SUBJECT: Hearing on Indemnification and Cross-Waiver Authority before the
Subcommittee on Space and Aeronautics (Chrm. Rohrabacher) of the House Committee on Science. October 30, 1997

MEMBERS Chrm. Rohrabacher (R-CA), Reps. Bartlett (R-MD), Salmon (R-AZ),
PRESENT: Cook (R-UT), Cannon (R-UT), Cramer (D-AL), Luther (D-MN),
Lofgren (D-CA), Jackson Lee (D-TX)

WITNESSES: June Edwards, Associate General Counsel, NASA
Jerry Rising, VP Reusable Launch Vehicles, Lockheed Martin
Dr. Robert Lindberg, VP X-34 Program, Orbital Sciences Corporation

OPENING STATEMENTS

Chrm. Rohrabacher noted this hearing was a departure from the usual Committee hearing in that it is about space law and not about space programs. When he ran for Congress his slogan was "Vote for Dana, at least he's not a lawyer." We are encountering new approaches that are bumping up against old laws. The Administration has proposed an amendment to the Space Act that would address needed changes in indemnification and cross waiver authority. The Senate has proposed a temporary authority covering only X-33 and X-34.

Rep. Cramer, a lawyer himself, admitted the complexity of the issue before the Committee. When we talk of indemnifications and cross-waivers of liability, we are talking about the appropriate allocation of risk and responsibility between the government and the private sector. Rep. Cramer expressed strong support for the advanced space transportation R&D programs, including X-33 and X-34. He expressed his support for providing appropriate indemnification and waivers to allow these programs to proceed.

Ms. Edwards, NASA, presented a discussion of cross-waivers and indemnification. She noted that nothing in the authority sought by the Administration waives the right of the individual to bring suit. This amendment would not only save money, but would encourage space activities by reducing uncertainties. What NASA is seeking is an explicit statement of NASA's ability to waive claims of the United States Government in its domestic cross-waivers. Ms. Edwards next provided a history of NASA's indemnification authority dating back to the 1970's and the development of the Space Shuttle. She concluded that we are entering a highly creative time in space and we need to respond and allow new technologies to come forward.

Mr. Rising, Lockheed Martin, described the unique relationship between industry and government under the X-33 program. To address both the development costs and the impact of budget constraints, NASA has taken a bold step with the X-33 program. However, the X-33 Cooperative Agreement has placed the X-33 flight test program in the "gap" wherein traditional government coverage for third party liability is unavailable either under Public Law 85-804 or under the Space Act so NASA cannot provide indemnification for tort liability to third parties. Lockheed Martin fully supports the language drafted by NASA. Although the flight tests are not scheduled to begin until mid 1999, there are two reasons Lockheed Martin urges consideration as soon as possible: 1) we need the government's determination of insurance requirement, and the government's indemnity coverage to allow us to work with insurers; and, the potential RLV customer community and the investment community perceive this legislation as an important indicator of the government's support and commitment to the X-33 program and the full scale operational RLV.

Dr. Lindberg, Orbital Science, testified that the first X-34 vehicle is in fabrication and the first flight is projected for December 1998. Before even one flight can be conducted, it is necessary to have in place a means of protection against damage, loss, or injury which might result from the operation of OSC's experimental vehicle for NASA. Existing statutes regarding third party liability do not recognize the reality of the new business relationships that NASA is forging in an attempt to keep costs down and be more responsive to industry and national priorities. He concluded the OSC supports NASA's initiative to seek statutory authority to enter into indemnification agreements that fall outside the scope of existing legislation, and expressed hope that the Committee could reach agreement with the Senate on this critical legislation.

QUESTIONS AND ANSWERS

Chrm. Rohrabacher was interested in the cost of flying without this authority. Mr. Rising asked to provide that information for the record and when pressed, estimated that insurance would cost in excess of $20 million per flight. The Chairman responded that he did not think that this was any way to drive launch costs down.

Mr. Luther was interested in what precedent there is in the government for this authority. Ms. Edwards outlined the existing statutory authority for indemnification agreements in defense-related activities, the Department of Transportation's cross-waiver and indemnification authority under the Commercial Space Launch Act and authority contained in the Price-Anderson Act's nuclear energy research liability risk allocation legislation. Mr. Luther offered that it would be helpful to understand what other authority is out there and asked for a diagram of precedent. He was also interested in whether or not the government would grant indemnification and cross-waivers in the event of breach of contract. There appears to be substantial confusion about responsibilities and "liabilities" under the terms of a contract (contractual matters) and those liabilities that would be covered by cross-waivers and indemnification (liability to third parties for tort or negligent activities, not contractual obligations).

