Public Contract Law Journal

Termination for Default & Entitlement to Excess Reprocurement Costs: The 2018 Dentons “Gilbert A. Cuneo” Government Contracts Moot Court Competition

by Cory Chipman & Daniel H. Ramish

Thomas E. Daley and Zachary H. Schroeder drafted the competition problem. Cory Chipman and Daniel H. Ramish authored the best overall Contractor Brief. Bryan Medema and Rachel Van Maasdam authored the best overall Government Brief. At the time of the competition, Mr. Ramish and Ms. Van Maasdam were LL.M. candidates, and Mr. Chipman and Mr. Medema were J.D. candidates at The George Washington Law School (GWLaw). The Moot Court Experiential course, a new course created to provide competitors with skills training in advocacy and legal writing, to increase their substantive understanding of government contracts case law, and to emphasize professional development, was co-taught by Chief Judge Jeri Somers, U.S. Civilian Board of Contract Appeals, and Karen D. Thornton, Director of GWLaw’s Government Procurement Law Program. GWLaw thanks its distinguished and outstanding volunteer judges for challenging and mentoring the competitors.

Cory Chipman is a Legal Fellow at Witherspoon Kelley, and a 2018 graduate of The George Washington University Law School. Daniel H. Ramish is a Government Contracts Associate at Smith Pachter McWhorter, PLC, and an LL.M. candidate at The George Washington University Law School. Any views expressed herein are the authors’ own and do not represent the views of their respective employers.

Table of Authorities

Cases

Armour of America v. United States, 96 Fed. Cl. 726 (2010)
Astro-Space Labs., Inc. v. United States, 470 F.2d 1003 (Ct. Cl. 1972)
Atkins N.A., Inc. v. United States, 106 Fed. Cl. 491 (2012)
Bass Enters. Prod. Co. v. United States, 133 F.3d 893 (Fed. Cir. 1998)
BearingPoint, Inc. v. United States, 82 Fed. Cl. 181 (2008)
California Bridge & Const. Co. v. United States, 50 Ct. Cl. 40 (1915),
aff’d, 245 U.S. 337 (1917)
Cervetto Bldg. Maint. Co. v. United States, 2 Cl. Ct. 299 (1983)
Churchill Chem. Corp. v. United States, 602 F.2d 358 (Ct. Cl. 1979)
Cincinnati Elecs. Corp. v. United States, 32 Fed. Cl. 496 (1994)
Composite Laminates, Inc. v. United States, 27 Fed. Cl. 310 (1992)
Consol. Airborne Sys. v. United States, 172 Ct. Cl. 588 (1965)
D. Moody & Co. v. United States, 5 Cl. Ct. 70 (1984)
Darwin Const. Co., Inc. v. United States, 811 F.2d 593 (1987)
DCX, Inc. v. Perry, 79 F.3d 132 (Fed. Cir. 1996)
Fairfield Scientific Corp. v. United States, 222 Ct. Cl. 167, 611 F.2d 854 (1979)
Ind. Mich. Power Co. v. United States, 422 F.3d 1369 (Fed. Cir. 2005)
J.C. Equip. Corp. v. England, 360 F.3d 1311 (Fed. Cir. 2004)
John A. Johnson Contracting Corp. v. United States, 132 Ct. Cl. 645 (1955)
Ketchikan Pulp Co. v. United States, 20 Cl. Ct. 164 (1990)
Kisco Co. v. United States, 221 Ct. Cl. 806, 610 F.2d 742 (1979)
Laguna Constr. Co. v. Carter, 828 F.3d 1364 (Fed. Cir. 2016)
Lamb Engr. & Const. Co. v. United States, 01-225 C, 2002 WL 32933387, at *10 (Fed. Cl. Aug. 26, 2002)
M. Maropakis Carpentry v. United States, 609 F.3d 1323 (Fed. Cir. 2010)
M.E.S., Inc. v. United States, 104 Fed. Cl. 620 (2012)
Marley v. United States, 423 F.2d 324 (Ct. Cl. 1970)
McDonnell Douglas Corp. v. United States, 182 F.3d 1319 (Fed. Cir. 1999)
Mega Const. Co. v. United States, 29 Fed. Cl. 396 (1993)
New York Shipbuilding Corp. v. United States, 385 F.2d 427 (Ct. Cl. 1967)
Pacific Architects & Eng’rs, Inc. v. United States, 491 F.2d 734 (Ct. Cl. 1974)
Patrick Corr & Sons v. United States, 55 Ct. Cl. 7 (1919)
Penner Installation Corp. v. United States, 89 F. Supp. 545, 116 Ct. Cl. 550,
aff’d per curiam by an equally divided court, 340 U.S. 898 (1950)
Pinckney v. United States, 88 Fed. Cl. 490 (2009)
Raytheon Co. v. United States, 747 F.3d 1341 (Fed. Cir. 2014)
Rosenberg v. United States, 76 Ct. Cl. 662 (1933)
Roxco, Ltd. v. United States, 60 Fed. Cl. 39 (2004)
Schlesinger v. United States, 182 Ct. Cl. 571 (1968)
Seaboard Lumber Co. v. United States, 48 Fed.Cl. 814 (2001)
Securiforce Int’l America, LLC v. United States, 879 F.3d 1354 (Fed. Cir. 2018)
Sys. Fuels, Inc. v. United States, 818 F.3d 1302 (Fed. Cir. 2016)
United Partition Sys., Inc. v. United States, 90 Fed. Cl. 74 (2009)
United States v. U.S. Gypsum Co., 333 U.S. 364 (1948)

Administrative Board Decisions

Asc Sys. Corp., DOTCAB No. 74-1, 78-1 BCA ¶ 13,119, aff’d, 223 Ct. Cl. 672 (1980)
Conncor, Inc., GSBCA No. 4654, 77- 2 BCA ¶ 12,857
C-Shore Int’l, Inc. v. Dep’t of Agric., CBCA No. 1696, 10-1 BCA ¶ 34,379
Disan Corp., ASBCA No. 21297, 79-1 BCA ¶ 13,677
Envtl. Tectonics Corp., ASBCA No. 21204, 78-1 BCA ¶ 12,986
Fairfield Sci. Corp., ASBCA No. 21151, 78-1 BCA ¶ 13,082, recon. denied, 78-2 BCA ¶ 13,082, aff’d in part, rev’d in part on other grounds, 222 Ct. Cl. 167, 611 F.2d 854 (1979).
Fulford Mfg., ASBCA No. 2143, et al., 1955 WL 808
Incentive Transp. Servs. Inc., PSBCA No. 5412, 09-2 BCA ¶ 34,198
Jamco Constructors, Inc., VABCA No. 3271, 94-1 BCA ¶ 26,405
Levelator Corp., VABCA No. 1069, 74-2 BCA ¶ 10,763
Mid-S. Contractors, Inc., VABCA No. 2023, 85-3 BCA ¶ 18,210
Pyrotechnic Specialties, Inc., ASBCA No. 57890, 17-1 BCA ¶ 36,696
Standard Eng’g & Mfg. Co., ASBCA No. 3733, 57-2 BCA ¶ 1477
Tom W. Kaufman Co., GSBCA No. 4623, 78-2 BCA ¶ 13,288
Tyco Air Spec Div., ASBCA No. 16534, 73-1 BCA ¶ 9951
Walsh Const. Co., ASBCA No. 52952, 02-2 BCA ¶ 32,004
Walsky Const. Co., ASBCA No. 41541, 94-2 BCA ¶ 26,698
World-Wide Dev. Co., Inc., ASBCA No. 16608, 73-2 BCA ¶ 10,140

Statutes and Regulations

28 U.S.C. § 1295
28 U.S.C. § 1491
41 U.S.C. § 609
48 C.F.R. § 1.602
48 C.F.R. § 19.602-1
48 C.F.R. § 52.249-8
48 C.F.R.§ 49.402–3

Miscellaneous

Air Force Instruction (AFI) 11-202V3, Exceptions to the 12-Hour Minimum Crew Rest Periods, ¶ 2.1.3 (Oct. 5, 2017), available at http://static.e-publishing.af.mil/production/1/afdw/publication/afi11-202v3_afdwsup/afi11-202v3_afdwsup.pdf
Azmat Khan & Anand Gopal, The Uncounted, N.Y. Times, Nov. 16, 2017, https://www.nytimes.com/interactive/2017/11/16/magazine/uncounted-civilian-casualties-iraq-airstrikes.html
Civilian Casualties and Collateral Damage, Lawfare, https://www.lawfare blog.com/civilian-casualties-collateral-damage (last visited Mar. 18, 2018)
How to Become a UAV Pilot with Customs and Border Protection, Border Patrol.edu

IN THE UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT

DRONE CRUISE ENTERPRISE, INC.,
Appellant.
v.
Heather Wilson, SECRETARY OF THE AIR FORCE,
Appellee.

