August 1, 2016
In this Government Contracts Litigation Update, Gibson Dunn examines trends and summarizes key decisions of interest to government contractors during the first half of 2016. This publication covers the waterfront of the most important opinions issued by the U.S. Court of Appeals for the Federal Circuit, U.S. Court of Federal Claims, Armed Services Board of Contract Appeals, and Civilian Board of Contract Appeals, among other tribunals.
This first half of the year yielded nine government contracts-related opinions from the Federal Circuit. From January 1 through June 30, 2016, the U.S. Court of Federal Claims issued fifteen government contracts-related Orders and Opinions, the Armed Services Board of Contract Appeals ("ASBCA") published sixty-five substantive decisions, and the Civilian Board of Contract Appeals ("CBCA") published fifty-two substantive decisions. The cases discussed herein address a wide range of issues with which government contractors should be familiar, including jurisdictional requirements, limitations on the remedies available to contractors, and the various topics of federal common law that have developed in the government contracts arena. Broadly speaking, these decisions can be grouped into five main categories: (1) jurisdictional cases; (2) cases addressing available remedies; (3) terminations; (4) common law principles; and (5) issues relating to small business determinations. But before addressing each of these areas in turn, we briefly discuss the tribunals that adjudicate government contracts disputes.
Under the doctrine of sovereign immunity, the United States generally may not be sued unless it has waived its immunity and consented to suit. Pursuant to statute, the Government has waived immunity over certain claims arising under or related to federal contracts through the Contract Disputes Act, 41 U.S.C. §§ 7101 – 7109 ("CDA"), and through the Tucker Act, 28 U.S.C. § 1491. Under the CDA, any claim arising out of or relating to a government contract must be decided first by a contracting officer. A contractor may contest the contracting officer’s final decision by either filing a complaint in the U.S. Court of Federal Claims or appealing to a board of contract appeals. The Tucker Act, in turn, waives the Government’s sovereign immunity with respect to certain claims under statute, regulation, or express or implied contract, and grants jurisdiction to the Court of Federal Claims to hear such claims. The CDA waives the Government’s sovereign immunity with respect to claims arising under or relating to an executive agency contract.
The Court of Federal Claims thus has jurisdiction over a wide range of monetary claims brought against the U.S. Government including, but not limited to, contract disputes and bid protests pursuant to both the CDA and the Tucker Act. For example, if a contractor’s claim is founded on the Constitution or a statute instead of a contract, there is no CDA jurisdiction in any tribunal, but the Court of Federal Claims would have jurisdiction under the Tucker Act as long as the substantive source of law granted the right to recover damages. Thus, the Court of Federal Claims’ jurisdiction is broader than that of the boards of contract appeals.
In addition to establishing jurisdiction for certain causes of action in the Court of Federal Claims, the CDA establishes four administrative boards of contract appeals: the Armed Services Board, the Civilian Board, the Tennessee Valley Authority Board, and the Postal Service Board. See 41 U.S.C. § 7105. The ASBCA hears and decides post-award contract disputes between contractors and the Department of Defense and its military departments, as well as NASA. In addition, the ASBCA adjudicates contract disputes for other departments and agencies by agreement. For example, the U.S. Agency for International Development has designated the ASBCA to decide disputes arising under USAID contracts. The ASBCA has jurisdiction pursuant to the CDA, its Charter, and certain remedy-granting contract provisions. The CBCA hears and decides contract disputes between contractors and civilian executive agencies under the provisions of the CDA. The CBCA’s authority extends to all agencies of the federal government except the Department of Defense and its constituent agencies, NASA, the U.S. Postal Service, the Postal Regulatory Commission, and the Tennessee Valley Authority. In addition, the CBCA has jurisdiction, along with federal district courts, over Indian Self-Determination Act contracts.
The U.S. Court of Appeals for the Federal Circuit hears and decides appeals from decisions of the Court of Federal Claims, the ASBCA, and the CBCA, among numerous other tribunals outside the area of government contract disputes. Significantly, the Federal Circuit has a substantial patent and trademark docket, hearing appeals from the U.S. Patent and Trademark Office and federal district courts, that by volume of cases greatly exceeds its government contracts litigation docket. Of 1,369 cases pending before the Federal Circuit as of June 2016, 20 were appeals from the boards of contract appeals and 105 were appeals from the Court of Federal Claims – cumulatively comprising roughly 9% of the appellate court’s docket. Nevertheless, the Federal Circuit is the governing authority for most government contracts disputes.
The boards of contract appeals saw new appointments to their benches in the first half of 2016. Judges David F. D’Alessandris and Kenneth D. Woodrow were appointed to the ASBCA in April 2016. Both new appointees hailed most recently from the Commercial Litigation Branch of the U.S. Department of Justice’s Civil Division, which represents the Government in cases before the Court of Federal Claims. On May 29, 2016, Judges Erica S. Beardsley, Kyle E. Chadwick, Kathleen J. O’Rourke, and Beverly M. Russell were sworn in as new judges on the CBCA. Judges Beardsley and Chadwick joined the bench after careers in government and private practice, whereas Judge O’Rourke served in the Air Force as well as the Department of Commerce, and Judge Russell served in the Departments of Transportation and Justice.
There are currently six vacant judgeships on the U.S. Court of Federal Claims, the most recent resulting from the retirement of Judge Lawrence Block in January 2016. There are five judicial nominees for these vacancies pending, all of which have been pending since at least January 2015.
As they frequently do, jurisdictional issues dominated the landscape of key government contracts decisions during the first half of 2016.
In order for the CBCA or ASBCA to exercise jurisdiction over a claim, there must be a contract from which that claim arises. See FAR 33.201 (defining a "claim" as "a written demand or written assertion by one of the contracting parties seeking… relief arising under or relating to this contract"). The Federal Circuit and Boards of Contract Appeals issued numerous decisions during the first six months of 2016 addressing what constitutes a valid contract from which a claim may arise.
Hymas v. United States, 810 F.3d 1312 (Fed. Cir. 2016)
Beginning in the 1970s, the U.S. Fish and Wildlife Service entered into cooperative farming agreements with private farmers in the Umatilla National Wildlife Refuge and the McNary National Wildlife Refuge. Pursuant to the agreements, the farmers are allowed to farm land inside the refuges free of charge and sell 75% of the crops they produce, leaving 25% behind to feed birds and other wildlife. After being denied the right to participate in this program via a closed priority selection service administered by Fish and Wildlife, Appellant Hymas brought suit in the Court of Federal Claims, alleging that the selection process violated a variety of statutes, including the Administrative Procedure Act ("APA"). The Court of Federal Claims found that it possessed subject matter jurisdiction over the claim pursuant to the Tucker Act, because the action arose "in connection with a procurement or a proposed procurement."
The Federal Circuit reversed and dismissed Hymas’s claim, holding in a majority opinion authored by Judge Wallach that the agreements were cooperative agreements rather than procurements. Under the Federal Grant and Cooperative Agreement Act, "an executive agency shall use a procurement contract" when "the principal purpose of the instrument is to acquire . . . property or services for the direct benefit or use of the United States Government;" whereas it "shall use a cooperative agreement" when "the principal purpose of the relationship is to transfer a thing of value" to someone "to carry out a public purpose of support or stimulation authorized by a law" and there is "substantial involvement" between the person and the agency. The court found that the farmers’ relationship with Fish and Wildlife were more like cooperative agreements because they transfer something of value–the use of the land–for the public purpose of feeding the wildlife on the refuges and because the Service is substantially involved by providing advice on the best practices. In dissent, Judge Stoll argued that the arrangement was a procurement contract whereby the Government acquires the farmers’ "services" in providing food for the wildlife in exchange for the farmers being able to sell the additional crops for money.
