of

surreptitiously injecting a barred laches defense into the case.

Indeed, in considering DACO's delay as part of the equitable

balance, the judge merely honored the precept that the

government, when it seeks an equitable remedy, "is no more immune

to the general principles of equity than any other litigant."

21

United States v. Second Nat'l Bank, 502 F.2d 535, 548 (5th Cir.

1974).

DACO also contends that the district court clearly

erred in finding prejudicial delay. This contention is

unpersuasive. The evidence shows that DACO first raised the

refund issue in its June 1989 interim order. DACO did nothing

further on this score until ten months later, when it sent

letters to the wholesalers conveying its "preliminary views" on

the suitability of refunds. DACO then dropped the refund issue

like a hot potato and did not resurrect it until August 20, 1992,

when the then-Secretary, Guillermo Mojica Maldonado (Mojica),

announced at a press conference that he planned to seek refunds

from the wholesalers. All told, DACO waited three years after

this court vacated the injunction to commit itself to the pursuit

of restitution.

DACO does not dispute the accuracy of this chronology,

but takes vigorous exception to the court's conclusion that

"[t]his type of stopping and starting, delaying and then

proceeding[,] must be considered prejudicial to the wholesalers,

who had to run their business with the threat of multimillion

dollar refunds occasionally flaring up and then disappearing."

TPR II, 862 F. Supp. at 707. DACO offers a myriad of excuses for

its procrastination; it intimates that, as a government agency,

torpor is to be expected; it claims to have undergone numerous

changes in staff and leadership during the period; and it says

that its attention was diverted because of ongoing litigation

22

over its proposed 13 GPM that lasted until March of 1991. The

district court dismissed these excuses as lame. We, too, find

them insufficient.

Government agencies, like private corporations, have an

obligation to conduct their affairs in a reasonably efficient

manner. See Potomac Elec. Power Co. v. ICC, 702 F.2d 1026, 1034

(D.C. Cir. 1983) (warning that "excessive delay saps the public

confidence in an agency's ability to discharge its

responsibilities"). An entity that chooses to indulge

inefficiencies cannot expect to be granted special dispensations.

If "[t]he mills of the bureaucrats grind slow," United States v.

Meyer, 808 F.2d 912, 913 (1st Cir. 1987), then the agency, having

called the tune, must pay the piper. See, e.g., United States v.

Baus, 834 F.2d 1114, 1123 (1st Cir. 1987) (holding that the

government "should not be allowed by words and inaction to lull a

party into a false sense of security and then by an abrupt volte-

face strip the party of its defenses"); Cutler v. Hayes, 818

F.2d 879, 896 (D.C. Cir. 1987) (explaining that, when an

administrative agency loiters, "the consequences of dilatoriness

may be great"). By like token, neither government agencies nor

private employers can escape responsibility for the exercise of

due diligence merely because of employee turnover. Department

heads and other key personnel may come and go, but the

institution must endure. See Cutler, 818 F.2d at 896-97.

Similarly, preoccupation with other litigation is hardly a reason

for extreme delay. See, e.g., Mendez v. Banco Popular, 900 F.2d

23

4, 6-7 (1st Cir. 1990) (district court did not abuse discretion

in failing to grant extension of time based on attorney's busy

trial calendar); Pinero Schroeder v. Federal Nat'l Mortgage

Ass'n, 574 F.2d 1117, 1118 (1st Cir. 1978) (same). And in all

events, litigation ending in early 1991 cannot credibly explain

why DACO took no firm position until August 1992.

We will not wax longiloquent. It is trite, but true,

that equity ministers to the vigilant, not to those who sleep

upon their rights. See, e.g., Sandstrom v. Chemlawn Corp., 904

F.2d 83, 87 (1st Cir. 1990). Given the uncontradicted evidence,

we believe that the district court acted lawfully in ruling that

unreasonable delay on DACO's part militates against relief.

4. Bad Faith. It is old hat that a court called upon
4. Bad Faith.

to do equity should always consider whether the petitioning party

has acted in bad faith or with unclean hands. See Precision

Instrument Mfg. Co. v. Automotive Maintenance Mach. Co., 324 U.S.

