July 24, 2017
In this mid-year check-in on government contracts litigation, Gibson Dunn examines trends and summarizes key decisions of interest to government contractors from the first half of 2017. 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 ("ASBCA"), and Civilian Board of Contract Appeals ("CBCA").
The first six months of 2017 yielded three government contracts-related opinions of note from the Federal Circuit, excluding decisions related to bid protests. From January 1 through June 30, 2017, the U.S. Court of Federal Claims issued 10 notable non-bid protest government contracts-related decisions, and the ASBCA and CBCA published 38 and 37 substantive government contracts decisions, respectively. As discussed herein, these cases address a wide range of issues with which government contractors should be familiar, including matters of cost allowability, jurisdictional requirements, contract interpretation, the Service Contract Act, and the various topics of federal common law that have developed in the government contracts arena. Before addressing each of these areas, we briefly provide background concerning the tribunals that adjudicate government contracts disputes.
Under the doctrine of sovereign immunity, the United States generally is immune from liability unless it waives its immunity and consents 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 ("CDA"), 41 U.S.C. §§ 7101 – 7109, 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 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. 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 the National Aeronautics and Space Administration ("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 1,528 cases pending before the Federal Circuit as of June 30, 2017, 13 were appeals from the boards of contract appeals and 134 were appeals from the Court of Federal Claims—cumulatively comprising just under 10% of the appellate court’s docket. Nevertheless, the Federal Circuit is the court of review for most government contracts disputes.
In January 2017, the CBCA marked 10 years since it was established by Act of Congress in the National Defense Authorization Act of 2006. That Act abolished existing boards of contract appeals for most civilian agencies, folding their judges, staff, and jurisdiction into the new CBCA. In the years since its creation, the CBCA has docketed more than 5,600 cases and resolved over 5,300 of them. Also in January, Judge Richard Walters retired from the CBCA after 10 years of service on the Board and 25 years of federal government service.
On March 13, 2017, President Trump designated Judge Susan G. Braden as the Chief Judge of the U.S. Court of Federal Claims. President Trump further nominated candidates to fill two of six vacant judgeships on the Court: Damien Michael Schiff and Stephen S. Schwartz. Mr. Schiff is a senior attorney with the Pacific Legal Foundation in California and Mr. Schwartz is a litigation partner at a law firm in Washington, D.C. The Senate Judiciary Committee approved Mr. Schiff’s nomination on July 13.
The ASBCA issued several important decisions during the first half of 2017 addressing the merits of cost allowability issues under the Federal Acquisition Regulation ("FAR").
TSI held four cost-plus-fixed-fee contracts with the Navy for research and development. Several years into the contracts, the government disallowed expenses that had not been questioned in prior years. TSI appealed to the ASBCA, arguing that it relied to its detriment on the government’s failure to challenge those same expenses in prior years.
The Board (Prouty, A.J.) held that the challenged costs were "largely not allowable" and that "the principle of retroactive disallowance," which it deemed "a theory for challenging audits whose heyday has come and gone," did not apply because the same costs had simply not come up in the prior audits. The theory of retroactive disallowance, first articulated in a Court of Claims case in 1971, prevents the government from challenging costs already incurred when the cost previously had been accepted following final audit of historical costs; the contractor reasonably believed that it would continue to be approved; and it detrimentally relied on the prior acceptance. Tracing precedent discussing the principle, the Board cited the Federal Circuit’s decision in Rumsfeld v. United Technologies Corp., 315 F.3d 1361 (Fed. Cir. 2003), which stated that "affirmative misconduct" on the part of the government would be required for the principle of retroactive disallowance to apply because it is a form of estoppel against the government. The Board "sum[med] up: there is no way to read our recent precedent or the Federal Circuit’s except to include an affirmative misconduct requirement amongst the elements of retroactive disallowance. Period." Further, the Board held that the government’s failure to challenge the same costs in prior years did not constitute a "course of conduct precluding the government from disallowing the costs in subsequent audits."
ATS was awarded a cost-plus-fixed-fee contract with the U.S. Army Research, Development and Engineering Command to provide training for armed forces personnel. ATS’s proposal noted that it would charge for its commercial item training materials and equipment at its affiliate’s catalog prices attached to the proposal, and the government accepted the proposal without further negotiation. The Defense Contract Audit Agency subsequently questioned the costs under FAR 31.205-26(e) on the basis that although the training materials were commercial, ATS had not demonstrated that it transferred the materials at price within its accounting system. ATS appealed the CO’s decision disallowing the costs.
The Board (O’Sullivan, A.J.) held that FAR 31.205-26(e) does not impose a requirement that transfers have economic substance. It was sufficient that the transfers were recorded by the transferring division at price. Therefore, the Board decided that ATS was entitled to recover its commercial catalog prices for training materials.
Raytheon appealed from three final decisions determining that an assortment of costs—including those associated with consultants, lobbyists, a corporate development database, and executive aircraft—were expressly unallowable and thus subject to penalties. After a two-week trial, the Board (Scott, A.J.) sided largely with Raytheon in a wide-ranging decision that covers a number of important cost principles issues.
