February 9, 2017
This February 2017 edition of Gibson Dunn’s Aerospace and Related Technologies Update discusses newsworthy developments, trends, and key decisions from 2016 that are of interest to aerospace and defense, satellite, and drone companies, and new market entrants in the commercial space and related technology sectors, including the private equity and other financial institutions that support and enable their growth.
Specifically, this update covers the following areas: (1) commercial unmanned aircraft systems (“UAS”), or drones; (2) government contracts litigation involving companies in the aerospace and defense industry; and (3) the commercial space sector. We discuss each of these areas in turn below.
Unmanned aircraft systems (“UAS”) technology has improved rapidly while becoming reasonably affordable for most organizations. The commercial applications of UAS, more commonly referred to as “drones,” include sensory data collection, building inspections, utility inspections, agriculture monitoring and treatment, railway inspections, pipeline inspections, mapping of mines, and photography. New applications are being created on a regular basis.
For years, the law prohibited commercial drone operations absent a special exemption. However, in 2016, a comprehensive set of regulations governing non-recreational drone operations was finalized, thus creating sweeping opportunities to implement commercial drone operations.
In 2016, many organizations incorporated drones into their operations and tested future concepts. The drone delivery concept was validated through multiple corporate deliveries: Amazon Prime Air made its first delivery in the United Kingdom; DHL delivered packages to a mountain plateau in Germany; Google and Chipotle tested burrito deliveries at Virginia Tech; and 7-Eleven and Flirtey delivered products in Reno, Nevada. Disney World, in collaboration with Intel, revealed a new holiday show consisting of drones performing in the night sky, rather than traditional fireworks. Walmart announced it would use drones to better track inventory at distribution centers. And CNN became the first U.S. broadcaster to launch a drone division.
Overall, 2016 was an historic year that officially ushered in a new industry. We expect that the industry will continue to develop in the coming year, and that key topics such as rules governing flights over non-participating people, litigation concerning property owners’ rights to airspace, privacy, and operations beyond visual line of sight will be addressed. Related jurisdictional disputes are likewise on the horizon.
Expanded drone operations also created controversy. Citizens and police shot down drones on several occasions, news organizations reported collisions between drones and commercial aircraft (all stories were proven false after investigations), and concerns about privacy continued to build.
To get you caught up on 2016’s groundbreaking drone developments, below we have briefly summarized: (A) Part 107 drone regulations; (B) the likely Proposed Rule for Operations Over Non-Participating People; (C) Privacy; and (D) the Intersection of Federal and State/Local Drone Laws.
On August 29, 2016, the long-awaited comprehensive regulations for Small Unmanned Aircraft Systems (“sUAS”), drones weighing 55 pounds or less, became law under Part 107 of Title 14 of the Code of Federal Regulations (“Part 107”). These regulations are monumental for commercial drone operations because they provide the regulatory foundation for the burgeoning industry. Prior to Part 107, the law prohibited commercial drone operations unless an operator obtained a Section 333 exemption from the Federal Aviation Administration (“FAA”). Part 107 permits commercial operations within certain parameters and eliminates the need for an exemption, unless one wants to operate outside of those parameters.
Significantly, Part 107 removed the time-consuming and expensive Section 333 requirement that commercial drone operators obtain a recreational or sport pilot license. Under the new regulations, commercial drone pilots must obtain the newly created remote pilot certificate with a sUAS rating or be under the direct supervision of a person with a certificate. To obtain the certificate, a person must pass an aeronautical knowledge test at an FAA-approved center, be vetted by the Transportation Security Administration, be able to speak English, and be at least 16 years old. Individuals with an existing pilot license need only take an online sUAS training course to obtain a remote pilot certificate. In 2016, the FAA issued over 14,000 remote pilot certificates.
In addition, Part 107 set forth several key operational limits for commercial drones:
The FAA’s willingness to provide waivers is one of the most promising aspects of Part 107 and will allow regulations to expand as technology progresses. The waivers permit remote pilots to deviate from the following operational limits:
Applications for a Certificate of Waiver are completed online and granted on a case-by-case basis. In 2016, the FAA granted 239 waivers. The majority of these waivers were for nighttime operations. Notably, the following organizations received waivers:
If an organization needs an exemption from a particular section in Part 107 that is not subject to a waiver, it can request a Section 333 exemption or apply for a type certification. This will be particularly relevant for operators wishing to fly drones greater than 55 pounds because Part 107 only applies to drones weighing 55 pounds or less.
In addition to applying for waivers, operators can now seek airspace authorization for operations in restricted airspace. However, obtaining airspace authorization has been a source of frustration for many operators. Part 107 allows operations “in Class B, Class C, or Class D airspace or within the lateral boundaries of the surface area of Class E airspace” if the remote pilot obtains “prior authorization from Air Traffic Control.” But an FAA guidance letter from October 3, 2016, restricted Air Traffic Control from granting such authorization, stating that FAA headquarters will approve airspace waivers and coordinate with the relevant air traffic facility. The FAA UAS website’s authorization portal requires that applications be submitted at least 90 days prior to the operation, which can seriously hinder timely operations.