APPEAL FROM THE UNITED STATES COURT OF FEDERAL CLAIMS IN NO. 18-1184C, JUDGE RANDOLPH

BRIEF FOR THE APPELLANT CORY CHIPMAN
 

STATEMENT OF RELATED CASES

Drone Cruise Enterprise, Inc. (DCE) is not aware of any related cases.
 

JURISDICTION

The jurisdiction of the Court of Federal Claims was invoked under 28 U.S.C. § 1491(a)(2). On March 1, 2018, DCE timely appealed from the trial court’s final judgment of February 15, 2018. This Court has jurisdiction over this appeal under 28 U.S.C. § 1295(a)(3).
 

STATEMENT OF THE ISSUES

1.   Whether the Court of Federal Claims (“COFC,” “court below,” or “trial court”) erred in affirming the default termination of DCE’s contract when the unchallenged facts demonstrate that the Government’s decision to terminate for default was motivated by a desire to protect the reputation of the Air Force, rather than by contract performance.
2.   Whether the court below erred in affirming the default termination because the record shows that the Government failed to exercise independent judgment and make a termination decision on the merits guided by the pertinent factors prescribed in the Federal Acquisition Regulation (FAR).
3.   Whether the court below properly denied the Government excess costs of reprocurement for failure to mitigate damages based on an excessive thirteen-month delay in reprocurement that dramatically increased costs.
4.   Whether the court below properly denied the Government excess costs of reprocurement for failure to mitigate damages because the Contracting Officer (“CO”) refused to consider DCE’s proposal, when that proposal represented by far the lowest priced offer, submitted by a presently responsible incumbent with excellent performance ratings, and when the preceding termination was based on the actions of one former employee.
5.   Whether the court below erred in finding that the reprocurement contract was sufficiently similar to the original contract to support assessment of excess costs, when the reprocurement contract doubled the amount of pilot experience required and increased the number of pilots required to perform the work by fifty percent.

STATEMENT OF THE CASE

I.  Nature of the Case

This case is about an excellent-rated contractor that was terminated for default following an isolated mistake by a single rogue employee. Government officials ordered the CO to penalize the contractor to avoid further negative media coverage of the Government’s own mistakes.

This case is not a referendum on the U.S. policy on drone warfare. Targeted drone strikes have killed many enemy combatants who sought to do grievous harm to our nation and her people, but also have resulted in hundreds of accidental civilian deaths.1 The New York Times recently reported that one in five targeted drone strikes in Iraq resulted in civilian death.2 There may be a policy debate to be had about the proper parameters for the use of drone strikes, but for the time being, drones are a vital national security tool used by the Air Force.

Contractors like DCE are essential partners for the Air Force, helping to address the shortage of qualified pilots in recent years. Order at 2. After DCE had an “excellent” first year of contract performance that “exceeded expectations,” on one summer night in 2014 an Air Force drone strike went awry. Id. at 6. The Air Force commanding officer forcefully ordered DCE’s support pilot to violate the contract, take the controls, and shoot the target, which resulted in the death of two Afghan civilians. Id. at 6 - 7.

When the Wall Street Journal subsequently ran an article critical of the Government’s accountability and oversight in the drone strike, a Senator and General ordered the CO to harshly penalize DCE to change the media narrative to portray the Air Force as the party enforcing the rules, rather than the one breaking them. Id. at 7.

DCE appeals the COFC’s decision upholding the CO’s default termination of its contract. The lower court’s legal conclusion with respect to the validity of the termination is plainly inconsistent with its factual findings regarding the Government’s decision to terminate the contract for default.

The record demonstrates that the Government’s termination decision was motivated by a desire to protect the reputation of the Air Force and its drone program, rather than by DCE’s performance under the contract. Id. at 7 - 8. No Government officials investigated or discussed DCE’s contract performance before the CO decided to terminate the contract for default. Id.

Furthermore, the CO did not independently exercise discretion in light of the factors in the FAR, but merely followed the General’s order to terminate “immediately.” Id. The record reflects that the token meeting to discuss the default termination and the cursory review of DCE’s response to the cure notice were a charade, with a predetermined outcome. Id. The CO told the General he would follow orders and terminate DCE’s contract “regardless of the firm’s position or response” after issuing the cure notice, and he was true to his word. Id. at 7 - 9. DCE respectfully requests that the trial court’s decision upholding the default termination be overruled and that the termination be converted to one for the convenience of the Government.

The Government cross-appeals the trial court’s decision denying its assessment of excess costs of reprocurement against DCE for failure to mitigate damages. The court held that the Government’s thirteen-month delay   in awarding the reprocurement contract was manifestly unreasonable and greatly increased costs, citing the prejudicial effects of the changes to the Government’s retention bonus program and its influence on the availability of qualified pilots. Id. at 26.

The court also found that the Government failed to mitigate by unreasonably refusing to consider DCE’s proposal for the reprocurement. DCE was presently responsible when its proposal was submitted, was found to be exceptionally well qualified by the source selection committee, and had by far the lowest price. Id. at 10 - 11. The court further found the only impediment to future compliant performance was resolved, because the termination was based on the actions of one employee who was subsequently fired. Id. at 27. With only two offers, the court ruled that the Government was unreasonable in failing to negotiate with DCE. Id. at 28. The court’s denial of excess costs was therefore just and well founded, and DCE asks this Court to affirm.

The trial court did rule that the reprocurement contract was sufficiently similar to the original contract to have supported assessment of excess costs. However, the facts in the record show that the reprocurement contract actually was materially different because it required twice as much pilot experience and mandated shorter shift limits, increasing the number of pilots required to perform the work by fifty percent. Id. at 11 - 12. The changes to the Government’s retention bonus program contributed to these material differences because the increased retention reduced the pool of available pilots to hire and increased costs. Id. at 10, 16. Thus, in the alternative, excess costs should be denied, or substantially reduced, because the reprocurement contract was not sufficiently similar to the original.

II.  Course of Proceedings & Disposition Below

The Air Force terminated DCE’s contract for default on August 6, 2014. Id. at 9. On October 30, 2017, the Air Force assessed excess costs of reprocurement against DCE, and the final decision pertaining thereto was issued on November 5, 2017. Id. at 13.

DCE timely appealed to the COFC. The court ruled that the CO had not abused discretion in terminating DCE’s contract for default, but denied the Government’s assessment of excess costs of reprocurement. DCE timely appealed to this Court. Id. at 15 - 16.

SUMMARY OF THE ARGUMENT

“Fly the damn drone and forget the bureaucratic bullshit.” Id. at 6 - 7. That was the repeated demand of Colonel Nathan Jessup on July 10, 2014, right before he ordered the shot that claimed the lives of two Afghan civilians.    Id. But those words also exemplified the Air Force’s attitude about orders, and proper legal procedure, in the termination decision that followed. After appropriately applying the Fulford doctrine to exercise jurisdiction, the Court of Federal Claims erred when it sustained the default termination, because the Government’s termination decision was defective substantively and procedurally. In terminating DCE’s contract for default, the CO followed the improper orders of his superiors, rather than following the requisite procedures to make a decision on the merits of the case.

It is axiomatic that the Government may only decide to terminate a con- tract for default on the basis of the contractor’s performance of the contract. McDonnell Douglas Corp. v. United States, 182 F.3d 1319, 1326 (Fed. Cir. 1999). Where the Government has an ulterior motive in terminating a contract for default, that is substantively improper as a matter of law. See id.

The factual findings of the court below demonstrate that the Government improperly terminated DCE’s contract for default to protect the public image of the Air Force and its programs, and not on the basis of contract performance. Order at 7. The ACO’s initial response after the events of July 10 was to have DCE continue performance. Id. The Senator and General intervened because of a Wall Street Journal article critical of the Air Force’s lack of accountability and oversight. Id. They wanted to “come down hard” on DCE to change the media narrative, so that DCE “took the blow” instead of the Air Force. Id.

When the ACO committed to the General to terminate the contract for default, the record reflects that neither the Senator, nor the General, nor the ACO had discussed or investigated the contractor’s alleged performance failure. Id. at 7 - 8. Thus, DCE’s contract performance could not possibly have been the real basis for the default termination. Therefore, the termination decision was an abuse of discretion, and the trial court’s failure to vacate the default termination was legal error.

In addition to the substantive requirement to terminate a contract for a valid contract-related reason, the Government also has the  responsibility to make an independent decision on the merits to terminate a contract for default, in accordance with the pertinent factors specified in the FAR. Fairfield Scientific Corp. v. United States, 611 F.2d 854, 862 (Ct. Cl. 1979).