Ingham Reg’l Med. Ctr. v. United States, 126 Fed. Cl. 1 (2016)
In another case presenting the question of whether a particular agreement constitutes a contract sufficient to confer CDA jurisdiction, plaintiff hospital operators participating in the military TRICARE program sought to bring a class action asserting that 5,200 participating hospitals had been systematically underpaid for certain services they provided as part of the TRICARE program.
The putative class members founded their claims on the exchange of a series of documents with the Government, including a letter, a notice, a series of Frequently Asked Questions, a spreadsheet, a payment adjustment worksheet, and a release form. The plaintiffs claimed that the terms of the offers for the contracts were expressed in these documents, and that the first contract "included an obligation on the part of the Government to calculate the amount owed to each hospital." The plaintiffs claimed that they accepted this offer by completing and returning the spreadsheet to the Government and that the Government breached the contract when it "failed to accurately calculate all the monies owed thereunder."
The Court of Federal Claims (Horn, J.) was not persuaded. It held that plaintiffs did not establish that the terms of the cited documents could be considered an offer, as the "language of these documents demonstrates that defendant would not enter into a bargain until after analysis of the information submitted by the hospitals and the execution of the Release by the hospitals." Accordingly, the court found that it lacked subject matter jurisdiction to hear the case.
S. Harman and Assocs., Inc., ASBCA No. 60214 (Feb. 3, 2016)
In the first of two ASBCA opinions from the first half of 2016 concerning the existence of a valid contract, the board heard from a contractor that alleged that its negotiations with a training manager constituted an implied-in-fact contract. In early 2015, S. Harman & Associates began negotiating with a civilian training manager at a military base regarding the possibility of Harman conducting a retirement planning seminar for civilian employees on the base. Over the course of two months, Harman and the manager exchanged emails regarding the scheduling, format, and pricing of the proposed session. Harman also began preparing for the training, booking airline tickets for its staff and arranging for the seminar materials to be printed. In the meantime, however, the contracting officer assigned to the matter determined that the contract would need to be awarded through competitive bidding, a process that resulted in another contractor submitting the lowest offer. Harman submitted a claim for compensation, which was denied on the grounds that no contract existed.
The ASBCA (Prouty, A.J.) agreed and dismissed the appeal. Harman did not dispute that no express contract existed, and the board held that the requirements for creation of an implied-in-fact contract were not satisfied. Although it was clear that the civil training manager intended for the contract to go to Harman, he had never purported to finalize any agreement. Even if he had, moreover, the manager would have lacked authority to do so, because the proposed contract cost more than he was authorized to spend without a contracting officer’s approval. The board therefore concluded that the parties’ negotiations and Harman’s preparatory expenses were insufficient to form an enforceable contract.
Anwar Alsabah Co., ASBCA No. 59881 (Feb. 18, 2016)
In this case, the ASBCA reminded contractors of their responsibility to ensure that they enter contracts with agents authorized to bind the Government. In 2015, Anwar Alsabah Company submitted a claim for payment associated with seven Toyota Land Cruiser SUVs it delivered to the Army in Iraq under a "memorandum of agreement." The Government denied the claim on the ground that no contract existed, arguing that the project purchasing officer listed on the agreement in question was not a contracting officer authorized to enter contracts of this nature on behalf of the Government.
Anwar was unable to submit evidence that the contract was signed by an authorized contracting officer, so the board (O’Connell, A.J.) granted judgment as a matter of law to the Government. In doing so, Judge O’Connell confirmed that contractors bear responsibility for ensuring that the government officials on the other side of their agreements have actual authority to bind the Government.
Americom Government Servs., Inc., CBCA No. 2294 (Mar. 31, 2016)
The CBCA also issued a decision considering the validity of a contract in a case concerning the Government’s ratification of otherwise unauthorized work. In connection with providing host national satellite licenses and bandwidth services for use by the military in Korea, AGS invoiced the General Services Administration ("GSA") nearly $580,000. GSA approved the payment, but after payment of the invoice discovered that the services were not covered under the task order pursuant to which AGS sought recovery. GSA sought to recoup the money by deducting payments otherwise due to AGS on other completed obligations, claiming that the contractor bore the risk of mistaken payment on an invalid contract instrument
Noting that "[p]aying a claim, based on ratification, is an extraordinary remedy," the board (Pollack, A.J.) nevertheless found that the Government ratified the unauthorized contract work at issue on the facts of this case. The board stated that GSA "clearly allowed [the military] to continue using the HNA licenses, thereby taking the benefit at no cost" despite knowing "by May 2006, that [the military] was using licenses that had not been properly procured." The board found that AGS was entitled to be paid, because the "fact that the initial payment may have been made in error, and the fact that there was no authorized contract, does not give the Government the right to continue to use the licenses for free."
Because the CDA does not define the term "claim," the courts and boards of contract appeals look to the definition set forth in the Federal Acquisition Regulation ("FAR"). FAR 33.201 defines a "claim" as "a written demand or written assertion by one of the contracting parties seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising under or relating to this contract." Whether the courts and boards have jurisdiction over a matter therefore turns on whether there is a valid "claim" and, relatedly, how that claim is defined.
As discussed in our 2015 Mid-Year Government Contracts Litigation Update, last year the Federal Circuit issued a key decision in K-Con Building Sys., Inc. v. United States, 778 F.3d 1000 (Fed. Cir. 2015). In K-Con, the Federal Circuit sought to harmonize two well-established rules: (1) the CDA confers jurisdiction on the Court of Federal Claims only for claims that have been submitted to the contracting officer for decision; and (2) once a claim is in litigation, the contracting officer is divested of authority to decide the claim. In doing so, the court looked to the complaint to determine what was in litigation.
We noted then that this aspect of the decision could create a jurisdictional trap if the complaint alleges a claim broader than that submitted to the contracting officer for a decision. The net result could be that the broader claim alleged in the complaint precludes the contracting officer from ruling on it, but because the broader claim was not submitted to the contracting officer for a decision, the court lacks jurisdiction over it. As predicted, the Court of Federal Claims had an opportunity to address this issue early in 2016.
Kansas City Power & Light Co. v. United States, 124 Fed. Cl. 620 (2016)
In this case, plaintiff Kansas City Power & Light Co. ("KCPL") sought indemnification from the United States under the CDA for the cost of settling a wrongful death suit stemming from an electrical accident that occurred on property owned by United States. KCPL held a contract for the delivery of electrical utility services to a GSA property located in Kansas City, Missouri, and the contract included an indemnity provision. Following a fatal accident in an electrical substation vault, a deceased GSA employee’s widow filed suit against KPCL for negligence and loss of consortium, which ultimately settled for $2.25 million. KPCL thereafter submitted a certified claim to its GSA contracting officer seeking reimbursement for the settlement amount as well as for the costs incurred defending the action. The claim was denied, and KCPL filed suit in the Court of Federal Claims.
Although the Government argued that KCPL made contradicting factual statements between the claim submitted to the contracting officer and in its filed compliant, rendering the uncertified supplemental information in the complaint not part of the claim, the court (Sweeney, J.) rejected this argument and held that "even though the complaint adds a detail that was not contained within the text of the certified claim and was not referenced by the CO in his final decision, the operative facts underlying both are the same." Similarly, Judge Sweeney concluded that the court could consider a breach of contract claim for GSA’s alleged failure to defend the underlying action even though the certified claim to the contracting officer did not include the phrase "breach of contract," because the underlying theory–indemnification–was the same. Accordingly, the court found that it had jurisdiction over the claims.
