Donald H. Rumsfeld, Secretary of Defense v. Applied Companies, Inc.

construction, it difficult to tory why is see apply equally does not construction Lilly non-priority context. line

Perhaps the entire of cases stem- perhaps

ming Ruschig wrong, point ques-

we should at some address that position

tion I take no on that en banc. juncture.

issue at this I think is worth out, however,

pointing ques- real by Judge

tion statutory raised Rader’s

analysis Lilly is not whether was an un- departure from Ruschig

warranted cases,

line of but whether entire line based on a fundamentally cases is §

flawed construction of 35 U.S.C. 1.

paragraph RUMSFELD, Secretary H.

Donald Defense, Appellant, COMPANIES,

APPLIED

INC., Appellee.

No. 01-1630.

United States Court of Appeals,

Federal Circuit.

DECIDED: April 2003. Donovan, Jones, B. & of

Peter Jones Beach, CA, peti- Newport filed combined panel rehearing rehearing and en tion for Appellee. banc for the Stinson, Attorney, B. Trial Com- David Branch, Division, Civil Litigation mercial Justice, DC, Washington, Department of petition for the response filed a to the response him the were appellant. With McCallum, Jr., Attor- Robert D. Assistant Cohen, Director; General; David ney M. Di- Bynum, Deborah A. Assistant and response was counsel on the rector. Of Attorney, Trial Defense Tracy, Donald Center, Richmond, Logis- Defense Supply Richmond, Virginia. Agency, tics SCHALL, DYK, PROST, Before Judges. Circuit by Opinion filed Circuit for Court Opinion concurring-in- Judge SCHALL. filed Circuit part dissenting-in-part DYK. Judge PANEL ON PETITION FOR REHEARING.

ORDER (“Applied”) Inc. has Applied Companies, panel rehearing of petitioned 10, 2002 decision. December court’s Inc., 318 Companies, Rumsfeld (Fed.Cir.2002) (“Applied”). F.3d 1317 out of a This suit arises Logistics the Defense between (“DLA”), the De- component Agency Defense, Applied. Under partment of specified period, during the Applied all of purchase from DLA was to refriger- types two DLA termi- cylinders. After storage ant the convenience contract for nated the termi- Applied submitted government, of contract and breach nation settlement Among officer. contracting claims to alleged that things, other had breached the contract providing, in response of law. In petition, (“RFP”) the request proposals fur- government states that “[t]he record below bidders, prospective nished to faulty esti- does not reflect —either way whether, in — mates of the number it would fact, Applied delivered any pursuant items require during the period contract and to the contract.” As far as Applied’s sec- failing then to inform when it bidders de- point concerned, ond is termined the estimates were inaccurate. urges that our decision is free of legal Following the contracting officer’s denial error. of its claim for profits, appeal- Having Applied’s considered petition ed to the Armed Services Board of Con- and the response, we con- (“Board”) Appeals tract provi- under the that, clude to the extent our decision states sions of Disputes Act, the Contract in definitive terms that there were deliver- §§ U.S.C. 601-613. Id. at 1319. contract, ies under the the decision is fac- Ruling on cross-motions summary tually incorrect. Accordingly, judgment, the Board concluded that DLA IT IS ORDERED THAT: had breached the contract negligently (1) fading to inform that the estimates Petition for Rehearing grant- is in the RFP were inaccurate. In Ap re ed for purpose the limited of correcting Cos., Inc., plied 50,749, 50, ASBCA Nos. factual misstatements in the court’s deci- 51,662, (CCH) 01-1 ¶31,- B.C.A. sion issued on December 2002. That 154,729, (Feb. at 2001 WL 210655 decision is hereby withdrawn and the deci- 2001). The that, Board also concluded sion attached to this Order is substituted during quantum proceedings, Applied in place. its could seek to recover the profits it had (2) In all respects, other the Petition for anticipated making on the total number of Rehearing is denied. cylinders that DLA estimated the RFP. 154,734. Id. at The Secretary of Defense OPINION (“government”) appealed the Board’s deci SCHALL, Judge. Circuit sion. In decision, our December 10 we affirmed the ruling Board’s that DLA had This suit arises from a requirements breached its Applied. contract with Ap between Logistics Defense plied, However, at 1323. (“DLA”), we also Agency component of the De- stated law, a matter of Applied partment Defense, and Applied Compa- was not to recover anticipated entitled its nies, Inc. (“Applied”). contract, Under the profits. Id. at 1324. among things, other DLA was to from Applied all of its requirements for