Here, the General ordered the ACO to terminate the contract, and the ACO followed that order “immediately.” Order at 7 - 8. He made the decision to terminate for default on the General’s order, with no deliberation. Id. at 8. Then he went through the motions of considering the FAR requirements after the fact, with a perfunctory forty-five minute meeting. Id. He followed that action with a cure notice, but ignored the contractor’s efforts to cure, as he had told the General he would. Id. at 8 - 9. These facts compel the legal conclusion that the termination decision was procedurally indefensible, and that the court below erred in holding otherwise and must be reversed.

The Government’s efforts to “come down hard” on DCE to deflect media attention from its own mistakes extended to the assessment of excess costs of reprocurement as well. And the CO was no more attendant to the legal requirements for that claim.

The court below correctly denied the Government the excess costs of reprocurement, because the Government failed to mitigate its damages as it was required to do. See Marley v. United States, 423 F.2d 324, 332 (Ct. Cl. 1970). Where the Government had rushed through the termination decision when a more thorough and intensive deliberation was called for, on the reprocurement the CO inexplicably and inexcusably took thirteen months to award the new contract, during which period a new Air Force retention policy went into effect that reduced the supply and increased the market rate of pilots. Order at 26. Then the CO willfully disregarded DCE’s responsible, exceptionally qualified and low-priced proposal. Id. at 27. As a result, the Government unreasonably paid a $7 million price premium for services for which DCE had received an excellent service rating, which costs the court below rightly resisted shifting to the contractor. Id. at 11, 28.

In the alternative, the trial court erred in failing to acknowledge the legal significance of the material changes to the reprocurement contract. See Rosenberg v. United States, 76 Ct. Cl. 662, 679 (1933). The combination of doubling the years and hours of pilot experience, increasing the number of pilots necessary
to perform the Contract, and decreasing the number of qualified pilots available in the private sector, created substantial and material differences between the original contract and reprocurement contract. Order at 10, 11 - 12. Even if the Government’s failure to mitigate did not make assessment of excess costs altogether unwarranted, the changes the Air Force chose to make in the reprocurement requirement account for much of the extra reprocurement costs the Air Force experienced, and cannot rightly be assigned to DCE.

ARGUMENT

I.  Standard of Review

The Court reviews the COFC’s findings of law de novo. Sys. Fuels, Inc. v. United States, 818 F.3d 1302, 1305 (Fed. Cir. 2016). Factual findings by the court below will only be overturned if they are clearly erroneous. Bass Enters. Prod. Co. v. United States, 133 F.3d 893, 895 (Fed. Cir. 1998). Thus, findings of fact will stand unless the Court “on the entire evidence is left with the definite and firm conviction that a mistake has been committed.” United States v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948); Ind. Mich. Power Co. v. United States, 422 F.3d 1369, 1373 (Fed. Cir. 2005).

II.  The Court of Federal Claims Properly Applied the Fulford Doctrine to Exercise Jurisdiction to Review the Termination Decision

Appellant filed its appeal on January 2, 2018, well within the statutory one- year period from the November 5, 2017, CO final decision on excess costs of reprocurement and was therefore timely. 41 U.S.C. § 609(a)(3) (2012).

The trial court properly exercised jurisdiction to review the Air Force’s decision to terminate the Appellant’s contract for default on the basis of the Fulford doctrine. Under Fulford, courts and boards have long interpreted the FAR Default clauses to permit timely challenge of a default termination either following the termination or following the subsequent assessment of excess costs of reprocurement. Fulford Mfg., ASBCA No. 2143, et al., 1955 WL 808.

The Armed Services Board of Contract Appeals (ASBCA) expanded the doctrine beyond challenges based on excusability in Fairfield Scientific Corp., finding jurisdiction “without regard to the theory upon which the default termination is challenged.” ASBCA No. 21151, 78-1 BCA ¶ 13,082, 63,905, recon. denied, 78-2 BCA ¶ 13,082, aff’d in part, rev’d in part on other grounds, 222 Ct. Cl. 167, 611 F.2d 854 (1979). This court’s predecessor, the Court of Claims, chose not to reject the doctrine when it had the opportunity to do so. Id. The Boards of Contract Appeals continue to apply the doctrine consistently. See, e.g., C-Shore Int’l, Inc. v. Dep’t of Agric., CBCA No. 1696, 10-1 BCA ¶ 34,379, at 169,740; Incentive Transp. Servs. Inc., PSBCA No. 5412, 09-2 BCA ¶ 34,198, at 169,006.

The COFC applied the doctrine in D. Moody & Co. v. United States, after the enactment of the Contract Disputes Act of 1984 (CDA). 5 Cl. Ct. 70, 75 – 77 (1984). The Court explained that Fulford is not contrary to the statutory time frames provided in the Act, but rather clarifies when the appeal period for the Default clause starts for purposes of the Act and the Disputes clause. Id. at 75 - 76. Challenges to the propriety of the termination decision simply become ripe at two different times under the Default clause (i.e., after termination and upon assessment of excess costs). Id. at 75. More recent COFC decisions demonstrate the enduring viability of the doctrine. See, e.g., Roxco, Ltd. v. United States, 60 Fed. Cl. 39, 47 (2004); M.E.S., Inc. v. United States, 104 Fed. Cl. 620, 635 (2012).

The application of the Fulford doctrine is essential for reasons of judicial economy. The assessment of excess costs of reprocurement dramatically changes the financial ramifications of a default termination. If contractors only were permitted to appeal when the termination decision is issued, many appeals would be filed needlessly, as a precaution against excess costs that might never materialize. Giving contractors a second opportunity to challenge the termination in the event that excess costs are assessed allows them to make informed and efficient decisions about appeals, both at the time of default termination and when reprocurement costs are assessed. Further- more, fairness dictates that contractors be afforded the opportunity to assert all applicable defenses to the imposition of excess costs of reprocurement, including challenging the validity of the underlying termination if that was not previously challenged.

This Court has not previously ruled on the use of the Fulford doctrine, except to distinguish its use in connection with excess costs of reprocurement from its use on claims unrelated to the termination for default, to decline to extend the doctrine. See J.C. Equip. Corp. v. England, 360 F.3d 1311, 1318 - 19 (Fed. Cir. 2004).

Notably, the Court’s decision in M. Maropakis Carpentry v. United States, 609 F.3d 1323, 1331 (Fed. Cir. 2010), and its progeny, including the recent decision in Securiforce International v. United States, 879 F.3d 1354 (Fed. Cir. 2018), do not affect the exercise of jurisdiction under the Fulford doctrine in this case.

In accordance with Maropakis, claims asserted as defenses, like other claims, must be presented to the CO as a prerequisite to the exercise of CDA jurisdiction by the court or boards. 609 F.3d at 1331; Raytheon Co. v. United States, 747 F.3d 1341, 1354 (Fed. Cir. 2014). Not all defenses constitute claims. Laguna Constr. Co. v. Carter, 828 F.3d 1364, 1368 (Fed. Cir. 2016). Defenses are only claims requiring presentation to the CO if they seek “the payment of money . . . [or] the adjustment or interpretation of contract terms.” Id. Otherwise, “the CO has no necessary role in assessing the defenses.” Securiforce, 879 F.3d at 1362 - 63.

DCE’s contention that the Government’s termination for default decision was improper is a true defense and not a claim, because DCE seeks neither money damages, nor an adjustment or interpretation of the contract. See id. at 1363. The requested remedy is that the termination of DCE’s contract be converted to one for the convenience of the government. That result would prevent the Government from assessing excess costs of reprocurement, and DCE might be entitled to convenience termination settlement costs in a separate, future claim. But successful prosecution of the defense would not itself result in the payment of money or an equitable adjustment to the contract and would not entail an interpretation of the contract terms.

Similarly, DCE’s challenges to the excess costs of reprocurement are plainly not claims. Again, none of the defenses DCE put forward would entitle the company to money damages or a contract adjustment. Instead, the only remedy would be to reduce or avoid having to pay excess costs to the Government. Therefore, based on this court’s holding in Laguna, DCE’s defenses need not have been subject to a CO final decision for the COFC to properly exercise jurisdiction under the CDA and consider them. See 828 F.3d at 1368. For the foregoing reasons, this Court should affirm the trial court’s decision to apply the Fulford doctrine to allow the challenge to the propriety of the default termination.

III.  The Court of Federal Claims Erred in Upholding the Default Termination Despite Fatal Substantive & Procedural Deficiencies

The trial court’s decision to uphold the default termination of DCE’s con- tract must be overturned because it is contrary to the well-established body of law governing abuse of discretion by contracting officials. The termination decision was substantively improper because it was motivated not by the contractor’s performance under the contract, but by the Government’s desire to protect the public image of the Air Force and its programs. The termination decision was also procedurally improper because the Government did not make an independent decision on the merits consistent with the pertinent factors and requirements imposed by the FAR.