First, the Board rejected the government’s argument that the consultant costs were expressly unallowable simply because the government was dissatisfied with the level of written detail of the work product submitted to support the costs. Judge Scott noted that written work product is not a requirement to support a consultant’s services under FAR 31.205-33(f), particularly not where, as here, much of the consultants’ work was delivered orally due to the classified nature of the work performed. The Board found that not only were the consultant costs not expressly unallowable, but indeed were allowable. This is a significant ruling because the documentation of consultant costs is a recurring issue as government auditors frequently make demands concerning the amount of documentation required to support these costs during audits.
Second, the government sought to impose penalties for costs that inadvertently were not withdrawn in accordance with an advance agreement between Raytheon and the government concerning two executive aircraft. Raytheon agreed that the costs should have been withdrawn and agreed to withdraw them when the error was brought to its attention, but asserted that the costs were not expressly unallowable and subject to penalty. The Board agreed, holding that the advance agreements did not themselves clearly name and state the costs to be unallowable, and further that advance agreements do not have the ability to create penalties because a cost must be named and stated to be unallowable in a cost principle (not an advance agreement) to be subject to penalties. This ruling could have significance for future disputes arising out of advance agreements.
Third, the government alleged that costs associated with the design and development of a database to support the operations of Raytheon’s Corporate Development office were expressly unallowable organizational costs under FAR 31.205-27. The Board disagreed, validating Raytheon’s argument that a significant purpose of the Corporate Development office was allowable generalized long-range management planning under FAR 31.205-12, thus rendering the costs allowable (not expressly unallowable).
The only cost for which the Board denied Raytheon’s appeals concerned the salary costs of government relations personnel engaged in lobbying activities. Raytheon presented evidence that it had a robust process for withdrawing these costs as unallowable under FAR 31.205-22, but inadvertently missed certain costs in this instance due to, among other things, "spreadsheet errors." Raytheon agreed that the costs were unallowable and should be withdrawn, but disputed that the costs of employee compensation (a generally allowable cost) were expressly unallowable and further argued that the contracting officer should have waived penalties under FAR 42.709-5(c) based on expert evidence that Raytheon’s control systems for excluding unallowable costs were "best in class." The Board found that salary costs associated with unallowable lobbying activities are expressly unallowable and that the contracting officer did not abuse his discretion in denying the penalty waiver.
KBR appealed the government’s withholding of over $44 million in allegedly unallowable costs incurred for private security to accompany officials and convoys used to deliver food and supplies to military forces in Iraq. KBR moved for summary judgment on the basis that the use of private security was permissible in light of the government’s breach of its obligation to provide adequate protection.
The Board (O’Sullivan, A.J.) granted summary judgment, holding that the government had committed the first material breach under the contract by failing to provide adequate force protection in accordance with the contract. The Board further held that continued performance by KBR after this first breach was consistent with the purpose of the contract, and that it was a commercially reasonable decision to continue performance with private security forces. Consequently, the Board held, the government could not disallow costs incurred by KBR and its subcontractors for private security, even if the costs were otherwise unallowable under the contract.
Quimba had a cost-plus fixed-fee information technology research contract with the Air Force. The company was prohibited from issuing invoices throughout a substantial portion of the life of the contract due to alleged deficiencies in its accounting systems, which finally were resolved. Quimba was ultimately paid in full, but the contracting officer subsequently issued a final decision finding that a substantial portion of direct labor costs for the company’s owners was unallowable pursuant to FAR 31.205-6. Under this provision, compensation to owners of closely held corporations is allowable only to the extent it is deductible as compensation under the Internal Revenue Code. The relevant tax regulations provide for a presumption (subject to exceptions, as noted below) that such compensation is deductible only in the year in which the compensation is paid; not the year in which it is accrued.
Ruling on cross-motions for summary judgment, the Court of Federal Claims (Smith, J.) found that the deferred compensation costs were in fact allowable under FAR 31.205-6 due to an exception in the tax regulations for deferred compensation costs that could not be paid in the year accrued because of administrative or economical impracticability. The court found that deferral was the only option for Quimba, and thus "this case is one in which the evidence plainly overcomes the presumption" set forth in the tax regulations. Quimba was awarded summary judgment.
As they frequently do, jurisdictional issues dominated the landscape of key government contracts decisions during the first half of 2017.
In order for the ASBCA or CBCA 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 boards of contract appeals issued two decisions during the first half of 2017 addressing what constitutes a valid contract from which a claim may arise.
The EPA awarded ASW a contract for the remediation of lead-contaminated properties in Missouri. The contract provided for payment at defined rates for services and equipment ordered and used, and a total ceiling value, but did not guarantee a minimum amount of work or payment. Further, although the contract contained estimates, it contained no guarantee that the government would actually purchase goods or services in the amount of these estimates. Dissatisfied with its allocation of work, ASW brought suit before the CBCA. This decision concerns cross-motions for partial summary judgment as to whether the contract was a time and materials contract or, alternatively, an indefinite delivery/indefinite quantity ("IDIQ") or requirements contract.
On March 27, 2017, the Board (Vergilio, J.) held that because the contract specified no minimum guarantee, and further did not provide that the contractor would fulfill all of EPA’s requirements, the contract lacked the consideration necessary to establish an IDIQ or requirements contract. Thus, EPA was granted summary judgment on this issue. Nevertheless, the Board found that because "the agency ordered and the contractor performed services," ASW is "entitled to payment  for services actually ordered . . . and provided." The Board directed ASW to identify "what, if any, additional payment it seeks" based on the work it performed.