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The CBCA also recently issued an important opinion regarding when an appellant’s affirmative defenses constitute "claims" under the CDA. Under the Federal Circuit’s precedent in M. Maropakis Carpentry, Inc. v. United States, 609 F.3d 1323, 1331 (Fed. Cir. 2010), "a contractor seeking an adjustment of contract terms must meet the jurisdictional requirements and procedural prerequisites of the CDA, whether asserting the claim against the government as an affirmative claim or as a defense to a government action" (emphasis added). The two cases below address what constitutes a "claim" against the government "as a defense to a government action."
Jane Mobley Assocs., Inc. v. GSA, CBCA No. 2878 (Jan. 5, 2016)
In this case, the GSA awarded a task order under a federal supply schedule contract for environmental communications consulting services. After the work had been completed, the GSA Office of Inspector General audited the "award and administration of the [contractor’s] task order," and concluded that JMA had allegedly overbilled GSA for certain labor costs and failed to include the required prompt payment discount terms on its invoices. The contractor denied OIG’s findings and a dispute arose as to its entitlement to payment, culminating in a final decision by the contracting officer on June 1, 2012.
In its appeal of the contracting officer’s final decision, the contractor set forth various affirmative defenses. The Government moved for summary judgment on the grounds that the contractor had not submitted these defenses as "claims" to the contracting officer. But the board (Sheridan, A.J.) denied the Government’s motion, explaining the difference between contractor claims asserted as defenses to a government claim, as compared to when a contractor merely attacks the factual underpinnings of a government claim: "Plainly stated, a CDA claim seeks affirmative relief under the contract through a contract adjustment; a factual defense only attempts to reduce or eliminate the liquidated damages assessment" (emphasis in original). Finding that it had jurisdiction over each of the contractor’s defenses, the CBCA noted that "[i]n the CDA context, if we were to apply the rule of Maropakis to any defense raised by a contractor in response to a government claim that is not in the nature of an adjustment of contract terms or not seeking separate monetary relief, the ‘drastic consequence’ could well be that the contractor’s appeal is never able to be heard on the merits. This is contrary to the intent and purpose of the CDA."
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The ASBCA also addressed whether a contractor’s claims could "merge" into or be precluded by related claims that would otherwise not be within the board’s jurisdiction.
Military Aircraft Parts, ASBCA No. 60290 (Feb. 4, 2016)
Between 2009 and 2011, the Government issued three orders for parts for the C-130 aircraft from Military Aircraft Parts ("MAP"). MAP shipped two units under the first order for first-article testing, but the Government asserted that the parts had failed the "form, fit, and function" test, and subsequently issued a unilateral modification canceling the order. The Government thereafter unilaterally canceled the second order, and the parties bilaterally canceled the third. MAP submitted a claim for breach of contract, which was denied by the contracting officer. The contracting officer admitted that the unilateral cancellation of the first order was improper, but converted the cancellation to a termination for convenience and denied relief for all three orders. After MAP appealed, the Government moved to dismiss, arguing that MAP could not appeal before responding to the Government’s termination for convenience with a termination settlement proposal pursuant to FAR part 49.
The board (O’Sullivan, A.J.) found that MAP was not required to make a termination settlement proposal prior to appealing the denial of its breach claim. Relying upon the Federal Circuit’s decision in James M. Ellett Construction Co. v. United States, 93 F.3d 1537 (1996), Judge O’Sullivan held that "a contractor is not precluded by a pending termination settlement proposal from pursuing contract claims independent of that proposal." Because the Government’s termination for convenience came later than its unilateral cancellation, the board reasoned, the relief available to MAP for a breach claim could be considerably different from the relief available for a claim arising from the termination for convenience. (At the very least, MAP could have been eligible for interest on its breach claim.) Therefore, MAP’s breach claim did not "merge" into the government’s termination for convenience, and the board denied the Government’s motion to dismiss for lack of jurisdiction.
Supreme Foodservice GmbH, ASBCA Nos. 57884, et al. (Mar. 17, 2016)
Supreme Foodservice had a contract with the Defense Logistics Agency to deliver food and other products to American military forces in Afghanistan. In 2005, the contractor formed a new company, from which it sourced many of the goods that it provided to the military. The Government alleged that the new company charged Supreme Foodservice above-market prices, meaning that the parent contractor’s costs to the DLA were inflated. Supreme Foodservice ultimately settled a False Claims Act lawsuit arising from these allegations, but nevertheless appealed DLA’s denial of claims for payments as well as the contracting officer’s determination that the company’s purported fraud resulted in the contract being void ab initio.
The ASBCA (Scott, J.) rejected Supreme Foodservice’s appeal. First, she determined that the board had jurisdiction over the matter–even though it may not rule upon the criminal and fraud claims that Supreme faced–because it had jurisdiction over the alleged fraudulent conduct as a breach of contract. Although Judge Scott agreed with the contractor that the DLA’s new claims were time-barred, she rejected Supreme’s contention that the DLA’s affirmative defenses against Supreme were also claims, meaning that the Government’s affirmative defenses were not subject to the CDA’s six-year statute of limitations. Finally, the board rejected Supreme’s contention that the prior FCA settlement barred further administrative action.
Another common issue before the tribunals that hear government contracts disputes remains whether the contractor appealed a valid CDA claim. FAR 33.201 defines a "claim" as "a written demand or written assertion by one of the contracting parties seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising under or relating to this contract." Under the CDA, a claim for more than $100,000 must be certified. In the first half of 2016, the Federal Circuit and boards considered (1) when a claim accrues, (2) whether the requirement that the claim state a "sum certain" has been satisfied; and (3) whether the claim has been properly certified.
The FAR defines "accrual" of a contract claim as "the date when all events, that fix the alleged liability of either the Government or the contractor and permit assertion of the claim, were known or should have been known." 48 C.F.R. § 33.201.
Kellogg Brown & Root Servs., Inc. v. Murphy, 823 F.3d 622 (Fed. Cir. 2016)
In this case, the Federal Circuit reversed and remanded an ASBCA determination that KBR’s claim for $10.4 million in Iraq food service costs from the U.S. Army was untimely. KBR filed a certified claim with the Army on May 2, 2012, seeking to recover "other costs" for work performed by one of its subcontractors constructing dining facilities in Iraq. Based on the CDA’s six-year statute of limitations, the ASBCA dismissed KBR’s claim for lack of subject matter jurisdiction after finding that KBR’s claim accrued and the statute of limitations began running when the subcontractor completed its work in September 2003, more than six years before KBR filed its claim in May 2012. Alternatively, the board found that the claim had accrued in January 2005, when KBR and its subcontractor agreed to cooperate to present an invoice to the Army for costs above a settlement threshold.
In reversing and remanding the dismissal, the Federal Circuit (Newman, J.) explained that, under the FAR, a monetary claim does not accrue until the claim’s amount is "known or should have been known." The Government had required KBR to resolve any issues with the subcontractor before it could bring a claim against the Government. Although KBR and the subcontractor had reached an agreement on January 24, 2005 for a different set of costs, KBR did not receive the subcontractor’s certified claim specifying the "other costs" due to the subcontractor until August 26, 2006–less than six years before KBR submitted its claim to the Army. Therefore, the court found that the claim was not barred by the statute of limitations.