In petition for rehearing, Applied two types of refrigerant storage cylinders argues first that our decision contains a during the period from factual error. June Specifically, Applied asserts through June of incorrectly option we year. state pur- DLA request proposals (“RFP”), chased a 11,500 total of DLA approximately cyl- inders estimated its annual the contract. According to Applied, types two 62,945 while DLA of did order number cylinders, units, respectively. contract was terminated Prior to contract any award, before deliveries were DLA Ap- made. determined that the estimates plied’s point second is that our conclusion the RFP were greatly overstated. that Applied not However, entitled to recover its this information not commu- anticipated profits is as a incorrect matter offerors, nicated to any of the including Applied. Applied stances,” was awarded the con- I, or “ODSs.” Applied tract, ordering only approximate- but after 154,730. DLA, B.C.A. at which was ly quantity 10% cylin- estimated charged with building and maintaining a ders, DLA terminated the stockpile of Department ODSs for the 6,1995. February convenience on Defense, assessed the existing inventories ODSs, the amount of likely ODSs to be Following the denial of its termination recycled, used and and the amount of for convenience proposal settlement and a ODSs needed to ensure availability for claim for Applied ap breach of mission critical uses. In June of pealed to the Armed Services Board of assessment, based on its (“Board”) developed Appeals Contract pro under the estimates amount of R-12 and R- Act, visions of the Disputes Contract 114 refrigerants that (“CDA”). §§ it needed acquire U.S.C. to Ruling on and, by extension, cross-motions for the number of summary judgment, cylinders be required Board would concluded that DLA had store those re- breached frigerants. requirements 14, Id. July 1993, On DLA negligently failing to issued Applied inform that the the RFP for requirements estimates of cylinder requirements in RFP tract. DLA in estimated the RFP that 62,945 were inaccurate. Determination of the cylinders would be needed for the amount of was reserved fur for storage R-12 refrigerants 56,- and that Cos., ther proceedings. In re Applied cylinders would be needed for the Inc., 50,749, 50,896, 51, ASBCA Nos. and storage of R-114 refrigerants, for a total ¶ (CCH) 31,325, 01-1 B.C.A. 2001 WL 120,000 of approximately cylinders during (Feb. 2001) I”). (‘‘Applied year the one term of the contract.1 Id. DLA’s subsequent motion for reconsidera The RFP stated that the variation in actu- Cos., Inc., tion was In re Applied denied. quantity purchased al “plus be 03% 50,749, 50,896, ASBCA 51,662, Nos. and minus 03%.” The quantities estimated ¶ (CCH) 31,430, 01-2 B.C.A. 2001 WL were the same for option year. Id. On 2001) (May 21, II’’). (‘Applied The 11, 1993, or about August Applied, among Secretary of (“government”) Defense now others, responded to the Applied RFP. appeals the Board’s decision. Because the responsive was the lowest offeror. Board did not err in holding that had DLA In January of after initiating a breached its contract with Applied, af we pre-award survey, DLA determined firm. the reserve R-12 for and R- 114 refrigerants were considerably lower BACKGROUND than previously 154,731. believed. Id. at I. result, As a DLA established that facts, number of R-12 pertinent storage and R-114 cylin- which are not in ders dispute, that would be during up- are forth in needed Applied set They I. coming 1,037, are as follows: year were respec- tively. Id. The requirements stemmed procurement from a cylinders to store On June DLA awarded the R-12 refrigerants, R-114 which are contract to Applied, accept- classified as I “Class Ozone Depleting Sub- ing per its bid of cylinder. Id. In $52.60 1. The RFP and contract involved sizes types cylinders other refer to the two hereafter and models of that are "cylinders” at issue not issue covered the con- dispute. in this clarity, In the interest of we tract. award, repeated determination, DLA the notice unilateral the termination in the RFP. Under the contracting payment estimates contained officer un- denied contract, 20, 1994, period June der-absorbed overhead costs and unilater- 14, 1995, obligated DLA was to “or- ally Applied’s June settled termination claim for [cylinders] $295,253.00. der from contractor all the Ap- Id. This sum covered required purchased by that are to be plied’s terminating costs its work provided The contract also Government.” $31,718.00 progress relating [cylinders] specified that the “quantities in progress. to work Since al- the schedule are estimates and are ready partial payments had received purchased by not this contract.” The con- $295,253.00, totaling the contract the ter- incorporated tract various clauses from the contracting mination officer determined (“FAR”). Acquisition Regulations Federal any not pay- entitled by way ment of termination settlement. August Ap- DLA informed Id. plied time—that it the first had “dis- —for that a significant covered mistake was Applied subsequently submitted calculating made in the estimates.” Id. In contracting officer a claim for breach of place of the erroneous estimates contained Applied alleged that it had re- RFP both the and the faulty lied on DLA’s in prepar- estimates provided new estimates of the minimum ing and submitting its bid and had entered quantities and maximum of R-12 R- and agreements into with subcontractors and 114 refrigerant cylinders actually pur- suppliers 154,733. accordingly. Id. at that it require. chased Id. DLA Based on the estimates contained in the eventually ordered a total approximately contract, asserted, RFP Applied and it had 11,950 units of R-12 R-114 cylinders, and expected generate to a profit per of $8.85 approximately quan- one-tenth of the total cylinder on approximately cylin- tity originally estimated. Id. ders, $1,057,530.80. for a total Id. According Applied, to negligence DLA’s in

DLA sought modify to the contract to preparation of the estimates constitut- reflect the new Applied estimates. re- ed a breach of Ap- contract that entitled sponded by submitting price a revised plied damages “to recover in the amount of per cylinder pay- and requesting $126.98 anticipated profit.” $615,945 ment “under absorbed indi- DLA replied by rect costs.” Id. proposing 12, 1998, On June the contracting officer pay per to unit for the quanti- reduced $79 issued a final denying Applied’s decision ty cylinders. Applied accept did not breach claim. Id. Though contracting 6, this proposal, and on February officer concluded that DLA had failed to DLA terminated the contract for conve- exercise due care in preparation of its 154,732. nience. Id. at It appear does not estimates, she negligence viewed that as from the record before us Applied giving to a change, rise constructive rather any cylinders delivered to DLA. breach, than a of the contract between Applied. Applied Accordingly, she ruled submitted termination for con- relief, Applied terms of proposal venience settlement was limited in the $1,791,499.00, an equitable adjustment amount of compensate it Changes for the shortfall in ordered Clause see FAR 1(b), 52.243-l(b), § DLA and for the overhead it 48 C.F.R. allegedly or to 52.243— absorbed in the preparing course of costs had incurred performing obligations plus profit, under the reasonable contemplated as 26, 1997, February Id. On by the Termination for Convenience Clause, 2(f)(2), see FAR 48 C.F.R. constituted a breach of the contract that 52.249— 2(f). § contracting The officer entitled Applied to compensatory damages: 52.249— stated that whatever costs could “The Government was ... negligent, and have established under a theory appellant of con- entitled damages change partial structive termination for breach I, of the contract.” Applied would have been paid part 154,734. convenience B.C.A. at The Board therefore of the termination settlement. granted Applied’s motion for summary judgment. Finally, while it noted that its