Mr. Cramer asked for Ms. Edwards to provide an example of cross-waivers and what would happen in the case of contractor negligence. Ms. Edwards gave an example and noted that waivers do not override the provision of the contract. Mr. Cramer expressed gratification that the Senate is working on this issue in S. 1250 and was interested in hearing the witnesses' views of the Senate language. Ms. Edwards replied that NASA has two concerns: 1) it is of a limited nature and applies only to X-33 and X-34. In this era of creativity we need broader authority or we could be in a position of having to seek new authority next year, and 2) USA is very serious about commercializing the Space Shuttle and we would need this authority to provide a reasonable risk allocation mechanism for this approach as well. Mr. Lindberg replied that the gap between the Space Act authority and the Commercial Space Launch Act authority needs to be addressed.

Mr. Bartlett wanted to know why it wasn't in the best interest of the government to self-insure. Mr. Edwards replied that the Space Act requires NASA to encourage commercial activities in space, and requiring industry to obtain a reasonable amount of insurance helps spur development of the industry and prepares the industry better to operate in the commercial sector when the time comes. It also helps establish a commercial insurance industry,and raised the insurance industry's comfort level with this type of activity.

Ms. Lofgren offered no questions but made a strong statement of support to move this legislation quickly, inasmuch as it really is not doing anything new or different and is very much within the mainstream of current policies. Chrm. Rohrabacher noted that that is the intent of the Subcommittee and the Committee.

Mr. Davis asked program specific information on the X-34. He wanted to know what the plan was if X-34 were destroyed during test flight. Mr. Lindberg responded that the NASA manager convened a team that recommended a second vehicle. The current contract calls for two flights with an option for 25. If X-34 funding is zeroed out in 1999 and beyond, there will be no second vehicle and there will only be two flight tests. On further questioning Mr. Lindberg noted that not all test objectives could be met at White Sands and they are looking at conducting some flight tests at the Eastern Test Range and landing at Kennedy Space Center.

Mr. Salmon wanted to know what the impact would be of the 2002 sunset clause contained in S. 1250. Mr. Rising responded that the X-33 flight tests concluded in 1999.

Chrm. Rohrabacher asked if the S. 1250 authority was sufficient for X-33 needs. Mr. Rising replied that he prefers NASA's approach. The Chairman next noted that the Senate is concerned that under a cooperative agreement, there is not enough oversight to ensure safety. Ms. Edwards replied while NASA will not do oversight of commercial operations, we will continue to exercise rigorous oversight of all safety issues.

Ms. Jackson-Lee stated the if we are serious about commercial space, we need to work on the legal hurdles, and supported the authority for NASA.

The Chairman thanked the witnesses and adjourned the hearing.

Copies of the NASA statement are available on the Office of Legislative Affairs Homepage: htttp://www.hq.nasa.gov/congress

Statement of Members and other witnesses are available on the Science Committee Homepage: http://www.house.gov/science

Julie Meredith
Legislative Affairs Specialist
Office of Legislative Affairs

Karl Stehmer
Legislative Affairs Specialist
Office of Legislative Affairs

Thank you, Mr. Chairman and Members of the Subcommittee. I am pleased to be here today to testify in support of an important piece of legislation - the amendment of Section 308 of the National Aeronautics and Space Act as contained in NASA's FY 1998 authorization bill submitted by the Administration earlier this year. This amendment addresses two fundamental, yet distinct liability issues, namely: cross-waivers of liability and indemnification. Cross-waivers of liability relate to, primarily, first-party and second-party liability, while indemnification relates to third-party liability.

In cross-waivers of liability, each party agrees to bear its own risk of participation in a joint space activity, and is thus freed from the concern that it may be liable for other partiesí contributions. Specifically, each party participating in - and benefiting from - the covered activity agrees that it will not bring claims against the other participating parties. Without a cross waiver, each participant could be subject to the total risk of the activity, not just its own participation. As such, scarce funds would be spent on duplicative and expensive insurance, not on productive activity. Not all liabilities are waived, however, just those of the parties and their contractors and subcontractors. Claims by natural persons, such as employees, as well as claims premised upon willful or intentional harms, are explicitly not prevented by the cross-waivers of liability. To do otherwise; to waive, for instance, the claims of an astronaut or his or her estate would not only be unfair; it could even be unconstitutional. In other words, an injured person, or his or her estate, does not forfeit any rights by reason of a cross-waiver.