* * *
Although the waiver and airspace authorization process is far from perfect, the mere existence of an institutionalized waiver and airspace authorization program is promising. We expect that the FAA will streamline the process in 2017, making waivers and airspace authorization more accessible to remote pilots.
We also expect that Part 107 is the beginning, and not the end, of drone regulations. For example, in the next few years, the FAA will likely propose rules for drones heavier than 55 pounds, and within the next few months, the FAA will likely publish a Notice of Proposed Rule Making for operating drones over non-participating people.
In February 2016, the FAA assembled an aviation rulemaking committee (“ARC”) to recommend standards that would allow certain drones to be operated over people. The ARC submitted its recommendations on April 1, 2016, dividing drones into four categories based on the level of risk correlated to a weight or impact energy equivalent.
The FAA’s Notice of Proposed Rulemaking (“NPRM”) is expected to significantly vary from the ARC’s recommendations. The FAA sent the proposed rule to the White House Office of Information and Regulatory Affairs (“OIRA”) in November 2016. Once OIRA approves the proposed rule, the NPRM will be published in the Federal Register and a public comment period will begin. As with the NPRM for Part 107, there likely will be thousands of public comments concerning the proposed rule. Timing for publishing the NPRM is uncertain. On January 20, 2017, President Trump issued a memorandum to all executive departments and agencies freezing new or pending regulations for 60 days.
The proposed rules have the potential to remove a tremendous obstacle for certain drone operators. Under Part 107, drones are prohibited from flying over unsheltered people unless they are “[d]irectly participating in the operation.” Individuals “[d]irectly participating” include the remote pilot, the person on the controls, a visual observer, and anyone else essential to the operation. Those who have merely given consent for the operations are excluded.
Therefore, under Part 107, implementing certain commercial drone operations may be a challenge, or impossible, due to the presence of non-participating people in the operational area. For example, drone operations cannot take place over active construction or mining sites without first clearing the area of people, and news organizations may be prohibited from flying directly over a newsworthy event. Part 107 does provide waivers for flights over non-participants on a case-by-case basis, but the waiver process is not always a practical option for addressing time-sensitive commercial needs. The upcoming proposed rule will create standards for safe flights over non-participating people and should be a catalyst for many commercial operations. Flights over non-participating people will likely increase privacy concerns.
As the popularity of both commercial and hobbyist drones increases, concerns over privacy and personal data collection continue to swell. In February 2015, President Obama issued a Presidential Memorandum directing that privacy, civil rights, and civil liberties concerns be taken into account as drones are integrated into the national airspace. Obama ordered the National Telecommunications and Information Administration (“NTIA”) of the U.S. Department of Commerce to create a private-sector engagement process to help develop voluntary best practices for privacy, accountability, and transparency issues regarding commercial and private drone use. That process took place over the past year, with the participation of multiple private-sector groups. On May 19, 2016, the NTIA released voluntary best privacy practices for drones. The voluntary best practices received agreement from technology companies, insurance companies, media organizations, drone industry associations, and privacy groups. Although these best practices do not create any legal standards, they set useful guidelines for any organization conducting drone operations.
Covered Data: The best practices focus heavily on the collection and storage of “covered data.” Covered data is information collected by drones that identifies a particular person. If the data is unlikely to be linked to a particular person, or if it is altered so that a particular person is not recognizable, it is not considered covered data.
Reasonable Expectation of Privacy: Absent a compelling need, drone operators should avoid collecting covered data when the subject has a reasonable expectation of privacy. Operators should avoid intentional, persistent, and continuous collection of covered data about individuals. Further, operators should make reasonable efforts to minimize flights over private property without consent of the owner or without appropriate legal authority.
Data Security: Organizations storing covered data should implement a program to address and manage cybersecurity risks. The program should have reasonable administrative, technical, and physical safeguards appropriate to the organization’s size and the nature of the covered data. Appropriate safeguards include those described in guidance from the Federal Trade Commission, the National Institute of Standards and Technology Cybersecurity Framework, and the International Organization for Standardization’s 27001 standard for information security management. Corporations should consider the below practices to secure covered data:
Part 107 does not address privacy. In the NPRM for Part 107, the FAA stated that privacy issues were “beyond the scope” of the rule, and “that state law and other legal protections for individual privacy may provide recourse for a person whose privacy may be affected through another person’s use of a UAS.” During the comment period for the NPRM, the FAA received around 180 comments regarding privacy concerns, but declined to include privacy regulations within Part 107.
The Electronic Privacy Information Center (“EPIC”) challenged the FAA’s decision to exclude privacy regulations from Part 107 by filing a petition for review in August 2016. EPIC had previously sought review of the NPRM because it excluded privacy regulations, but in May 2016, the D.C. Circuit held that EPIC’s challenge was premature because the proposed rule was not final. After the rule became final, EPIC filed a new petition of review asking the court to vacate Part 107 and remand it to the FAA for further proceedings. EPIC contends that the FAA Modernization and Reform Act of 2012 requires the FAA to address privacy concerns related to drones, while the FAA asserts that privacy is beyond its charge to regulate aviation safety in the national airspace. All eyes will be on the D.C. Circuit to determine if the FAA will be required to issue rules related to privacy.