806, 814 (1945) (explaining that the doctrine of unclean hands

"closes the doors of a court of equity to one tainted with

inequitableness or bad faith relative to the matter in which he

seeks relief"); see also Dobbs, supra, at 109; see generally K-

Mart Corp. v. Oriental Plaza, Inc., 875 F.2d 907, 910-12 (1st

Cir. 1989) (discussing "unclean hands" doctrine in relation to

the equitable maxim that "he who seeks equity must do equity").

But even though equitable doctrines are renowned for their

elasticity, they are not without all limits. The doctrine of

unclean hands only applies when the claimant's misconduct is

24

directly related to the merits of the controversy between the

parties, that is, when the tawdry acts "in some measure affect

the equitable relations between the parties in respect of

something brought before the court for adjudication." Keystone

Driller Co. v. General Excavator Co., 290 U.S. 240, 245 (1933).

In the case at bar, the test was met. The district

court found pervasive evidence of bad faith on DACO's part,

directly related to the core elements of the dispute sub judice.

See TPR II, 862 F. Supp. at 707. Although DACO brands this

finding clearly erroneous and worse for instance, DACO claims,

without a shred of record support, that the finding is "tinged

with political, rather than legal, analysis," Appellants' Brief

at 37 we believe that there is ample evidence in the record to

support the district court's perspective.

In making its finding of bad faith, the lower court

relied heavily on two occurrences. The court found that, in the

spring of 1986, while the government of Puerto Rico was pondering

the advisability of an excise tax, see supra pp. 3-4, high-level

officials, including the President of the Senate and the

Secretary of State, summoned executives of the three appellees to

a series of private audiences. The court further found that "the

wholesalers were warned that they should cooperate with the

government in the implementation of the new tax by refraining

from further lowering gas prices, so that the government could

achieve revenue from the tax . . . ." TPR II, 862 F. Supp. at

695. The discussions were blunt. To offer one illustration, Jose

25

Luis Blanco, Esso's operations manager at the time, testified

that the Secretary of State uttered "a very strong threat" to the

effect that, if Esso failed to acquiesce in the government's

strategy, the company's continued existence in Puerto Rico would

be "very difficult."

DACO claims that these thinly veiled minations had no

bearing on margin regulations imposed well after the excise tax

was enacted. This claim is disingenuous. Past is prologue, and

the district court plausibly could find as it did that the

1986 meetings were part of the same overall course of conduct

that led to the push for restitution six years later. After all,

the meetings involved the same principals and the same subject

matter, and, with the benefit of hindsight, can be viewed as a

harbinger of things to come. On this basis, the district court

did not err in concluding that the 1986 meetings were relevant to

DACO's good faith (or lack thereof) in seeking restitution some

years thereafter. This is particularly true in that, shortly

after the government "suggested" that the wholesalers refrain

from lowering gasoline prices, DACO attempted to justify its

regulation of GPMs on the ground that the wholesalers' prices

were too high. Thus, in effect, DACO bore a degree of

responsibility for creating the "excess profits" that it later

attempted to recapture, first via the excise tax, and then by

dint of the motion for restitution. The second pillar of the

court's conclusion lacks the dramatic impact of these strong-arm

tactics, but affords a closer temporal link. The court thought

26

that the actions of Secretary Mojica in and around 1992 betokened

bad faith. See TPR II, 862 F. Supp. at 707. At trial, Mojica

admitted that he had chosen the 8.6 figure based not on any

economic rationale, but as a stratagem to enhance DACO's

negotiating position. The district court found this behavior

"irresponsible." Id. And Secretary Mojica made a bad situation

worse by issuing a remedial order that singled out Texaco, Esso,

and Shell, whilst leaving unscathed a number of other wholesalers

who had exceeded the 8.6 margin. The lower court found that

these efforts to exact restitution from the appellees and from

no other similarly situated wholesalers smacked of bad faith,

see id., and DACO can point to no evidence that refutes the

implication of selective targeting in retaliation for the

appellees' active opposition to the government's desires.