The cost allowability issues of this case are discussed above. As a preliminary matter, the ASBCA (Scott, A.J.) addressed whether it had jurisdiction over the three appeals because the final decisions referred only to "affected contracts" rather than designating a specific contract with Raytheon. The Board held that while the CDA requires that a claim relate to a government contract, it does not require specific identification of that contract by number. Thus, because it was clear that the government’s claims related to contracts with Raytheon, the Board held that it had jurisdiction to address the merits.
Another common issue arising before the tribunals that hear government contracts disputes is 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 2017, the boards considered (1) when a claim accrues, (2) whether the claim has been properly certified, and (3) whether the claim demands payment of a sum certain.
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. The CDA provides for a statute of limitations of six years from the time when a claim accrues.
CMC contracted to obtain software and associated licenses for use by students at the National Defense University. After the contract was completed and CMC was paid for its last invoice, CMC submitted a claim for interest on tardy payments for invoices submitted prior to the termination of the contract.
The ASBCA (Prouty, A.J.) rejected the government’s argument that because payment of the invoices was never in dispute, it should not be obligated to pay interest to CMC after submission of the claim. In essence, the government was arguing that a dispute is a necessary element of a claim under the CDA and that without a valid claim, there could be no CDA interest. However, the Board held that an invoice could become the subject of a claim if it is disputed or the government unreasonably delays payment of the invoice. Accordingly, the Board found that the government had unreasonably delayed its payment of invoices and was entitled to interest.
In 1963, Clear Creek entered into a contract with the Department of Interior’s Bureau of Reclamation ("BOR") whereby BOR agreed to construct a water distribution system and then transfer the system to Clear Creek for operation and maintenance. In 2010, Clear Creek asserted a number of claims against BOR, including a breach of contract claim regarding the structure of the water conduit, and a claim that BOR bore a contractual responsibility to repair a toppled concrete vault.
The government moved to dismiss both claims as untimely, and the Court of Federal Claims (Sweeney, J.) agreed. The court found that Clear Creek had been aware of the deficiencies underlying both claims as early as 2002. Specifically, the court observed that Clear Creek knew about the corroding valves within the conduit as early as 1988, and had orally expressed concern about them sometime before October 2002. The court stressed that this initial concern "should have triggered an investigation . . . into the nature of the alleged deficiencies," which would have revealed the structural problems underlying Clear Creek’s breach of contract claim. As for the collapsed concrete vault, the court found that because Clear Creek was also aware that the vault was collapsed as early as 2002, "it was on notice that it had a potential cause of action that demanded investigation," and it was that initial discovery of a problem that "trigger[ed] the accrual of plaintiff’s claim, not its understanding of the exact nature of its claim."
A decision from the ASBCA considered who is an appropriate representative for a contractor in a CDA appeal, while a decision from the CBCA considered whether a contractor that changed its name still had standing to appeal.
The Navy awarded TKC several contracts related to technical expertise and program management. After the Defense Contract Audit Agency determined that TKC’s indirect cost rate proposals were inadequate, the contracting officer issued a final decision seeking reimbursement of indirect costs. A notice of appeal was subsequently lodged by a former officer of TKC, who failed to describe his legal relationship with the company. The Navy moved to dismiss the appeal, arguing that TKC’s representative was not a corporate officer of the company and could not bring the appeal.
The Board (Paul, A.J.) held that TKC had the burden of proving that the representative qualified as an "officer" of TKC, and since the representative was no longer an officer of TKC, he could not represent TKC in its appeal. The Board accordingly dismissed the appeal.
The government awarded a Federal Supply Schedule contract to Eastco, which thereafter changed its legal name to United Facility Services Corporation ("UFSC") while continuing to do business under the Eastco name. The parties then executed a blanket purchase agreement and task order for operations and maintenance at three federal buildings in Miami pursuant to the original FSS contract with "Eastco." Eventually, GSA and UFSC modified all relevant contracts so that they were in UFSC’s name, but noting that UFSC was doing business as Eastco. A dispute arose over a request for an equitable adjustment, and the company filed an appeal to the CBCA under the Eastco name. The government moved to dismiss the appeal, alleging that only UFSC, not Eastco, was in privity of contract with the government.
The Board (Lester, A.J.) rejected the government’s argument. While the CBCA only has jurisdiction under the CDA to hear claims where there is privity of contract, the Board found that the government modified its contract knowing that Eastco was alternate name for UFSC. Finding that operating a business under two different names does not alone create two separate entities, the Board held that GSA clearly knew that Eastco and UFSC were the same entity and, therefore, privity of contract existed.
In two cases, the ASBCA and Court of Federal Claims considered whether a demand for payment in connection with negotiations to definitize a contract, or the submission of an invoice, could constitute a certified claim under the CDA.
The Army awarded a contract to Kandahar for the provision of gravel and other supplies and services. Kandahar never commenced performance on the contract and the Army issued a notice of termination for default. Four years later, Kandahar submitted an invoice requesting payment for work allegedly performed, which the contracting officer denied because the wrong contract number was listed and no such contract existed in the Army’s contracting database. After Kandahar appealed, the Army moved to dismiss on the grounds that the Board lacked jurisdiction because Kandahar failed to submit a certified claim to the contracting officer prior to initiating the appeal.