Regardless of whether or not there are federal rules directed towards drone privacy, corporations should make their best efforts to comply with the NTIA Voluntary Best Practices, as well as state and local privacy laws.
Although Part 107 created a federal regulatory framework for commercial drone operations, there is still significant confusion as to what constitutes a legal flight under evolving state and local laws. Laws regulating the drone industry exist in 32 states, and five states have adopted resolutions regarding drones. In 2016, at least 38 state legislatures considered legislation to regulate the drone industry, and 17 states (Alaska, Arizona, California, Delaware, Idaho, Illinois, Indiana, Kansas, Louisiana, Oklahoma, Oregon, Rhode Island, Tennessee, Utah, Vermont, Virginia and Wisconsin) passed 31 pieces of legislation. In addition, countless local governments proposed and passed ordinances impacting the drone industry at the local level. Thus, it will be critical for companies launching commercial drone enterprises to work closely with counsel to determine which, if any, state and local laws apply to each commercial operation. They will also need to evaluate preemption issues.
In the developing drone community, confusion stems from the FAA’s position that it controls the airspace “from the ground up,” and that the notion that it does not control airspace below 400 feet is a “myth.” However, many state and local governments do not agree with the FAA’s interpretation. There are major implications for where navigable airspace begins, and the question ultimately will be settled by federal courts over the next several years. This is one of the most important legal issues for the industry because, without clarification, legal compliance and enforcement may be impossible within some localities.
While the FAA governs the “navigable airspace” of the United States, navigable airspace is defined as the “airspace above the minimum altitudes of flight prescribed by regulations . . . including airspace needed to ensure safety in the takeoff and landing of aircraft.” The FAA regulations list the minimum safe altitude as 500 feet above the surface in non-congested areas (lower in sparsely populated areas) and 1,000 feet above the highest obstacle in congested areas. Although aircraft can fly below these minimum safe altitudes for takeoff or landing, when these laws and regulations were created, the very concept of low-flying, low-price drones–which can take off and land on anyone’s property–only existed in science fiction. The proliferation of drones requires clarification of where private property rights end and navigable airspace begins.
The Supreme Court provided some guidance on property rights and navigable airspace in 1946 in United States v. Causby. In Causby, a chicken farm was located near an airport, and the glide path for one of the runways was 83 feet above the property. The Court examined whether military aircraft flying 83 feet above the property was a taking. The Court held that it was a taking and stated: “[I]t is obvious that if the landowner is to have full enjoyment of the land, he must have exclusive control of the immediate reaches of the enveloping atmosphere. Otherwise buildings could not be erected, trees could not be planted, and even fences could not be run.” The court also acknowledged that an invasion of air above one’s property can be in the “same category as invasions of the surface.” The Court declined to determine the exact boundary between one’s property and public airspace: “We need not determine at this time what those precise limits are.” Even if the Court did determine precise limits, a military aircraft landing at an airport in 1946 is fundamentally different from today’s low-flying, low-price, consumer and commercial drones.
In 2016, two pending lawsuits began to address the key question of defining navigable airspace in the context of drones.
Boggs v. Merideth, No. 3:16-cv-00006 (W.D. Ky. Jan. 4, 2016)
In Boggs v. Merideth (also known as the “Drone Slayer” case), a drone operator in the Western District of Kentucky filed a lawsuit against a landowner (the self-proclaimed “Drone Slayer”) who downed the plaintiff’s drone with a shotgun. The drone was flying around 200 feet above the Defendant’s property, and the defendant claimed it was trespassing and invading his privacy. After a state judge found the defendant was “within his rights,” the plaintiff filed a complaint in federal court for declaratory judgement to “define clearly the rights of aircraft operators and property owners.” The district court has not yet ruled on the issue.
Huerta v. Haughwout, No. 3:16-cv-358, Dkt. No. 30 (D. Conn. Jul. 18, 2016)
The most notable case of 2016 regarding the FAA’s authority over low-level airspace was Huerta v. Haughwout (also known as the “flamethrower drone” case). The Haughwouts posted YouTube videos of a drone flying a few feet above their property. In one video, a drone fired an attached handgun, and in another video, a drone roasted a turkey with an attached flamethrower. The FAA sent the Haughwouts an administrative subpoena to acquire more information about these activities. The Haughwouts declined to comply with the subpoenas and claimed their activities were not subject to investigation by the FAA. The FAA sought enforcement of the subpoenas. The District Court for the District of Connecticut found the administrative subpoenas to be valid and ordered the Haughwouts to comply.
In his order, Judge Jeffrey Meyer included dicta that casts doubt on the FAA’s claim to controlling airspace from the ground up: “the FAA believes it has regulatory sovereignty over every cubic inch of outdoor air in the United States . . . [T]hat ambition may be difficult to reconcile with the terms of the FAA’s statute that refer to ‘navigable airspace.'” The dicta addressed the question of where the FAA’s authority begins, but noted that the “case does not yet require an answer to that question.” Notably, the Judge stated:
Congress surely understands that state and local authorities are (usually) well positioned to regulate what people do in their own backyards. The Constitution creates a limited national government in recognition of the traditional police power of state and local government. No clause in the Constitution vests the federal government with a general police power over all of the air or all objects that leave the ground. Although the Commerce Clause allows for broad federal authority over interstate and foreign commerce, it is far from clear that Congress intends–or could constitutionally intend–to regulate all that is airborne on one’s own property and that poses no plausible threat to or substantial effect on air transport or interstate commerce in general.
