January 7, 2016 - Protests & Litigation

Significant Government Contract Litigation: A Year in Review

LitigationAlthough 2015 did not include as many landmark decisions as 2014 did, there were a number of important government contract claims that further developed various aspects of the Contract Disputes Act (CDA).  Below is a summary of some of the significant decisions from 2015.

Interpreting Sikorsky

Several 2015 decisions interpreted Sikorsky Aircraft Co. v. United States, 773 F.3d 1315 (Fed. Cir. 2014), a decision issued by the Federal Circuit holding that the CDA’s six-year statute of limitations is not a jurisdictional bar that is subject to resolution on a motion to dismiss.  In Kellogg Brown & Root Servs., ASBCA No. 58175 (May 13, 2015), the Armed Services Board of Contract Appeals (ASBCA) held that a government claim, which had accrued more than six years before the contracting officer’s assertion of the claim, was not time-barred.  Judge Scott ruled that, after Sikorsky, asserting a failure to comply with the statute of limitations is an affirmative defense and the asserting party must prove, for example, that the government knew or should have known that it was being overcharged.  Ultimately, the ASBCA held that the government’s claim in Kellogg was timely because it did not accrue until 2010, which was within the six-year statute of limitations.

Two additional cases were decided under the Sikorsky interpretation of the six-year CDA statute of limitations.  See The Ryan Co., ASBCA No. 58137 (May 27, 2015); Raytheon Co., ASBCA No. 58849 (May 27, 2015).  In both cases, the ASBCA declined to convert motions to dismiss into motions for summary judgment because the “should have known” test for claim accrual “has a reasonableness component based upon what facts were reasonably knowable to the claimant,” and those facts were not in the record.

The cases interpreting Sikorsky confirm that allegations of non-compliance with the CDA statute of limitation must be timely raised as an affirmative defense and that the party raising the defense bears the burden of proof.  Furthermore, the precedent affirms that challenges based on the statute of limitation will generally be considered after all of the relevant facts are in the record, not during a motion to dismiss or a motion for summary judgment.

Timeliness of Appeals

Several notable decisions issued in 2015 address the timeliness of an appeal in response to a contracting officer’s denial of a claim.  Under the CDA, the relevant Board of Contract Appeals only has jurisdiction over appeals that are taken within 90 days of receipt of the contracting officer’s final decision.

In Axxon Intl, LLC, ASBCA No. 59497 et al. (Jan. 21, 2015), the ASBCA exercised jurisdiction over an appeal that was mistakenly submitted to the U.S. Army counsel within the 90-day window, rather than the ASBCA.  The ASBCA held that the mistaken submission was not fatal.  In Tessada & Assocs., ASBCA No. 59446 (Apr. 21, 2015), the ASBCA addressed a distinction concerning delivery of a notice of appeal.  A notice of appeal delivered by the U.S. Postal Service is deemed filed when it is delivered to the Postal Service with a valid address and sufficient postage.  Meanwhile, a notice of appeal sent via commercial carrier is deemed filed when it is actually received by the Board.  In Tessada, the company sent the appeal via commercial carrier, which was received by the Board one day after the ninety day appeal period.  However, Tessada also sent a copy of the appeal via the Postal Service, which was received by USPS before the 90-day appeal period expired but was delivered to the ASBCA after the 90-day period and after the appeal sent via commercial carrier was received by the ASBCA.  Given that an appeal is filed when the Postal Service receives the notice, the notice sent via Postal Service was sufficient to vest jurisdiction despite not being delivered until after the 90-day period.

Terminations for Convenience under FAR Part 12

In TriRAD Techs. Inc., ASBCA No. 58855 (Feb. 23, 2015), the ASBCA took the opportunity to clarify the non-intuitive distinction between the FAR termination clauses prescribed by FAR Part 12 (applicable to commercial items) and Part 49 (applicable to terminations for convenience under other contracts).  The government terminated TriRAD’s commercial item contract for convenience, but the parties could not agree on the amount of allowable termination costs to which TriRAD was entitled.  In sustaining TriRAD’s appeal for termination costs, the Board specifically pointed to the distinction between the termination provisions for commercial item contracts, found in FAR Part 12, and the standard under FAR Part 49.  Importantly, the FAR Part 12 termination provision permits recovery of a “percentage of the contract price reflecting the percentage of the work performed,” whereas FAR Part 49 permits recovery for the “work delivered and accepted.”