As you would expect, cross-waivers of liability are most useful for activities involving high-value property; they are not standard in most routine types of endeavors. However, they are inherently appropriate for many of NASA's aerospace activities because our mission lies at the cutting edge of aeronautical and space development and exploration, and involves unique, highly valuable equipment and property. Further, the waivers are a mutual undertaking of the parties, who, if they can afford to be involved in space activity, are knowledgeable and sophisticated entities capable of protecting their own interests.

Cross-waivers of liability were first implemented during the 1970s, and since that time have become the standard in the space launch world, both for commercial and government-sponsored activities. NASA has employed them, to great effect, throughout its long history of Launch Services Agreements and in its many international and domestic cooperative activities. Such waivers are now an indispensable element of high-risk space and aeronautical activities worldwide, as other space-faring nations have come to appreciate the great value and practicality of these instruments. Nearly a decade ago, the Congress specifically reassessed NASA's cross-waiver practice in its consideration of amendments to the Commercial Space Launch Act (CSLA) and, as a result, required such cross-waivers as a condition of commercial space launch agreements licensed by the Department of Transportation. In doing so, the Congress expressly noted that "[t]hese waivers are a standard element in all [NASA] launch contracts." S. Rep. No. 100-593, 100th Cong., 2d Sess. 14 (1988). They remain so today, and are used in all of NASA's Launch Services Agreements and cooperative aerospace programs.

Beyond merely saving money, the cross-waiver also encourages space activity by reducing uncertainty. With the largest class of potential claims eliminated, each party may proceed unburdened by the concern that other involved parties may bring claims against it. This is particularly important in the commercial context: while governments may more easily elect to self-insure against catastrophic losses in a given high-risk activity, private companies are more tightly constrained by limited resources and by Directorsí and stockholders' objections to assumption of large but undefined and unlimited contingent liabilities. Moreover, the cost of insurance for certain activities may be prohibitive, or insurance may simply be unavailable. The near-universal recognition of these facts is what makes cross-waivers a standard feature of commercial space agreements.

While there is no doubt about the utility and practice of using cross-waivers of liability, the Department of Justice, in conjunction with NASA and the Department of State, recently reviewed the legal authority employed for waiving claims of the United States and recommended that clarification of that authority be obtained. Thus, in 1995, the President delegated to NASA authority to enter into cross-waivers of liability on behalf of the U.S. Government with our foreign partners in international agreements. However, to clarify the authority to waive such claims in instruments other than international agreements, such as agreements with domestic partners, legislation is required. That is what we are seeking today - an explicit statement of NASA's ability to waive claims of the U.S. Government in its domestic cross-waivers. Without the amendment, the commercial aerospace industry supporting NASA's aerospace activities could be placed at a competitive disadvantage vis-à-vis our international partners, since the Agency can waive these claims in international agreements but may not be able to provide the same level of assurance in wholly domestic activities.

The second part of the Administration's proposed legislation addresses indemnification authority. Today this Congress is faced with issues similar to those evaluated by an earlier Congress over 18 years ago, in 1979. The nation was planning its development of the first reusable launch vehicle, the U.S. Space Shuttle, which would be launched into space and return to earth, flying above major population centers on its journey. Because of this, many potential Shuttle users were reluctant to expose themselves to the chance of a Shuttle mishap over populated areas. Having several users on a single shuttle mission also meant that the universe of potential claims was multiplied and the initial problem was exacerbated. In studying the issue, the Congress saw the Space Shuttle as a powerful tool for national prestige, foreign policy, and economic growth if they could minimize the liability exposure to make commercial use of space viable. Congress also recognized NASAís ability to manage the shuttle so as to minimize the risk assumed by the indemnification. In testimony before the House Subcommittee on Space Science and Applications, Mr. Neil Hosenball, then NASA General Counsel, explained why legislation was necessary.

"The mix of payload users outlined above [the United States, foreign governments, intergovernmental organizations or commercial concerns] all but prevents an orderly and equitable allocation of risks of liability absent special authority. For example, if a university professor were to fly a small self-contained payload for a payment of $10,000 to NASA, third party liability insurance could cost up to five times that much. Moreover, if a number of commercial users each attempted to acquire adequate insurance protecting itself on a given Shuttle flight, the estimated $300 - $500 Million capacity of the liability insurance market could well be exceeded." Space Shuttle Operational Planning, Policy, and Legal Issues: Hearings Before the Subcomm. On Space Science and Applications of the House Comm. on Science and Technology, 96^th Cong., 1^st Sess.,1942 (1979).