The dicta in Huerta may indicate how federal courts will address this vital issue. As drone operations continue to expand, the importance of the question will continue to grow.
2017 will be an important year for the development of the commercial drone industry. We can expect to see more organizations adopting drone operations; the FAA streamlining Part 107 waivers and airspace authorization; a proposed rule governing flights over non-participating people; litigation regarding property owners’ rights to airspace; more dialogue regarding privacy issues; and significant progress in operations beyond-the-visual-line-of-sight (“BVLOS”), given the approval obtained by the Northern Plains UAS Test Site for conducting BVLOS flights in 2017. This approval will allow companies to develop, test, and evaluate BVLOS concepts and platforms without the need for a Part 107 waiver. Progress in BVLOS operations combined with the upcoming proposed rule for flights over non-participating people will greatly expand commercial applications.
In addition, the Trump administration’s approach to commercial drones, and any judicial decisions regarding federal preemption and privacy, will shape the future of this burgeoning industry.
Gibson Dunn’s 2016 Year-End Government Contracts Litigation Update and 2016 Mid-Year Government Contracts Litigation Update cover 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 (“ASBCA”), and Civilian Board of Contract Appeals (“CBCA”), among other tribunals. We invite you to review those publications for a full report on case law developments in the government contracts arena.
In this update, we summarize key court decisions related to government contracting from 2016 that involve players in the aerospace and defense industry. The cases discussed herein, and in the Government Contracts Litigation Updates referenced above, address a wide range of issues with which government contractors in the aerospace and defense industry are likely familiar, including issues of contract interpretation, jurisdictional requirements, limitations on the remedies available to contractors, and the various topics of federal common law that have developed in the government contracts tribunals. In addition, we highlight the uncertainty surrounding the direction federal contracting policy will take under the new Trump administration.
Whether the courts and boards of contract appeals have jurisdiction over a matter turns on whether there is a valid “claim” and, relatedly, how that claim is defined. Because the Contract Disputes Act, 41 U.S.C. §§ 7101‒7109 (“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.”
In 2016, two decisions from the ASBCA that involved the aerospace and defense industry touched on jurisdictional issues. In Military Aircraft Parts, ASBCA No. 60290 (Feb. 4, 2016), the ASBCA 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. In Alaska Aerospace Corp., ASBCA No. 59794 (Sept. 13, 2016), the ASBCA considered whether the contractor had submitted a claim as required by the CDA.
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.
Alaska Aerospace Corp., ASBCA No. 59794 (Sept. 13, 2016)
In 2003, the Missile Defense Agency awarded a contract to Alaska Aerospace for the use of a launch complex and support services. The contract incorporated, by reference, FAR 52.216-7, Allowable Cost And Payment (Dec. 2002), which allows reimbursement of contributions to employee pension plans. In 2014, the Government partially disallowed costs for employee pension plans and sought to recover the disallowed costs.
The Board (Melnick, A.J.) first noted that because the Government was seeking to recoup money, the case was a Government claim for which the Government bore the burden of proof. In finding that the Government failed to meet its burden, the Board explained that the Government’s reliance on the contracting officer’s final decision as evidence of overpayment was improper. The contracting officer’s final decision attempted to impose a penalty, not establish recoupment as a basis for the demand for payment. Further, findings of fact in the contracting officer’s final decision are not binding upon the parties and are not entitled to any deference.
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. Two such cases involve aerospace and defense companies and are discussed below. Under the CDA, a board has jurisdiction over appeals 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.
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 give the board discretion to waive the 90-day appeal period. Although the two cases were decided differently on the merits, the ASBCA made clear, in both instances, that it would not interpret Sikorsky to allow a waiver of the appeal period.
Military Aircraft Parts, ASBCA No. 60336 (Apr. 25, 2016); and 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 cancellation of two purchase orders for more frames, claiming that the termination and cancellation 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, Military Aircraft Parts appealed the contracting officer’s final decisions that denied a number claims for breach of contract arising out of a contract that the Government terminated for default. The Government argued that Military Aircraft Parts did not timely appeal the default terminations 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. Military Aircraft Parts 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.”
The following decision from the second half of 2016 articulates broadly applicable contract interpretation principles that government contractors should consider.
King Aerospace, Inc., ASBCA No. 57057 (July 26, 2016)
In 2005, the Government awarded a contract to King for the maintenance of a fleet of aircraft. In 2009, King presented a certified claim incorporating a Request for an Equitable Adjustment (“REA”) based on additional maintenance required as a result of aircraft conditions inferior to those represented in the contract. The contracting officer denied the claim and King appealed.