The ASBCA also issued two decisions analyzing whether contractors had adequately claimed a "sum certain," a jurisdictional prerequisite under the CDA and FAR definition of "claim."
Strobe Data, Inc., ASBCA No. 60123 (Jan. 5, 2016)
Here, the ASBCA sua sponte raised the issue of whether Strobe’s monetary claim was asserted in a "sum certain" as required by the CDA. In the claim submitted to, and denied by, the Air Force contracting officer under a contract to provide avionics components, Strobe claimed that it was owed a "minimum" of $30 million due to the Air Force’s alleged improper testing of the units that resulted in their disqualification by the Air Force.
Interestingly, Strobe contended that its appeal was not asserted in a sum certain, and therefore that its appeal should be dismissed without prejudice for lack of jurisdiction. In what the board (Delman, A.J.) deemed a "novel" reversal of roles, the Air Force, apparently wishing to reach the merits of the appeal, opposed dismissal on jurisdictional grounds and maintained that the board should retain jurisdiction. Although the board had previously held that qualifying language such as "at a minimum" does not establish a sum certain, the Air Force contended that there was a "sum certain" because Strobe had alleged a number of units, and a price per unit, that could be used to calculate a sum certain. The board rejected this argument, finding that Strobe had also qualified the number of units by stating that it "lost the opportunity to sell a minimum of 200 [units]." Similarly, the board found the fact that Strobe had unequivocally asserted $30 million in losses in its complaint could not cure the qualification in its underlying claim. Accordingly, the board dismissed the claim for lack of jurisdiction.
Government Services Corp., ASBCA No. 60367 (June 20, 2016)
In another case, the ASBCA found that an unequivocal statement of a sum certain, even absent the underlying calculations, would support jurisdiction over a claim. Government Services Corp. submitted a certified claim for $100,000, alleging that a negative performance rating by the Government constituted bad faith and a breach of the duty of good faith and fair dealing. The contracting officer subsequently requested "detailed substantiating records" with respect to the claim calculation of $100,000. The contractor explained that the amount was "derived by a simple mathematical formula of estimating the future expense, both administrative and legal, that is expected to be required to counter the apparent bad faith libelous actions" by the Government. The contracting officer denied the claim, and this appeal followed.
The board (O’Sullivan, A.J.) denied the Government’s motion to dismiss for lack of jurisdiction based on the allegation that GSC’s claim did not include a "sum certain" explaining the mathematical basis for its calculation. The board stated that it is well-settled that neither the CDA nor its implementing regulations require a detailed cost breakdown or other specific cost-related documentation. The board held, in keeping with previous decisions, that "use of estimated or approximate costs in determining the value of a claim is permissible so long as the total overall demand is for a sum certain." Indeed, the contractor need only submit a "clear and unequivocal statement" regarding the basis and amount of the claim–a requirement which the contractor satisfied.
In a recent decision, the CBCA explained that failure to comply with the CDA’s requirement for certification of any claim in excess of $100,000 cannot be cured by the contracting officer rendering a decision on the invalid claim.
Richter Developments, Ltd. v. GSA, CBCA No. 5119 (Mar. 24, 2016)
On August 10, 2015, Richter submitted a request for equitable adjustment ("REA") of $198,233.42 for delay damages and other alleged changes to the scope of a project to lease warehouse and office space in Miami. The REA was not certified; nevertheless, the contracting officer issued a decision denying the REA.
The CBCA (Sheridan, A.J.) found that certification of a claim of more than $100,000 is not only a statutory requirement, but also a jurisdictional prerequisite for review of a contracting officer’s decision by the board. Although a defective certification may be corrected, the complete absence of a certification deprives the board of jurisdiction. Moreover, the she noted that a contracting officer’s final decision on an uncertified "claim" over $100,000 cannot cure the deficiency–noting that "[w]ithout presentation of a proper claim, in this case, one that is certified, no decision is possible and any action taken by the contracting officer is a nullity." Accordingly, the board dismissed the appeal for lack of jurisdiction.
A host of recent cases addressed the CDA’s jurisdictional requirement to timely file an appeal after receipt of a contracting officer’s final decision. Under the CDA, a board has jurisdiction only over appeals that are taken within 90 days of receiving the contracting officer’s final decision; whereas there is a one-year statutory clock applicable to appeals filed in the Court of Federal Claims.
Because the CDA’s statutory timeline to file an appeal begins to run when the contracting officer issues a decision, a key issue is when that decision is issued–a decision made all the more challenging when, as the ASBCA recently considered, the contracting officer fails to issue a decision at all.
Aetna Government Health Plans, ASBCA No. 60207 (Feb. 10, 2016)
On July 13, 2015, Aetna submitted a certified claim for over $17 million in response to the Government’s termination for convenience of its TRICARE contract. The contracting officer received the claim on July 20, 2015, and on September 11 notified Aetna that additional documentation was required to evaluate the claim. On September 21, 2015, Aetna filed this appeal, contending that it was appealing from the "deemed denial" of its claim because the contracting officer failed to issue a decision within 60 days of receipt of a certified claim over $100,000, or to notify the contractor of the time within which the decision will be issued, in accordance with the CDA.
The Government sought to dismiss the appeal, or in the alternative, to stay the appeal and remand to the contracting officer for issuance of a final decision. The ASBCA (McIlmail, A.J.) denied both requests, finding that the contracting officer’s statement that he anticipated issuing a decision upon the claim "within 90 days of receipt" of the additional documentation requested failed to "pinpoint a particular date by which he would issue a decision." The board found that this practice failed to comport with the CDA’s requirements, and accordingly denied both the motion to dismiss and the request for a stay.
Afghan Active Group, ASBCA No. 60387 (April 14, 2016)
Afghan Active Group was awarded a contract to construct an asphalt parking pad in 2009, but did not perform any work under the contract except a site visit and obtaining a Defense Base Act insurance policy. Upon contract closeout, the contractor asserted that it was entitled to 30% of the total contract value. The contracting officer issued a final decision denying the claim, which advised the company of its 90-day deadline to appeal. The contractor emailed the contracting officer a series of follow-up communications to express its disagreement with the final decision, which went unanswered. After several months, the Government informed the contractor that if it wanted to appeal the final decision, it should appeal to the ASBCA, which it did several weeks later. The Government moved to dismiss, arguing that the appeal was filed after the CDA’s 90-day deadline.
The board (Prouty, A.J.) rejected the Government’s argument, finding that the email communications to the contracting officer, while "somewhat awkward," expressed "dissatisfaction" with the final decision and indicated intent to "officially commence an appeal." The board reiterated its long-held precedent that "in cases involving misdirected appeals that providing notice of appeal to the CO is ‘tantamount to filing with the Board.’" The board also rejected the Government’s argument that AAG’s notice of appeal was improper because it failed to specify whether it intended to appeal to the board or Court of Federal Claims, as required under the CDA. Judge Prouty reasoned, however, that AAG’s use of the word "appeal" rather than the phrase "bring an action" indicated its intent to appeal to the board rather than the Court of Federal Claims. Accordingly, the board denied the Government’s motion to dismiss.
Bushra Company, ASBCA No. 59918 (April 22, 2016)
The ASBCA (Prouty, A.J.) dismissed Bushra Company’s appeal of a contracting officer’s termination for default of its contract for deliveries of limestone at various sites within Iraq, finding that Bushra had failed to comply with the CDA’s 90-day deadline.
