SUFI Network Services, Inc. v. United StatesSUFI Network Services, Inc. v. United States
OPINION AND ORDER
This case is before the Court on the parties’ cross-motions for summary judgment on liability. Plaintiff, SUFI Network Services, Inc. (“SUFI”) is seeking the recovery of attorneys’ fees, expenses, and interest that it incurred following the Government’s material breach of a contract for telephone services performed in Germany. The contract in
For the reasons explained below, the Court concludes that SUFI’s legal costs are not precluded by any FAR cost principle or the Bill Strong decision, and constitute costs eligible for recovery by equitable adjustment under the contract’s “Changes” clause. The Court therefore grants SUFI’s February 13, 2012 motion for summary judgment and denies the Government’s March 15, 2012 cross-motion for summary judgment.
The parties each argued in their cross-motions that the decision of the Armed Services Board of Contract Appeals (“ASBCA”) on attorneys’ fees, SUFI Network Services, Inc., ASBCA No. 55306,
Background
The Court provided a more detailed factual background and procedural history of this dispute in its January 17, 2012 opinion denying the Government’s motion to dismiss. See SUFI CFC I,
1. The Contract
SUFI and the U.S. Ar Force Non-Appropriated Funds Purchasing Office (“AF-NAFPO”) entered into a contract on April 26, 1996 for SUFI to install and operate telecommunications systems on Ar Force bases in Germany. SUFI ASBCA VIII,
Neither the CDA, 41 U.S.C. §§ 601-13 (2006) (current version at 41 U.S.C. §§ 7101-09), nor the FAR applies to this contract. Compl. (Jul. 8, 2011), at 1 ¶ 2.
If any ... change causes an increase or decrease in the cost of, or the time required for, performance of any part of the*189 work under this contract ... the Contracting Officer shall make an equitable adjustment in the contract price, the delivery-schedule, or both, and shall modify the contract.
FAR § 52.243 — 1(b) (2011); see also SUFI ASBCA VIII, at 168,218 ¶ 2.
2. SUFI’s Monetary and Employee Claims
On August 25, 2004, SUFI notified the AFNAFPO’s contracting officer (“CO”) that it intended to cancel the contract as a result of the AFNAFPO’s material breach. SUFI ASBCA VIII, at 168,218 ¶ 6. The parties reached a Partial Settlement Agreement (“PSA”) on May 31, 2005, with an effective date of April 1, 2005, pursuant to which SUFI stopped its work under the contract. Id. at 168, 218-19 ¶ 7; see also Pl.’s Mem. (Mar. 29, 2012), at 11; Def.’s Mem. (Mar. 15, 2012), at 11 ¶¶ 13-14. SUFI submitted 28 monetary claims to the CO on July 1, 2005, under both the contract and the PSA. Id. at 168,219 ¶ 8.
After the CO failed to issue a final decision for more than six months, the Board docketed SUFI’s appeal as a “deemed denial” on January 5, 2006. Id. at 168,217. The CO subsequently denied all but one of SUFI’s 28 monetary claims. Id. at 168,219 ¶ 9. SUFI then amended its complaint to appeal the CO’s final decision. Pl.’s Mem. (Mar. 29, 2012), at 11; Def.’s Mem. (Mar. 15, 2012), at 11 ¶ 16. On October 13, 2006, the parties executed an agreement (the “October 2006 Agreement”) settling ten of SUFI’s monetary claims. See SUFI ASBCA VIII, at 168,219-21 ¶¶ 13-18. The Board, however, determined that this agreement was unenforceable. See id. at 168,221-22.
SUFI ultimately recovered on 22 of its 28 monetary claims. See generally SUFI ASBCA VIII,
At the time of the Board’s decision on SUFI’s 28 monetary claims in SUFI ASBCA VIII, SUFI had not yet presented the CO with its claim for attorneys’ fees and expenses. Def.’s Mem. (Mar. 15, 2012), at 8; Pl.’s Mem. (Feb. 13, 2012), at 4 ¶ 7.
Since [counsel] undertook to represent SUFI in its claim preparation and in this litigation on a one-third contingency basis (finding 340) ... we need not rule on the allowability of their legal fees and expenses. Once this decision is promulgated, [counsel] presumably will be compensated based upon their contingent fee arrangement with SUFI.