II. decision only addressed the issue of Ap- plied’s entitlement, Applied appealed the the Board contracting two of- observed “[bjreach ficers’ decisions may to the Board. Ruling on include antici- patory parties’ profits.” Id. summary (citing cross-motions for Carchia v. United judgment, the Board addressed Ct.Cl. ques- (1973)).2 tion of May DLA’s On negligent whether inclusion Board inaccurate estimates the RFP denied was a motion for II, reconsideration. of its contract with 01-2 B.C.A. ¶ 31,430. Applied. Noting undisputed timely appealed fact that the Board’s jurisdiction “the Government decision. We knew it would have actually pursuant 1295(a)(10).3 § need to 28 about one-tenth of the U.S.C. quantities in solicitation,” relying on the deci- DISCUSSION sion of Court of Claims in Womack 389 F.2d 793 We review the Board’s un decision (1968),the Board ruled DLA’s actions der the standard set forth in the CDA: Applied’s 607; 2. The Board denied for antici- Dewey, § claim 41 U.S.C. 803 F.2d at 654. In patory profits option year that scheme, DLA view foregoing of the the breadth of did exercise. not The Board also denied the issues in the contracting covered officer's de- government's judgment motion for summary cision "determines the extent of the contrac- dismissing Applied's appeal of DLA's unilater- right appeal tor's jurisdic- and the board's al determination of the for conve- termination tion.” example, Id. 655. Dewey, at For we I, Applied nience settlement. B.C.A. at 01-1 contracting held that where the decid- officer 154,734. Since the termination settlement only ed entitlement and the board thereafter claim and the sought breach of contract claim decided par- entitlement and remanded to the anticipatory profits, the same the Board sus- regarding quantum, ties the board's decision appeals tained understanding both "with the was appealable. final thus Id. at 658. appeals one will be dismissed during quantum phase agreement after an case, In Applied appealed this two contract- is or a reached determination is as to made ing decisions to the Applied officers' Board. 154,- begins.” the date when interest Id. at I, 154,733. B.C.A. In the deci- first 735. sion, the contracting termination officer de- Applied nied entitlement to under-absorbed jurisdiction 3. We appeal have exclusive "of an decision, overhead costs. In the second from a agency decision of an board of final contracting Applied's officer denied claim appeals pursuant 8(g)(1) contract to section part, breach of contract. For its the Board Disputes Act Contract of 1978.” 28 154,734. only decided entitlement. Id. at Ac- 1295(a)(10) added). § (emphasis U.S.C. cordingly, contracting since the did officer provides CDA that all claims first be must quantum, not decide but decided entitle- contracting submitted to the for a deci officer ment, the Board's decision 605(a); entitlement § sion. Dewey See 41 U.S.C. Elecs. final and appealable Dewey, to Corp. this court. See 803 F.2d (Fed.Cir.1986). ("In rendering 803 F.2d receiving at 655 After decision as an adverse officer, contracting from the decision the con ... the Board entitlement decided all may appeal appro ”). tractor that decision to the issues then before it.... priate agency board appeals. of contract See agency any promise board on DLA did not The decision of esti- not be final or question of law shall quantity approximately mated conclusive, any ques- the decision on but cylinders and consequently, its failure be final and conclusive tion of fact shall to do so did not breach the contract. set aside unless the and shall not be short, government’s reasoning, under the fraudulent, arbitrary, or or decision is DLA the fact that awarded the contract to capricious, grossly erroneous as to or so Applied knowing the estimates the RFP faith, if necessarily imply bad or such faulty purposes were is irrelevant for supported by decision is not substantial determining whether there was a breach of evidence. Applied responds that it is the 609(b). § parties Because the U.S.C. that, by preparing law of this circuit esti- dispute relating do not the facts negligently, government may mates estimates, preparation of the inclusion requirements breach a if it even RFP, the estimates in the and the termi in fact fulfills such as it needs has nation of the question sole contract items from the contractor. The before us is whether the Board’s decision government’s understanding as to the na- by legal is tainted error. We review the correct, ture of a contract is de Rex legal Board’s conclusions novo. agree faulty but we esti- (Fed. Cohen, Sys. v. 224 F.3d may mates form the basis for a claim that Cir.2000); Dalton, Co. v. Cessna Aircraft a requirements contract has been breach- (Fed.Cir.1997). 1442, 1446 126 F.3d ed. appeal, government On does not A contract “calls for the dispute that DLA’s estimates as to the government to fill all actual require refrigerant number of R-12 and R-114 specified ments for supplies services require during that it would during period by purchasing the contract term significantly were over- awardee, agrees provide from the who stated. Neither does the dis- Medart, them at agreed price.” Inc. v. pute that, award, prior to contract Austin, (Fed.Cir.1992). aware the estimates were incor- rect but did not inform of the This arrangement offers the error until after the contract was award- flexibility measure of both and cost cer asserts, however, government ed. The tainty, by ensuring government an ad that the Board erred as a matter of law supply equate required item at an (i) in that DLA holding breached its con- agreed price before it determines the exact (ii) that, Applied stating tract with quantity ultimately pur items it will concerned, far damages Applied as as are exchange chase. Id. In providing anticipatory profits. is entitled to recover government certainty cost and flexibility We address these contentions turn. respect to the quantity of items or dered, contractor, a in theory, may at least I. higher per price. exact a unit Technical The government argues require- that a States, Assistance Int’l v. United 150 F.3d ments contract only obligates agency (Fed.Cir.1998). 1369, 1372 purchase a require- from contractor all its While the quantity of items that ments for the items covered the con- government purchase will under a re tract, agreed-upon price; at the it does not quirements necessarily contract is uncer obligate particu- agency tain, irrelevant, it is not quantity Starting quantity lar of items. from that as the premise, government may impact capacity contends that both a contractor’s supply the contract items and the price at a claim for breach of a requirements con- agrees Medart, which it to supply them. tract: reason,