Notably, the Government’s termination for default letter did not include language explaining Bushra’s right to appeal within 90 days, as required by FAR 33.211(a)(3)(v). However, the board found that because Bushra did not allege that it was misled by the letter when it filed its untimely appeal, "the contractor did not prove that termination for default’s failure to more precisely set forth the contractor’s appeal rights caused it actual prejudice."
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In a pair of appeals before the ASCBA, Military Aircraft Parts attempted–unsuccessfully–to argue that the Federal Circuit’s ruling that the CDA’s six-year statute of limitations period is not jurisdictional, Sikorsky Aircraft Corp. v. United States, 773 F.3d 1315 (Fed. Cir. 2014), should permit the board to discretionarily waive the appeals period. Although the two cases ultimately were decided differently on the merits, the ASBCA nevertheless made clear in both instances that it would not interpret Sikorsky to allow for a waiver of the 90-day appeal period, notwithstanding the Federal Circuit’s finding that the six-year statute of limitations in which to assert a claim is not jurisdictional.
Military Aircraft Parts, ASBCA No. 60336 (April 25, 2016)
Military Aircraft Parts, ASBCA No. 60139 (June 3, 2016)
In the first case, Military Aircraft Parts appealed the termination for default of its contract to provide aircraft frames to the Defense Logistics Agency and the cancelation of two purchase orders for more frames, claiming that the termination and cancelation were breaches of the contract. The board (McIlmail, A.J.) held that it could not review the appeal from the termination of the original contract because it was not brought within 90 days after the termination decision. Although the contractor urged the board to adopt a "good cause" exception to the 90-day deadline in light of the Federal Circuit’s ruling that the CDA’s statute of limitations is not jurisdictional, Judge McIlmail reiterated that the 90-day appeals period cannot be waived.
In the second case, MAP appealed the contracting officer’s final decisions denying a number of breach of contract claims arising out of a contract that the Government had terminated for default. The Government argued that MAP did not timely appeal the default terminations of purchase orders for aircraft structural parts, and was using its breach of contract claims on appeal to the board in an attempt to skirt the CDA’s 90-day jurisdictional deadline for appeal of the contracting officer’s final decision on the default termination. MAP denied the assertion that its complaint was merely a challenge to default terminations "clothed in breach of contract language," and, in the alternative, argued again that the reasoning in Sikorsky should allow the board to find that the 90-day appeal period is not jurisdictional. The board (O’Sullivan, A.J.) agreed with the Government, finding that the board lacked jurisdiction over the claims because they were implicit challenges to the default termination. In doing so, Judge O’Sullivan cited pre-Sikorsky precedent to reaffirm its long line of precedent holding that the 90-day deadline is "jurisdictional, absolute, and may not be waived."
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In a trio of decisions, the ASBCA demonstrated the intensely factual nature of whether the Government’s failure to advise an appellant of its appeal rights will toll the CDA’s 90-day filing deadline. The CDA requires that a contracting officer’s final decision inform the contractor of "its rights as provided in this chapter." 41 U.S.C. § 7103(e). FAR 33.211(a)(4)(v) implements the CDA’s statutory language, requiring that the decision contain paragraphs "substantially" advising the contractor of its specific appeal rights, and provides the language to "substantially" include. Taken together, these cases demonstrate that only where a contractor can demonstrate prejudice as a result of the Government’s failure to advise contractors of their appeal rights will the 90-day limitation be tolled.
Shafi Nasimi Construction and Logistics Co., ASBCA No. 59916 (Jan. 6, 2016)
Mansoor International Development Services, ASBCA Nos. 59466 et al (May 19, 2016)
Access Personnel Services, Inc., ASBCA No. 59900 (June 15, 2016)
In Shafi Nasimi, the board (Delman, A.J.) granted the Government’s motion to dismiss for lack of jurisdiction due to an untimely appeal where the termination notice appealed from explained the contractor’s appeal rights, but not the 90-day window in which it may appeal. Judge Delman found that the Government’s failure to alert the contractor to the 90-day time period in which it may appeal was irrelevant where the contractor did not allege prejudice or reliance.
In the Mansoor case, the board (Melnick, A.J.) dismissed five appeals as untimely even though three of the five final decisions lacked any mention of appeal rights and the other two provided defective notifications. Judge Melnick found that the contractor was aware of the 90-day deadline as a result of its previous appeal challenging the contract termination.
Finally, in the Access Personnel Services case, Judge Delman came down on the other side and denied the Government’s motion to dismiss an appeal filed nearly four years after a letter the Government claimed was a final decision (although the letter did not state as much and did not provide a statement of appeal rights). The board found that the contractor’s ignorance regarding its appeals rights tolled the appeal deadline: "Appellant was misled and prejudiced by the CO’s failure to provide this notice in the decision. The government argues that to toll the appeal period would, in effect, provide for an indefinite appeal period. The short answer to this contention is that the government has the ability to obviate this concern by issuing CO decisions in accordance with law." Judge Delman rejected the Government’s contention that the contractor should have taken affirmative steps to determine its appeal rights after its claim was denied, underscoring that the CDA "places the obligation of notification squarely on the shoulders of the government."
Guardian Angels Med. Serv. Dogs, Inc. v. United States, 809 F.3d 1244 (Fed. Cir. 2016)
Guardian Angels contracted with the Department of Veterans Affairs to provide service dogs to disabled veterans. On August 31, 2012, the contracting officer informed Guardian Angels that the VA was terminating the contract for default. Guardian Angels requested reconsideration, which caused the contracting officer to send a second letter requesting additional documentation. Finally, on May 3, 2013, the contracting officer sent a third and final letter stating that she would not reconsider the August 2012 decision and that Guardian Angels could challenge the decision in the Court of Federal Claims if it wished. On January 7, 2014–less than one year from the final letter but more than one year after the first–Guardian Angels filed suit in the Court of Federal Claims.
The Court of Federal Claims dismissed the claim for lack of jurisdiction, explaining that the claim was not filed within 12 months of the contracting officer’s final decision (determined to be the 2012 letter) as required by the CDA. The Federal Circuit, in a unanimous opinion by Judge Mayer, reversed and remanded. The court explained that the March 2013 letter offering to review further documentation signaled that the contracting officer’s August 2012 determination was not final, even though the contracting officer did not actually review the initial decision any further. The court held that the final decision did not come until the third and final, May 3, 2013, letter; therefore, Guardian Angels’ claim was timely.
Once a valid "claim" is presented, the tribunals that hear government contracts disputes must determine what relief may be available to contractors bringing suit under the CDA.
SUFI Network Servs., Inc. v. United States, 817 F.3d 773 (Fed. Cir. 2016)
In our 2015 Year-End Government Contracts Litigation Update, we covered a decision from the Court of Federal Claims holding that the Government may not under the Wunderlich Act appeal from adverse decisions issued by the ASBCA. This decision was upheld this year by the Federal Circuit, keeping in place a $113 million contractor judgment ordered by the ASBCA arising from the Government’s breach of a telephone services contract.
The ASBCA originally decided that the United States owed SUFI $2.8 million on one set of claims and $4.6 million on another. SUFI challenged that determination in the Court of Federal Claims under the Wunderlich Act, 41 U.S.C. §§ 321-22. Only the contractor has the right to appeal an ASBCA decision under the Wunderlich Act, and the Federal Circuit held in 2014 that the board had not properly considered the evidence and remanded the claim. In early 2015, the ASBCA’s new decision awarded SUFI $113 million. The United States sought to challenge the award. However, under the Wunderlich Act, which governed this case, "only the contractor has the right to appeal from a Board decision." In affirming the Court of Federal Claims’s decision dismissing the Government’s appeal, the Federal Circuit held that the Government lacks the right to appeal an ASBCA decision under the Wunderlich Act, whether it is challenging an initial ASBCA decision or, as in this case, a reconsidered decision. Furthermore, the court held that there was no exception to allow an appeal in this case in order to ensure that the board followed the court’s 2014 mandate; alternatively, the court said that the mandate had been followed.