SUFI ASBCA VIII, at 168,289. Additionally, the Board noted that FAR § 31.205-33(b) (2011) does not govern the parties’ non-appropriated funds contract but is “useful in the absence of other guidance.” Id.
3. SUFI’s Fee Claim
SUFI submitted its attorneys’ fees claim to the CO on December 29, 2010. SUFI CFC I,
4. The Instant Dispute
On February 13, 2012, SUFI moved for summary judgment on both liability and damages, pursuant to Court Rule ("RCFC”) 56. The Government cross-moved for summary judgment on March 15, 2012. By order dated February 17, 2012, the Court stayed the issue of damages pending this decision on liability.
In their respective cross-motions, each party asserts preclusion arguments pertaining to the Board’s decision in SUFI ASBCA VIII. SUFI contends that the Board ruled for it on liability but deferred ruling on damages. Pl.’s Mem. (Mar. 29, 2012), at 4. In contrast, the Government contends the Board found that (i) “where a party enters into a contingent fee arrangement such fees are not compensable,” Def.’s Mem. (Mar. 15, 2012), at 16; and (ii) therefore, a ruling on damages was “just gratuitous,” Def.’s Mem. (Apr. 9,2012), at 2-3 n. 1.
SUFI asserts entitlement to its attorneys’ fees (i) as damages under the contract and PSA, see Compl. (Jul. 8, 2011), at 4 ¶¶ 19-22; and (ii) in the alternative, as an equitable adjustment under the Changes clause, see id. at 5 ¶¶ 23-25.
For the reasons explained below, the Court rejects both parties’ preclusion arguments because the ASBCA never clearly decided the attorneys’ fees issue. Nonetheless, upon de novo review, the Court grants SUFI’s motion for summary judgment on liability and denies the Government’s cross-motion. The Court need not address SUFI’s first theory of entitlement because there is no genuine dispute that SUFI is entitled to its attorneys’ fees claim as an equitable adjustment under the Changes clause of the contract.
Standard of Review
Summary judgment is appropriate where “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” RCFC 56(a); see also Arko Exec. Servs., Inc. v. United States,
Discussion
A. Both Parties' Preclusion Arguments Are Unavailing.
“Normally, a final judgment in one court is binding on the same parties in a subsequent action before another court as a matter of res judicata; in such a setting the first judgment ordinarily cannot be collater
Here, the Government argues that the Board in SUFI ASBCA VIII expressly referenced FAR § 31.205-33(b), which purportedly prohibits the award of any legal fees to a litigant represented on a contingent fee basis. See Def.’s Mem. (Apr. 9, 2012), at 2-3 n. 1; Def.’s Mem. (Mar. 15, 2012), at 16. The Court cannot abide this sweeping characterization and, in any event, will not give it preclusive effect in light of the Board’s explicit “we need not rule” language. SUFI ASBCA VIII, at 168,289.
SUFI’s preclusion argument similarly fails. See Pl.’s Mem. (Mar. 29, 2012), at 4. While the Board did grant SUFI’s non-legal employees cost claim, it specifically stated “we need not rule” as to SUFI’s attorneys’ fees claim. SUFI ASBCA VIII, at 168,289. Furthermore, the Board expressly referenced both (i) “finding 340,” which documented SUFI’s contingency fee arrangement; and (ii) FAR § 31.205-33(b), which at least limits a plaintiffs recovery of contingency fees against the Government. See id. Mindful that SUFI did not even submit a claim for attorneys’ fees to the CO until December 29, 2010, the Court holds that the Board could not and did not rule conclusively in November 2008 as to SUFI’s attorneys’ fees claim. Accordingly, the Court proceeds to the substance of the contingency fee issue.
B. The Court May Award Attorneys’ Fees Where Counsel Represents a Party Against the Government on a Contingency Basis.
“Costs of professional and consultant services are allowable ... when reasonable in relation to the services rendered and when not contingent upon recovery of the costs from the Government.” FAR § 31.205-33(b). Here, the Government urges the Court to apply this contingent fee restriction as an absolute bar and, therefore, to deny SUFI’s attorneys’ fees claim irrespective of its merits. The Court does not accept the Government’s position.