The Government is not required to terminate the contractor upon a  default, but has the discretion to do so. Sol O. Schlesinger v. United States, 390 F.2d 702, 707 (Ct. Cl. 1968). The Government must be “fair and reasonable” in the exercise of discretion. Darwin Const. Co., Inc. v. United States, 811 F.2d 593, 597 (Fed. Cir. 1987). If the termination decision is found to have been arbitrary and capricious, or an abuse of discretion, the decision will be set aside. Schlesinger, 390 F.2d at 710.

In its seminal decision in McDonnell Douglas, this Court reinforced the longstanding substantive rule that a termination decision that lacks a “reasonable, contract-related basis” is arbitrary and capricious and an abuse of discretion. 182 F.3d at 1326.

Procedurally, if the Government fails to make a decision on the merits in accordance with the requirements of pertinent regulations, that supports a finding that the termination decision was an abuse of discretion. Darwin Const. Co., Inc., 811 F.2d at 597. Though the Court’s decision in McDonnell Douglas did not turn on procedural error in the termination decision, the Court alluded to the fact that, in accordance with settled law regarding abuse of discretion by government officials, “whether [an] official violated an applicable statute or regulation” is another factor that may demonstrate that a decision was arbitrary and capricious. McDonnell Douglas Corp., 182 F.3d at 1326.

A.  The Termination Decision Was Improper As a Matter of Law Because It Lacked a Proper Basis in Contract Performance

The record demonstrates that the Government’s termination decision, ordered by Senator Archer and General Weinberg and acknowledged by ACO Hammaker, was made to protect the reputation of the Air Force and its drone program, without investigation into, or consideration for, DCE’s performance under the contract. Order at 7 - 8. The undisputed facts compel the legal conclusion that the termination was improper.

This Court held in McDonnell Douglas that the Schlesinger decision and the associated line of cases stand for the proposition that when there is no proper nexus between the termination decision and the contractor’s performance under the contract, the termination for default is arbitrary and capricious and an abuse of discretion. McDonnell Douglas Corp., 182 F.3d at 1326 (interpreting Schlesinger v. United States, 390 F.2d 702 (Ct. Cl. 1968); Darwin Const. Co., Inc., 811 F.2d at 596; see John A. Johnson Contracting Corp. v. United States, 132 F. Supp. 698, 706 (Ct. Cl. 1955).

In each earlier case, this Court noted an underlying motivation for default termination that was unrelated to contract performance: congressional pressure, Schlesinger, 390 F.2d at 708; a desire to “rid the Navy of having to deal with [the Contractor],” Darwin Const. Co., Inc., 811 F.2d at 596; advice from counsel “legal complications might ensue” if it was a nondefault termination, John A. Johnson Contracting Corp., 132 F. Supp. at 706. By contrast, in McDonnell Douglas, the termination decision was motivated by concerns about the contractor’s inability to satisfy contract requirements, perform at the specified price, and meet the schedule — factors directly related to contract performance. McDonnell Douglas Corp., 182 F.3d at 1328–29.

The Court of Claims decision in John A. Johnson Contracting Corp. is particularly instructive because of the factual similarities to this case. 132 F. Supp. 698 at 705. There, the contracting officer had intended to terminate the contract for the convenience of the government. Id. When government lawyers intervened and advised that legal complications would ensue from a convenience termination, the contracting officer terminated the contract for default instead. Id. at 706.

The Johnson court held that the CO’s decision to terminate for default based on the consequences to the Government of terminating the contract for convenience “did not represent his judgment as to the merits of the case,” but was a “decision arrived at for an irrelevant reason.” Id. The court ruled that the default termination was a “nullity,” because the contracting officer’s decision was “shaped by ulterior motives, looking toward the possible or probable legal consequences of that decision.” Id.

Here, the public relations consequences of the termination decision were an irrelevant and improper reason to terminate the contract for default. When the shot ordered by Colonel Jessup and fired by Mr. Santiago resulted in civilian casualties, the contracting officer’s initial reaction was to have DCE continue performance under the contract, with no consideration for termination of any kind. Order at 6 - 7.

Then the Wall Street Journal released an article two days later that was critical of the Government for its lack of accountability and oversight in the administration of the drone program. Id. at 7. The Air Force was susceptible to such criticism, because its commanding officer had ordered the contractor to violate the contract, and because there had not been a second supervising serviceman present, as the contract required. Id. at 4, 6 - 7. Out of a clearly articulated concern for the Air Force’s reputation, and the grave harm to the drone program that would result if the Government’s behavior received additional publicity from a Congressional investigation, Senator Archer approached General Weinberg, and the General, in turn, approached ACO Hammaker, ordering termination of DCE’s contract. Id. at 7.

None of the communications between the Senator and the General, or the General and the ACO, discussed the contractor’s performance under the contract at all, or whether the contractor had violated the contract terms. Id. at 7 - 8. The Government’s primary source of information in the two days following the shot appears to have been the newspaper article. Id. at 7. There is no evidence in the record that the Senator or General or ACO reviewed the contract documents or made inquiries with project staff prior to the ACO’s commitment to terminate the contract for default in response to the General’s order. Thus, as in Johnson, the CO’s decision to terminate the contract for default was manifestly not based on the merits of the case, but was motivated by the desire to avoid adverse consequences to the Government, irrespective of the contractor’s performance under the contract. See John A. Johnson Contracting Corp., 132 F. Supp. at 706.

The trial court overlooked its own factual findings in reaching its decision to uphold the termination for default, because the court was looking only at potential ulterior motives that predated the alleged default (as in Schlesinger), and therefore missed that the intervening improper motivation related to after-the-fact concerns about the consequences of the termination decision (as in Johnson). Order at 18 - 19. The record reflects that the Government’s decision to terminate for default was not based on DCE’s contract performance. Id. at 7. Therefore, as a matter of law, the default termination was an abuse of discretion and must be converted to a termination for the convenience of the Government. McDonnell Douglas Corp., 182 F.3d at 1326.

B.   Termination Was Improper As a Matter of Law Because the Government Failed to Exercise Discretion in Accordance with Applicable Regulations

That the Air Force decided to terminate DCE’s contract to protect its reputation was intrinsically improper, and sufficient to nullify the decision. But the improper motivation also displaced the Government’s consideration of the termination decision in accordance with the procedural requirements of applicable regulations, as reinforced in the case law, further preventing the exercise of discretion necessary for a valid termination for default.

It is settled law that “a proven violation of an applicable statute or regulation may be enough to show that . . . conduct was arbitrary and capricious.” U. S. Fid. & Guar. Co. v. United States, 676 F.2d 622, 630 (Ct. Cl. 1982). The CO is required to consider pertinent factors listed at FAR 49.402-3(f) in determining whether to terminate a contract for default. Pyrotechnic Special- ties, Inc., ASBCA No. 57890, 17-1 BCA ¶ 36,696, at 178,698. The CO must exercise independent judgment in applying those factors in the termination decision. Id. A proper termination decision must not merely address whether termination for default is legally permissible, but must weigh default termination against other courses of action. See FAR 49.402-3(a); Mid-S. Contractors, Inc., VABCA No. 2023, 85-3 BCA ¶ 18,210, at 91,398.

For default terminations based on other contract provisions, the CO must also issue a cure notice and afford the contractor an opportunity to cure prior to termination. FAR 49.402-3(d); FAR 52.249-8(a)(2); Composite Laminates, Inc. v. United States, 27 Fed. Cl. 310, 317 (1992). The CO must consider whether the contractor’s response to the cure notice cures any default in deciding whether to terminate the contract for default. See FAR 49.402-3(f)(1) - (2).

1.   The CO Did Not Consider the Relevant Factors Prescribed in the FAR

The FAR specifies seven factors that the CO “shall consider” in determining whether to terminate a contract for default, including “[t]he terms of the contract and applicable laws and regulations,” “[t]he specific failure of the contractor and the excuses for the failure,” and “other pertinent facts and circumstances.” FAR 49.402-3(f). Failure to make a decision on the merits in light of the FAR factors constitutes an abdication of discretion. Fairfield Scientific Corp., 611 F.2d at 862. The exercise of discretion requires “more than a pro forma check off” of the referenced factors; it should include “an active and reasoned consideration.” Jamco Constructors, Inc., VABCA No. 3271, 94-1 BC A ¶ 26,405, at 131, 361.