967 F.2d at 581. part For that It disputed is not that the Government of the solicitation for a knew it would actually need about one- tract, the government prepares estimates tenth quantities in the solicitation. quantity of goods require it will It did not exercise reasonable care when during the term of the contract. These knowledge, acquired well in ad- estimates, though guarantees award, “not vance of war- or was not fac- Contractors, ranties of tored quantity,” into the Shader contract estimates. The was, therefore, Inc. v. Government negligent, 149 Ct.Cl. (1960), appellant entitled to ... only damages constitute one of the limitations on otherwise

almost unbridled flexibility with respect to I, Applied 01-1 154,734. B.C.A. at In view the number of purchases. units it There- of the undisputed facts, the Board did not fore, implied there is an obligation upon err holding that DLA breached the re- government good to “act in faith quirements Applied and that use reasonable in computing care its esti- entitled to recover the damages that re1 Medart, mated needs.” 967 F.2d at suited 581. from the breach.4 Failure to meet obligation constitutes II. a breach of the resulting contract. Id. We above, As noted Board decided have stated “[w]here contractor can of liability. issue It did not address by preponderant show evidence esti- quantum. did, however, The Board make mates were ‘inadequately negligently or concerning statements the recovery to prepared, faith, not in good grossly or which it believed Applied was entitled unreasonably inadequate at the time the reason I, of DLA’s breach. made[,]’ estimate was Board stated that was entitled to could be liable appropriate “compensatory damages” for DLA’s resulting.” Id. (quoting Clearwater Forest breach, “[bjreach and it observed that Indus., Inc. v. United damages may anticipatory profits.” include (1981)). According- 154,734. II, Id. at In Applied the Board ly, to the extent that a esti- stated that because DLA’s breach was “to- mate is inadequately or negligently pre- tal,” Applied whole, “is entitled to be made pared, its inclusion without in a correction and here that includes anticipatory solicitation or contract constitutes a mis- they to the extent proved.” can be representation that, whether deliberate or 155,220. B.C.A. at The Board’s state- unintentional, amounts to a breach of con- ments regarding quantum suggest that it Womack, tract. F.2d at 800. is appropriate for provide guidance us to This case squarely is controlled regarding proper Applied’s measure of jurisprudence that holds that negli recovery. See Fla. E. Ry. v. Coast Co. gently prepared States, can give estimates rise to United 647, 228 Ct.Cl. 660 F.2d noted, 4. As Womack, the Board plained found that DLA’s esti- misrep- ‘‘[a]n inadvertent negligently prepared. mates were Board The stemming negligence fully resentation is did not find part bad faith on the of DLA. A damaging as as a party deliberate one to the finding prerequisite of bad faith is not a to a who it relies on to his detriment.” 389 F.2d claim for upon breach of contract based at 800. faulty estimates. As the Court of Claims ex- 1336 (1981)

474, put position by in a (Though judge the trial had entitled to be better 475 if liability recovery [breaching party] the issue of and the than ruled fully performed was reserved had the contract.” Miller quantum determination Robertson, 260, 243, the court ad- proceedings, for further v. 266 U.S. 45 S.Ct. (1924). thought “ap- 73, it it quantum way, because Put dressed 69 L.Ed. 265 another ... fur- propriate to comment non-breaching party “the ‘should on no parties and the trial guidance ther get account than would have accrued more ” judgment to as judge, [its] underscore performed.’ if the contract had been important issue central Int’l, Inc., to a controverted v. Delta 285 F.3d White Constr. case.”). (Fed.Cir.2002) to the 1040, (quoting 1043 DPJ (1st FDIC, 247, v. 30 F.3d 250 Cir. Co. parties’ respective positions on the 1994)). In anticipatory order to recover damages govern- issue are as follows: The breach of a when, a argues require- ment that contract, party the non-breaching “must contract, agency ments an orders all the aby preponderance establish of the evi- requires from a contrac- contract items dence” for such tor, may the contractor not recover antici- Energy v. Capital Corp. award. United patory compensate it for profits to the loss (Fed.Cir. States, 302 F.3d of sales that never occurred and to which 2002). recognized “Lost are ‘a it never was entitled under the contract. damages measure of where their loss is According government, a contrac- proximate result breach and recovery negligently prepared tor’s es- profit fact that there would a have been damages timates is to reliance limited established, definitely and there is some price adjustment. Applied that a submits basis on which a reasonable estimate of compensatory it is entitled to a ” profit amount can be made.’ Cal. damages anticipatory profits. that includes States, Fed. Bank v. 245 United F.3d proper contends that the measure (Fed.Cir.2001) (quoting Neely damages compensate for DLA’s breach is the it would have made on (1961)). quantity

the entire negligently require. estimated it would purpose Because the of a below, agree For the reasons forth we set award put non-breaching party is to is not “in good position a as would have [it] profits on anticipatory entitled to the esti- breaching party fully per- been had the quantity cylinders. mated formed,” Bank, Fargo Wells 88 F.3d at logical starting point for a dam- rule, general As a when there has ages is an analysis understanding of the been breach of the non-breach party’s breaching obligations under ing party is entitled to an award of dam above, explained contract. As a require- ages place good posi that will it “in as ments “calls for the tion as would have been in had the [it] fill speci- all its actual breaching party fully performed.” Wells supplies fied Bank, during services the con- Fargo N.A v. United (Fed.Cir.1996). period by tract purchasing from the awar- F.3d This rule dee, agrees provide who them at the damages, by ensuring sets the floor for Medart, agreed price.” party no at 581. non-breaching suffers pecuniary Court of Claims and Federal Circuit loss as result of the breach. cases well, support It ceiling damages anticipatory sets the for the award of party profits because the non-breaching requirements is “not for the breach of a contract all involve situations in which guarantee the the company any actual sales. government perform failed to this obli- government contended gation because it had “actual circumstances, these any award of lost specified supplies but, and services” in profits speculative and inappropriate. another, way one diverted that business Id. The Court of rejected Claims the gov- away from party the with whom it had ernment’s contentions. As for the first contracted. argument, the court stated: In Locke v. United agree We that nothing in the contract (1960), 283 F.2d 521 government the would prevented have the Government plaintiffs contracted to list the typewriter from enlarging its own repair facilities repair company, along with three other to fill completely its needs. This would companies, in a Federal Supply Schedule. have left nothing to be awarded under Id. at 522. departments Various of the the Federal Supply Schedule contracts. federal were required to use But the alleged facts as show that the whose appeared contractors names Government did have service some re- In exchange schedule. govern- quirements beyond its capacity. own ment’s listing of his in company the sched- Presumably, these were ule, company Locke’s obligated “was awarded to contractors the schedule. perform all the services which he con- Plaintiffs chance obtaining some of tracted.” Id. at 523. After several awards, these by being in the schedule months of listing Locke’s company, during competing with the other contrac- which time company received business tors, had value a business sense. The from government, ter- Government by its deprived minated the contract and struck the com- plaintiff of this value. pany from schedule. Locke sued for Id. at 524 (emphasis in original). breach of seeking In rejecting form of lost profits. After second ar- the Board of gument Review of the General award Services of anticipatory Adminis- —that relief, tration denied him would speculative' Locke filed suit be court —the in the Court pointed of Claims. appeared out that it that Locke “did have a chance of obtaining at least In opposing claim, Locke’s breach one-fourth of the typewriter total repair government advanced essentially two ar- business let by Government.” Id. at guments. First, it contended that since 525. The court therefore referred the case Locke’s company had into a entered re- to the trial commissioner pro- for further quirements contract, which not guaran- did ceedings, directing the trial commissioner any tee that minimum quantity of services (1) to determine: the total type- amount of ordered, would be Locke could not recover writer-repair business was let providing services to which government and for which Locke would his company no had entitlement under the have eligible been Second, but for the govern- the government urged, (2) breach; ment’s any whether material agreed to list company, Locke’s facts along with prevent have tended to typewriter-repair other Locke contrac- tors. departments receiving proportionate Because were share free to any choose available; (3) companies listed business per- that was issue, form the govern- average services unit normally cost in per- incurred performance ment’s forming repair the kind of work involved tinuing to company contract; (4) list Locke’s did not under the expenses per- in into contracts with the requirements incurred tered