Sys. Fuels, Inc. v. United States, 818 F.3d 1302 (Fed. Cir. 2016)
In 1983, System Fuels entered into a contract with the Department of Energy for the disposal of spent nuclear fuel. The contract required System Fuels to pay to package and load the fuel into transportation casks and DOE to pay for the actual transportation. DOE breached its obligation to begin accepting the spent nuclear fuel, which forced System Fuels to load it into canisters and storage casks that could only be used for holding, not transporting. System Fuels brought suit to recover the costs spent packaging the fuel in storage casks, which the Court of Federal Claims rejected, finding that System Fuels had not shown the difference between what it would have spent loading the spent nuclear fuel into transportation casks versus the amount it actually spent loading the fuel into canisters and storage casks.
The Federal Circuit, in a unanimous opinion by Judge Moore, found that the lower court had clearly erred and that System Fuels was entitled to the entire amount of damages associated with loading the fuel into storage casks, because that would not have been required if the Government had performed its contract. The court said that any money System Fuels might have to spend in the future to reload the fuel into transportation casks if the Government ultimately performs is speculative and, therefore, not relevant to the present dispute.
Northrop Grumman Computing Sys., Inc. v. United States, – F.3d – (Fed. Cir. May 24, 2016)
Northrop Grumman contracted with U.S. Immigration and Customs Enforcement ("ICE") to provide lease and support network monitoring software. Under the contract, ICE agreed to use its best efforts to obtain funding for the contract’s three option years. Shortly after being awarded the contract, Northrop assigned all of its rights to the annual lease payments to ESCgov, Inc. in exchange for immediately receiving an amount that covered its anticipated revenues under the contract. ESCgov then assigned its rights to yet another third party, Citizens Leasing Corp.
When ICE decided not to exercise the option years, Citizens Leasing required Northrop, pursuant to the claim sponsorship terms of their agreement, to challenge ICE’s decision with the contracting officer, arguing that ICE had not used its best efforts to obtain funding. The contracting officer denied the claim, and the Court of Federal Claims affirmed on the basis that there was no jurisdiction because "Northrop was seeking damages based on a ‘pass-through’ theory" and that Northrop had failed to inform the contracting officer about the agreements with ESCgov and Citizens. In a previous opinion, the Federal Circuit reversed and held that Northrop stated a proper claim under the CDA.
On remand, the Court of Federal Claims granted the Government’s summary judgment motion on the basis that Northrop could not prove damages. The Federal Circuit affirmed, holding that "in order to recover on a breach of contract claim, a plaintiff must prove damages," which Northrop could not do because ESCgov paid Northrop the same amount of money that Northrop expected to profit under the contract. If anyone was damaged by ICE’s failure to exercise the option years, the court explained, it was ESCgov or Citizens, not Northrop Grumman.
The ASBCA and Court of Federal Claims also issued several important decisions during the first half of 2016 arising from contract terminations.
Highland Al Hujaz Co., Ltd., ASBCA Nos. 58243 (Mar. 30, 2016)
The ASBCA (Thrasher, J.) denied Highland’s appeal of the U.S. Army Corps of Engineers’ termination for default of a contract to design and build an Afghan National Army installation. The contract called for Highland to provide temporary facilities for about 700 Afghan soldiers. Highland, however, refused to supply electrical power for the duration of the project unless the Government made progress payments that it had been withholding, and gave six days’ notice of its intent to stop providing power.
The board determined that not supplying power to the temporary facilities was sufficient cause for the Corps to terminate the entire contract, and that Highland’s excuses for not providing power–such as two delayed payments from the Government, a natural disaster, and other logistical problems–did not excuse non-performance. Even if Highland faced financial difficulties, the Government’s delayed payments were not the cause. Moreover, Highland’s excuses would conceivably merit an extension of time, but not wholesale refusal to supply power to the temporary facilities, as called for by the contract. Highland failed to convince the board that the Government’s decision to withhold two payments in the weeks prior to Highland’s default excused its default because the Government had separate and valid justifications for withholding those payments.
Precision Standard, Inc., ASBCA Nos. 58135, 58205 (June 8, 2016)
This appeal arose from a contract awarded by the Defense Logistics Agency to Precision Standard, Inc. for the manufacture and delivery of aircraft skins. The ASBCA (O’Sullivan, A.J.) held that a default termination was justified by the contractor’s failure to perform in accordance with the contracting officer’s directions and to properly respond to cure notices after the Government insisted on what the contractor believed was the incorrect welding standard. Notably, the board underscored the principle that the contractor has a duty "to continue performance of the contract pending resolution of a dispute arising under the contract."
Rex Systems Inc., ASBCA No. 59624 (April 15, 2016)
Rex Systems sought compensation for the Government’s termination for convenience of its contract, arguing that the Government imposed significant costs upon the company as a result of delay during the performance period. Notably, the contractor sought payment of an amount greater than it would have been entitled to had the contract been completed timely.
The ASBCA (Prouty, A.J.) concluded that Rex was not entitled to costs of production materials ordered prior to first article acceptance or delay damages for "unabsorbed overhead." And even though Rex was entitled to "very little profit" for its costs resulting from termination, the board found that there was no basis to compensate the contractor at a higher profit margin that it would have earned had the contract not been terminated. Rex was, however, entitled to additional reimbursement for settlement expenses.
Securiforce Int’l Am., LLC v. United States, 125 Fed. Cl. 749 (2016)
The Defense Logistics Agency awarded a requirements contract to Securiforce to deliver fuel to eight sites in Iraq over three years. In connection with a problem implementing a waiver of certain statutory requirements, DLA terminated the Securiforce contract for convenience in part. A dispute then arose between the parties over whether the contract entitled Securiforce to government security during performance of the contract, and DLA subsequently terminated the remainder of the contract for cause when Securiforce failed to make fuel deliveries in a timely manner. After sending a letter to DLA asking for rescission of the termination, Securiforce filed a complaint in the Court of Federal Claims seeking declaratory relief, and followed up with the Government by requesting a contracting officer’s final decision on the prior partial termination for convenience. When the Government rejected its requests, Securiforce alleged in the Court of Federal Claims that DLA had materially breached the parties’ contract.
In a lengthy opinion, the court (Horn, J.) denied the Government’s partial motion to dismiss for lack of jurisdiction and its motion to dismiss Securiforce’s claim related to the termination for convenience, but granted the its motion as to the claim related to the termination for cause. On the jurisdictional point, the court held that it had jurisdiction to hear an action for a declaratory judgment that the Government’s termination for convenience was a breach of contract; the court was unconvinced by the Government’s argument that Securiforce had improperly disguised a monetary claim as a non-monetary claim in order to avoid the CDA’s claim certification requirement. On the merits, the court agreed with Securiforce that DLA had abused its discretion in terminating the contract for convenience because the contracting officer testified that she did not exercise independent judgment in making that decision. On the other hand, the court held, this abuse of discretion, along with the Government’s other alleged breaches, did not excuse Securiforce’s default on its obligations. To the extent that Securiforce’s complaint sought declaratory relief as to the termination for cause, therefore, the court granted the Government’s motion to dismiss.
