To say that there is a crisis surrounding the closing of government contracts, especially large cost-type contracts held by large government contractors, would certainly not be an understatement. [i] Closing a contract essentially requires verification that the goods or services have been provided and that final payment has been made to the contractor. Audits are the tools the government uses to support contract closeouts. However, the government is seemingly taking forever to perform various audits of government contracts. To illustrate, the Defense Contract Audit Agency, the audit arm of the Department of Defense, had a backlog of 25,000 incurred cost audits at the end of Fiscal Year 2011, some dating as far back as 1996. GAO, Defense Contracting: DOD Initiative to Address Audit Backlog Shows Promise, But Additional Management Attention Needed to Close Aging Contracts, GAO-13-131(Washington D.C.: December 2012). This general inability of the government to timely audit contractors is affecting, among other things, the claims process under the Contract Disputes Act, 41 U.S.C. §§ 601-613 (CDA), and is leading to some interesting legal ramifications. For in-house counsel of federal government contractors it is incumbent upon them to know that there have been a number of recent decisions at the Court of Federal Claims (COFC) and the Armed Services Board of Contract Appeals (ASBCA) regarding the application of the statute of limitation (SOL) to claims submitted under the CDA. Combined, these decisions reinforce the CDA SOL provision, which applies equally to both the government and the contractor, that claims must be filed within six years of their accrual. This is nothing new, as such has always been a CDA requirement. What is new, however, are those factual situations where the government files claims against contractors for matters arising out of audits of events that occurred many years prior. What does all this mean for in-house counsel? Well, in these times of reduced litigation budgets and expanded performance of legal duties by internal legal departments, in-house counsel must become thoroughly familiar with the CDA SOL decisions and scrutinize the timeliness of government claims, particularly those claims predicated upon audits. Under appropriate circumstances, in-house counsel can move to dismiss such claims themselves – without immediately having to resort to outside counsel – resulting in substantial cost savings for the company.
For most government contractors, particularly the larger ones, the substantial majority of its contract litigation is handled by outside counsel, primarily because government contracting is a specialized niche which requires legal representation well versed in litigating often complex government procurement matters. Moreover, in-house counsel may lack sufficient experience to handle the full panoply of contract litigation – from filing a claim to discovery to motion practice to trial. Nevertheless, in-house counsel are skilled, multi-faceted attorneys certainly qualified to write a sufficient motion to dismiss, which is, for the most part, all that is required for the boards to resolve the plethora of CDA SOL appeals. If the motion is denied, counsel can be retained to prosecute the appeal where necessary. However, if granted, then that is it, case over –barring an appeal – and in-house has saved the company thousands of dollars in legal fees and has increased his value to the organization. Before cranking out that motion, however, in-house should be cognizant of CDA basics and recent decisions on the issue.
By way of a quick primer, the Contract Disputes Act (CDA) of 1978, 41 U.S.C. §§ 601-613, provides procedures for US government and contractors to resolve disputes arising out of federal contracts. The CDA contains detailed procedures for filing claims and the various forums for the resolution thereof. The CDA requires the filing of a claim within six years of its accrual. A claim is first the subject to a contracting officer’s final decision (COFD), which denies or grants the claim, in whole or part. The contractor can appeal the COFD. Within 90 days therefrom, appeal can be made to either the Armed Forces Board of Contract Appeals or the Civilian Board of Contract Appeals, depending on the agency involved. Alternatively, the contractor can appeal to the Court of Federal Claims within one year of receipt of the COFD. Of course, appeals at the Boards are governed by Board rules and procedures, and appeals at COFC by its rules and procedures. There are many differences between the Boards and the Court, but the general consensus among practitioners is that the Boards are much less formal and procedural than the COFC. Dare I say that filing at the Board is, well, easier for in-house to do.
Between the two forums, the Board has taken the lead on CDA SOL appeals. Raytheon Missile Systems, ASBCA 58011, Armed Services Board of Contract Appeals, 2013 ASBCA LEXIS 11, Jan. 28, 2013, involved a contractor’s changes in its Cost Accounting practices. Raytheon (RMS) appealed a contracting officer’s final decision issued November 29, 2011 asserting a government claim for over $17 million for violations of disclosed Cost Accounting Standards accounting practices. RMS had issued a CAS Disclosure Statement to the Defense Contract Management Agency (DCMA) that was to be effective January 1, 1999. On May 14, 1999, the Naval Air Systems Command (NAVAIR) awarded RMS a letter contract to remanufacture Tomahawk missiles, and RMS submitted its price proposal on July 20, 1999. RMS’s price proposal was reviewed by NAVAIR, DCAA, and a DCMA price analyst, who issued a report thereon. In August 1999, RMS and the government reached agreement on a fixed-fixed price for the contract. Then, in 2005, the same DCMA price analyst performed a second review of RMS’s price proposal, this time finding RMS’s price proposal to be inconsistent with its Disclosure Statement. Thereafter, on November 29, 2011, the contracting officer issued a COFD alleging violations of RMS’s disclosed CAS accounting practices. The Board, in granting RMS’s motion to dismiss for lack of jurisdiction, held that the government was the “proponent of our jurisdiction and therefore bears the burden of proving it under these circumstances,” and that “claim accrual does not turn upon what a party subjectively understood; it objectively turns upon what facts are reasonably knowable.” Id. at 11 and 10. The Board then found that the events fixing the alleged liability occurred in 1999 when RMS amended its Disclosure Statement showing certain subcontractors not receiving special burden. The Board found unpersuasive the government’s argument that the accrual of its claim had been tolled until the government performed an audit to determine the amount of damages, holding that a party cannot unilaterally toll the SOL. Thus, the government’s claim of November 29, 2011 was untimely and therefore invalid.