As a result of this and other inputs, Congress amended the Space Act to add a new section 308. Under this authority, Shuttle users are obliged to obtain third-party liability insurance (at no cost to NASA) to protect themselves and the U.S. Government, from claims by third parties for damage or injury resulting from Shuttle activities benefiting the user. The amount of insurance has been fixed at no more than $500 million dollars, or the maximum amount available in the world insurance market at a reasonable premium. This formulation has a very real benefit to the Government as well. For third- party claims within the insurance amount, the treasury is protected by the insurance policies at no cost to the taxpayer. Only if payable third-party claims exceed insurance amounts does NASA accept payment responsibility.

The process by which NASA, in its discretion, provides indemnification is based on an analysis, on a case-by-case basis of the inherent risks, available insurance and the relationship of the activity to NASA's mission. With the Shuttle program, NASA has generally required customers with primary payloads to buy the full amount of third party liability insurance on the market. In addition, cross-waivers are always used where indemnification has been provided so that there is no risk of indemnifying against a claim that has been waived. Finally, NASA limits its risk through rigorous program management and oversight of the Shuttle vehicle operations program. As a result, over the entire period in which section 308 authority has been used, there has never been a third-party claim paid, additional resources have been available for space activity, and the cost of insurance has decreased.

By 1988, the commercialization of Expendable Launch Vehicles (ELV's) was a reality and similar liability concerns arose regarding ELV launches. Industry representatives, such as Roger Chamberlain, Vice President, Martin Marietta Commercial Titans, Inc., testified before the Senate Science, Technology, and Space Subcommittee that liability issues were an overriding concern.

"We do believe that a strong commercial launch industry is a key element in maintaining the American leadership in space and is a critical element of our national space transportation recovery program. Critical to the success of this industry and to this recovery program we believe is a risk sharing approach between the ELV companies and the U.S. Government in that remote event that damages resulting from a commercial launch accident would exceed the insurance coverage reasonably available in the launch marketplace. As Martin Marietta proceeds into the commercial launch service business, our exposure to defined and unbounded space launch risk, however improbable, is our single overriding concern . . . An additional concern to us is the fact that the current situation puts us at a competitive disadvantage internationally, as was discussed briefly by the Government panel. Foreign launch programs receive substantial support from the Governments. Ariane is held harmless by the European Space Agency and the French Government for third-party claims above, again, reportedly in the $400 million French francs area, or about $70 million and, as we understand it, from damage to launch facilities above a level that is significantly less than even the maximum probable case of loss. In the case of the Proton and the Long March vehicles, the Soviet and Chinese Governments appear to assume all risk and can evidently price below their cost where their main driver is bringing hard currency into the country and they are not driven by relationship between price and cost. This support allows our foreign competitors to realize savings in insurance costs that they can pass on to their customers. They also enjoy more favorable commercial risk environment that facilitates each new investment decision that they must make. Our industry needs reassuring legislation to enable us to compete more effectively in this international marketplace." Commercial Expendable Launch Vehicle Liability: Hearing Before the Subcomm. On Science, Technology, and Space of the House Comm. on Commerce, Science, and Transportation, 100^th Cong., 2nd Sess., 45 (1988).

Responding to the testimony given by the aerospace and insurance industries, as well as outside organizations and individuals, and building on the successful model of the Shuttle, Congress amended the CSLA granting the Department of Transportation (DOT) claims authority in support of commercial launch providers. While the CSLA used the "maximum probable loss" as a ceiling for the necessary insurance, in other respects the process mirrors NASA's section 308 practice.

Now, a new situation has arisen which calls for yet another approach to indemnification. In the past, experimental aerospace vehicles were routinely produced under Government contracts and carried only Government property and personnel. As a result, the Government took full ownership of and liability for X-vehicles. If something failed and damage resulted, it was clear who was responsible. It was a change in this situation that led to the original language in section 308. The authority to indemnify given to NASA in 1979 contemplated protection of private "users" of Government-owned space vehicles. Of course, back then there were no other kinds of space vehicles. Congress in 1979 did not intend to make NASA an insurer or indemnitor of private users of private space vehicles, not only because no one asked for such authority, but also because in such a case there would be no NASA R&D link to the flight and such authority would have been an incongruous expansion of NASA's mission. Instead, when such a situation arose, Congress passed the 1988 CSLA amendments, giving the authority to indemnify privately-owned space vehicles and activities to a regulatory agency. Now however, by attempting to lower the involvement of the Government and leverage the R&D investment of the taxpayer with corporate participation in the development of new commercial vehicles, we have created a new class of operation which falls between the old section 308 and the CSLA: a cooperative R&D effort that is not a traditional Governmental development program, has strong programmatic links to an R&D agency and industry, and has a commercial focus. As such, no current liability mitigation scheme fits, although NASA's funding and insight into the technology make NASA the agency most able to control the risk and the Space Act the proper location for the new authority.