First and foremost, the FAR and its cost principles provide only guidance here; they do not control the parties’ non-appropriated funds contract. See FAR §§ 1.104, 2.101 (2011). However, even if the FAR were controlling, SUFI’s contingent fee arrangement with outside counsel would “not preclude the award of reasonable attorney’s fees.” E.C. Schleyer Pump Co., Inc., ASBCA No. 33900,
The better interpretation of FAR § 31.205-33(b) is that it merely provides guidance as to fee recovery, setting attorneys’ fees at “the ‘lodestar’ amount of the hours worked at the normal hourly rate.” Pl.’s Mem. (Feb. 13, 2012), at 4; cf. Blanchard v. Bergeron,
C. SUFI’s Fee Claim, Is Compensable As an Equitable Adjustment Under the Contract’s Changes Clause, Despite SUFI’s Eventual Appeal of Its Monetary Claims to the ASBCA.
When a contractor incurs costs due to (i) formal or constructive changes to the contract; (ii) governmental defect or delay; or (iii) the Government’s breach, the contractor is entitled to request an equitable adjustment (“REA”). See Michael W. Clancy, REA Preparation Costs—Bill Strong Enterprises, Inc. v. Shannon, 25 Pub. Cont. L.J. 537, 582 (1996) (internal footnotes omitted). An “equitable adjustment” is an adjustment to a contract’s price or schedule under a Changes clause to compensate a contractor for adverse governmental action. See 4 John Cosgrove McBride & Thomas J. Touhey, Government Contracts: Law, Administration, Procedure § 28.280 (Walter Wilson ed., Matthew Bender 2009). REA preparation “normally requires a substantial effort, including contract analysis, factual investigation, legal entitlement analysis, the' drafting process, the collection of documentary evidence, and the pricing of the equitable adjustment.” Clancy, supra, at 582 (internal footnote omitted). Nonetheless, “[c]osts ... are unallowa-ble if incurred in connection with ... the prosecution of claims or appeals against the Federal Government.” FAR § 33.205-47(f)(1).
Here, the AFNAFPO materially breached the parties’ contract, plausibly entitling SUFI to an equitable adjustment under the Changes clause. However, SUFI ultimately appealed its 28 monetary claims to the ASBCA, recovering on 22 of them.
Thus, at issue is whether SUFI’s attorneys’ fees claim is itself allowable as an equitable adjustment, or unallowable as costs incurred in connection with the prosecution of SUFI’s monetary claims against the Government.
1. FAR § 33.205-47(f)(1)’s Per Se Bar Does Not Apply to SUFI’s Attorneys’ Fees Claim.
The title of FAR § 31.205-47 (2011) is “Costs related to legal and other proceedings.” The FAR limits the scope of “legal proceedings” to “any civil judicial proceeding to which the Government is a party or any criminal proceeding ... including]
2. SUFI’s Attorneys’ Fees Claim Involves Compensable “Contract Administration” Costs Within the Meaning of Bill Strong.
In applying FAR § 33.205-47(f)(1), the Court distinguishes between allowable “contract administration” costs and unallowable “claim prosecution” costs by “examining] the objective reason why the contractor incurred the cost.” Bill Strong,
There is no “bright-line test” rendering costs “automatically allowable just because those costs were incurred before” a Board appeal. Id. at 1545. The “Government must receive some benefit from the” expenditure of the costs in order for them to be allowable. Id. “In the practical environment of government contracts,” this benefit may be an increase in “the likelihood of settlement without litigation” or, simply, “a greater incentive to negotiate rather than litigate.” Id. at 1549-50.