We think that the record as a whole corroborates the

district court's determination that the 8.6 figure was chosen as

a crude club to bludgeon the wholesalers into a settlement,

without regard for the economic realities of the petroleum

industry. Indeed, the nisi prius roll is replete with evidence

suggesting this unhappy conclusion. For one thing, DACO's chief

economist, Carlos Lasanta, testified that he had advised his

superiors that the 8.6 margin was economically inadequate, yet

DACO persisted in its plan. For another thing, Secretary Mojica

testified that he issued the remedial order and set the ceiling

27

without even pausing to review the administrative record.6

In sum, the grounds relied upon by the district court

pass muster. Because the remedy of restitution is premised on

the concept of unjust enrichment, DACO's actions both in 1986 and

in 1992 sabotage its present attempt to seize the high ground by

asserting that the wholesalers took unfair advantage of the

erroneous injunction. Hence, we are unwilling to disturb the

court's determination that DACO's actions were tinged with bad

faith.

5. Reliance. A court considering a restitutionary
5. Reliance.

remedy may properly weigh the factor of reliance in its equitable

balancing. See Moss v. Civil Aeronautics Bd., 521 F.2d 298 (D.C.

Cir. 1975), cert. denied, 424 U.S. 966 (1976). In doing so here,

the court found that the statements of two different Secretaries

(Ortiz and Ocasio) led the wholesalers to believe that DACO

regarded their margins "to be reasonable, and therefore, that

restitution of such reasonable profits would not later be

demanded." TPR II, 862 F. Supp. at 708. Moreover, the

wholesalers convinced the court that they justifiably relied on

6DACO asserts that, because the remedial order "was only the
starting point for [its] consideration of the appropriate level
of refunds," the terms of the order "cannot rationally be
considered evidence of bad faith." Appellants' Brief at 38-39.
This ipse dixit does not withstand scrutiny. When Secretary

Mojica announced the promulgation of the remedial order, he
presented the 8.6 figure not as a guidepost to a determination
of the eventual measure, but as a fait accompli. Moreover, the
order itself described "a maximum profit margin of 8.6 cents per
gallon" as "conclusive and undebatable." DACO retreated from
this figure only after the wholesalers sought judicial
protection.

28

those statements in formulating their business plans. See id.

The record is consistent with these findings. It is

not farfetched to think that Secretary Ortiz's statements, see,

e.g., supra p.14, could have lulled the wholesalers into a false

sense of security. See, e.g., Insurance Co. v. Mowry, 96 U.S.

544, 547 (1877) ("A representation as to the future can be held

to operate as an estoppel . . . where it relates to an intended

abandonment of an existing right, and is made to influence

others, and by which they have been induced to act."). Then,

too, the wholesalers adduced explicit evidence of reliance,

credited by the trier. A number of executives testified that

they took the Secretary's statements regarding the reasonableness

of their firms' profit margins at face value, and authorized

investments in Puerto Rico that they would not otherwise have

approved. We cannot hold that the court clearly erred in

detecting detrimental reliance on these facts. See, e.g.,

Cumpiano, 902 F.3d at 152 ("Where there are two permissible views

of the evidence, the factfinder's choice between them cannot be

clearly erroneous.") (quoting Anderson, 470 U.S. at 573-74).

The court's finding of detrimental reliance is

bolstered by another circumstance. When Judge Fuste issued the

injunction, DACO could have but did not ask him to require a

bond or an escrow account. See Inland Steel Co. v. United

States, 306 U.S. 153, 156-57 (1939) (holding that court acted

lawfully in conditioning injunction against ICC on establishment

of escrow account to defray possible restitutionary obligations).