This Court held in DCX, Inc., v. Perry that “[a]lthough compliance or non- compliance with section 49.402-3(f) may aid . . . in determining whether a contracting officer has abused his discretion in terminating a contract for default,” the FAR factors “are not prerequisites to a valid termination.” 79 F.3d 132, 135 (Fed. Cir. 1996). In essence, the decision in DCX stands for the proposition that “harmless technical defects in an otherwise proper default termination do not require automatic conversion to a termination for convenience.”

BearingPoint, Inc. v. United States, 82 Fed. Cl. 181, 182 (2008); see also United Partition Sys., Inc. v. United States, 90 Fed. Cl. 74, 88-89 (2009).

The Court found in DCX that “the termination contracting officer’s contemporaneous memorandum and hearing testimony demonstrate[d] that he [had] addressed the pertinent regulatory factors and found that they did not counsel against termination.” 79 F.3d at 145 (emphasis added). That he had not considered every factor was a mere technicality that did not invalidate the termination.

In this case, none of the FAR factors was meaningfully considered contemporaneous with the termination decision, and pertinent factors never were considered at all. The court below erred as a matter of law in concluding that the procedural requirements for default termination prescribed in the FAR were satisfied. The court held that the ACO “adhered to the procedures required by FAR 49.402.3(a) and met with [the CO and counsel] to discuss the appropriate course of action” and that his “actions after [the] meeting . . . demonstrate that he considered the factors listed in FAR 49.402-3(f).” Order at 18 - 19.

However, the court’s uncontested factual findings do not support its legal conclusions. The ACO’s meeting and his consideration of the FAR factors occurred only after he had already decided to terminate the contract for default. Id. at 7 - 8. The ACO’s decision was made when he acknowledged the General’s order to terminate and said he would terminate for default irrespective of DCE’s position and response to the cure notice. Id. Altering his decision after that point would mean disobeying his General’s order and going back on his word.

The plain language of the FAR requires that the Government “decide which type of termination action to take . . . only after review . . . [of the] propriety of the proposed action.” FAR 49.402-3(a) (emphasis added). Likewise, the FAR factors are required to be considered “in determining whether to terminate a contract for default.” FAR 49.402-3(f) (emphasis added).

For the CO to have firmly committed to terminate a contract for default before undertaking any review is highly irregular. Indeed, it is so extraordinary that there do not appear to be any decisions of government contracts tribunals addressing these circumstances. However, the COFC has found significant the use of the past tense in the FAR’s requirement for a termination memorandum. Armour of America v. United States, 96 Fed. Cl. 726, 750 (2010). Because FAR 49.402-5 states the CO’s termination memo must describe “the reasons for the action taken,” the court held that “[u]nlike certain other requirements in the FAR, it therefore appears permissible, albeit poor practice, to write the justification . . . after the fact.” Armour of America, 96 Fed. Cl. at 750.

The same logic would compel the opposite conclusion here. The Government was required to exercise judgment in light of the FAR factors prior to, or at least contemporaneous with, the decision to terminate for default. Though the CO need not have considered every factor, he was required to consider all relevant factors. Pyrotechnic Specialties, Inc., ABSCA No. 57890, 17-1 BCA ¶ 36,696, at 178,698. Failure to consider any of the factors in a meaningful way was clearly improper. Walsky Constr. Co., ASBCA No. 41541, 94-2 BCA ¶ 26,698, at 26,698.

The record illustrates that the ACO’s subsequent superficial, post hoc deliberation was staged to support the decision that had already been made. The meeting discussing default termination of the four-year, $22.5 million contract took just forty-five minutes: one minute for each $500,000. Order   at 3, 8. The cure notice went out the following day. Id. at 8. As the Court observed of the CO in Schlesinger, who hurried to terminate the contractor for default at the bidding of a Congressional Subcommittee without deciding on the merits, “speed was demanded and quick action taken.” 390 F.2d at 709. The General had ordered the ACO to terminate “immediately,” and that is what he did, without meaningful regard for the factors or procedures required by the FAR. Order at 7 - 8.

There is also no evidence in the record that the CO even paid lip service to the potential excuses for DCE’s performance failures. The CO notably failed to consider whether the Government’s actions, including the Colonel’s repeated orders to fire and the failure to provide a second supervisor — both contrary to the contract requirements — caused or otherwise excused any DCE default associated with firing the shot. See, e.g., Pinckney v. United States, 88 Fed. Cl. 490, 506 (2009) (noting that a default is excusable where “improper government actions were the primary or controlling cause of the default”); FAR 49.402-3(f)(2) (“The contracting officer shall consider . . . [t] he specific failure of the contractor and the excuses for the failure.”). Thus, the unchallenged facts demonstrate the CO failed to consider the pertinent factors prescribed in the FAR in making the decision to terminate the contract for default, which is an abuse of discretion that invalidates the default termination. See Fairfield Scientific Corp., 611 F.2d at 862.

2.   The CO Did Not Exercise Independent Judgment

FAR 49.402-3(f) reflects the distinct role of the CO in the termination decision, explicitly stating that it is the CO who “shall consider” the factors specified in determining whether to terminate a contract for default. 48 C.F.R. § 1.602, FAR 49.402-3(f). The CO may of course consult with other government officials in the decision-making process, provided that “in the end he [puts] his own mind to the problems and [renders] his own decisions.” Pacific Architects & Engineers, Inc. v. United States, 491 F.2d 734, 744 (Ct. Cl. 1974). The CO may not “merely rubber-stamp[ ] a subordinate’s or superior’s findings.” Atkins N. Am., Inc. v. United States, 106 Fed. Cl. 491, 500 (2012) (quoting N.Y. Shipbuilding Corp. v. United States, 385 F.2d 427, 435 (Ct. Cl. 1967)). It is an abuse of discretion if “the [CO] was improperly influenced . . . to terminate the contract for default rather than . . . exercise his own independent judgment in the light of the factors set out in the regulations.” Fairfield Scientific, 611 F.2d at 862.

The CO’s exercise of personal and independent judgment in the decision to terminate for default is essential, because the CO has a different role from other officials who may be involved. In addressing disputes under a contract, the CO “must not act as a representative of one of the contracting parties, but as an impartial, unbiased judge.” Penner Installation Corp. v. United States, 89 F. Supp. 545 (Ct. Cl. 1950), aff’d per curiam by an equally divided court, 340 U.S. 898 (1950). Under the FAR, the CO has the responsibility to “ensure that contractors receive impartial, fair, and equitable treatment.” FAR 1.602-2(b). Other government officials have no such duty.

The facts in the record show that ACO Hammaker was just following the General’s orders and did not use his personal and independent judgment in terminating DCE’s contract for default. General Weinberg expressly ordered that DCE’s contract be terminated immediately, circumventing the ACO’s decisional process and imposing the outcome. Order at 7.

If there was any lingering doubt about whether the ACO would nevertheless stay impartial, follow the proper procedures, and render his own decision, it was dispelled when the ACO told the General that he would terminate DCE’s contract regardless of how the firm responded to the cure notice. Id. at 7 - 8. The response to a cure notice is an opportunity for the contractor to resolve the default, or to demonstrate that performance failures were excusable. Lamb Engr. & Const. Co. v. United States, 01-225 C, 2002 WL 32933387, at *10 (Fed. Cl. Aug. 26, 2002). Here, there were excuses for DCE’s performance (see supra section i), and DCE would act to cure the default (see infra section iv). But the ACO in effect told the General that he would follow orders and terminate DCE for default regardless of whether the firm was even in default at the end of the cure period. That constitutes an “abdication rather than an exercise of . . . discretion.” Fairfield Scientific Corp., 611 F.2d at 862.

3.   The CO Did Not Weigh Alternative Actions

FAR 49.402-3 dictates that “[w]hen a default termination is being considered, the Government shall decide which type of termination action to take (i.e., default, convenience, or no-cost cancellation).” FAR 49.402-3(a) (emphasis added). The CO’s decision to terminate a contract for default “inherently requires consideration of a termination for convenience of the Government. . . .” Cincinnati Elecs. Corp. v. United States, 32 Fed. Cl. 496, 505 (1994) (citing FAR 49.402-3(a)). In the event that “alternatives are not considered, [if] default is believed mandated rather than a discretionary act, [it] should not be sustained.” Mid-S. Contractors, Inc., VABCA No. 2023, 85-3 BCA ¶ 18,210, at 91,399.

In its McDonnell Douglas decision, in support of its finding that the Government had properly “terminated the A-12  program  for  reasons  related to contract performance,” this Court stressed that the CO had “testified at length about his decisional process that led to the termination for alleged default.” 182 F.3d at 1327. The CO described his careful consideration of what he viewed as his “three choices: to terminate for convenience, to terminate for default, or to do nothing.” Id.