The Board (D’Alessandris, A.J.) held that Kandahar did not file an actual claim because a written demand seeking the payment of money that exceeds $100,000 must be certified prior to filing an appeal to constitute a "claim" under the FAR. Accordingly, the Board granted the Army’s motion to dismiss the appeal for lack of jurisdiction.
L-3 entered an "undefinitized contractual action" ("UCA") with the Air Force in which it agreed to provide certain training services while still negotiating the terms of the contract. After the parties failed to reach agreement on the prices for two line items in the UCA, the Air Force issued a unilateral contract modification, setting prices for those line items and definitizing the contract. L-3 argued that the Air Force’s price determination was unreasonable, arbitrary and capricious, and in violation of the FAR, and filed suit seeking damages. The government moved to dismiss for lack of subject matter jurisdiction.
The Court of Federal Claims (Kaplan, J.) dismissed L-3’s complaint, concurring with the government that L-3 had never presented a certified claim to the contracting officer for payment "of a sum certain to cover the losses it allegedly suffered." The court found that the proposals L-3 had presented to the Air Force were not "claims," but rather proposals made during contract negotiations that did not contain the requisite claim certification language.
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." These decisions make clear that even if some components of a claim are for specific damages, if other components of the claim are unspecified, that can be enough to divest the tribunal of jurisdiction over the entire case for failure to state a total claim for a sum certain.
The Navy awarded IMC a contract to provide wastewater treatment system repairs. After alleging that the Navy provided defective plans and specifications, IMC submitted a request for equitable adjustment, which it thereafter certified. After the Army failed to respond, IMC filed a deemed denial appeal with the ASBCA seeking nearly $2 million in specified damages for equipment and home office overhead costs, as well as $373,000 for additional work that IMC proposed to do in order to complete the contract.
The Board (Sweet, A.J.) held that it did not possess jurisdiction over the appeal because IMC failed to demand a sum certain in its claim. The claims for nearly $2 million in specific costs incurred as a matter of right were valid, but the $373,000 for work proposed, but not yet ordered to be performed, was not. Because the overall "claim" must be for a sum certain, the Board refused to allow the appeal to proceed only with the specified costs; the additional, indefinite proposed costs divested the Board of jurisdiction over the entire appeal. Further, because claims may not be asserted for the first time in the complaint but must be in the claim presented to the contracting officer, the Board refused to permit IMC to amend its complaint to correct the deficiency.
Melwood entered into a contract with the government to perform facility maintenance services at Fort Meade in Maryland. Melwood sought additional funds for reimbursement of retention bonuses, subcontractor payments, and anticipatory lost profits in an amount "TBD." The contracting officer responded to Melwood’s request with a letter requesting additional information and explicitly stating "[t]his is not a final decision of the contracting officer." Melwood did not respond to the letter, but rather filed an appeal with the ASBCA.
The Board (Woodrow, A.J.) held that because the total amount requested was unspecified and "to be determined," the total amount claimed could not be readily calculated, and therefore the Board did not have jurisdiction to hear the appeal. While Melwood argued that the "TBD" sums could be calculated from information in the government’s possession, the Board rejected this argument for two reasons: (1) Melwood did not explain how the government would make such a calculation; and (2) Melwood’s submittal did not identify the specific contracts that would give rise to the lost profits dollar amounts. Further, as in the IMS case discussed immediately above, the Board declined to assert jurisdiction over the portions of the claim containing specific amounts, finding that if a portion of a claim does not contain a sum certain, the submission to the contracting officer does not satisfy the definition of a claim. For all of these reasons, the Board dismissed the appeal.
A number of decisions from the tribunals that hear government contracts disputes dealt with the CDA’s requirement that a claim have been "the subject of a contracting officer’s final decision."
ACS submitted a request for equitable adjustment to the contracting officer. The contracting officer responded with a letter denying the request and, without stating whether it was or was not a final decision, advising that "[i]f ACS wishes to continue this request for equitable adjustment then do so in accordance with contract clause 52.233-1 Disputes." ACS thereafter filed an appeal with the ASBCA, which the government moved to dismiss for failure to submit a certified claim to the contracting officer.
The Board (McIlmail, A.J.) held that because the contractor’s request did not implicitly or explicitly request a contracting officer’s final decision, and because the reference to the Disputes clause in the contracting officer’s response did not substitute as a request for a final decision, the Board lacked jurisdiction. The Board therefore dismissed ACS’s appeal.
The Department of Agriculture awarded Foxy a fixed price contract for the relocation of a U.S. Forest Service bunkhouse and visitor center near Las Vegas, Nevada. By four separate letters, Foxy requested additional payments from the government to account for changes to the scope of the project. The contracting officer denied each of the requests for various reasons, including a lack of detail, the format in which they were written, and failure to certify the request. Finally, Foxy submitted a notice of appeal to the CBCA.
The Board (Lester, A.J.) determined that it lacked jurisdiction to hear Foxy’s claims and accordingly dismissed the appeal. The Board found that Foxy’s letters failed to request a final decision and were uncertified. Although the contracting officer issued a final decision in response to at least one letter, the government cannot confer jurisdiction on the Board by issuing a decision on an uncertified claim.
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In a pair of decisions, the Court of Federal Claims considered when the Court may retain jurisdiction over claims that were not submitted to the contracting officer for a final decision.