The commercial focus of the Reusable Launch Vehicle (RLV) program makes a cooperative approach reasonable since the continuing Governmental interest in the nation's competitiveness justifies both the public investment in the program and some Governmental help in mitigating a potential liability which could undermine the entire effort. The most obvious example is the X-33 cooperative agreement, where a first phase, R&D technology demonstration effort predominantly funded by the Government is anticipated to lead to a much larger, privately-funded full-scale development of a new vehicle. In this arrangement, ownership remains in the contractor and responsibility for the joint tests of the X-33 demonstrator may be shared or stay with private industry. In such cases, potential liability to third parties becomes a significant corporate issue, which as described in the testimony I cited from the 1988 CSLA hearings, can become a corporationís "single overriding concern." If that concern cannot be mitigated, it will deter investment and research in new vehicles and lead to one of two bad results: no new vehicles will be developed, eroding the country's technological edge; or the Government will have to return to its old practice of fully funding new space vehicle development. It is my opinion that the concrete benefit of encouraging cooperative R&D outweighs the theoretical risk of third-party claims in excess of available insurance.

Iíve just explained why the indemnification authority contained in the current section 308 of the Space Act is not available for programs like the RLV program. NASAís only other indemnification authority is not available either. This conclusion follows from the welcome fact that today we can focus our R&D on commercial vehicles, not weapons. In the past, space vehicles were generally developed to serve a national defense purpose. To enable that, certain authorities that were enacted to facilitate the national defense were available to an agency sponsoring the development. The indemnification authority in Public Law 85-804 is a case in point. That authority allows NASA, among others, to indemnify contractors when such an action facilitates the national defense. But when the purpose of a contract is to demonstrate technologies needed to lower purely commercial risk and lead to a commercial vehicle designed to meet the needs of the commercial marketplace, a national defense link cannot be credibly claimed. Thus, despite some suggestions to the contrary, it is my opinion that as a matter of law, the authority of P.L. 85-804 is not available to protect contractors in commercially-focused programs like RLV.

In short, current indemnification authorities do not fit the legal arrangements that are currently being used as we move into an era of commercial space activity and "faster, better, cheaper" Government programs. The new approach being tried for the RLV program, and hoped to be extended into the next generation "future-X" and other follow-on efforts, is from a legal perspective fundamentally different from the old "business as usual" approach. This does not mean there is not a large Governmental interest in the success of these programs. In fact, the Governmental interest may even be increased since we are attempting to achieve much more for the nationís economy with much less Government investment. But it does mean that some of the legal authorities that supported the old way of doing business may need to be modified to reflect the newer situation. That is the situation with indemnification authority. Congress recognized this fact in 1979 when it enacted the original section 308 to meet the needs of private users of the Shuttle, and again in 1988 when it passed the amendments to the CSLA and gave DOT authority to consider claims arising from commercial space launches. It now needs to recognize it again.

The claims mechanism now being sought for R&D vehicles is essentially identical to that provided by DOT for commercial launches. That is, the amendment we seek provides the promise of expedited consideration by Congress of third-party claims in excess of insurance available at reasonable price. The authority is discretionary with NASA. Before indemnification is granted, we must be satisfied that all potential risks are minimized, safety and oversight requirements are met, and maximum available insurance is purchased by the user or developer. Thus, the Government risk is minimized. But such risk cannot be reduced to zero because the industry partners need near-term assurances from the Congress that the liability obstacle will be addressed; otherwise, it makes no sense to spend scarce corporate resources now in preparation for flight tests which our partners may ultimately not be willing to undertake. I believe the proposed legislation will provide a significant benefit to the nation's space program. The low level of risk to the taxpayer in these types of indemnification programs is shown by the fact that in the almost 20 years that its progenitors have been in use, no claims have actually had to be paid.

On a final note, I want to also make it clear that this indemnification is intended to be used only in NASA's domestic R&D programs. It is not to be available for use in cooperative international activities with foreign partners, such as the International Space Station. NASA and its international agreement partners regularly commit to an equitable sharing of any third-party liability arising from our cooperative space activities. That is an appropriate arrangement and is based on treaty. For non-governmental partners, however, no matter how small the risk of claims, the U.S. Government should not indemnify activities of foreign industry. The requested legislation does not ask for or imply any such expansion of existing authority.

Thank you, Mr. Chairman, Members of the Subcommittee. That concludes my prepared remarks. I would be happy to provide any additional information or answer any questions you might have for me.