By contrast, in the Court of Claims decision in Schlesinger, in ruling that “discretion was never exercised” and that the Government had “surrendered its power of choice,” the court emphasized that the Government “acted as if it had no option but to terminate for default.” 390 F.2d at 708. There was “no consideration of a possible waiver or an extension, no weighing of a convenience-termination instead of a default-termination”; the Government’s only interest was whether it could “legally terminate the contract for default at [that] time.” Id.

In this case, in response to General Weinberg’s order, ACO Hammaker acted as if he had no option but to terminate the contract for default. Order   at 7 - 8. There is no evidence in the record that he weighed potential alter- native courses of action, which included continuing performance, terminating the contract for the convenience of the Government, or opting not to exercise the remaining options on the contract when the first option period expired two and a half months later. In the ACO’s forty-five minute meeting with the CO and Air Force counsel, the only  consideration  was  whether or not the termination was “appropriate” — that is, whether it was legally defensible. Id. at 8. Finding it was, the ACO sent the cure notice the very next day. Id.

Because the CO’s failure to consider any alternative but default termination demonstrates his lack of discretion in the termination “decision,” the court below erred as a matter of law in upholding the default termination, and the termination must be vacated. Schlesinger v. United States, 182 Ct. Cl. 571, 581-83, 585 (1968).

4.   The CO Did Not Give DCE the Required Opportunity to Cure

The contract and the FAR provide that a cure notice and opportunity to cure are preconditions to any termination on the basis of failure to perform other contract provisions. FAR 49.402-3(d); FAR 52.249-8(a)(2). The FAR factors also require the CO to review whether the contractor has cured any performance failure. See FAR 49.402-3(f)(1)-(2) (requiring consideration of “the terms of the contract,” and “the specific failure of the contractor and the excuses for the failure”). If the Government fails “to provide the notice and opportunity to cure when required,” that “[renders] a default termination procedurally defective.” Composite Laminates, Inc., 27 Fed. Cl. at 317 (citing Kisco Co. v. United States, 221 Ct. Cl. 806, 821, 610 F.2d 742, 751 (1979)).

The Court of Claims held in Cervetto Building Maintenance Co. v. United States that “[w]hen an irrevocable decision to terminate is made before the end of the cure period, and a contractor’s timely efforts to cure are ignored, the termination is improper.” 2 Cl. Ct. 299, 303 (1983). In that case, the CO decided to terminate the contract for default following an inspection tour    the day before the final day of the cure period and signed the termination notice the morning of the final day. Id. at 301. The contractor had sent a letter responding to the cure notice, describing efforts to cure, including significant personnel changes. Id. at 303.

The court found that the CO had made the final decision the evening of the inspection and, in so doing, impermissibly had ignored the contractor’s efforts to cure in the final day and night, and that there was also substantial doubt whether the CO considered the contractor’s letter. Id. In overturning the default termination, the court held that the fatal flaw was not the “timing of the decision to terminate,” but that, in making the decision, “the defendant [had not] considered all of the contractor’s efforts to comply with the cure notice.” Id. at 302 - 03.

Here, ACO Hammaker’s final decision was made before the cure notice was even sent, when he told his superior that he would terminate for default regardless of DCE’s position or response to the cure notice. Order at 7 - 8. DCE made significant efforts to cure, including briefing all employees on the importance of complying with Section C.6 of the contract, and removing the employee responsible, Mr. Santiago, from the project. Id. at 8. By contrast, Colonel Jessup, who ordered the shot, appears from the record to have continued to support the drone program after the incident based on his November 18, 2014, email, urging that the reprocurement move forward as quickly as possible. Id. at 9. There is also no indication in the record that the Government conducted training, or took any other remedial action to address its failures to uphold its obligations under the contract that contributed to the incident.

The CO’s termination decision made the conclusory statement that the contractor had failed to cure the conditions cited in the cure notice, with no acknowledgment whatsoever of DCE’s cure efforts. Id. There is therefore no reason not to take the CO at his word that he would have terminated the   firm for default “regardless of [its] position or response.” Id. at 7 - 8. Thus, the default termination was improper and must be converted to a termination for convenience. Cervetto Bldg. Maint., 2 Cl. Ct. at 303.

In sum, the Government terminated DCE’s contract for default to protect its public image, and not because of the contractor’s performance of the con- tract. The Government did not consider the factors prescribed in the FAR. The Government did not render an impartial and independent decision,  or weigh alternative courses of action. It did not even give DCE a genuine opportunity to cure. The termination decision was final and effectively irrevocable when the CO acknowledged the General’s order to terminate. Though the Government went through the motions of reviewing the decision after the fact, default termination was a foregone conclusion. For all of these reasons, the termination decision was arbitrary and capricious and an abuse of discretion and must be overturned.

IV.  The Court Below Properly Rejected the Government's Claim for the Claim for the Excess Costs of ReprocurementBecause the Government Failed to Mitigate Damages, but Erred in Finding that the Reprocurement Contract Was Sufficiently Similar to the Original Contract

The court below properly rejected the Government’s claim for excess costs because the Air Force failed to meet its burden to mitigate its damages when it delayed the reprocurement for thirteen months. Order at 26. The court below found the Government further failed to mitigate damages by ignoring DCE’s reprocurement proposal, which was not only “exceptionally qualified and well suited to meet the Air Force’s requirements,” but over $3.5 million less per year than Guantanamo Drones’ proposal. Id. at 11, 26. The Government’s delay, and exclusion of DCE from the reprocurement, resulted in an inefficient reprocurement with an unreasonable price that may not be fairly or legally assessed against DCE.

The court below erred, however, in finding the Air Force’s reprocurement contract was similar enough to the original contract to support assessment of excess costs of reprocurement. The reprocurement contract included three significant new terms. First, the reprocurement contract required employees to maintain a pilot’s license for two years instead of the original contract’s one- year requirement. Id. at 11 - 12. Increasing pilot qualifications increased costs and made finding and retaining pilots more difficult. Id. at 23. Second, the reprocurement contract shortened maximum work shifts from twelve hours to eight hours. Id. at 4, 12. Shortened shifts increased the number of required pilots by at least fifty percent and increased both fixed and variable costs. Id. at 23. Third, the Government issued the reprocurement contract after increasing retention bonuses for Air Force pilots. Improved Air Force retention made it more expensive to find and retain pilots. Id. at 26. Therefore, the reprocurement contract contained provisions that materially changed the item reprocured from the original contract and resulted in increased costs that DCE should not be required to bear.

A.  The Government Failed to Mitigate Damages by Unreasonably Delaying the Reprocurement

This Court reviews the legal conclusions of COFC de novo and its factual findings for clear error. Guardian Angels Med. Serv. Dogs v. United States, 809 F.3d 1244, 1247 (Fed. Cir. 2016) (citing Sikorsky Aircraft Corp. v. United States, 773 F.3d 1315, 1322 (Fed. Cir. 2014)).

“As a matter of law, the Government may not sustain a claim for excess reprocurement costs after failing to conduct a timely and reasonable procurement.” M.E.S., Inc., 104 Fed. Cl. at 638 (citing Marley v. United States, 423 F.2d 324, 333 (Ct. Cl. 1970)). The Government bears the burden of proving that the reprocurement occurred within a reasonable period of time. Disan Corp., ASBCA No. 21297, 79-1 BCA ¶ 13,677, at 67,087 (finding that the Government failed to meet its burden because the CO took seven months to reprocure supplies at an unreasonable cost); see also Rumley v. United States, 285 F.2d 773, 777 (1961) (affirming an ASBCA decision that six months’ delay was unreasonably long and further reducing a 44% increase in price to 29% because of the delay). Whether a delay is reasonable depends on the facts and circumstances of each procurement. Astro-Space Labs., Inc. v. United States, 470 F.2d 1003, 1018 (Ct. Cl. 1972).

The CO must procure replacement services within a reasonable time at a reasonable price. In re Walsh Constr. Co. of Ill., ASBCA No. 52952, 02-2 BCA ¶ 32,024, at 158,284. A particular period of time, even nine months, is not sufficient in itself to show unreasonable delay. See Conncor, Inc., GSBCA No. 4654, 77-2 BCA ¶ 12,857, at 62,575. The delay must harm the contractor. Id. A substantial change in or increased cost for the items procured may indicate an unreasonable delay. Armour of America, 96 Fed. Cl. at 766. Furthermore, the Government may not charge a contractor for excess reprocurement costs arising from unexplained delay and internal agency debate. Asc Sys. Corp., DOT- CAB No. 74-1, 78-1 BCA ¶ 13,118, at 64,140, aff’d, 223 Ct. Cl. 672 (1980).