KCPL contracted with the government to provide electrical utility services to a federal property. The contract included a tariff schedule providing for indemnity. During performance of the contract, an employee received fatal burns from a blast on site and his wife sued KCPL for negligence and loss of consortium. The parties eventually settled the suit, after which KCPL submitted a certified claim to the contracting officer to recover the amount paid in the settlement as well as the costs of litigation. When the contracting officer issued a final decision denying the claim, KCPL filed a complaint in the Court of Federal Claims.
We reported in our 2016 Mid-Year Government Contracts Litigation Update on the government’s unsuccessful motion to dismiss portions of KCPL’s complaint as contradictory to the claim before the contracting officer, thus rendering that portion of the complaint outside of the claim over which the court had jurisdiction. The court (Sweeney, J.) rejected that argument, holding 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." This year, it was KCPL’s turn to try and strike a portion of a pleading based on what was submitted to the contracting officer.
After its motion to dismiss was denied, the government filed an amended answer asserting seven affirmative defenses, including offset. KCPL moved to strike the offset defense as not presented to the contracting officer, but Judge Sweeney again rejected this argument. Although the defense had not been raised before the contracting officer, the court found that the defense was not a claim in the typical sense: it did not involve any request for relief under the contract, but instead sought to offset a claim for reimbursement of monies otherwise paid. The court therefore found that a contracting officer did not need to consider the merits of the reimbursement for the court to have jurisdiction to address the defense.
Walsh submitted a certified claim for equitable adjustment in connection with its contract to construct a number of "drilled piers" for the Army Corps of Engineers. Walsh asserted in the request that additional work was necessary because of differing site conditions and disruption of work flow due to numerous "unnecessary inspections." The contracting officer denied the claim, and Walsh filed suit in the Court of Federal Claims asserting three counts: government-caused delay, breach of good faith and fair dealing, and differing site conditions. The government moved to dismiss the first two counts as not submitted to the contracting officer.
The court (Braden, C.J.) split the difference, denying the motion with respect to government-caused delay and granting it with respect to breach of good faith and fair dealing. As to government-caused delay, Chief Judge Braden explained that the claim filed in court need not parrot "the exact language or structure" of the claim filed with the contracting officer; rather, it need only contain the same "operative facts" and request "essentially the same relief." Despite the fact that Walsh attributed the additional costs to a "differing site condition" in the claim for equitable adjustment and as "Government-caused delay" in the complaint, the court nonetheless found that they contained allegations of the "same ‘operative facts.’" But with respect to the good faith and fair dealing count, the court agreed that the "operative facts [set forth in the request for equitable adjustment] were not sufficient to alert the contracting officer of the possibility of a claim for breach of the duty of good faith and fair dealing." Nonetheless, the court stayed the case for three months to allow Walsh the opportunity to "present a claim for a breach of the duty of good faith and fair dealing to the CO for a final decision," finding that it would be inequitable to dismiss one count when the other two had been properly submitted to the contracting officer.
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Two cases from the boards considered whether a contracting officer’s denial of a claim was required to proceed with the instant appeal.
In this case, the CBCA addressed the jurisdictional questions of whether a deemed denial results where a contracting officer asserts that he lacks authority to decide a claim based on suspicion of fraud. The underlying dispute arose from Savannah River’s contention that certain costs were allowable, which the contracting officer refused to decide based upon a False Claims Act case filed after the certified claim was submitted. The Board (Goodman, A.J.) held in accordance with Court of Federal Claims precedent that a contracting officer lacks authority to decide a claim when a suspicion of fraud exists. The Board further determined that when a contracting officer is divested of authority to issue a final decision on a CDA claim, there is no deemed denial of claim to confer jurisdiction to the Board.
ABS submitted a certified claim in December 2016, to which the contracting officer responded in February that she "intend[ed] to issue a final decision by 5 May 2017." Rather than wait until May, the contractor filed an appeal the same day that it received the response from the contracting officer, asserting that a reasonable time had passed and thus there was a deemed denial of the claim. The government moved to dismiss.
The Board (McIlmail, A.J.) initially stayed the appeal until the May 5 date set forth in the contracting officer’s response. When no response was submitted, and no timeline set forth by the government as to when it would come, the Board held that it did not need to decide whether the original appeal was untimely because, under the CDA, contracting officers must issue a decision within 60 days or otherwise notify the contractor of the (reasonable) time within which a decision will be made. Because the contracting officer had not issued a final decision, had missed the date by which the officer intended to issue a decision, and had provided no follow-up indicating the necessity for more time to issue a decision, the Board held that an unreasonable amount of time had passed, and denied the government’s motion to dismiss.
The ASBCA issued two noteworthy decisions during the first half of 2017 arising from contract terminations for default.
Delfasco had a contract with the Army for the manufacture and delivery of a specified number of munition suspension lugs. The Army thereafter exercised an option to double the number of lugs required. When Delfasco stopped making deliveries due to an inability to pay its subcontractor, the Army terminated the contract for default. Delfasco appealed to the ASBCA, asserting that the government had waived its right to terminate for untimely performance by allegedly stringing Delfasco along even after the notice of termination.