In Raytheon Company, Space & Airborne Systems, ASBCA Nos. 57801, 57802, 57804, and 57833, Armed Services Board of Contract Appeals, 2013 ASBCA LEXIS 42, April 22, 2013, Raytheon (RSAS) appealed four government claims, all of which were the subject of one COFD dated July 7, 2011. RSAS asserted that each claim was outside the six-year SOL. One appeal, ASBCA No. 57802, involved RSAS’s submission of a CAS Disclosure Statement Revision 1 which, among other things, changed four accounting practices. Revision 1 was submitted on February 10, 2004, but failed to provide required data, such as the dollar cost impact of the changes, the potential shift of costs between CAS – covered contracts by type, or the impact of the changes on the impacted departments and agencies. RSAS later provided the dollar impact of the changes on February 15, 2005, and the dollar cost impact on the property accounting system/property management on April 3, 2006. In denying RSAS’s motion, the Board found that the government could not reasonably have known it had a claim until RSAS had submitted the all of the cost impact information on April 3, 2006. Accordingly, the government claim submitted on July 7, 2011 was within the six-year SOL and, therefore, timely.
Conversely, on ASBCA No. 57802 involving RSAS Revision 3 which notified the government that changes with specified cost impacts would be effective January 1, 2005, the Board held that the government’s claim was untimely, because RSAS notification contained sufficient level of detail and supporting data such that the government should have known that at least some adverse costs impacts were occurring by February 15, 2005. Finding unpersuasive the government’s argument that RSAS submission lacked sufficient level of information and supporting data, the Board held that “claim accrual does not depend on the degree of detail provided, whether the contractor revises the calculations later, or whether the contractor characterizes the impact as ‘immaterial.’” The Board likewise found unpersuasive the government’s similar contention of insufficient information in ASBCA Nos. 57804 and 58833, holding both government claims untimely.
See also, The Boeing Co., ASBCA No. 57490, 12-1 BCA ¶ 34,916 at 171,671-72 (government’s final decision seeking $6.4 million from Boeing for accounting disclosures changes in 2000 was outside the SOL), and Raytheon Co., v. United States, 104 Fed. Cl. 327 (Fed. Cl. 2012) (government’s claim that certain costs in an advance agreement are unallowable exceeded the SOL where agreement had been entered into nearly 10 years prior to the government’s claim).
In all of these recent SOL decisions, outside counsel represented the contractors, and filed the motions to dismiss. Certainly in-house counsel could have done such. Motions to dismiss are primarily fact driven: when did the event occur and when did the government know about it. In-house counsel, just as outside counsel, has access to the relevant documents and people to draft sufficient chronology of facts to support a motion. Then, to represent ones company at the Boards of Contract Appeals, in-house counsel need only obtain company approval to do so, and then timely file a Notice of Appeal (Rule 1 and 2 of the Rules of the Armed Services Board of Contract Appeals). The Notice of Appeal is jurisdictional. It must be filed at the Board within 90 days of receipt of the COFD. A good tactic is for counsel to file its Motion to Dismiss for Lack of Jurisdiction with the Notice of Appeal if possible, or certainly soon thereafter. The requirement that the complaint be filed within 30 days of the Notice of Appeal will likely be postponed until the Board resolves the jurisdictional motion.
If the Board denies the motion, but the company wants to continue to pursue the appeal, retained counsel can be brought in at that point if in-house counsel is unable to pursue the appeal. However, if the Board sustains the motion to dismiss then the appeal is over, unless the government appeals to the Court of Federal Appeals. Barring such, in-house has likely saved its company a substantial amount in legal fees.
Government contractors of all sizes are increasingly going to confront issues surrounding the SOL in light of the fact that the DCAA is generating audit reports of events that occurred years prior. These reports are supporting COFDs, and government claims therefrom. Litigation in this area is going to explode because millions and millions of dollars are at stake. To be sure, retained counsel will handle the bulk of this litigation. However, to the extent that in-house counsel can assume a minor litigation role and file motions to dismiss for CDA SOL violations, their value to their organizations can be substantially enhanced.
[i] David Newsome is a Senior Legal Counsel for KBR and a retired Army officer of the Judge Advocate General’s Corps where he maintained an Acquisition Law Specialty. The views expressed herein are his own. This article is for general information purposes and is not intended to be and should not be taken as legal advice.