The boards of contract appeals and Court of Federal Claims addressed a number of issues during the first half of 2016 arising out of the body of federal common law that has arisen in the context of government contracts.
The Court of Federal Claims and ASBCA issued two decisions of note concerning the requirements for a prime contractor to sponsor a claim of its subcontractor against the Government. Because subcontractors are not in privity of contract with the Government, a prime contractor must "sponsor," or pass through, the subcontractor’s claim. A contractor sponsors the subcontractor’s claim by bringing an appeal on the subcontractor’s behalf, or by allowing the subcontractor to bring an appeal in the prime contractor’s name. Sponsored claims are allowed only if the prime contractor can make a claim against the Government based on the subcontractor’s theory of recovery. This limitation is based upon the Severin doctrine, after the case of Severin v. United States Court of Claims, 99 Ct. Cl. 435 (1943), which provides that a prime contractor cannot sponsor a subcontractor’s claim against the Government if the prime contractor has no liability to the subcontractor for the costs or damages at issue.
M.K. Ferguson Co. v. United States, No. 12-57C (Fed. Cl. Apr. 14, 2016)
Ground Improvement Techniques, Inc. served as a subcontractor to M.K. Ferguson on a Department of Energy project dating back to the 1990s. The subcontractor won a judgment against M.K. Ferguson arising out of a contract dispute, but M.K. Ferguson went bankrupt before it could fully satisfy the judgment. The bankruptcy court ordered M.K. Ferguson to file a "pass-through" CDA claim with the Department of Energy in an effort to have its subcontractor’s judgment satisfied. The Government thereafter moved to dismiss the claim on three grounds: (1) the claim was never properly certified to a contracting officer; (2) M.K. Ferguson was not liable for GIT’s claim, so it could not sponsor the claim; and (3) the claim could not be an "allowable cost" under M.K. Ferguson’s prime contract with the Government.
The Court of Federal Claims (Bush, J.) rejected all three arguments and denied the Government’s motion to dismiss. First, the court analyzed at length the Government’s argument that M.K.’s claim failed for lack of proper certification, finding that although the first certification had not contained all the elements required by the CDA, it had filed a corrected certification satisfying the CDA and, moreover, the initial certification did not amount to a complete and incurable failure to certify. Second, the court held that the Severin doctrine did not apply because any proceeds from a successful claim by M.K. Ferguson would go to the owners of GIT’s claim. Lastly, the court determined that no authority supported the Government’s argument that "an unsatisfied judgment that is part of a prime contractor’s bankruptcy estate cannot be allowable" to a contract like M.K.’s prime contract with the Department of Energy. The court remanded the matter to DOE for renewed consideration of M.K.’s claim by a contracting officer.
BAE Systems San Francisco Ship Repair, ASBCA Nos. 58810, 59642 (June 13, 2016)
BAE Systems sought a nearly $1 million equitable adjustment to its contract to overhaul an Army Logistics Support Vessel, the MG Charles P. Gross. During the course of completing the contract work, BAE, through its piping subcontractor Custom Ship Interiors, Inc. discovered that the piping systems were not as depicted on the contract drawings and required unanticipated additional repairs. The subcontractor, through BAE, thereafter submitted 19 "Condition Found Reports" or change proposals for additional labor and materials required to complete the piping replacement work. In an effort to meet its approaching contract deadline, BAE and CSI proceeded with the piping replacement work.
The ASBCA (Ting, A.J.) largely granted BAE’s requested costs for labor and materials, including subcontractor labor and materials and overtime labor costs. The board rejected the Government’s contention that the overtime labor rates and claimed costs were not reasonable and found that, although the contract was silent on the issue of overtime pay, the Government had essentially agreed to pay overtime rates by not challenging BAE’s interpretation of the contract or its plan to work overtime to complete the piping repairs when entering an oral agreement to extend the contract completion date. According to Judge Ting, "with full knowledge of BAE’s interpretation of that provision, the CO did not address or object to OT charges but entered into an agreement with BAE to extend the contract." Notably, the board found that the Severin doctrine did not bar BAE from recovering subcontract costs. The board emphasized that the Severin doctrine has been narrowly construed and that the Government had not met its burden to show that BAE was not responsible for the costs incurred by CSI.
The CBCA considered when a government contracts claim under the CDA may be precluded by a related proceeding in another tribunal–in this case, by a GAO bid protest decision.
Optimum Services, Inc. v. Dep’t of Interior, CBCA No. 4968 (May 2, 2016)
The Department of the Interior sought to dismiss an appeal brought by Optimum Services, Inc. ("OSI") on the grounds that a decision by the GAO regarding a bid protest brought by OSI was res judicata with regard to OSI’s claim in the appeal. In 2008, the Department of Interior’s National Park Service ("NPS") awarded a contract to OSI. An unsuccessful offeror filed a protest of the award at the Court of Federal Claims, in response to which the Park Service agreed to terminate the contract award to OSI and resolicit the contract. OSI then filed a protest with GAO, challenging the decision to issue a new solicitation and the termination of convenience of the OSI contract. GAO denied OSI’s protest, stating that while it generally declines to review the termination of contracts, which are matters of contract administration, it will review the propriety of a termination where it flows from a defect the contracting agency perceived in the award process.
The board found that the GAO’s decision in OSI’s protest was not res judicata in this appeal because DOI failed to establish (1) that GAO acted in a judicial capacity when it decided OSI’s protest and (2) that GAO had the ability to offer complete relief for OSI. The board explained that GAO did not act in a judicial capacity when it decided OSI’s protest because GAO’s decisions under the Competition in Contracting Act are only recommendations that are not binding on the Executive Branch. Moreover, GAO could not offer OSI complete relief because OSI sought remedies in its appeal (a claim for monetary damages) that were not available in its protest before GAO. Accordingly, the board denied the Government’s motion to dismiss.
Public Warehousing Company, K.S.C., ASBCA No. 59020 (May 2, 2016)
This appeal arose from three prime vendor contracts between Public Warehousing Company and the Defense Logistics Agency. The parties’ primary dispute concerned the proper interpretation of the Prompt Payment Act. Specifically, the Government interpreted the provision to prohibit application of the Prompt Payment Act to payments related to military contingency operations. PWC argued, however, that "the Government’s interpretation [ran] headlong into 5 C.F.R. § 1315.5(c)," which allows accelerated payment methods for payments made under a military contingency (and thus anticipates some application to payments related to military contingency operations). The Government’s interpretation also called into question Defense Federal Acquisition Regulation Supplement ("DFARS") 232.901, which precludes application of the Prompt Payment Act to payments to military contingencies in certain circumstances.
The ASBCA (Thrasher, A.J.) denied the Government’s partial motion to dismiss for lack of subject matter jurisdiction and motion for summary judgment for the following reasons. First, it held that "5 C.F.R. § 1315.1(b)(2) does not preclude an agency from contractually agreeing to make payments related to military contingency operations pursuant to the terms of the Prompt Payment Act, as the Government did in the instant case. Accordingly, 5 C.F.R. § 1315.1(b)(2) does not bar any portion of PWC’s claim." Second, the board determined the Government’s motion for summary judgment–based on the argument that a portion of the contractor’s claim accrued more than six years prior to submitting its claim–failed because the Government did not allege when each invoice was paid. Judge Thrasher explained that liability for Prompt Payment Act penalties accrues for each invoice when the Government pays the invoice without paying any required Prompt Payment interest. Moreover, the board noted that summary judgment was inappropriate because the Government failed to present specific facts regarding the invoices and accordingly did not establish the absence of a material dispute of genuine fact with respect to the statute of limitations inquiry.