The Board (Prouty, A.J.) set out the test for waiver in a case involving termination for default due to late delivery as follows: "(1) failure to terminate within a reasonable time after the default under circumstances indicating forbearance, and (2) reliance by the contractor on the failure to terminate and continued performance by him under the contract with the Government’s knowledge and implied or express consent." The Board held that Delfasco failed to satisfy the first prong because the government’s show cause letter placed Delfasco on notice that any continued performance would only be for the purpose of mitigating damages. Moreover, Delfasco failed to satisfy the second prong because Delfasco’s payment to its subcontractor after the show cause letter would have been owed regardless, and was not paid in reliance upon the government’s failure to terminate. Therefore, the Board found that the government had not waived its right to terminate, and denied the appeal.
After the Army rejected two production lots under a contract with PSI because they failed to pass multiple acceptance tests, the contractor was placed in delinquent status under the contract’s delivery schedule. Thereafter, the contract was terminated for default. PSI filed an appeal with the ASBCA seeking to recover unreimbursed costs and alleging that the government wrongfully rejected one of the production lots.
The Board (Page, A.J.) noted that where the contractor alleges that it complied with the contract’s specifications, the contractor bears the burden of proving its compliance with the contract’s specifications. Here, PSI did not meet that burden because it failed to provide any evidence that it substantially complied with the contract’s plans and specifications. The Board further rejected PSI’s contention of a prior course of dealing based on two prior instances of the different performance. Accordingly, the Board denied the appeal.
A number of noteworthy decisions from the first half of 2017 articulate broadly applicable contract interpretation principles that should be considered by government contractors.
A settlement during bankruptcy proceedings resulted in the termination for default of one of U.S. Coating’s government contracts. In the instant appeal, U.S. Coating asserted that it agreed to the settlement under the mistaken belief that the contract termination would not be for default, but rather for convenience. The government moved for summary judgment arguing: (1) that U.S. Coating’s allegation of a prior agreement was barred by the parol evidence rule; and (2) even if consideration of the prior agreement were not barred, the statement by an Assistant U.S. Attorney upon which U.S. Coating based its belief is not a proper authority to bind the government.
The Board (Woodrow, A.J.) denied summary judgment because there was evidence that a separate oral agreement existed with the government that entirely contradicted the government’s contention that the settlement was integrated. The Board further held that the government attorney had actual authority to bind the government under 28 U.S.C. § 516, which statutorily delegates settlement authority to the U.S. Department of Justice. Therefore, because of the bankruptcy filing, the DOJ and its officers had actual authority to supervise and conduct all litigation. Moreover, the bankruptcy filing imposed an automatic stay prohibiting the contracting officer from commencing administrative actions or proceedings. Accordingly, the government could not terminate the contract for default absent permission from the Bankruptcy Court.
IAP contracted to provide power plants to military bases in Afghanistan, which required delivery into the country from Pakistan. After the government provided notice to IAP to proceed with some of the contract deliveries, Pakistan closed its borders for seven months. IAP filed an appeal with the ASBCA seeking an equitable adjustment for costs incurred in connection with the border closure.
The Board (Melnick, A.J.) held that IAP was entitled to an equitable adjustment based on the doctrine of constructive acceleration. Constructive acceleration occurs when the government demands compliance with an original contract deadline, despite there being an excusable delay. The Board found that IAP could not have foreseen the border closure, that the closure was out of IAP’s control, and that IAP was entitled to recover the significant additional expense it incurred in meeting the government’s insisted deadline notwithstanding the border closure. The Board rejected separate commercial impracticability and warranty of availability claims by IAP.
The government contracted with Paradise Pillow to provide the Federal Emergency Management Agency with 150,000 blankets for victims of a hurricane. After Paradise Pillow delivered the blankets, the government decided that the blankets were not necessary and the parties agreed that the government would be able to return the blankets in return for a 35% restocking fee. Two days later, the government sent Paradise Pillow a letter cancelling the contract "in its entirety."
The CBCA (Daniels, A.J.) granted Paradise Pillow summary relief, finding that a clause in the original contract ("RESTOCKING: Not applicable.") "did not preclude the parties from agreeing . . . to modify the delivery order to have the contractor retrieve and restock" the goods. The Board found that the government had agreed to the modification in an arm’s-length negotiation, and the modification was valid.
In 2007, the Defense Reutilization and Marketing Service ("DRMS") solicited bids for a five-year contract to dispose of military equipment. Throughout the bidding process, DRMS fielded multiple requests to disclose the anticipated workload for the contract. Over the course of multiple responses, DRMS provided historical workload data and stated that it anticipated an increase relative to historical data. In the contract ultimately awarded to Agility, a clause stated, "the contractor may experience significant workload increases or decreases," and specified a process for the contractor to "renegotiate the price" if the workload increased 150% over the average workload of the three previous months. Immediately after commencing performance, Agility realized that the workload was substantially higher than predicted and immediately sought to renegotiate the price, arguing that the workload at the outset was over 150% greater than the historical data DRMS had provided. DRMS denied the request, asserting that the contract measured the 150% threshold from the workload at the beginning of Agility’s performance, not the historical data.
As noted in our 2015 Year-End Government Contracts Litigation Update, Agility filed suit in the Court of Federal Claims, which found for DRMS. Agility appealed to the Federal Circuit and, in an opinion issued in February 2017, the Federal Circuit (Moore, J.) reversed. The court held that DRMS failed to provide Agility with a realistic workload estimate in violation of FAR 16.503, noting that the estimates DRMS provided were negligent in light of a 2007 DRMS memo concluding that there would be an imminent "surge of equipment and material" that would be turned into DRMS.