that Locke would have (“GSA”) under the contract. Services Administration forming obligations its General Thus, Locke, transcription reporting in the of Claims and court ser- Id. Court for was entitled to agencies. held that the contractor for various federal Each vices (i) the amount of recovery require- to the extent of contract included the standard 52.216-21(e). that typewriter-repair § business existed ments clause found in FAR (ii) obtained; that, that it would have its “[ejxcept That clause states as this ability satisfy requirements the for the provides, contract otherwise the Govern- stated ment shall order from the Contractor all California Federal Bank. specified in supplies or services required pur- that are to be Schedule In Tomcello v. United by activity ac- chased the Government (1982), government 681 F.2d 756 specified in tivities the Schedule.” 48 with requirements entered into 52.216-21(c). However, § none of C.F.R. (“Soledad”) Enterprises, Inc. Soledad plaintiffs any was assured that of the grounds maintenance and refuse removal agencies purchase The services. Navy family housing projects. at six How- obligation sole ever, upon pro- that it recognizing could several contracts was to from the cure the contract from De- services pool comprised contracting plaintiffs of the Works, partment Navy’s of the Public transcription requirements all the of the pest diverted its rodent agencies. stipulated listed It was Soledad, away trol services contracts, period during the of the some of requirements Id. at 758. contract. agencies covered the contracts con- rejected govern- The Court of Claims transcription tracted for services argument ment’s that because Soledad did companies parties that were not perform un- any pest not control services Reporters, GSA contracts. Ace-Federal requirements der the the con- permitted 226 F.3d at 1331. This was not tract had constructively been terminated plain- absent a waiver from Id. GSA. government. convenience of the contracting tiffs filed claims with GSA’s The court stated that the termination officer, alleging pur- that the off-schedule convenience gov- clause does not allow the agencies chases some constituted away ernment to divert business from a breach of alleged contract. For only meaningful contractor and breach its breach, they sought to recover lost obligation under a consequential damages. After Id. at 771. Significantly, though the court contracting officer denied the claim and question left the further Appeals the GSA Board of Contract sus- proceedings, it made clear Soledad’s enti- denial, plaintiffs appealed tained the tlement was not to an mini- “obligatory court. this Because we concluded that the mum” pest number of calls for control Board had work, holding erred the terms buyer’s but to “all of the require- precluded recovery of the contracts of lost ments.” Id. at 761. profits damages, we reversed and remand- Finally, Reporters, in Ace-Federal Inc. ed. Barram, (Fed.Cir.2000), 226 F.3d 1329 Recognizing that the contracts at issue availability prof- we reaffirmed the of lost typical not compensation requirement were contracts and when they guarantee any breaches a did not by pro- business, curing goods party or services from third individual contractors because case, plaintiffs agencies amongst sources. en- were free to choose provision the contractors of tran- effect of taking away from the contractor services, scription we analogized to Locke. the opportunity to earn profit. cases, In government both asserted that the of any guarantee absence of ob- case, however, This does not in taining work rendered profits lost too volve the kind of breach that occurred in speculative prove. to Like the Court of Locke, Tomcello, and Ace-Federal. DLA Locke, in Claims disagreed, we holding did purchase not parties from third government’s that the promise purchase to refrigerant cylinders that it obligated, transcription services from the con- contract, under the to Ap tractors on the schedule “ha[d] substantial plied. Thus, government unlike the in business value because there were only cases, those it did not divert from a re between two and five authorized sources” quirements contractor business that exist for the in geographical services each re- ed. contrary, To the it did order from gion. Id. at 1332. We concluded Applied all of its actual requirements for circumstances, by these considering refrigerant cylinders, although those re the total amount of transcription services quirements were far less than what had government purchased par- from third been estimated in the RFP. Eventually, ties, along with other factors, relevant the contract was terminated for the conve court or the Board reasonably could deter- nience of after Applied mine the amount of actual business and and DLA were agree unable to on an profits plaintiffs that lost as a result of adjusted price cylinders. short, In words, breach. Id. In other because did not government’s commit the breach breach in Ace-Federal Locke, occurred in Tomcello, involved the away diversion from the non- breaching parties of actual business that Ace-Federal; diverting business that ex — they (as otherwise would have received away isted from the contractor. Locke), Tomcello and profits the loss of The government’s breach in this case “proximate

was a result of the breach and was the inclusion of negligently prepared there some [was] basis on which a estimates in breach, the RFP. For that estimate reasonable of the amount of the Applied is not entitled to recover prof- Bank, [could] be made.” Cal. Fed. it its would have made had DLA fact 245 F.3d at 1349. had requirements to the extent approxi- Locke, combined teaching of 120,000 mately cylinders. refrigerant Al- Tomcello, and Ace-Federal is that lowing Applied to recover lost government breaches a requirements con estimated would ef- tract when has for con fectively convert the contract at issue from services, tract or items but diverts busi satisfy one to all of DLA’s to ness from the contractor and does not use one in which DLA guaranteed Applied a satisfy contractor require those certain level of business. Contract esti- case, ments. In that the contractor mates “not guarantees are warranties entitled to recover damages in the form of quantity,” Contractors, however. Shader profits, provided lost it is able to meet the 276 F.2d at 7. No case has been cited to us requirements for recovery not which, under a requirements ined Federal Bank. The critical California point is contractor was anticipa- that the allowed recover itsof obligation tory profits “to fill all as damages actual for a require breach of ments ... purchasing from the resulting awar from negligently pre- dee,” Medart, has the pared estimates. here. In anticipa- of breach occurred addition, in to recover order case, pur- cut “definitely plaintiff agreed estab- it must be