To summarize, at this liability stage of the proceedings, attorneys’ fees and expenses incurred in preparation of an REA under a Changes clause are themselves presumptively compensable as an equitable adjustment where:
(i) The contractor incurred the costs due to (a) formal or constructive changes to the contract, (b) governmental defect or delay, or (e) the Government’s breach, see Clancy, supra, at 582 (internal footnotes omitted);10
(ii) (a) The contractor incurred the costs in furtherance of information exchange or negotiation with the Government, whether or not it ultimately succeeded in forestalling a Board appeal, Bill Strong,49 F.3d at 1549-50 , or (b) the Government received some other benefit from the expenditure, id. at 1545; and
(iii) Where applicable, the contractor incurred the costs before the actual filing of its Board appeal, FAR*194 § 33.205-47(f)(1); see also FAR § 9.403 (2011); Clancy, supra, at 585-86.
Whether a contractor can satisfy this test for presumptive allowability, and whether the Government can rebut this presumption, normally are factual inquiries for the contracting officer. See United States v. Callahan Walker Constr. Co.,
SUFI easily satisfies this test for presumptive compensation on liability. In this regard, SUFI already prevailed under Bill Strong on its analogous employee claim. See SUFI ASBCA VIII, at 168,289-92; Pl.’s Mem. (Mar. 29, 2012), at 11; Def.’s Mem. (Mar. 15, 2012), at 13 ¶ 21. Also, SUFI engaged in regular negotiations and information exchanges with the CO to execute both the PSA and the ill-fated October 2006 Agreement. Finally, SUFI subjected its monetary claims to a Defense Contract Audit Agency (“DCAA”) audit, and SUFI’s counsel responded to the DCAA’s questions “on several occasions.” Pl.’s Mem. (Feb. 13, 2012), at 2 ¶ 2. Thus, as a factual matter, the record is replete with support for SUFI’s attorneys’ fees claim.
In its attempt to rebut SUFI’s prima facie case, the Government submits five separate arguments.
First, the Government argues that SUFI already had commenced the prosecution of its monetary claims at the time it prepared its REA. Def.’s Mem. (Mar. 15, 2012), at 19-20. However, as discussed above, (i) claim prosecution did not per se commence until SUFI actually appealed its monetary claims to the Board; and (ii) the factual record is filled with instances of negotiation and information exchange at the administrative level sufficient to satisfy Bill Strong.
Second, the Government contends that SUFI negotiated with the CO only to engineer the false appearance of continued contract performance. Def.’s Mem. (Mar. 15, 2012), at 20-21. SUFI, however, executed the October 2006 Agreement, which would have settled ten of its monetary claims. See SUFI ASBCA VIII, at 168,219-21 ¶¶ 13-18, 168,221-22. Executing a settlement agreement is not indicative of a party engaging in sham negotiations.
Third, the Government submits that SUFI deliberately presented the CO with an “oversized” demand for $130,308,071.53 in order “to ensure” its denial and SUFI’s subsequent appeal to the Board. Def.’s Mem. (Mar. 15, 2012), at 21. In support of this position, the Government adds that SUFI knew its demand was unrealistic in light of the AFNAF-PO’s past rejection of an estimated $10.2 million termination for convenience settlement, which SUFI had proposed in August of 2003. Id. at 21 n. 10; see also id. at 10 ¶ 6. However, SUFI responds that (i) it provided the proposed settlement estimate only upon the AFNAFPO’s request; and (ii) the proposal did not relate to all of SUFI’s monetary claims. Pl.’s Mem. (Mar. 29, 2012), at 10. In light of the Government’s policy found in FAR § 33.204 (2011), “to try to resolve all contractual issues in controversy by mutual agreement at the contracting officer’s level,” the Court rejects the Government’s position. Penalizing a contractor for a subjectively “oversized” demand, by comparing the demand to a past settlement proposal, would discourage the contractor from proposing early settlement in the first place.
Fourth, the Government notes that SUFI did not wait for a final decision on its monetary claims before appealing to the Board. Def.’s Mem. (Mar. 15, 2012), at 21-22. However, SUFI waited more than six months for the CO to issue a final decision before filing its Board appeal as a deemed denial.
Finally, the Government submits that SUFI’s monetary claims “swelled” once before the Board from $130,308,071.53 to $162,124,658.89. Def.’s Mem. (Mar. 15, 2012), at 22; see also id. at 11-12 ¶¶ 16-17. However, SUFI responds that the $162,124,658.89 figure “inelude[s] interest, as well as revisions to principal based on record evidence and correction of errors.” Pl.’s Mem. (Mar. 29, 2012), at 11. The Court finds SUFI’s explanation credible and, therefore, rejects this argument as well.