The McNamara-O’Hara Service Contract Act, 41 U.S.C. § 6701 et seq., establishes labor standards for government contracts and subcontracts over $2,500 where the principle purpose of the contract is to furnish services in the United States through the use of service employees. In the first half of 2017, the Federal Circuit considered whether government contractors are entitled to a price adjustment for increased costs of providing a defined benefit pension pursuant to the Multiemployer Pension Protection Amendments Act of 1980 (MPPAA).
Call Henry had a follow-on contract with NASA to provide inspection, maintenance, and testing services. The contract was subject to the Service Contract Act ("SCA"), 41 U.S.C. § 6701 et seq., which entitles a contractor’s covered service employees to certain wage and fringe benefit standards. Additionally, for follow-on contracts resulting from competitive bid, employees under a collective bargaining agreement cannot be deprived of benefits their representative negotiated under the predecessor contract. Due to the increased cost of complying with these provisions, contractors may be entitled to an upward contract price adjustment under the SCA. In this case, Call Henry had negotiated a collective bargaining agreement under the predecessor contract, requiring contributions to the union’s pension plan, but during the follow-on contract its employees voted to associate with a new union. This triggered withdrawal liability under the prior pension plan, for which Call Henry submitted a claim that NASA denied.
Call Henry filed suit in the Court of Federal Claims, which dismissed the case on the pleadings. On appeal, the Federal Circuit (Reyna, J.) upheld the dismissal, holding that Call Henry was not entitled to an upward price adjustment under the SCA. The SCA price adjustment clause, FAR 52.222–43(d), covers increased costs incurred complying with a "wage determination otherwise applied to the contract." However, Call Henry had independently negotiated the prior collective bargaining agreement; Call Henry’s contract with NASA itself did not require Call Henry to pay withdrawal liability costs. Therefore, the withdrawal liability was not an increased cost of complying with a wage determination and not entitled to an adjustment in contract price.
The boards of contract appeals and Court of Federal Claims addressed a number of issues during the first half of 2017 arising out of the body of federal common law that has developed in the context of government contracts.
Under the Christian doctrine, a mandatory contract clause that expresses a significant or deeply ingrained strand of procurement policy is considered to be included in a contract by operation of law. G.L. Christian & Assocs. v. United States, 312 F.2d 418, 426 (Ct. Cl. 1963). The ASBCA considered whether FAR 52.228-15, Performance and Payment Bonds—Construction, was such a mandatory clause.
K-Con was awarded two firm-fixed-price contracts for the design and construction of a laundry facility communications equipment shelter at Camp Edwards in Massachusetts. After awarding both contracts, but before issuing a notice to proceed for either contract, the government requested that K-Con provide performance and payment bonds despite the absence of bonding requirements in either contract. The government acknowledged that K-Con would need to charge the government for the bonding fees. It took several years for K-Con to obtain the required bonding, and when it did it submitted a request for equitable adjustment not only for the bonding costs but also for the cost escalation over this period. The government accepted only the increased cost for the bond and denied the rest. K-Con appealed.
The Board (Woodrow, A.J.) determined that, under the Christian Doctrine, the FAR 52.228-15 bonding clause was included in the original contract by operation of law because it was both mandatory and represented a significant public procurement policy. Thus, it denied the appeals.
CompuCraft had a contract for services related to the heating, ventilation, and air conditioning system at the Savannah Tomochichi Federal Building and Courthouse. In 2015, CompuCraft completed its obligations under the contract and received payment in full. Six months later, the contracting officer posted an evaluation of CompuCraft with negative ratings and a recommendation that CompuCraft not receive similar work in the future. CompuCraft appealed the performance evaluation as inconsistent with regulatory requirements and the government moved to dismiss.
The Board (Sullivan, A.J.) granted the government’s motion to dismiss in part. The Board found that it lacked jurisdiction to grant injunctive relief, and dismissed those portions of the complaint seeking such relief. But it denied the motion with respect to the government’s argument that those claims based on categories that had been reconsidered in the contracting officer’s revised performance evaluation were moot because the overall negative rating under "management" still brought the entire dispute within the Board’s purview.
We have been following in our recent publications developments in the law of whether and to what extent the ASBCA may exercise jurisdiction over claims and defenses sounding in fraud when that fraud affects the administration of government contracts. For example, in our 2016 Year-End Government Contracts Litigation Update, we covered, among other cases, the Federal Circuit’s decision in Laguna Construction Company, Inc. v. Carter, 828 F.3d 1364 (Fed. Cir. 2016), which held that as long as the ASBCA can rely upon prior factual determinations from other tribunals (such as through a guilty plea), the Board has jurisdiction to adjudicate legal defenses based upon those prior determinations.
We last checked in on the ASBCA litigation involving Supreme Foodservice in our 2016 Mid-Year Government Contracts Litigation Update. The Defense Logistics Agency claimed that its multi-billion dollar contract with Supreme Foodservice for the delivery of food, water, and other products to U.S. military bases in Afghanistan was void ab initio based upon fraudulent overcharging of above-market prices and cited a prior guilty plea by Supreme Foodservice as the basis for prior factual determinations. The key issue still in dispute was whether the Defense Logistics Agency was aware of the alleged overcharging and nonetheless continued to contract with Supreme Foodservice such as to give rise to a defense of waiver.