Here, the Government failed to conduct a timely and reasonable procurement and therefore failed to meet its burden to issue the reprocurement in a reasonable timeframe. See Disan Corp., ASBCA No. 21297, 79-1 BCA ¶ 13,677, at 67,087. The delay here was unreasonable like the delay in Disan, which lasted seven months without explanation and cost over 190% more than the defaulted contract. See id. Here, the delay lasted thirteen months and cost over sixty percent more than the original contract. The delay harms DCE because changes in the Air Force retention program increased costs for contracts of this kind. Such increases took place after the signed contracting officer, CO Ross, testified that he would have completed the reprocurement. Order at 25. The increase in price harms DCE because the changed circumstances from delay both contributed to Guantanamo Drones higher proposal price and limited DCE’s proposal as the defaulted contractor when DCE “could have done [the job] for almost half [Guantanamo’s] price.” Id. at 13.

The court below noted that CO Markinson “offered only vague statements as to what difficulties he had understanding the drone industry,” id. at 24 - 25 n.9, and that “CO Markinson’s top priority was not reprocuring the contract.” Id. It also recognized that the CO’s delay injured DCE because “[d]uring [the] delay, the Air Force substantially increased its retention bonuses, and,  in effect, limited the amount of available qualified pilots contractors could employ.” Id. at 26.

CO Markinson’s inexplicable delay is like the internal agency debates in Asc. Sys. Corp.; there, the Federal Aviation Administration (FAA) delayed reprocurement because of internal dysfunction and tried to push increased costs from that delay onto the defaulting contractor. Asc Sys. Corp., DOT- CAB No. 74-1, 78-1 BCA ¶ 13,118, at 64,140. There, the Board held that the Government’s internal problems and their consequences vitiated the reprocurement levy. Id. Here, the Air Force delayed reprocurement because of CO turnover and internal priority disagreements and is trying to push increased costs from that delay onto DCE. The court below correctly vitiated the reprocurement levy of any excess costs of reprocurement because the protracted delay and higher price show that the Government failed “to conduct a timely and reasonable reprocurement.” M.E.S., Inc, 104 Fed. Cl. at 638.

B.  The Government Failed to Mitigate Damages by Refusing to Consider DCE’s Reprocurement Proposal

While the Government has no duty to work with the original contractor on the reprocurement contract, see Ketchikan Pulp Co. v. United States, 20 Cl. Ct. 164, 167 (1990), the defaulted contractor may be awarded the reprocurement if it is “responsible and capable of performance. ” Churchill Chem. Corp. v. United States, 602 F.2d 358, 364 (Ct. Cl. 1979). However, a defaulted contractor may not receive more than the initial contract price for performing the reprocurement. Id.

The CO ultimately is responsible for procuring services at the rate most advantageous for the Government. Standard Eng’g & Mfg. Co., ASBCA No. 3733, 57-2 BCA ¶ 1,477, at 5064. “Whether the contracting officer acted reasonably, under the circumstances of a particular reprocurement, is a question of fact.” Lassiter v. United States, 60 Fed. Cl. 265, 270 (2004) (internal citations omitted).

Failure to mitigate damages during the reprocurement precludes the agency from obtaining any excess costs of reprocurement. See Tom W. Kaufman Co., GSBCA No. 4623, 78-2 BCA ¶ 13,287, at 65,020 (finding a failure to mitigate damages when a CO excluded the defaulted contractor from the reprocurement because the contractor would have been the most suitable and readily available to perform). Excluding a suitable, yet previously defaulted contractor, may constitute a failure to mitigate damages. Id. Therefore, failing to mitigate damages by excluding a responsible and responsive defaulted contractor from the reprocurement prevents the Government from levying reprocurement costs. See World-Wide Dev. Co., ASBCA No. 16608, 73-2 BCA ¶ 10,140, at 47,685 (holding that the government cannot collect reprocurement costs after automatically excluding the defaulted contractor where the contractor could finish the option and satisfactorily cure the default to provide a substantial part of the required performance). But see Tyco Air Spec Div., ASBCA No. 16534, 73-1 BCA ¶ 9951, at 46,681 (holding that a defaulted contractor with a higher price may be excluded from a reprocurement).

Here, like the contractor in Churchill Chem. Corp., DCE was presently responsible, capable of performing the work, and submitted the lowest price. 602 F.2d at 364. Furthermore, unlike that contractor, DCE’s proposal contained no disqualifying defects. Id. CO Markinson must have found DCE presently responsible, because under FAR 19.602-1(a), a nonresponsibility determination for a small business requires the CO to refer the matter to the Small Business Administration (SBA) for its review, and the potential issuance of a Certificate of Competency. FAR 19.602-1(a). There is no indication in the record that the CO referred this matter to the SBA.

While CO Markinson had broad discretion to select a contractor that would provide services at the rate most advantageous to the Government, see Standard Eng’g & Mfg. Co., ASBCA No. 3733, 57-2 BCA ¶ 1,477, at 5064, his only justification for paying an additional $3.5 million a year for Guantanamo Drones’ services was its “superior past performance record.” Order at 11. However, like the contractor in Tom W. Kaufman, who, despite a valid default termination, performed satisfactorily and offered qualifying, identical items in the reprocurement, DCE received excellent performance reports and had previously performed the services requested in the reprocurement. Id. at 6. There, the GSBCA found it “unreasonable” for the CO not to ensure that the contractor had an opportunity to receive the reprocurement. Tom W. Kaufman Co., GSBCA No. 4623, 78-2 BCA ¶ 13,287, at 65,020. Here, this Court should find it unreasonable that DCE was not given the opportunity to receive the reprocurement contract simply because the CO felt DCE had a deficient performance record.

CO Markinson did not disclose the contractors’ past performance records, but appears to have relied solely on the government-ordered actions of a single, former DCE employee. Order at 11. Excluding DCE on these grounds was clear error, was unreasonable, and resulted in a failure to mitigate damages.

The facts here are less like Tyco and more like the contractor in World-Wide Development Co. who offered the lowest price and could have finished the option period and satisfactorily cured the default. See ASBCA No. 16717, 74-1 BCA ¶ 10,474, at 49,526. Similarly, DCE offered the lowest price and could have finished the option period and did cure the alleged default by removing Santiago from the original contract. Whereas Tyco involved a higher priced incumbent, World-Wide, like DCE, was a lower-priced and qualified incumbent. Id. There, the Board ruled that the government could not “collect premium reprocurement costs after . . . excluding the defaulted contractor.” Id. at 49,527. Here, this Court should affirm that the Government cannot collect $7,178,500 from DCE after it rejected DCE’s much cheaper and qualified proposal. Therefore, DCE should not be held responsible for any of the excess costs of reprocurement arising from the reprocurement contract.

C.  The Reprocurement Contract Was Not Sufficiently Similar to the Original Contract

As discussed above, COFC correctly decided the facts surrounding and applied the law underlying the Government’s failure to act reasonably to mitigate its damages. Order at 26 (“[T]he Government did not sustain its burden of proving that it reprocured the drone services within a reasonable period of time.”). On the other hand, COFC incorrectly applied the law concerning the similarity of the services between the original and reprocurement contracts because it failed to consider the combined effect of all three changes on the reprocurement contract.

The Government bears the burden of demonstrating entitlement to excess costs of reprocurement. Cascade Pac. Int’l v. United States, 773 F.2d 287, 293-94 (Fed. Cir. 1985). The Government may impose excess costs of reprocurement only when “(1) the reprocured supplies are the same as or similar to those involved in the termination; (2) the Government actually incurred excess costs; and (3) the Government acted reasonably to minimize the excess costs resulting from the default.” Id. at 294 (emphasis added) (citations omitted).

The Government demonstrates similarity by “comparing the item repro- cured with the item specified in the original contract.” Id. (citing Environmental Tectonics Corp., ASBCA No. 21204, 78-1 BCA ¶ 12,986). The Government demonstrates incurred costs by “what it spent in reprocurement.” Id. (citing Fairfield Scientific Corp., 611 F.2d at 863-66). And the Government demonstrates reasonableness by “act[ing] within a reasonable time of the default, us[ing] the most efficient method of reprocurement, obtain[ing] a reasonable price, and mitigate[ing] its losses.” Id. (citing Astro-Space Laboratories, Inc., 470 F.2d at 1018). Failure to meet each condition waives the Government’s entitlement to excess costs of reprocurement. See id.

Only after the Government shows that reprocured services meet these similarity, cost, and reasonableness requirements does the contractor bear the burden of showing the prejudicial effects any changes had on the new con- tract’s price. See Seaboard Lumber Co. v. United States, 48 Fed. Cl. 814, 822 (2001) (holding that the government bore and met its burden of demonstrating it acted reasonably because it complied with contract terms to calculate damages).