29

Although a bond or escrow fund is not a prerequisite for

restitution in cases involving injunctions, see, e.g., Newfield

House, Inc. v. Mass. Dep't of Pub. Welfare, 651 F.2d 32, 39 n.12

(1st Cir.) (holding that "the need for a[n injunction] bond is

limited to the recovery of damages and has no application to a

claim of restitution of amounts subsequently found to have been

undue"), cert. denied, 454 U.S. 1114 (1981), a court called upon

to perform equitable balancing may nonetheless weigh the absence

of a bond or other fund as a factor in its equitable assay. See

Moss, 521 F.2d at 314; see also Thompson v. Washington, 551 F.2d

1316, 1321 (D.C. Cir. 1977). This is the music to which the

district court marched. See TPR II, 862 F. Supp. at 708. Just

as the existence of a bond or other fund would have undercut any

claim of detrimental reliance, so, too, their absence lends

credence to the wholesalers' lament.

6. Public Interest. It cannot be gainsaid that a
6. Public Interest.

court asked to dispense equitable remediation should give serious

consideration to the public interest. See Morgan, 307 U.S. at

194 ("It is familiar doctrine that the extent to which a court of

equity may grant or withhold its aid, and the manner of moulding

its remedies may be affected by the public interest involved.");

Rosario-Torres, 889 F.2d at 323 (similar). Here, the district

court found that the public interest would be disserved by

granting restitution. The court reasoned "that investment in

Puerto Rico by the gasoline companies would be curtailed, or that

Esso, Texaco and/or Shell [might] even leave the island

30

completely, resulting in a possible loss of jobs and

competitiveness in the wholesaling market." TPR II, 862 F. Supp.

at 708.

At trial, DACO made no effort to contradict the

wholesalers' testimony on this point. In this venue, it likewise

abjures any challenge to the testimony's relevance. Instead,

DACO complains about the district court's related statement that

DACO had "failed to propose a cogent plan to restore losses" to

the Puerto Rico motorists who bore the brunt of the alleged

overcharges. Id. In DACO's eyes, depositing a restitutionary

award into the commonwealth's general fund comprises an entirely

satisfactory trickle-down substitute for the court's envisioned

plan of direct payments to motorists.

Once again, DACO's fascination with a single tree

obscures its view of the forest. The district court's rescript,

properly read, does not hold that depositing refunds into the

commonwealth's coffers is repugnant to the public interest in an

absolute sense. The court's point is quite different. Judge

Fuste expressed the belief that the clear harm to the Puerto Rico

economy that would result from levying a huge restitution award

outweighed the benefit accruing from refunds that would not

directly compensate the injured victims. Though such a judgment

call may be arguable, we are unprepared to say that it represents

a clearly erroneous assessment of the evidence. Cf., e.g., Moss,

521 F.2d at 308 ("The bite which is effectively taken from future

earnings by a recovery fund may in turn impair the health of the

31

industry, to the disadvantage of the fare-payers themselves.").

7. Recapitulation. We have fashioned a tried-and-true
7. Recapitulation.

framework for gauging claimed abuses of discretion:

In making discretionary judgments, a district
court abuses its discretion when a relevant
factor deserving of significant weight is
overlooked, or when an improper factor is
accorded significant weight, or when the
court considers the appropriate mix of
factors, but commits a palpable error of
judgment in calibrating the decisional
scales.

United States v. Roberts, 978 F.2d 17, 21 (1st Cir. 1992); accord

Dopp, 38 F.3d at 1253 (listing other cases). Here, the record

discloses that the district court made a careful appraisal within

the contours of this tested framework. DACO has failed to show

that the court, in performing this appraisal and arriving at its

judgment, overlooked appropriate factors, considered

inappropriate factors, or made a detectable mistake in weighing

the evidence. Mindful, as we are, that "[t]he very nature of a

trial judge's interactive role assures an intimate familiarity

with the nuances of ongoing litigation a familiarity that

appellate judges, handicapped by the sterility of an impassive

record, cannot hope to match," Dopp, 38 F.3d at 1253, we decline

to place a heavy appellate thumb on the scales of justice and

thereby upset the trier's delicate balancing of the competing

equities in this unusual situation.

III. OTHER ISSUES
III. OTHER ISSUES

In addition to its assault upon the district court's

equitable determination, DACO mounts a more narrowly targeted

32

offensive on a second front. In this regard, DACO assigns error

to a series of discovery rulings that together forced the

disclosure of eighteen agency documents, mostly in the nature of

correspondence between DACO (or other government representatives)

and DACO's outside counsel. This attempt to open a second front

is little more than a diversionary sortie, poorly outfitted and

easily repulsed.