In the wake of Laguna Construction, the government moved for partial reconsideration of its prior motion for summary judgment, arguing that the Federal Circuit established a bright line standard that the government cannot have a "known right" to relinquish and waive prior to the entry of a guilty plea arising from the conduct at issue. The Board (Scott, A.J.) rejected this argument, holding that there is no such bright line standard. Rather, whether the government was aware of the facts underlying the fraud is a question of fact that focuses on the conduct at issue, not the existence of a guilty plea in court. There being material facts in dispute under this standard, the Board reaffirmed its prior decision denying the government’s motion for partial summary judgment.
CanPro contracted with GSA to lease space in a Boca Raton commercial building to the Social Security Administration. CanPro alleges that it expected no more than 250 visitors to the space per day, which was consistent with the office space, but after the Social Security Administration closed the nearest branch office the number of daily visitors increased to over 500. CanPro filed a complaint in the Court of Federal Claims alleging breach of contract and of the implied duty of good faith and fair dealing.
The Court of Federal Claims (Sweeney, J.) dismissed CanPro’s breach of contract claims on the pleadings, but denied the motion to dismiss the claims alleging breach of the implied duty of good faith and fair dealing. Notwithstanding the lack of a specific lease provision regarding the number of daily visitors, the court found that GSA had an implied duty of good faith and fair dealing and the "normal and customary" use provision of the lease implicitly limited daily visitors to a reasonable number. The court found that GSA adequately stated a claim and that CanPro could establish damages from "excessive overcrowding" if this was reasonably foreseeable to GSA at the time of contracting.
NASA awarded a contract to Horn to assist with the recovery of errant payments made to other contractors, providing for a 13.5% contingency fee on all recoveries. Over the course of the contract, Horn identified and submitted 402 claims to NASA, of which NASA approved and paid only 40. Horn filed suit in the Court of Federal Claims.
Following a "lengthy trial," the court (Horn, J.) agreed with Horn that the government breached both the contract and its implied duty of good faith and fair dealing, finding that NASA’s conduct was "not in line with plaintiff’s reasonable expectations under the contract." The court noted that NASA’s delays both in providing Horn with the data it needed to complete payment audits, as well as in reviewing the claims submitted by Horn, materially impacted Horn’s ability to perform under the terms of the contract. The court did not, however, go so far as to find that NASA acted in bad faith, given the large amount of general intra-agency confusion over the scope of the contract and the "high standards to prove bad faith."
Another important common law limitation on a contractor’s ability to obtain damages from the government is the sovereign acts doctrine, which insulates the government from liability for acts taken in its sovereign (not contractual) capacity.
Garco’s subcontractor was hired to work on housing construction on Malmstrom Air Force Base in Montana. In October 2007, base command staff promulgated a memorandum providing that individuals with certain criminal records would be denied access to the installation. Garco submitted a request for equitable adjustment on the ground that its subcontractor had planned to use some individuals with criminal records on its work at Malmstrom, and that these base access restrictions made it more difficult to complete performance. The request was denied and, as set forth in our 2015 Year-End Government Contracts Litigation Update, the ASBCA rejected Garco’s appeal under the sovereign acts doctrine.
On appeal, the Federal Circuit (Stoll, J.) affirmed but for a different reason. Garco conceded before the court that the base access restriction did constitute a sovereign act, but nevertheless argued that the memorandum constituted a change of policy that effected a compensable constructive acceleration of the contract. The court rejected the argument that the memorandum constituted a change to prior base access policy, finding that it did not and thus could not constitute an unforeseeable change. In a dissenting opinion, Judge Wallach contended that the case should have been remanded to the ASBCA for further findings to establish whether the government should be released from liability for its sovereign act.
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, Lauren M. Assaf, Matthew P. O’Sullivan, Pooja R. Patel and Casper J. Yen.
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:
Karen L. Manos (+1 202-955-8536, [email protected])
Joseph D. West (+1 202-955-8658, [email protected])
John W.F. Chesley (+1 202-887-3788, [email protected])
David P. Burns (+1 202-887-3786, [email protected])
Michael Diamant (+1 202-887-3604, [email protected])
Caroline Krass (+1 202-887-3784, [email protected])
Michael K. Murphy(+1 202-995-8238, [email protected])
Ella Alves Capone (+1 202-887-3511, [email protected])
Jim Doody (+1 202-887-3716, [email protected])
Melissa L. Farrar (+1 202-887-3579, [email protected])
Lindsay M. Paulin (+1 202-887-3701, [email protected])
Jonathan M. Phillips (+1 202-887-3546, [email protected])
Laura J. Plack (+1 202-887-3678, [email protected])
Erin N. Rankin (+1 202-955-8246, [email protected])
Jeffrey S. Rosenberg (+1 202-955-8297, [email protected])
Jin I. Yoo (+1 202-887-3797, [email protected])
Timothy J. Hatch (+1 213-229-7368, [email protected])
Marcellus McRae (+1 213-229-7675, [email protected])
Maurice M. Suh (+1 213-229-7260, [email protected])
James L. Zelenay, Jr. (+1 213-229-7449, [email protected])
Dhananjay S. Manthripragada (+1 213-229-7366, [email protected])
Sean S. Twomey (+1 213-229-7284, [email protected])
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