Reprocured items or services are not substantially similar to the original specifications if unreasonable changes in cost or quantity occur between the original and reprocurement contracts. See Consol. Airborne Sys. v. United States, 348 F.2d  941, 947 (Ct. Cl. 1965) (holding that a reduction in the quantity    of repurchased contract articles was a variation or deviation within the CO’s discretion and that such discretion was reasonably exercised). Higher quality standards, see Rosenberg, 76 Ct. Cl. at 679 (1933), superior products, Patrick Corr & Sons v. United States, 55 Ct. Cl. 7, 27-31 (1919), or substantial alterations, Cal. Bridge & Constr. Co. v. United States, 50 Ct. Cl. 40, 64-65 (1915), aff’d, 245 U.S. 337 (1917), make the contracts substantially dissimilar and prohibit the Government from recovering those unreasonable increases in cost. See, e.g., Cal. Bridge & Constr., 50 Ct. Cl. at 65.

Unreasonable increases in cost are the product of all changes in the reprocurement. See, e.g., id. (holding that the reprocurement was not substantially similar to the original contract because of all four deviations combined). The Government can only charge the defaulted contractor the fair market value at the time of default and cannot impose the added costs attributable to changes in the reprocurement “which were over and above those in the original contract.” Levelator Corp., VABCA No. 1069, 74-2 BCA ¶ 10,763, at 51,182 (remanding to the contracting officer to reduce the excess cost assessment by the fair market value, at the time of default, of the three extra items in the reprocurement purchase order); see also Mega Constr. Co. v. United States, 29 Fed. Cl. 396, 487 (1993) (“As an alternative to finding that the repurchase was made at market value or costs, the court may make findings that the reprocurement prices and circumstances, including the method of reprocurement, were reasonable.”).

1.   The Reprocurement Contract’s Two-Year Pilot’s License Requirement Was Material and Substantially Increased Contract Price

Here, CO Ross’s decision to double the pilot-license requirement imposed a heightened standard that substantially altered and increased the costs of employing new pilots. Order at 23. Like the specifications requiring weight, texture, and tensile strength substantially changed the original specifications in Rosenberg, doubling the pilot-license requirement from one to two years substantially changes the skill level and pay requirements of pilots. 76 Ct. Cl. at 679.

Unmanned Aerial Vehicles (UAVs) require extensive experience to operate. For example, United States Customs and Border Protection (CBP) requires 1,500 hours of flight time to meet the minimum qualifications as a UAV pilot.3 While flight hours were not specified in either the original or reprocurement contracts, the court below found that doubling pilot experience excluded nearly twenty percent of DCE’s previously qualified pilots. Order at 22. While that court found DCE would not have incurred any additional costs based solely on replacing two pilots, the court below failed as a matter of law to con- sider all changes combined. Cal. Bridge & Constr. Co., 245 U.S. 337, 344 (1917) (finding the reprocurement was not substantially similar in part because, while three changes actually reduced reprocurement costs, costs increased when combined with a fourth change). Combined with the other changes, the reprocurement contract is substantially dissimilar from the original contract.

2.   The Reprocurement Contract’s Eight-Hour Maximum Shift Requirement Was Material and Substantially Increased Contract Price

In addition to doubling the pilot-license requirement, CO Ross also reduced the shift hours that pilots could work. Order at 12. Decreasing the number of hours a pilot may work consecutively increases the number of shifts that the contractor must fill. More shifts require hiring more pilots. Increasing the number of shifts is similar to the reprocurement in Patrick Corr & Sons, which demanded a higher percentage of white threads. 55 Ct. Cl. at 31. There, the court held that cotton waste was substantially similar to the product required by the defaulted contract, but the superior grade cotton in the reprocurement contract was substantially different in quality because of its higher quality and price. Id. at 27.

Here, increasing the number of shifts by fifty percent4 increases the number of pilots necessary to fill those shifts, especially in light of safety recommendations that require pilots to have at least ten hours of down time for every duty shift.5  Such safety restrictions limit a contracted pilot to working only one eight-hour shift in a twenty-four hour period. Like the superior grade cotton in Patrick Corr & Sons, 55 Ct. Cl. at 27, the reprocurement contract purchased a superior product at a higher price through increased pilot attentiveness during shorter additional shifts. The reprocurement contract requires fifty percent more pilots to fill the fifty percent more shifts. Not only would a contractor need to hire more pilots, but this change would combine with the flight experience requirement and lead to higher “administrative and overhead costs.” Order at 23. The Government cannot push these upgrade costs onto DCE.

3.   Providing Retention Bonuses Substantially Increased the Performance Costs of the Reprocurement Contract

The court below recognized that the increase in retention bonuses also increased costs of performance. Id. at 26 (“[T]he Air Force substantially increased its retention bonus and, in effect, limited the amount of available qualified pilots contractors could employ.”). The Air Force’s decision to offer retention bonuses is the kind of substantial alteration described in California Bridge & Construction Co. See 50 Ct. Cl. at 64. There, the Supreme Court decided that changes in the contract constituted a substantial alteration because the Government altered building specifications, entered four different contracts, and sustained a six percent cost increase because of the changes. See Cal. Bridge & Constr. Co., 337 U.S. at 344. The lower court feared that allowing such alterations would allow any sort of changes or alterations after a declared breach. Cal. Bridge & Constr. Co., 50 Ct. Cl. at 65. That court held that “[w]hen the Government took over the work and let a new contract, its rights and those of the original contractor were fixed by the law applicable to the rights and liabilities then existing.” Id.

Here, this Court should find that changes in the reprocurement contract constituted a substantial alteration because the Government doubled employment experience requirements, increased the number of employees necessary by fifty percent, and decreased the number of employees available in the market. These three differences kept the reprocurement from being substantially similar and allotted unreasonable reprocurement costs to DCE. See, e.g., id.

Furthermore, the amount of increased cost exceeds the fair market price   at the time of default, in part due to the Government’s delay in reprocuring the services. Order at 26. The court below failed as a matter of law to apply this fair market standard, see Levelator Corp., VABCA No. 1069, 74-2 BCA ¶ 10763, at 51,182, and, therefore, on this issue, the Court should remand to COFC to reduce the excess costs by the fair market value of the three changes from the original contract. Id.

The facts here are more similar to Levelator than Mega Construction because the reprocurement was not sufficiently similar to the original contract. Com- pare id. at 51,181, with Mega Constr. Co., 29 Fed. Cl. at 491. Levelator involved three specification changes that increased costs above the original fair market price, VABCA No. 1069, 74-2 BCA ¶ 10763, at 51,182, whereas Mega Construction involved a delay of five months with no changes in specifications. 29 Fed. Cl. at 491. Here, the Government delayed thirteen months, required a higher number of more experienced pilots, and increased performance costs by causing a scarcity of available pilots. Order at 26. Therefore, on this issue, this Court should remand to COFC for proper calculation of excess costs.

Conclusion

For the reasons given above, DCE respectfully requests that the Court sustain the decision of the court below with respect to the Fulford Doctrine and excess costs of reprocurement, and reverse with respect to the default termination.

Respectfully submitted,

Cory A. Chipman
Trial Attorney

Daniel H. Ramish
Trial Attorney

March 18, 2018
Attorneys for Appellant

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  1. Civilian Casualties and Collateral Damage, LAWFARE, https://www.lawfareblog.com/civilian-casualties-collateral-damage [https://perma.cc/LD52-T4S2] (last visited Mar. 18, 2018). Independent estimates of civilian death rates vary widely, but by many accounts nearly ten percent of those killed in drone strikes are civilians; some estimates are as high as thirty-four percent. Id.
  2. Azmat Khan & Anand Gopal, The Uncounted, N.Y. Times (Nov. 16, 2017), https://www.nytimes.com/interactive/2017/11/16/magazine/uncounted-civilian-casualties-iraq-airstrikes.html.
  3. How to Become a UAV Pilot with Customs and Border Protection, BorderPatrolEdu, https://www.borderpatroledu.org/become-uav-pilot/ [https://perma.cc/3PNW-K67U] (last visited Aug. 15, 2018).
  4. Where the original contract required two twelve-hour shifts, the new contract requires three eight-hour shifts. Going from two to three shifts is a fifty percent increase.
  5. Air Force Instruction (AFI) 11-202V3, Exceptions to the 12-Hour Minimum Crew Rest Periods, ¶ 2.1.3 (5 Oct. 2017) available at http://static.e-publishing.af.mil/production/1/afdw/publication/afi11-202v3_afdwsup/afi11-202v3_afdwsup.pdf (“For continuous operations when basic aircrew FDPs are between 12 to 14 hours, subsequent crew rest may be reduced to a minimum of 10 hours by the PIC in order to maintain a 24-hour work/rest schedule.”).