We set the stage. In ordering disclosure as a subset

of a broader order that DACO turn over the "complete

administrative file" in the case to the wholesalers, the court

determined that these writings were not entitled to protection

under either the attorney-client privilege or the deliberative

process privilege. We consider the district court's privilege

rulings cognizant that, "[b]ecause we regard the existence of a

privilege as a factual determination for the trial court . . .

the district court's finding of no privilege can be overturned

only if clearly erroneous." United States v. Wilson, 798 F.2d

509, 512 (1st Cir. 1986); accord United States v. Bay State

Ambulance & Hosp. Rental Serv., Inc., 874 F.2d 20, 27 (1st Cir.

1989). Since local law does not supply the rule of decision

anent DACO's claim for restitution, federal common law governs

our analysis of the wrangling over privileges. See Fed. R. Evid.

501.

A. Attorney-Client Privilege.
A. Attorney-Client Privilege.

The Supreme Court has described the attorney-client

privilege as "the oldest of the privileges for confidential

33

communications known to the common law." Upjohn Co. v. United

States, 449 U.S. 383, 389 (1981). The privilege protects "not

only the giving of professional advice to those who can act on it

but also the giving of information to the lawyer to enable him to

give sound and informed advice." Id. at 390. The purpose of the

privilege is "to encourage full and frank communications between

attorneys and their clients and thereby promote broader public

interests in the observance of law and administration of

justice." Id. at 389.

In its unpublished order requiring revelation of the

eighteen documents, the district court rejected DACO's claim of

attorney-client privilege on two grounds. First, the court found

that DACO waived any such privilege because four of the documents

"were inadvertently shown to Texaco's legal representatives"

during their initial review of the administrative file.7 We

examine the underpinnings of this ruling.

It is apodictic that inadvertent disclosures may work a

waiver of the attorney-client privilege. See, e.g., In re Sealed

Case, 877 F.2d 976, 979-80 (D.C. Cir. 1989); In re Grand Jury

Proceedings, 727 F.2d 1352, 1356 (4th Cir. 1984); see also

7At trial, the district court described how this bevue
occurred:

You people [DACO] told them [Texaco's
representatives], here is a room full of
papers, you can take a look at them. They
looked at them, they found them and then when
you discovered that they had seen them and
that they wanted copies of those, then you
came running here seeking an order.

34

Allread v. City of Grenada, 988 F.2d 1425, 1434 (5th Cir. 1993).

Thus, it beggars credulity to argue that the district court erred

in entering a turnover order anent the four documents to which

Texaco's representatives previously had been exposed. Apart from

that fairly obvious conclusion, however, it also must be

recognized that inadvertent disclosures can have a significance

that transcends the documents actually disclosed.

In general, a waiver premised on inadvertent disclosure

will be deemed to encompass "all other such communications on the

same subject." Weil v. Investment/Indicators, Research & Mgmt.,

Inc., 647 F.2d 18, 24-25 & n.13 (9th Cir. 1981); accord In re

Sealed Case, 877 F.2d at 980-81; see also 4 J.M. Moore & J.D.

Lucas, Moore's Federal Practice 26.11[2], at 26-185 (1994).

Since DACO does not contend that the four carelessly unveiled

documents concerned a different topic than the other fourteen

documents in the group, we think that, under the deferential

standard of review applicable to privilege questions, the

district court had an adequate basis for disregarding the

attorney-client privilege vis-a-vis all eighteen documents.

The district court's alternative ground for ordering

disclosure is equally solid. The court found as a fact, after in

camera inspection of the disputed documents, that outside counsel

had become an integral part of the adjudicative decisionmaking

process. Based on this factual finding, the court ruled that the

attorney-client privilege did not apply because, when an

administrative agency engaged in an adjudicative function

35

delegates its responsibilities to outside counsel, then the work

product generated by the firm is part of the adjudicative process

itself and, hence, beyond the reach of the attorney-client

privilege.