The Board (McImail, A.J.) concluded that King was entitled to additional compensation, noting that in order to prevail on a claim of misrepresentation, the contractor needed to show that there was a false representation of material fact that the contractor reasonably relied on to the contractor’s detriment. The Board determined that the contract represented that aircraft would be maintained in accordance with industry practices, and that the aircraft were not maintained in such a fashion. Further, this misrepresentation was material because the condition of the aircraft was likely to affect the inducement of King in assenting to maintaining the aircraft. Moreover, King honestly relied on the misrepresentation to its detriment because King would have bid higher had it known of the substandard condition of the aircraft. The Board also found that King’s reliance was reasonable as there was no contrary representation of the aircrafts’ conditions.
Raytheon Co., Space & Airborne Sys., ASBCA No. 58068 (Aug. 9, 2016)
In 2007, Raytheon SAS revised its cost accounting practices, one of which the Defense Contract Audit Agency (“DCAA”) determined to result in a $142,000 increase to the Government across all contracts with the business. DCAA did not consider decreased costs to the Government from one of the related changes, which more than offset the modest increase from the first change, due to a revision to FAR 30.606 in 2005, that prohibits such offsets, as discussed in an earlier decision in this case covered in the 2015 Mid-Year Government Contracts Litigation Update . The contracting officer subsequently issued a final decision on the alleged increased costs and Raytheon SAS appealed.
The Board (O’Connell, A.J.) sustained the appeal, ruling for Raytheon SAS, because it found that the contracting officer improperly determined the amount at issue was “material” based solely upon the dollar value of the increased cost, without considering other required factors, such as the magnitude of the dollar value in relation to Raytheon SAS’s total contracting relationship with the Government (here, less than 0.005%), the cost impact per contract (here, $36 per contract, per year), or the benefit of reduced administrative processing costs by the Government. The Board concluded that the contracting officer’s failure to consider these factors was an “abuse of discretion,” which is significant because there was no evidence of bad faith by the contracting officer.
Exelis, Inc., ASBCA No. 60131 (Aug. 29, 2016)
Exelis appealed from a contracting officer’s final decision finding that Exelis improperly accounted for the costs of a building lease pursuant to Cost Accounting Standard (“CAS”) 404, which governs Capitalization of Tangible Assets. Exelis moved to dismiss and asserted that there was no CAS 404 violation, and that while the CAS 404 claim asserted a sum certain, it did not assert a sum certain with regard to a FAR violation, which the Government was also asserting.
The Board (D’Alessandris, A.J.) determined that there was no CAS 404 violation. First, the Board found the plain language of CAS 404 to be clear, that it applied to “tangible” assets, and that a building lease is an “intangible” asset since it does not have “physical substance.” Second, even if the language was not clear, the preamble to CAS 404 showed that the CAS Board did not intend that all leases should be “tangible capital assets.” Third, in considering other interpretive aids, the Board continued to find that the Government could not establish a CAS 404 violation.
Regarding the alleged FAR violation, the Board first noted that new theories or new damages that arise from the same operative facts do not constitute new claims, and that the sum certain requirement simply requires a specified dollar amount for a claim. The Board also explained that estimated or approximate costs in determining the value of a claim is sufficient, as long as the overall demand is for a sum certain. In light of this, the Board found that the relevant facts in the appeal included the lease in question, and that the FAR and CAS claims involved the same operative facts and were the same claim for CDA purposes. Thus, despite the Government’s sum certain being calculated based on a purported CAS violation rather than a FAR violation, the claim was still proper because the two purported violations were the same for CDA purposes.
The direction that federal contracting policy will take under the new Trump administration remains somewhat vague, and we will continue to keep you informed as the administration’s policy develops. But we note that President Trump’s willingness to use Twitter to address the price of federal contracts will likely have implications in the industry. Although prior administrations have been critical about allegedly wasteful spending, President Trump’s Twitter activity suggests that the President is willing to directly intervene in the negotiation and execution of government contracts, which is something federal contractors will have to take into account.
The National Aeronautics and Space Administration (“NASA”) has lacked the domestic capability to transport astronauts to space since the expiration of the Space Shuttle Program in July 2011. Since then, NASA has relied upon the Russian Federal Space Agency (“Roscosmos”) to ferry astronauts to the International Space Station (“ISS”), at prices ranging from $21 million to $82 million per roundtrip. To remedy this situation, NASA instituted the Commercial Crew Program to work with commercial companies to develop manned spaceflight systems. In September 2014, NASA selected two companies to participate in this program: The Boeing Company (“Boeing”) and Space Exploration Technologies Corporation (“SpaceX”).
On September 1, 2016, NASA announced that both companies were facing technical challenges that would delay the first flights carrying NASA astronauts to the ISS until late 2018–more than three years after NASA’s original 2015 goal. Boeing was experiencing issues related to vehicle mass and the effects of vibrations generated during launch. SpaceX was experiencing delays from its decision to change its capsule design to enable water-based landings. In light of these developments, NASA extended its contract with Roscosmos for astronaut transportation through 2018, at an additional cost of $490 million for six more seats.