tory profits, Snoqualmie in the government’s chase timber located that without lished” profit. Washing- have been a in the State of would National Forest breach there Bank, Applied at award prospectus 1349. ton. In its issued before Fed. Cal. contract, DLA requirement. Had States Forest cannot meet that the United properly preparing tim- duty by estimated the total volume of discharged Service estimates, or cylinder specified approxi- area to be propounding ber that the estimates 73,100 if told offerors Id. at 427. mately it had M board feet. award, before contract were inaccurate to Though Plywood’s agreement Everett sell, expected have would not Applied purchase the timber from the Forest Ser- sold, 120,000 cylin- contract, it would not have a vice was not words, profit Applied In ders. other of volume were material to the estimates in the form of lost attempts to recover inaccurate, The estimates were contract. would not anticipated sales as the total volume of timber Everett but for DLA’s “definitely” have existed able to cut and Plywood was breach. 46,081 contract M board under the was 27,000 feet, approximately fewer M or Applied damages in

Finally, awarding than the had board feet Forest Service Ap- would allow form of lost prospectus. in the estimated If DLA’s breach. plied profit from furnished a reasonable estimate had of Claims calculated the dam- Court for the term of the cylinder needs resulting from the breach. The court ages have things one of two would the Forest pointed out that because of would have sub- occurred: either estimate, Ply- inaccurate Everett Service’s a awarded the mitted bid been expected it wood cut less timber than tract, would have perhaps in which case it bidding per when on the contract. Its unit on number of profit earned a cutting costs therefore increased. Accord- sold; declined to would have ingly, Plywood damages Everett “suffered contract, in which case it would bid on the reasonably ... as a foreseeable result of extent that profit. earned no To the have by failing warranty, defendant’s breach of upon based it is allowed to recover av- advantages to realize the lower cylinders included in units of which have resulted” erage rates would estimates, Ap- negligently prepared DLA’s of timber. cutting larger from volume pecuniary plied would find itself a better Id. at 433. The court therefore calculated propound- DLA had never position than if plaintiff average “the rate which estimates and breached the ed inflated ... paid have ... had the contract volume above, a damages As such noted Then, compute realized.” Id. been conflict with the squarely award would Plywood to which Everett non-breaching party rule that a “should entitled, applied the court the difference than would have ac- get no account more rate, Plywood between that which Everett performed.” crued if the contract had been paid would have had the es- Int’l, Delta Constr. 285 F.3d at 1043. accurate, timates been and the contract rate, cut, actually “to arrive for the volume view, Plywood our Everett payment resulting the excess 419 F.2d 425 (1969), plaintiffs failure to realize the lower aver- proper methodology suggests the contemplated.” Id. In other age to which a rate determining words, Plywood was entitled to contractor reason of the kind Everett is entitled compensation for the loss it incurred as a overestimates “has been measured re- result of the Forest faulty Service’s esti- pricing quantities based on an mate, in form adjustment of an accurate estimate of the quantities of price applied to the volume of work. Such places repricing the contrac- actually timber cut under the contract. tor in position it would have occupied Similarly, in Laundry Crown Dry& but breach.”). for the Government Cleaners, Inc. v. United 29 Fed.Cl. It does not appear from (1993), the record be- the court stated: “Where a fore us that Applied contractor any can show delivered preponderant cylin- evi dence that ders estimates relied on neg were before terminated the contract ligently prepared or were in unreasonably for the convenience government. If n adequate, indicating a lack of due care in any cylinders delivered, were preparation their at the time the estimates should have the opportunity to establish made, were may be hable that it is entitled to an equitable adjust- for resulting damages.” Id. at 520. The ment in price of those cylinders be- that, court further stated in such a situa cause it relied on DLA’s negligent esti- tion, the contractor “is entitled to be paid and, mates result, as a damages. suffered value of reasonable the work per We note in denying Applied’s breach formed.” Id. at 524. explained The court claim, DLA’s contracting officer refer- paying contractor reasonable enced approach. such an The contracting value of performed the work may involve officer noted that equitable “[a]n adjust- increasing price. the contract This is be ment compensates changes by paying a cause “[w]hen actual performance work contractor its increased costs resulting produce[s] a items, lower number from the change, plus an cost allowance for per allocation work item higher [is] profit than on that priee[,] bid cost.” See which was based United States higher on a number of Co., work items an Callahan Walker 56, Constr. 317 U.S. attendant per lower cost allocation 61, item 113, 63 (1942) (“An S.Ct. 87 L.Ed. 49 work.” Id. See also In re Cactus ‘equitable adjustment’ ... merely involved Enters., Inc., Press/Power GPOBCA 20-99 the ascertainment the cost of [additional (Jan. 31, 2001) (recognizing “the well-set work] and the addition to that cost of a tled principle relating ‘requirements reasonable and customary allowance for contracts’ which holds that contractors profit.”); Burners, Earth Inc. v. United who submit bids reliance on negligently States, (1999) 43 Fed.Cl. (noting prepared and incorrect estimates of work proper that “[t]he measure of equitable an in the solicitation are equita entitled to an adjustment costs, is reasonable including adjustment” (citations ble omitted)); In re reasonable work performed” Capitol HKH Corp., Hotel ASBCA No. (citation omitted)); In re Ry. Signal Gen. 47,575, ¶ (CCH) 146, B.C.A. at Co., ENGBCA No. 96-1 B.C.A. (Jan. 1998) WL ¶ (CCH) 27981, 139,755, (Aug. WL (“Where the estimate neg Government’s 1995) (“We conclude that equitable ligently prepared appellant reasonably adjustment for the switching machines upon relies estimate its financial should be measured the contractor’s detriment, remedy is an equitable ad (citation plus reasonable cost justment.” for a fair omitted)); allowance John Cibin ic, (citation omitted)). Nash, Jr., customary profit.” Jr. & Ralph C. Formation of (3d Government 1998) Contracts 1205 We ed. think the approach of an equitable (stating that relief for faulty government adjustment properly Applied’s assesses majority unaccountably denies