Dellow Corp., ASBCA No. 58538 (May 1, 2015) expanded on the ASBCA’s consideration of which termination clause governs the determination of allowable termination costs.  The Air Force terminated a contract, and Dellow filed a claim arguing that the scope of permissible recovery under FAR 52.212-4 is expanded by DFARS 252.232-7007, which also applied to the termination.  Notably, DFARS 252.232-7007(b) permits reimbursement for “costs, profit, and estimated termination settlement costs” instead of a recovery of “a percentage of the contract price reflecting the percentage of the work performed,” as stipulated in FAR 52.212-4(l).  Notwithstanding the more permissive language in the DFARS clause, the ASBCA found that, “where FAR 52.212-4(1) includes mandatory language and contemplates actual rather than estimated costs, the contract’s termination for convenience clause controls entitlement to termination settlement amounts.”

“Expressly Unallowable” Costs

In Raytheon Co., ASBCA No. 57576 (June 26, 2015), the ASBCA addressed expressly unallowable costs and penalties associated with such costs.  In sum, a cost claim is expressly unallowable when the government can show that a law or rule, or the relevant contract, explicitly prohibits the contractor from invoicing the cost.  An expressly unallowable cost is significant because penalties can be assessed against the contractor for invoicing the government for reimbursement of the incurred cost.

In Raytheon, the ASBCA overturned the Defense Contract Audit Agency’s (DCAA) conclusion that Raytheon’s bonus and incentive payments, as invoiced to the government, were expressly unallowable.  According to the ASBCA, FAR 31.205-1 does not expressly prohibit bonuses and incentive payments, even though the costs were unallowable (notably, the ASBCA agreed that certain legal costs that Raytheon passed on to the government were expressly unallowable).  The case represents a notable challenge to the DCAA’s aggressive audit positions and it provides an example of another large defense contractor that successfully challenged the DCAA’s positions relating to expressly unallowable costs.

In two relatively recent examples, the DCAA took an aggressive position and assessed penalties against small businesses for invoicing what the DCAA deemed to be expressly unallowable costs.  See Thomas Assoc., Inc., ASBCA No. 57795 (Oct. 4, 2012); Inframat Corp., ASBCA No. 57741 (Aug. 3, 2012).  Consistent with the Raytheon case, larger penalties assessed by DCAA for invoicing alleged expressly unallowable costs have been successfully challenged.  See General Dynamics Corp., ASBCA No. 49372 (June 10, 2002).

Certification and Claim Presentation

Horn & Assoc., Inc. v. United States, 123 Fed. Cl. 728 (2015) represents a cautionary tale for contractors filing a claim under the CDA.  Although the U.S. Court of Federal Claims (CoFC) ultimately rejected three fraud-based counterclaims raised by the government in response to a breach of contract action brought by Horn & Associates, the case reinforces the principles that contractors must present accurate claims and disclose all pertinent information related to the claim.

The contract in Horn had a contract providing contingent payments based on the amount that Horn & Associates was able to recover from third party contractors pursuant to audit and recovery efforts.  Horn filed a claim against the government asserting that Horn was owed millions of dollars under the contingent payment arrangement, prompting the government to file a counterclaim for fraud damages because, according to the government, Horn did not actually incur the charges claimed in the breach of contract action.  The CoFC rejected the government’s fraud-based claims because (i) there was no evidence of intent to defraud the government; (ii) there was no evidence that the contractor knew that its certified claim was false; and (iii) there was no evidence that the claim was a false or fraudulent statement under the CDA.  The court acknowledged that there were problems with the manner in which Horn had “characterized and presented [claim information] to the government,” but ultimately held that Horn did not present a claim with a reckless disregard for the truth.

Importantly, Horn’s claims disclosed that Horn utilized “reconstructed records” to build time cards reflecting employees’ time devoted to recovery and audit tasks under the contract, and that it did not have completely accurate time records due to the nature of the contingency-based contract.  Full disclosure of the nature of Horn’s calculations supported the CoFC’s justification to deny the government’s fraud claims.

Horn exemplifies the importance of both doing the necessary legwork to submit an accurate claim, and including all of the details regarding claim calculation.  These two principles, when taken together, help contractors defend against government counterclaims.