On January 4, 2017, NASA announced that it awarded additional space missions to Boeing and SpaceX. Originally, each firm was offered two roundtrip missions to the ISS. Now each firm will launch six missions. Boeing has scheduled an unmanned flight test for June 2018 and a crewed flight test for August 2018. It has even released new spacesuit designs. SpaceX has scheduled an unmanned flight test for November 2017 and a crewed flight test for May 2018.
The National Oceanic and Atmospheric Administration (“NOAA”) released a commercial space policy on January 8, 2016. Among other things, it designated the Office of Space Commerce as a point of contact for commercial providers to promote more efficient commercial engagement. The policy was part of NOAA’s efforts to understand better how partnerships with private firms in the rapidly changing commercial space sector could help the agency perform its functions.
NOAA’s National Environmental Satellite, Data, and Information Service (“NESDIS”) published a Commercial Space Activities Assessment Process on January 6, 2017. This report indicated NOAA’s interest in commercially provided data satisfying its technical requirements at a lower cost than government alternatives. It then set out a four-part process for future government contracts. First, NESDIS will release one or more Requests for Information to convey its interest in new data sets and gather information about new, emerging, and existing commercial observation capabilities. Based on these responses, NESDIS will then release one or more solicitations to acquire and evaluate commercial data satisfying the requisite specifications. NOAA may then purchase data from one or more vendors for analysis and evaluations through a demonstration project. Following these demonstrations, NESDIS may issue one or more solicitations to purchase on-orbit observations from commercial sources for operational use by NOAA.
On September 15, 2016, NOAA announced that it awarded contracts to GeoOptics, Inc. ($695,000), and Spire Global, Inc. ($370,000), as part of its Commercial Weather Data Pilot. The firms will provide space-based GNSS radio occultation data to NOAA for the agency to evaluate. They have until April 30, 2017, to complete the delivery of their data. NESDIS will conduct an assessment of the data through the end of FY 2017 and produce a final report in early FY 2018.
On July 20, 2016, the Federal Aviation Administration approved a private company’s plans to land a robotic lander on the Moon, capping a series of unprecedented regulatory approvals from NASA and the State Department that blaze a trail for commercial lunar expeditions. The company, Moon Express, is an early-stage startup founded for the purpose of establishing commercial travel to, and gathering resources and metals from, the Moon.
As previously there was “no existing regulatory framework for private missions beyond Earth orbit,” Moon Express CEO Bob Richards says that “Moon Express created a proposed framework” for the necessary approvals. While more details have yet to emerge about Moon Express’s framework, it purportedly focused on “the safety of its payload as well as outlining [how] the United Nation’s Outer Space Treaty would not be violated.” The framework uses “existing payload review and launch license processes under authorities of the Secretary of Transportation, and adds to them a series of voluntary disclosures intended to provide the Federal Government with sufficient information to help fulfill its supervisory obligations under the Outer Space Treaty.”
The approval is for a lunar mission in 2017, but Moon Express is still assembling its lander and coordinating for its rocket with Los Angeles-based “Rocket Lab.” If Moon Express reaches the Moon by December 31, 2017, it may win the “Google Lunar X Prize competition for the first private organization to reach the moon” and also reap a $20 million reward. Four others teams from around the world purportedly have obtained 2017 launch contracts from their respective governments. Moon Express recently announced it has raised an additional $20M in series B-1 funding, which it claims “fully finance[s]” its 2017 launch.
On November 28, 2016, President Obama signed into law H.R. 6007, a bill “[t]o amend title 49, United States Code, to include consideration of certain impacts on commercial space launch and reentry activities in a navigable airspace analysis, and for other purposes.” The bill amended 49 U.S.C. § 44718, which has long permitted the Secretary of Transportation to conduct studies and issue reports on any adverse impact on navigable airspace resulting from proposed construction. H.R. 6007 required the Secretary of Transportation to conduct an aeronautical study if the Secretary determines that any proposed construction or alteration would interfere with “air or space navigation facilities.” And in conducting such a study, the bill required the Secretary to consider “the impact on launch and reentry for launch and reentry vehicles arriving or departing from a launch site or reentry site licensed by the Secretary.” The bill’s purview included “space ports established at existing airports,” as airports are considered “General Aviation” facilities. By May 28, 2018, the FAA Administrator must “initiate a rulemaking to implement” the aforementioned amendments.
H.R. 6007 came on the heels of “officials at California’s Mojave Air and Space Port criticiz[ing an] FAA decision to allow the construction of taller electric transmission lines near the airport.” The bill’s sponsor, California Representative Kevin McCarthy, said on the House floor that the bill gave “the FAA the authority they now lack to examine whether structures being built near spaceports will obstruct spaceflight.” McCarthy’s explicit intent was that the bill “ensures  government policies keep up with the progress” of “commercial space flight.” Both the House and Senate unanimously approved H.R. 6007.
In August 2016, the Federal Aviation Administration (FAA) revised its rule on reciprocal waivers of claims for commercial launches and reentries. The new rule simplifies the procedure for customers who contract with a first-tier customer, as opposed to the licensee or permittee. Under the rule, these customers enter into a waiver agreement with the first-tier customer, not the licensee or permittee. The rule also mandates that all customers waive claims against every other customer regardless of whether those customers sign a different set of reciprocal waivers.