damages.5 claim for lost for the ad- plaintiffs case, cylin- If, no appears to be The measure of mitted breach. delivered, is limited to ders were by our majority unsupported uses is the Termination Conve- recourse under contrary general law precedent and Clause nience of the Government Moreover, it leaves the above, of contracts. Applied’s termi- noted contract. As completely uncompensated for breach of con- tractor claim and nation settlement anticipatory provides the same almost no incentive sought tract claim breach and however, explained, profits. we have As to avoid such breaches recover such not entitled to Applied is respectfully I dissent. in the future. proceed- any further profits. Accordingly, no in which majority cites case limited to the Board will be ings before misrep or negligent was a bad faith there outstanding issues disposing any other in a contract but resentation termination Applied’s connection Ply In Everett were denied. claim. settlement States, 190 Corp. wood & Door United CONCLUSION (1969), 80, 419 F.2d 425 Crown Ct.Cl. Cleaners, holding that Inc. v. Laundry Dry of the Board & The decision (Fed.Cl.1993), contract breached Fed. 506 Cac 29 Cl. Inc., is affirmed. Enterprises, tus GPOB- Press/Power (Bd. App. CA 20-99 Contract Jan. COSTS 2001), Corp., Capitol and In re HKH Hotel No costs. (CCH) 47,575, No. 98-1 B.C.A. ASBCA (Jan. ¶ 29,548, 146,467, 1998 AFFIRMED. WL 26, 1998), by majority support cited the DYK, concurring part Judge, Circuit 1340-1341, profits, ante at denying lost dissenting part. profits for a plaintiffs did not seek lost present government In contract the Thus, governmental misrepresentation. (1) to obligations: undertook two relevant possibility opinions’ those silence as to the actual misrepresenta of lost (2) accurately estimate its plaintiff and completely significance. tion is without no breach of the requirements. There was Plywood plaintiff In Everett majority holds that obligation, but the first pur- tracted with the Forest Service to breached be- obligation the second was parcel chase timber on a faith either bad government, cause the price land for a that would decrease over incorrect esti- negligently, provided time, pay plaintiff so that the less agreement I in full with the mate. am timber it per unit for the timber the more that majority Having so far. found breached, however, purchased. F.2d at 427. The cut and obligation second provide wrongful which did not that a default 5. The case on which the Board relied for was to be considered a conve- proposition Applied's termination nience-termination, Carchia, plaintiff was entitled to may anticipatory profits, include Carchia, gov- anticipated profits yet performed inapposite. for work not In improper wrongfully at the time it received the notice of ernment terminated a construc- Carchia, time, wrong- Id. at 625. In default. At the a default termination.” tion contract for dispute did not entitlement to ful default termination was treated as anticipated profits, only amount of such Claims breach of contract. As the Court of stated, “[sjince old-style profits. this was an government negligently misrepresented question of what measure should be used. how much timber was on parcel so that The statements in each case equitable plaintiffs average per cost unit was adjustment of the price was avail- higher than it had contemplated. Id. at (if able to the contractor it could establish plaintiff 429. sought The price adjust- that it was by harmed a negligently pre- ment, predecessor our court awarded bid) pared simply restated the claim as- the difference per between the price unit serted the contractor. Those state- the contractor had pay for the timber it ments were not addressed to lost profits cut and per the effective price unit it would and have no bearing on lost recov- paid have if timber the contractor ery.2 had been able to cut the quantity estimat- Without a controlling precedent, this ed the Forest Service. Id. at 433. court “applies] ordinary principles of con- There is no indication plaintiff tract construction and breach.” United sought profits, lost opinion does States v. Winstar Corp., 839, 871, 518 U.S. not discuss or even mention a lost 116 S.Ct. (1996) 135 L.Ed.2d 964 issue. (plurality opinion); Lynch accord v. Unit- none the other cited cases involv- ed 571, 579, U.S. 54 S.Ct. ing negligent misrepresentation did the (1934) 78 L.Ed. 1434 (“rights and duties” contractor seek profits. In Crown of government contract “are governed gen- Laundry, sought contractor only equi- erally by applicable the law to contracts adjustment table and the private individuals.”). between major- parties stipulated the actual dollar amount ity must recognize that there is no control- of damages at the outset were the contrac- ling precedent area, in this as it observes prevail. tor to 29 Fed.Cl. at 514. Like- that “[n]o case has been cited us in wise, Press, in Cactus the contractor which, a requirements contract, a sought only equitable adjustment of the contractor was allowed to recover anticipa- contract price. The is same of HKH true tory profits as damages for a ¶ Capitol Corp. 29,548 Hotel B.C.A. at contract resulting negligently pre- 146,471. equitable adjustment The sought pared estimates,” ante at and then it by the contractors in those appears cases cites which, no in situation, case in that to have mainly consisted of increased costs profits lost have been denied. According- associated the unexpected volume. ly, we must look to general law of But in Laundry Crown the amount of contracts. damages was not disputed, and in neither Cactus Press nor Capitol HKH Corp Hotel As majority recognizes, the rule in did the Board find that the contractor was this area profits is that lost are available to entitled to equitable adjustment.1 the non-breaching party, fore- assuming Those cases therefore did not reach the seeability. said, As we have Press, 1. In cases, Cactus rejected the Board the con- when is allowed tractor’s claim untimely. because it was because the has improperly di Capitol HKH Corp., Hotel the contractor's verted orders other sellers. Ante at 1336- claim was barred because the did contractor (discussing 1339 Reporters, Ace-Federal Inc. v. not seek patent clarification a ambiguity in Barram, (Fed.Cir.2000); 226 F.3d 1329 Torn relating to the estimate. 98-1 States, cello v. United 231 Ct.Cl. F.2d 681 ¶ 29,548 B.C.A. (1982); 756 Locke v. United (I960)). 283 F.2d 521 inapplicable, 2. Equally so far computation concerned, damages are the diversion 1344 warranty is the for breach of damages makes the non- of way the law

