Novel Contract Defenses From Gov't May Not Sway Fed. Circ.

In two government contracts appeals argued remotely on June 1, the US government asked the US Court of Appeals for the Federal Circuit to endorse controversial theories of waiver and jurisdiction in order to avoid the merits of contractor breach claims. While oral argument does not always reflect the decision to come, the Federal Circuit panels seem appropriately skeptical of the government's arguments.

In The Boeing Company v. US,¹ the government argued that Boeing waived its right to challenge the validity of a regulation in a breach of contract action because Boeing entered into the contract without first challenging the regulation through a separate legal action. During oral argument, all three panel members expressed concern with the government's theory.

In Parsons Evergreene LLC v. Secretary of the Air Force,² the government argued that the Contract Disputes Act. or CDA, does not provide jurisdiction over breach of contract claims involving Non-Appropriated Fund Instrumentalities, or NAFIs.

During oral argument Judges Raymond Clevenger and Todd Hughes questioned the factual predicate of whether a NAFI actually was a contracting party.

Practitioners should keep an eye on both cases and be mindful of similar arguments the government may raise in future litigation.

The Boeing Co. v. US

The Boeing appeal arises from Boeing's challenge to the validity of the cost impact provisions of Federal Acquisition Regulation 30.606(a)(3)(ii).

Prior to 2005, when a contractor changed its cost accounting practices and calculated the cost impact of those changes to the government pursuant to the cost accounting standards, or CAS, the generally accepted practice was that cost increases could be offset by cost decreases, precluding a windfall to the government from accounting practice changes that have little or no net impact.

In 2005, the FAR Council implemented FAR 30.606(a)(3)(ii), which generally prohibits such offsets.

After the rule went into effect, Boeing entered into a CAS-covered contract. During performance, Boeing made simultaneous changes to its cost accounting practices that triggered negotiations for a price adjustment, and the government invoked FAR 30.606(a)(3)(ii).

Following a series of claims submitted pursuant to the CDA, 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 Court of Federal Claims agreed with the government that Boeing waived its breach of contract action by not challenging the regulation prior to contract formation.³ Boeing appealed.

The government's primary contention is that Boeing waived its right to challenge the application of FAR 30.606(a)(3)(ii) to the contact 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.⁴

To support this argument, the government has to stretch two theories of waiver unique to government contract law well beyond their current bounds.

The first is the Blue & Gold rule, so-called after the Federal Circuit's 2007 decision in Blue & Gold Fleet LP v. US, which interprets the Court of Federal Claims' statutory authority to hear bid protests to mean that:

[A] party who has the opportunity to object to the terms of a government solicitation containing a patent error and fails to do so prior to the close of the bidding process waives its ability to raise the same objection afterwards in a Section 1491(b) action in the Court of Federal Claims."⁵

The second is the patent ambiguity doctrine, an exception to the common law doctrine of contra preferentem, that provides "where a government solicitation contains a patent ambiguity, the government contractor has 'a duty to seek clarification from the government, and its failure to do so precludes acceptance of its interpretation' in a subsequent action against the government."⁶

There are several problems with the government's theory.

First, Blue & Gold was a bid protest decision interpreting the Court of Federal Claims' authority to review bid protests under Section 1491(b). Boeing is not a bid protest, but rather a breach of contract case filed under the CDA and Section 1491(a)(2).

Second, the patent ambiguity doctrine and the Blue & Gold rule are both designed to address patent ambiguities and defects within the four corners of a solicitation and other contract documents. But FAR 30.606(a)(3)(ii) is a FAR provision not a contract clause, and both parties agreed it was not incorporated by reference into Boeing's contract.

Judge Raymond Chen highlighted this inconsistency between the government's position and the precedent it invokes:

Is there a case that you are aware of … where if a contractor believes that a regulation on its face conflicts with the plain meaning of a statute, that qualifies as a patent ambiguity that must be raised at the time of bidding? …. I always tend to think of it as ... conflicting statements in the solicitation as to what is the quantity of requested items ... or what is the scope of the work, and there are two different statements that seem to conflict with each other—that's the kind of thing that seems like a[n] ... ambiguity that the rule, in cases like Blue & Gold, is trying to induce people to clear up on the front end rather than the back end. I've never heard of a situation where a regulation on its face that arguably conflicts with the statute on its face is where we would … invok[e] the patent ambiguity rule.

Third, the Blue & Gold rule and patent ambiguity doctrine are waiver rules, but the government could not identify what exactly Boeing should have done to preserve its challenge. The following exchange between government counsel and Judge Richard Taranto highlights the issue:

Counsel: "[T]hey would have had to raise the challenge at the time of contract formation."

Judge Taranto: "Tell me what you mean by 'raise the challenge,' in a way that indicates … that there was a realistic possibility ... of securing the desired relief?"

Counsel: "Admittedly this is a nonwaveable provision ... and it is not something that the contracting officer has discretion to apply … so it would have to make a judicial challenge."

Judge Taranto: "What sort of judicial challenge ... ?"

Counsel: "Boeing could have raised a protest, and Boeing could have … at least reserved its right."

Judge Taranto : "Reservation would do what exactly, when the contracting officer had zero discretion? I don't understand why that is something other than an empty form of words."