The Trump administration has the potential to be the most supportive ever for the commercial space industry. During the campaign, two of President Trump’s advisors wrote in an op-ed that “government must recognize that space is no longer the province of governments alone.” The advisors mentioned the work of Boeing/ULA, Orbital ATK, Virgin Galactic, Blue Origin, Paragon, Sierra Nevada, and Xcor, and they praised SpaceX for its “Made in America policy.” They also promised to resurrect the National Space Council under Vice President Mike Pence to coordinate space policy.
Since winning the election, Trump has consulted several advocates of commercial spaceflight. Elon Musk of SpaceX and Jeff Bezos of Blue Origin both attended a meeting with Trump in December, and Peter Thiel, an investor in SpaceX, has been named to the President’s Strategic and Policy Forum.
But Senator Jeff Sessions, Trump’s nominee for attorney general, supports a more traditional space policy. Sessions, whose state is home to NASA’s Marshall Space Flight Center, reportedly has been involved in choosing Trump’s NASA landing team and a nominee for NASA administrator.
This division is reflected in the composition of Trump’s NASA landing team. After initially appointing a head of the team who appears to support a more traditional policy, the transition added several members who support commercial space exploration.
Trump has yet to nominate an administrator for NASA, but the early favorite is Congressman Jim Bridenstine, who has advocated for commercial space interests in Congress. Other candidates reportedly include former NASA deputy administrator Shana Dale, former NASA administrator Mike Griffin, former NASA astronaut Eileen Collins, and Scott Pace of George Washington University.
We will continue to keep you informed on these and other related issues as they develop.
 FAA Order JO 7200.23, Air Traffic Organization Policy (Oct. 3, 2016), available at https://www.faa.gov/documentLibrary/media/Order/FAA_JO_7200_23_2.pdf.
 See FAA, Micro Unmanned Aircraft Systems ARC Recommendations Final Report (April 1, 2016), available at https://www.faa.gov/uas/resources/policy_library/media/Micro-UAS-ARC-FINAL-Report.pdf.
 The White House, Office of the Press Secretary, Presidential Memorandum: Promoting Economic Competitiveness While Safeguarding Privacy, Civil Rights, and Civil Liberties in Domestic Use of Unmanned Aircraft Systems (Feb. 15, 2015), available at https://obamawhitehouse.archives.gov/the-press-office/2015/02/15/presidential-memorandum-promoting-economic-competitiveness-while-safegua.
 Voluntary Best Practices for UAS Privacy, Transparency, and Accountability, NTIA-Convened Multistakeholder Process (May 18, 2016), available at https://www.ntia.doc.gov/files/ntia/publications/uas_privacy_best_practices_6-21-16.pdf.
 Current Unmanned Aircraft State Law Landscape, National Conference of State Legislatures (Dec. 16, 2016), available at http://www.ncsl.org/research/transportation/current-unmanned-aircraft-state-law-landscape.aspx.
 FAA, Busting Myths About the FAA and Unmanned Aircraft (Mar. 7, 2014), available at https://www.faa.gov/news/updates/?newsId=76240.
 NASA’s Commercial Crew Program: Update on Development and Certification Efforts, NASA, Office of Inspector General, Office of Audits (Sept. 1, 2016), available at https://oig.nasa.gov/docs/IG-16-028.pdf.
 Steven Siceloff, Mission Awards Secure Commercial Crew Transportation for Coming Years, NASA (Jan. 3, 2017), available at https://www.nasa.gov/feature/mission-awards-secure-commercial-crew-transportation-for-coming-years.
 Steven Siceloff, New Spacesuit Unveiled for Starliner Astronauts, NASA (Jan. 25, 2017), available at https://www.nasa.gov/feature/new-spacesuit-unveiled-for-starliner-astronauts.
 NOAA Commercial Space Policy, NOAA (Jan. 8, 2016), available at https://www.corporateservices.noaa.gov/ames/administrative_orders/chapter_217/Commercial%20Space%20Policy.pdf.
 NOAA Issues Commercial Space Policy, NOAA (Jan. 8, 2016), available at https://www.noaa.gov/media-release/noaa-issues-commercial-space-policyl.
 Commercial Space Activities Assessment Process, NOAA/NESDIS (Jan. 6, 2017), available at https://www.nesdis.noaa.gov/sites/default/files/asset/document/nesdis_commercial_space_activities_assessment_process_final%201.6.17%20readable.pdf. See also NESDIS Commercial Space Activities Assessment Process, Office of Space Commerce (Jan. 6, 2017), available at http://www.space.commerce.gov/business-with-noaa/nesdis-commercial-space-activities-assessment-process/.
 NOAA Awards Commercial Weather Data Pilot Contracts, Office of Space Commerce (Sept. 15, 2016), available at http://www.space.commerce.gov/noaa-awards-commercial-weather-data-pilot-contracts/.
 Jordan Rice, The First Private Spaceflight Company Is Cleared for a Moon Landing, Astronomy Magazine (Aug. 4, 2016), http://www.astronomy.com/news/2016/08/next-stop-the-moon. Up until this point, private companies have flown only 22,236 miles above the Earth–Moon Express intends to send its lander ten times that distance. See Kenneth Chang, Florida Company Gets Approval to Put Robotic Lander on Moon, The New York Times (Aug. 3, 2016), available at https://www.nytimes.com/2016/08/04/science/moon-express-faa.html?_r=0.
