Federal Circuit Revives Boeing's Challenge to Controversial Cost Accounting Standards Rule, Rejecting the Government's Novel Waiver Defense

In a much-anticipated decision, the Federal Circuit revived Boeing's challenge to the validity of Federal Acquisition Regulations (FAR) 30.606(a)(3)(ii), which prohibits the offsetting of increased and decreased cost impacts arising from multiple changes in cost accounting practices.¹ The Court of Federal Claims dismissed Boeing's challenges, adopting the government's novel procedural defenses. The Federal Circuit reversed the Court of Federal Claims, rejecting the government's procedural arguments, and remanded the case.

The Federal Circuit's opinion does not speak to the court's view on the validity of FAR 30.606(a)(3)(ii); practitioners should watch the Court of Federal Claims proceedings carefully to see whether this controversial cost accounting provision survives review. Additionally, by reversing the Court of Federal Claims, the Federal Circuit eliminated the possibility of broader implications between FAR Part 52 contract clauses and implementing provisions in other parts of the FAR.

Prior to 2005, the generally accepted practice for determining the cost impact of multiple changes to cost accounting practices under the Cost Accounting Standards (CAS) clause was to offset cost increases against cost decreases. In 2005, the FAR Council implemented FAR 30.606(a)(3)(ii), which prohibits such offsets.

After the rule went into effect, Boeing entered into a CAS-covered contract. During performance, Boeing made changes to its cost accounting practices, and the government invoked FAR 30.606(a)(3)(ii). Boeing filed suit in the Court of Federal Claims challenging the government's application of the FAR provision as a breach of contract and, alternatively, an illegal exaction. Boeing's theory on the merits is generally that the FAR offsetting provision conflicts with the CAS statute.

The government's primary defense was that Boeing waived its right to challenge the application of FAR 30.606(a)(3)(ii) to the contract at hand because: "Boeing knew of a regulation that it considered to be illegal, invalid, and in contradiction to the CAS Statute and CAS Clause, yet chose not to raise a challenge to the regulation before entering into the Contract."² The Court of Federal Claims agreed with the government and dismissed Boeing's breach of contract claim. The Court also rejected Boeing's illegal exaction claim on the basis that Boeing could not identify a money-mandating statute or regulation to support its theory.³

In a unanimous decision, the Federal Circuit rejected the government's waiver argument, reversing the Court of Federal Claims. The Federal Circuit rejected the notion that Boeing could have "waived" its ability to challenge the government's application of FAR 30.606(a)(3)(ii) when it was undisputed that the contracting officer had no authority to waive the mandatory regulation, and the government could not specify what action Boeing could have taken to challenge the provision prior to entering the contract:⁴

A pre-award objection by Boeing would have been futile, as the government concededly could not lawfully have declared FAR 30.606 inapplicable in entering into the contract. Our precedents do not require, to avoid waiver, that the contractor have pursued judicial avenues of relief before the award. To the extent that the government even urges adoption of such a requirement here, it has provided no sound basis for doing so in this case: it has not identified a judicial avenue through which a ruling on the merits of the objection was assuredly available.⁵

Importantly, the Federal Circuit's decision on waiver precludes the prospect that the Court of Federal Claims' decision could have had on the inter-relationship between any FAR Part 52 contract clause and the administrative provisions in the correlative parts of the FAR.

The Federal Circuit also reversed the Court of Federal Claim's decision to dismiss Boeing's illegal exaction claim, explaining that, because Boeing sought to recover money already paid to the government, there is no further requirement to identify a money-mandating source of law: "Boeing alleged that the government has demanded and taken Boeing's money in violation of a statute. Whatever its ultimate merits, this allegation suffices for jurisdiction to adjudicate the illegal exaction claim."⁶

The Federal Circuit remanded the case to the Court of Federal Claims for further proceedings, during which the court will presumably reach the merits of Boeing's challenge to the validity FAR 30.606(a)(3)(ii). Contractors should keep an eye on this litigation, particularly as to whether the court upholds the controversial offsetting provision.

© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.