Counsel: "The fact is, I simply don't know what the outcome would have been if Boeing raised this in 2008, which is the reason why it would have had to raise the issue at that time. That is the entire point of Blue & Gold."

Judge Taranto: "But another way to look at it is that you're making an argument, and the Court of Federal Claims agreed, that there was a waiver, which means a bypass of an available opportunity, which seems to me to require some establishment of what opportunity there was that was plausibly available at the time of entry into the contract, and I am not sure that you have identified what that is."

Judge Chen also acknowledged the irony of the government asserting, on one hand, that Boeing waived its argument by failing to bring a prior challenge, while, on the other, declining to confirm that any such challenge would not fail on threshold issues such as standing and ripeness:

I can see the bind you're in a bit because all to often we see the government taking the position that contractors don't have standing, or they lack ripeness, for any allegation that they try to raise in a bid protest. ... If you can't tell us that they definitively would have had standing and any challenge to this regulation in fact would have been ripe at the time of the bid, then I am wondering how can we say that this was in fact waived when they didn't file a protest to this nonnegotiable regulation.

Finally, when the government suggested that Boeing might have challenged the regulation in district court under the APA, Judge Moore emphasized that:

You're talking about a separate action, not in the context of the application in this contract … but an APA challenge in district court doesn't get you to waiver … that has nothing to do with whether they waived in this case.

These exchanges and others during oral argument lend cautious optimism that the Federal Circuit will reject the government's novel waiver argument.

Practitioners should watch this decision carefully. Beyond waiver, the case also raises important issues regarding jurisdiction over exaction claims and, in the event of remand, the validity of FAR 30.606(a)(3)(ii).

Parsons Evergreeene LLC v. Secretary of the Air Force

The Parsons appeal is a relatively straightforward breach of contract claim filed with the Armed Services Board of Contract Appeals pursuant to the CDA. The underlying contract between Parsons and the Air Force involved design and build work for the 305th Air Force Service Agency, and the contract indicated that nonappropriated funds would be used for the solicited work.

Once the ASBCA decided Parson's breach of contract claims, Parsons appealed to the Federal Circuit. The government cross-appealed, arguing among other things that the ASBCA lacked jurisdiction to hear the case at all because the contract involved nonappropriated funds.

For context, litigation of contract disputes involving nonappropriated funds used to raise complex jurisdictional issues due to the so-called NAFI doctrine, established by the U.S. Court of Claims in the early 1950s.⁷

Pursuant to the NAFI Doctrine, the Court of Claims lacked jurisdiction over breach of contract claims against NAFIs because the Tucker Act's waiver of sovereign immunity was limited to claims involving appropriated funds.

The NAFI doctrine was largely overturned in 2011 by the Federal Circuit's en banc decision in Slattery v. US, where Judge Pauline Newman, writing for a narrow majority, held that:

[T[he jurisdictional foundation of the Tucker Act is not limited by the appropriation status of the agency's funds or the source of funds by which any judgment may be paid.⁸

Apparently not willing to let this anachronistic jurisdictional challenge rest in peace, the government argues that Slattery is limited to cases brought under the Tucker Act, leaving the NAFI doctrine to apply with full force to cases brought under the CDA.

Indeed, the Federal Circuit has recognized that, after Slattery, there remains an open question as to whether the doctrine applies to CDA cases.⁹ Yet, in deciding Parsons' claims, the ASBCA concluded that, following Slattery, "there remains no basis for continuing to apply the NAFI doctrine to CDA appeals."¹⁰

The Federal Circuit panel was presided by Judge Timothy Dyk, one of the four dissenting judges in Slattery. Judge Dyk did not reveal his position during oral argument, but Judges Clevenger and Hughes seemed interested in resolving the jurisdictional issue as a matter of fact instead of wading into the more complex legal issues.

Judge Clevenger responded to the government's assertion that Slattery does not apply to CDA by questioning the factual predicate that the contract was with a NAFI at all:

The Board said that this was a NAFI contract, even though on the face of the contract, the contract was entered into with the Air Force not with a NAFI — so why is this a NAFI contract? There was funding from a NAFI source, but we know from Slattery that where the funding comes from is irrelevant to a jurisdictional question.

Judge Hughes similarly commented:

Do you have any legal authority that … suggests that just because funding may come from a nonappropriated source, that it is necessarily a contract with a NAFI? … I think you've all jumped over [that factual issue] and gotten straight to the question of saying this is a NAFI — because it's a really interesting issue post-Slattery — but it is not clear to me at all that this is a NAFI, and the fact that there are nonapproriated funds doesn't solve for me the question of whether this is a contract with a NAFI or it is a contract with the Air Force itself that relies on nonappropraited funds, which seems to me under our case law to be a big distinction.

Practitioners dealing with nonappropriated funds and NAFIs should carefully watch this appeal to see how this issue is resolved.

Conclusion

Beyond being contractor appeals argued the same day, the Boeing and Parsons disputes share the theme of the government responding to genuine breach of contract claims by asking the Federal Circuit to avoid the merits and instead adopt controversial procedural theories that will rid the government of the case at hand and provide ammunition for future motions to dismiss.

While interpreting the tea leaves of oral argument is no exact science, it appears that the panels deciding these appears are, at the least, rightly skeptical of the government's ask.