“One give him the whole is to the value of the breaching party difference between receive had the expected to they benefits he accepted and the value goods Federal Glendale breach not occurred.” they if had been as warranted.” have had States, 239 F.3d v. United Bank FSB 2-714(2) (1989). in keeping § This is UCC (Fed.Cir.2001) (citing Re- “[o]rdinarily, the dam- with the rule that (Second) of Contracts statement of contract for a breach ages recoverable 344(a)(1981)). expectation party’s A § of the value of on the basis are measured having in “interest interest is the Corbin, su- promised performance.” by being put in as bargain benefit of his added). § pra, (emphasis have as he would been good position sure, was, in Re- To in this case there performed.” been be had the contract (Second) effect, warranty require- Contracts statement 344(a)(1981). damages Expectation § estimated; properly quan- ments were they are actu- provided are recoverable tity higher could have been or ordered reasonably foreseeable, ally contrary to uncertainty, lower. But such foreseen promi- the breach are caused assertion, majority’s does not bar re- sor, with reasonable cer- proved and are specifically not covery. Although we have tainty. issue, the lost we have addressed Bank, v. F.S.B. Bluebonnet Sav. repeatedly recognized gov- that when the (Fed.Cir.2001) bidding require- allows on either ernment added). leading authorities (emphasis contracts, it quantities or indefinite ments that the normal mea- agree on contracts is reasonable and foreseeable for contrac- profits. includes lost As sure of rely tors to estimates. put in the First Restatement Austin, Medart, Inc. Contracts, “compensatory damages will be (Fed.Cir.1992) (“[Presumably contractors amount of the losses given for the net [government’s] proffered esti- rely on the gains prevented, excess of caused and bids, their so the formulating mates possible.” Restatement savings made good act in faith and use government must (1932). (First) § 329 cmt. a of Contracts estimated computing reasonable care Corbin, Arthur Linton Corbin on See also Indus., needs”); Forest Inc. v. Clearwater (Interim 2002) (quot- § Contracts 992 ed. States, 386, 227 Ct.Cl. 650 F.2d United approval); Re- ing First Restatement (1981) (“[A] 233, prospective purchaser 239 (Second) § of 347 statement Contracts reasonably expected should be to base his (1981). operating plans and cost estimates on gains how to calculate the To determine estimates]”); [government Womack v. prevented by Logistics Agency’s Defense 182 Ct.Cl. (“DLA”) breach, we should look to breach (1968) (“Assuming that the bidder 801 If DLA had warranty of cases. warranted rely on reasonably, acts he is entitled to Companies, Applied (“Applied”) Inc. representing Government estimates as pro- that the contract would conclusions.”). In- honest and informed work, worth of cylinders’ vide deed, very purpose quantity the compensate would be awarded to reliance; such other- estimates induce contractor for ex- the benefit wise, said, predecessor court as our pected bargain, not for the value of the “surplusage would be at best or estimate misrepre- contract as it was without the Womack, F.2d at deception at worst.” example, For sentation. Uniform provides, Commercial Code “The measure 801. reasonable,

Where such reliance is “[i]f measure of damages, if as it had never probability reasonable damage can be happened. The case, famous Bristol Seed established, clearly uncertainty as to the by Corbin, treated provides an illustration preclude amount will not recovery.” Ace- of the majority’s Corbin, approach. supra, Barram, Federal Reporters, Inc. v. 226 § 1026 (describing Miller, White v. (Fed.Cir.2000) F.3d (quoting (N.Y.1877)). N.Y. 118 case, In that Locke v. United 283 buyer purchased seed from a seller who (1960)). circumstances warranted that it fit for was human con- which the destroyed all value and sumption. It was in fact mixed seed made under the contract impossi good for animal buyer feed. The was due ble, courts have measured the value damages based on the difference between at right the time of the breach. the value of the seed as warranted and the Corbin, 1030; § supra, E. Allen Farns- value of seed, the actual including lost worth, § Farnsworth on Contracts 12.15 profits. Id. Under the majority’s theory of (2d 1998). too, ed. So at the time the damages, however, buyer could not government made the Ap contract with expected recover profits because there plied, it definite, was worth something would not have any; been the seed was which government’s estimate was high unfit for human consumption. ly probative. Alternatively, recovery could be based on other evidence of the contract Here contractor assumed the risk value—how valued the contract requirements would when it signed, example, or how actually be estimate; less than the other, similarly situated companies valued. contractor did not assume risk that the Farnsworth, contracts. See government’s requirements estimate would § supra, 12.15. Taking into account ex be deliberately or negligently misstated. pected estimate, variations from the The majority’s of damages measure thus Board profits should award lost based on effectively erases the breach. Far from the amount likely purchases given the “converting] the contract to one in estimate. particularly It is inappropriate guaranteed which DLA Applied a certain for the majority to foreclose lost profit business,” level of asserts, majority damages at this stage, before has ante awarding merely even had the opportunity present evi the general reflects measure of damages. dence on the matter. The majority holds that an award of lost consequence of today’s decision is overcompensate Applied be- may misrepresent cause, had the government disclosed requirements with impunity long so as the actual requirements, Applied would have contractor suffers no increase in costs. either “submitted a bid” on the That seems to me policy bad to be as well it was or “declined to bid on the contract as bad law. I respectfully dissent. thus no made at all.” Ante at short, 1339. In the majority contends, it impossible have been for Applied to

recover on this be- breach,

cause even absent

“would not expected sell, have and it sold, 120,000

would not have cylinders.”

Ante at 1340. But that characterization

removes misrepresentation from the

Case Details

Case Name: Donald H. Rumsfeld, Secretary of Defense v. Applied Companies, Inc.

Court Name: Court of Appeals for the Federal Circuit

Date Published: Apr 2, 2003

Citation: 325 F.3d 1328

Docket Number: 01-1630

Court Abbreviation: Fed. Cir.