 Saki Knago and AJ Barbosa, The New Space Biz: Companies Seek Cash in the Cosmos, The Huffington Post (July 22, 2011), http://www.huffingtonpost.com/2011/07/22/new-space-business_n_907358.html.
 US Government Approves Plan for Moon Express to Become First Private Company to Venture Beyond Earth’s Orbit, Moon Express, http://www.moonexpress.com/news/us-government-approves-plan-moon-express-become-first-private-company-venture-beyond-earths-orbit/ (last visited Jan. 27, 2016).
 Homepage, Google Lunar XPrize, http://lunar.xprize.org/ (last visited Jan. 27, 2016).
 Sam Levin, Moon Express Raises $20m for 2017 Voyage to the Moon, The Guardian (Jan. 17, 2017, https://www.theguardian.com/science/2017/jan/17/moon-express-raises-20m-for-2017-voyage-to-moon; see also Emily Calandrelli, Moon Express Raises $20M in Series B-1, Fully Funds Trip to the Moon, TechCrunch (Jan. 13, 2017), https://techcrunch.com/2017/01/13/moon-express-raises-20-million-in-series-b-1-fully-funds-trip-to-the-moon/.
 H.R. Rep No. 6007 (2016), available at https://www.congress.gov/bill/114th-congress/house-bill/6007/text.
 Steven Mayer, Obama Signs McCarthy Bill to Protect Space Ports, Bakersfield.com (Nov. 29, 2016), http://www.bakersfield.com/news/obama-signs-mccarthy-bill-to-protect-space-ports/article_317b54d7-dffc-590d-b121-c7a8e6b3b32e.html.
 H.R. Rep No. 6007 (2016), available at https://www.congress.gov/bill/114th-congress/house-bill/6007/text.
 Jeff Foust, House Advances Commercial Space and Astronaut Health Bills, SpaceNews (Sep. 22, 2016), http://spacenews.com/house-advances-commercial-space-and-astronaut-health-bills/#sthash.pqkTLvBT.dpuf.
 Robert S. Walker & Peter Navarro, Op-ed: Trump’s Space Policy Reaches for Mars and the Stars, SpaceNews (Oct. 19, 2016), http://spacenews.com/trumps-space-policy-reaches-for-mars-and-the-stars/.
 Eric Berger, Peter Thiel Now Leading the Fight for Commercial Space in Trump’s NASA, Ars Technica (Dec. 20, 2016, 6:31 PM), https://arstechnica.com/science/2016/12/peter-thiel-now-leading-the-fight-for-commercial-space-in-trumps-nasa/.
 Andy Pasztor, Sen. Jeff Sessions Exerts Wide Influence Over Trump Space Plans, Wall St. J. (Dec. 13, 2016, 6:56 PM), http://www.wsj.com/articles/sen-jeff-sessions-exerts-wide-influence-over-trump-space-plans-1481673405.
 Andy Pasztor, Thiel Pushes to Add Commercial-Space Backers to Trump NASA Team, Wall St. J. (Dec. 21, 2016, 11:22 AM), http://www.wsj.com/articles/thiel-others-push-for-trump-nasa-team-expansion-1482263645.
 Eric Berger, Will Trump Pick an “Agent of Change” or an Insider to Lead NASA, Ars Technica (Nov. 17, 2016, 9:58 AM), https://arstechnica.com/science/2016/11/will-trump-pick-an-agent-of-change-or-an-insider-to-lead-nasa/.
Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding the issues discussed above. Please contact the Aerospace and Related Technologies practice group co-chairs, Karen L. Manos, David Wilf, Perlette M. Jura, and William J. Peters; the additional authors of this update, Dhananjay S. Manthripragada, Jared Greenberg, and David M. Wolber; the Gibson Dunn lawyer with whom you usually work; or any of the following:
David A. Battaglia (+1 213-229-7380, [email protected])
Perlette Michèle Jura (+1 213-229-7121, [email protected])
William J. Peters (+1 213-229-7515, [email protected])
Eric D. Vandevelde (+1 213-229-7186, [email protected])
Matthew B. Dubeck (+1 213-229-7622, [email protected])
Dhananjay S. Manthripragada (+1 213-229-7366, [email protected])
David M. Wilf (+1 212-351-4027, [email protected])
Eric D. Vandevelde (+1 213-229-7186, [email protected])
Nicolas H.R. Dumont (+1 212-351-3837, [email protected])
Eun Sung Lim (+1 212-351-2483, [email protected])
Karen L. Manos (+1 202-955-8536, [email protected])
David A. Wolber (+1 202-887-3727, [email protected])
Lindsay M. Paulin (+1 202-887-3701, [email protected])
Erin N. Rankin (+1 202-955-8246, [email protected])
Justin P. Accomando (+1 202-887-3796, [email protected])
Brian M. Lipshutz (+1 202-887-3514, [email protected])
© 2017 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.