D. The FAR Does Not Control but Provides Necessary Guidance in Applying the Common Law Test That Does Control.
“Because this is a non-appropriated funds contract, the common law applies without modification by the FAR.” Pl.’s Mem. (Feb. 13, 2012), at 5; see also FAR §§ 1.104, 2.101 (2011). Under the common law, attorneys’ fees are compensable if they are “a direct and foreseeable consequence” of the Government’s “breach of its contractual undertakings.” Mass. Bay Transp. Auth. v. United States (“MBTA”),
Notwithstanding the above, the FAR is highly relevant “as a guide” “in the absence of other guidance.” SUFI ASBCA VIII, at 168,289; In re Reidhead Bros. Lumber Mill, AGBCA No. 2000-126-1,
Moreover, the FAR would apply if the AFNAFPO were not a NAFI. In light of the Federal Circuit’s recent decision in Slattery v. United States, that distinction has become markedly less meaningful. See
Accordingly, the FAR does not control the instant dispute. Nevertheless, it provides the Court with necessary guidance in applying the common law’s MBTA/Pratt test that does control. The Court thus holds that SUFI’s attorneys’ fees claim is “a direct and foreseeable consequence” of the AF-NAFPO’s material breach.
Conclusion
For the foregoing reasons, the Court rejects both parties’ preclusion arguments pertaining to SUFI ASBCA VIII. Upon de novo review, the Court holds there is no genuine dispute that SUFI is entitled to its attorneys’ fees claim as an equitable adjustment. Therefore, the Court GRANTS SUFI’s February 13, 2012 motion for summary judgment on liability and DENIES the Government’s March 15, 2012 cross-motion for summary judgment. The parties are requested to submit a joint status report on or before Monday, July 2, 2012 describing their proposed procedures and schedule for resolving the damages portion of this case.
IT IS SO ORDERED.
Notes
. In addition to this case (No. 11-453C), another case involving the same parties and operative facts is pending before the Court (No. 11-804C). Presently, the parties are briefing cross-motions for judgment on the administrative record in case No. 11-804C. The Court issued a published opinion on January 17, 2012, in which it denied the Government’s motion to dismiss this case. See SUFI Network Servs., Inc. v. United States,
. The FAR does not apply to a government contract with a non-appropriated funds instrumentality ("NAFI”). See FAR § 1.104 (2011) ("The FAR applies to all acquisitions as defined in Part 2 of the FAR, except where expressly excluded.”); FAR § 2.101 (2011) ("Acquisition means the acquiring by contract with appropriated funds of supplies or services.”).
. In case No. 11-804C, SUFI seeks this Court's review of the ASBCA's rulings on twelve of its monetary claims, largely concerning the amount of damages that the Board awarded. See Compl. (Nov. 30, 2011), at 6-7 ¶¶ 22-23.
. The Board limited SUFI’s recovery on its employee claim only to those costs corresponding to SUFI's 22 successful monetary claims. See SUFI ASBCA VIII, at 168,290-91. This Court defers any analogous determination on SUFI’s attorneys’ fees for subsequent proceedings on damages.
. The Government agreed in the PSA to pay interest on any subsequent monetary claims that SUFI brought under the contract. SUFI CFC I,
. "A material breach does not automatically and ipso facto end a contract. It merely gives the injured party the right to end the agreement; the injured party can choose between canceling the contract and continuing it.” Cities Serv. Helex, Inc. v. United States,
. The Court defers any determinations on SUFI’s request for attorneys' fees and expenses relating to this action until the damages stage.
. The Bill Strong court limited the scope of its interpretive ruling to the former FAR § 31.205-33(d). See
. The Government cites Singer Co. v. United States for the proposition that "requests for equitable adjustment [are] not performance-related” and bear "no beneficial nexus either to contract production or to contract administration.”
.Whether SUFI’s costs are reasonable, and are allocable to the AFNAFPO’s material breach, see FAR § 31.201-2 (2011), is a question best left for the damages stage of the proceedings.