DACO resists this analysis, pontificating that such a

doctrine "would render the attorney-client privilege meaningless

where state or local governments employ counsel and rely on their

advice." Appellants' Brief at 47. But this trumpeting

misapprehends the tenor of the district court's ruling. The

attorney-client privilege attaches only when the attorney acts in

that capacity. See Bay State Ambulance, 874 F.2d at 27-28;

Wilson, 798 F.2d at 512; United States v. United Shoe Mach.

Corp., 89 F. Supp. 357, 358-59 (D. Mass. 1950). Here, the

district court found, in substance, that DACO delegated

policymaking authority to its outside counsel to such an extent

that counsel ceased to function as lawyers and began to function

as regulators. Therefore, DACO could not invoke the attorney-

client privilege in connection with the documents at issue.

We cannot term this finding clearly erroneous. The

record shows that DACO's counsel had, in fact, drafted remedial

orders that DACO adopted verbatim; that Dr. Logan, an employee of

DACO's counsel, was the "putative author of the [1989] 13-cent

regulation," TPR II, 862 F. Supp. at 706; and that counsel had

developed adjudicative data that the agency later reissued as its

own. Nor can we term the finding unsupported in law. See Mobil

Oil Corp. v. Department of Energy, 102 F.R.D. 1, 9-10 (N.D.N.Y.

36

1983) (rejecting claim of attorney-client privilege where

proponent failed to show that lawyers were acting in their

capacities as attorney advisors rather than as regulatory

decisionmakers); Coastal Corp. v. Duncan, 86 F.R.D. 514, 521 (D.

Del. 1980) (similar; observing that such a showing is

particularly important in a situation in which "attorneys

function primarily as policy-makers rather than as lawyers").

B. Deliberative Process Privilege.
B. Deliberative Process Privilege.

DACO also takes exception to the district court's

ruling that the deliberative process privilege did not exempt the

same cache of documents from production. The deliberative

process privilege "shields from public disclosure confidential

inter-agency memoranda on matters of law or policy." National

Wildlife Fed'n v. United States Forest Serv., 861 F.2d 1114, 1116

(9th Cir. 1988). The privilege rests on a policy of affording

reasonable security to the decisionmaking process within a

government agency. See NLRB v. Sears, Roebuck & Co., 421 U.S.

132, 150 (1975).

The Supreme Court has restricted the deliberative

process privilege to materials that are both predecisional and

deliberative. See EPA v. Mink, 410 U.S. 73, 88 (1973). In other

words, to qualify for the privilege, a document must be (1)

predecisional, that is, "antecedent to the adoption of agency

policy," and (2) deliberative, that is, actually "related to the

process by which policies are formulated." National Wildlife,

861 F.2d at 1117 (citation omitted). Because the deliberative

37

process privilege is restricted to the intra-governmental

exchange of thoughts that actively contribute to the agency's

decisionmaking process, factual statements or post-decisional

documents explaining or justifying a decision already made are

not shielded. See Sears, Roebuck, 421 U.S. at 151-52; Mink, 410

U.S. at 88; see also Developments in the Law Privileged

Communications, 98 Harv. L. Rev. 1450, 1620-21 (1985).

Even if a document satisfies the criteria for

protection under the deliberative process privilege,

nondisclosure is not automatic. The privilege "is a qualified

one," FTC v. Warner Communications Inc., 742 F.2d 1156, 1161 (9th

Cir. 1984), and "is not absolute." First Eastern Corp. v.

Mainwaring, 21 F.3d 465, 468 n.5 (D.C. Cir. 1994). Thus, in

determining whether to honor an assertion of the privilege, a

court must weigh competing interests. See id.; see also

Developments, supra, at 1621 (noting that courts asked to apply

the privilege must engage in "ad hoc balancing of the evidentiary

need against the harm that may result from disclosure").