Mach 1 AREP Carlyle Center LLC, ASBCA No. 59821 (June 1, 2016)
The Army Corps of Engineers leased office space in Northern Virginia from Mach 1 AREP Carlyle Center LLC. The lease purported to require the Corps to exercise nine separate one-year options after the first year, so long as Congress appropriated sufficient money each year for the lease, which the Government was required to use its "best efforts" to secure. Due to lack of funding brought about by a government shutdown over a budget dispute, the Corps terminated the lease earlier than anticipated.
The ASBCA (Prouty, A.J.), citing Supreme Court precedent interpreting the Anti-Deficiency Act, held that any provision for automatic renewal is precluded by law and "cannot be evaded by the inclusion of a ‘best efforts’ clause." Accordingly, "no lease can compel the [Government] to exercise option years that were not yet funded at the time the lease was entered," and the Government could not be liable for failure to exercise the remaining option years.
In a case that demonstrates the intersection between the Small Business Administration’s size determinations and contract compliance, the ASBCA rendered a decision involving a contractor’s noncompliance with a solicitation’s size standards of which industry and practitioners should be aware.
Third Coast Fresh Distribution, LLC, ASBCA No. 59696 (April 6, 2016)
Third Coast Fresh Distribution ("TCF") appealed to the ASBCA after a Defense Logistics Agency contracting officer terminated its $4.5 million fruits and vegetables contract with the company because TCF subcontracted some of the work in violation of the nonmanufacturer rule for small business contractors. The Small Business Administration initially found that TCF met the nonmanufacturer rule requirement to take "ownership or possession of the item(s) with its personnel, equipment or facilities in a manner consistent with industry practice" by planning to deliver the produce with its own trucks and drivers. But after contract performance began, the contracting office noticed that TCF used a subcontractor to perform deliveries and filed a new size protest, which resulted in a SBA determination that TCF no longer qualified as a small business. TCF did not appeal to SBA’s Office of Hearings and Appeals, and instead appealed to SBCA after its contract was terminated for default.
According to TCF, a Houston-based company, it had fully intended to deliver the produce to Dallas itself. But after what had originally been a combined contract for U.S. Department of Defense and nonmilitary customers was ultimately split and TCF received only the DOD work, TCF found that it was not "economically feasible" to handle the delivery itself at the smaller scale. The ASBCA (Melnick, A.J.) held that TCF’s failure to comply with the nonmanufacturer rule was grounds for a default determination, finding that TCF was not justified in using a subcontractor to deliver produce to the Dallas area because it was required to take ownership and deliver goods using its own personnel and trucks.
TCF argued that it was only required to present its nonmanufacturer rule compliance to the SBA at the time of the award, but the ASBCA disagreed. Judge Melnick explained, "It would be senseless if contractors could merely say they will comply . . . at the time of proposal, but not have to perform accordingly. Qualifying as a small concern was a condition of the contract." The opinion underscored that nonmanufacturer rule is intended to prevent "front" organizations set up solely to win government contracts and then supply large business products.
In opposing the appeal, the Government argued that the ASBCA did not have jurisdiction because TCF never contested the SBA’s new size determination. The ASBCA found, however, that it had jurisdiction because the company was appealing the contract termination, over which it does have jurisdiction, rather than the size determination. The board nevertheless denied the appeal on summary judgment, finding that TCF’s decision to alter its manner of performance was "a voluntary one made for business reasons" and that it was not absolved from the nonmanufacturer rule because TCF knew the contract might be split.
Although our mid-year update focuses on government contracts litigation arising out of the Boards of Contract Appeals, Court of Federal Claims, and Federal Circuit, two particular cases of note were recently decided by the United States Supreme Court.
Univ. Health Servs., Inc. v. United States ex rel. Escobar, 579 U.S. ___ (June 16, 2016)
As discussed extensively in Gibson Dunn’s 2016 False Claims Act Mid-Year Update, the Supreme Court recently upheld the validity of the theory of "implied false certification." Under this theory, a defendant may be liable under the False Claims Act when it submits a claim to the Government for payment implicitly certifying compliance with relevant statutory, regulatory, or contractual requirements. Here, after their daughter died while in the care of a mental health facility owned by a subsidiary of UHS, the respondents filed a qui tam action against UHS alleging that the facility had violated the False Claims Act by submitting Medicaid claims to the Government without having complied with requirements for licensing medical staff. The district court dismissed the complaint on the ground that the regulations allegedly violated did not constitute conditions for payment of the claims, but the First Circuit reversed.
The Supreme Court (Thomas, J.) vacated and remanded, resolving multiple circuit splits over how claims of implied false certification under the False Claims Act should be handled. First, the Court held that implied false certification is a valid theory of FCA liability under the well-established common-law principle that material omissions of information can be actionable for fraud. Second, the Court concluded that a defendant need not have violated an express condition of payment for FCA liability to attach, as long as the defendant’s undisclosed violation would be material to the Government’s payment decision. On the flip side, however, the violation of an express condition of payment would not automatically suffice. The materiality of a defendant’s implied false certification is controlling, the Court emphasized, not whether the defendant has violated an express condition of payment.
Kingdomware Techs. v. United States, 579 U.S. ___ (June 16, 2016)
In an effort to spur the Government to provide contracting opportunities to small businesses owned by veterans, Congress passed the Veterans Benefits, Health Care, and Information Technology Act in 2006. A key provision of the Act requires the Secretary of Veterans Affairs to set annual goals for participation in VA contracts by veteran-owned businesses, and a related provision–sometimes called the "Rule of Two"–specifies that, "for purposes of meeting [those] goals," the VA must restrict bidding to such businesses when there is a "reasonable expectation that two or more" veteran-owned businesses will make reasonable bids.
The VA took the position that the Act does not require it to apply the Rule of Two when it is not necessary to satisfy annual contracting goals, or when the VA places orders under preexisting Federal Supply Schedule ("FSS") contracts, under which businesses provide indefinite delivery of goods and services at set prices. After the VA applied this understanding with respect to procurements involving emergency notification services for VA facilities, Kingdomware Technologies, a veteran-owned small business, filed suit in the Court of Federal Claims. That court and the Federal Circuit sided with the Government on the ground that the VA’s understanding of its obligations was at least a reasonable interpretation of the Act. But the Supreme Court (Thomas, J.) reversed. First, the Court held that it had jurisdiction even though the contracts in question had been procured and performed, because the question presented was "capable of repetition, yet evading review." On the merits, the Court decided that the 2006 Act unambiguously requires the VA to apply the Rule of Two except in two specific sets of circumstances not applicable here. The justices rejected the notion that the Rule of Two’s statutory purpose–helping the VA meet its annual contracting goals–could override the Act’s clear mandatory language. The Court also concluded that FSS orders fall within the Rule of Two because they qualify as "contracts" within the meaning of the statute. Accordingly, the Government’s view that it had discretion not to apply the Rule of Two in these circumstances was not entitled to deference.
We will continue to keep you informed on these and other related issues as they develop.
The following Gibson Dunn lawyers assisted in the preparation of this client update: Karen L. Manos, John W.F. Chesley, Lindsay M. Paulin, Kevin J. Barber, Shannon Han, Naomi Takagi and Justin Epner.
Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding the issues discussed above. Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following:
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Joseph D. West (+1 202-955-8658, [email protected])
John W.F. Chesley (+1 202-887-3788, [email protected])
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