At bottom, then, the deliberative process privilege is

"a discretionary one." In re Franklin Nat'l Bank Sec. Litig.,

478 F. Supp. 577, 582 (E.D.N.Y. 1979). In deciding how to

exercise its discretion, an inquiring court should consider,

among other things, the interests of the litigants, society's

interest in the accuracy and integrity of factfinding, and the

public's interest in honest, effective government. See Warner

Communications, 742 F.2d at 1162. Consequently, "where the

38

documents sought may shed light on alleged government

malfeasance," the privilege is routinely denied. Franklin, 478

F. Supp. at 582; see also Bank of Dearborn v. Saxon, 244 F. Supp.

394, 401-03 (E.D. Mich. 1965) ("the real public interest under

such circumstances is not the agency's interest in its

administration but the citizen's interest in due process"),

aff'd, 377 F.2d 496 (6th Cir. 1967).

Assuming, arguendo, that the documents at issue are

both predecisional and deliberative a matter on which we need

not opine the district court's rejection of the deliberative

process privilege is nevertheless impervious to DACO's attack.

The court supportably found that the wholesalers had made a

"strong showing" of arbitrariness and discriminatory motives on

DACO's part. Given the discretionary nature of the deliberative

process privilege, and the district court's warranted conclusion

that DACO acted in bad faith over a lengthy period of time, see

supra Part II(D)(4), we resist the urge to tinker with the

court's determination that the wholesalers' interest in due

process and fairness outweighed DACO's interest in shielding its

deliberations from public view.8

8We note in passing that the district court's waiver
analysis, made in connection with DACO's claim of attorney-client
privilege, see supra Part III(A), arguably applies to the

deliberative process privilege as well. Because the privilege
lacks vitality here, we will not pursue the question of waiver
beyond noting that it is apparently unsettled. Compare, e.g.,

Clark v. Township of Falls, 124 F.R.D. 91, 93-94 (E.D. Pa. 1988)

(holding that a municipality waived any claim of executive
privilege by prior disclosure) with, e.g., Redland Soccer Club,

Inc. v. Department of Army, F.3d , (3d Cir. 1995)

[1995 WL 289681 at *25] (holding that inadvertent disclosure of

39

C. Harmless Error.
C. Harmless Error.

We add a postscript to our discussion of the district

court's discovery rulings. In all events, we do not believe that

the district court's rejection of DACO's privilege claims

affected DACO's substantial rights. Any error was, therefore,

harmless. See Fed. R. Civ. P. 61 (explaining that a court "must

disregard any error or defect in the proceeding which does not

affect the substantial rights of the parties").

In denying DACO's claim for restitution, the district

court mentioned only one of the eighteen challenged documents (a

June 1989 memorandum from DACO's outside counsel to Governor

Hernandez Colon). See TPR II, 862 F. Supp. at 705. The court

cited this memorandum as additional support for its factual

finding that contemporaneous events, rather than a long-term

commitment to regulation, spurred DACO's actions in June of 1989.

The memorandum comprised only a small fraction of the evidence on

which the court relied in reaching this conclusion. See supra

Part II(D)(1) (limning other evidence). It is axiomatic that a

litigant's substantial rights are not offended by the admission

of cumulative evidence. See, e.g., Doty v. Sewall, 908 F.2d

1053, 1056 (1st Cir. 1990); Garbincius v. Boston Edison Co., 621

F.2d 1171, 1175 (1st Cir. 1980); deMars v. Equitable Life Assur.

Soc'y, 610 F.2d 55, 62 (1st Cir. 1979).

IV. CONCLUSION
IV. CONCLUSION

documents did not give rise to waiver of deliberative process
privilege).

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We need go no further. There are neither precise

answers nor perfect solutions when a court is forced to deal with

the shadowy world of what might have been. Where, as here, the

customary deference accorded to the trial court as factfinder is

augmented by due respect for that court's equitable discretion,

appellate courts should hesitate to meddle. In this instance,

the judge, who had handled the case from its inception, weighed

and balanced the equities, and juxtaposed the parties' rights

with painstaking care. Thus, whether or not we, if writing on a

pristine page, might have concluded otherwise, we are unable to

tease an abuse of discretion out of what is quintessentially a

judgment call.

Affirmed.
Affirmed.

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