Public Contract Law Journal

Drone Cruise Enterprises, Inc. v. United States Air Force - Brief for the Appellee

by Bryan Medema & Rachel Van Maasdam

Rachel Van Maasdam is a 2018 graduate of the LL.M program at The George Washington University and an active-duty Judge Advocate in the United States Air Force, currently serving as the Chief of the Contract Law Field Support Center at Andrews Air Force Base. Bryan Medema is a 3L at The George Washington University Law School. Any views expressed herein are the authors’ own and do not represent the views of their respective past or present employers.

Table of Authorities

Federal Cases

Armour of America v. United States, 96 Fed. Cl. 726 (2010)
Associated Traders, Inc v. United States, 144 Ct. Cl. 744, 751 (1959)
Astro-Space Labs., Inc v. United States, 470 F.2d 1003 (Ct. Cl. 1972)
Cascade Pac. Int’l v. United States, 773 F.2d 287 (Fed. Cir. 1985) passim
Churchill Chem. Corp. v. United States, 602 F.2d 358 (Ct. Cl. 1979)
Composite Laminates v. United States, 27 Fed. Cl. 310, 326 (1992)
Consol. Airborne Sys., Inc. v. United States, 172 Ct. Cl. 588 (1965)
Darwin Const. Co. v. United States, 811 F.2d 593 (Fed. Cir. 1987)
DeVito v. United States, 188 Ct. Cl. 979, 413 F.2d 1147 (1969)
Fairfield Sci. Corp. v. United States, 222 Ct. Cl. 167 (1979)
Lassiter v. United States, 60 Fed. Cl. 265, 270 (2004)
McDonnell Douglas Corp. v. United States, 35 Fed. Cl. 358, 368 (1996)
Mega Constr. Co. v. United States, 29 Fed. Cl. 396, 484 (1993)
Roxco Ltd. v. United States, 60 Fed. Cl. 39 (2004)
Schlesinger v. United States, 182 Ct. Cl. 571, 581 (1968)
Seaboard Lumber Co. v. United States, 48 Fed. Cl. 814, 819 (2001)
United States v. Axman, 234 U.S. 36 (1914)
Whitlock Corp. v. United States, 159 F. Supp. 602 (Ct. Cl. 1958)

Board Decisions

Fulford Mfg. Co. v. United States, ASBCA No. 2143, et al., 1955 WL 808 (May 20, 1955) passim
Lafayette Coal Co., ASBCA No. 32174, 89-3 BCA 21,963
Marmac Indus., Inc., ASBCA No. 12158, 72-1 BCA P9249

Statutes & Regulations

28 U.S.C. § 1491(a)(2)
28 U.S.C. § 1295(a)(3)
FAR 49.402-2(a), 48 C.F.R. 49.402-2
FAR 49.402-3, 48 C.F.R. 49.402-3 passim
FAR 49.402-6, 48 C.F.R. 49.402-6
FAR 52.249-8, 48 C.F.R. 52.249-8 passim

IN THE UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT

DRONE CRUISE ENTERPRISE, INC.,
Appellant
v.

UNITED STATES AIR FORCE
Appellee

APPEAL FROM THE COURT OF FEDERAL CLAIMS IN NO. 18-1184C
BRIEF FOR THE APPELLEE

STATEMENT OF RELATED CASES

We know of no other appeal in or from this action that previously was before this Court or another appellate court under the same or similar title, and we know of no appeals before this Court that may directly affect or be affected by the decision in this appeal.

STATEMENT OF JURISDICTION

The Court of Federal Claims (COFC) had jurisdiction under 28 U.S.C. § 1491(a)(2) (2012). The court entered final judgment on January 31, 2018. The Government filed its notice of appeal on February 1, 2018, as did cross appellants Drone Cruise Enterprise, Inc. (DCE). This Court properly has jurisdiction under 28 U.S.C. § 1295(a)(3) (2012).

STATEMENT OF THE ISSUES

1.   Termination for Default: Whether the COFC properly found the termination for default entered against DCE by the United States Air Force (“Government”) was proper and not an abuse of discretion by the Con- tracting Officer (CO).

2.   Excess Reprocurement Costs: Whether COFC properly found the Government was not entitled to excess reprocurement costs as a result of alleged lack of mitigation on the part of the Government.

STATEMENT OF THE CASE

The Air Force terminated its contract with DCE for default on August 6, 2014. Order at 9. DCE did not appeal the termination at that time or at any subsequent time prior to this appeal; DCE now brings both an appeal for the termination for default and the assessment of reprocurement costs. After a hearing conducted in January 2018, COFC ruled in part for the Government, finding the termination for default proper, but that reprocurement costs were not owed. DCE timely appealed to this Court. Id. at 1.

SUMMARY OF THE ARGUMENT

The COFC erred when it found the Government’s decision to terminate DCE’s contract for default was within the scope of review. COFC incorrectly applied the Fulford doctrine because, in both Fulford and similar cases, the relevant issue was the lack of monetary interest at the point of termination. Fulford Mfg. Co. v. United States, ASBCA No. 2143, et al., 1955 WL 808, at 15.  Here, however, the Government’s decision to terminate the contract cost DCE either slightly less or significantly more than the amount in controversy sought for reprocurement, as described further below.

Alternatively, COFC correctly sustained the default termination. In deciding to terminate DCE’s contract, Administrative Contracting Office (ACO) Hammaker considered the relevant criteria for termination as outlined in FAR 49.402-3 and followed all necessary procedural steps. Order at 9. Further, while ACO Hammaker received direction to terminate the contract, he nonetheless acted with the requisite diligence and selected the method of termination (i.e., default), demonstrating the necessary independence for a termination for default determination to stand.

COFC incorrectly found the Government was not entitled to excess costs of reprocurement. COFC determined that the Government failed to mitigate its damages and unreasonably delayed in reprocuring the drone services DCE provided prior to defaulting on its contract. Id. at 23 – 24. DCE’s contention that the Government failed to take the necessary steps in reprocuring services is, at a minimum, without legal or factual basis to uphold COFC’s decision.

The Government took all appropriate and timely steps to reprocure drone services in an efficient, cost-effective, and appropriate manner. In doing so, the Government did make changes to the requirements, as legally allowed, id. at 21, 23, and precluded award to DCE on the basis of unsatisfactory past performance, as legally allowed. Id. at 26 – 27. The resulting reprocurement contract was significantly more expensive than the contract with DCE, resulting in the actual additional expenses incurred and now sought by the Government.

The Government experienced personnel turnover mid-reprocurement, which accounts for the passage of time. During that turnover, the Government consistently worked on reprocuring new services, which undermines any argument that the delay was unreasonable. Moreover, DCE suffered no prejudice as a result of any perceived unreasonable delay as evidenced by the fact that they submitted a bid on the reprocurement contract at a price that was exactly the same as the bid on their initial contract.

STATEMENT OF THE FACTS

In August 2012, the Air Force awarded Contract No. H722642-11-C-0002 (“the Contract”) to DCE, a service-disabled veteran-owned small business. Id. at 1 – 2. DCE was a twelve-employee operation, providing drone operations sup- port from a pool of former Air Force pilots, drone pilots, and commercial pilots. Id. at 2. The Contract required all DCE pilots have pilots’ licenses, a Federal Aviation Administration Medical Third Class certificate, a Bachelor’s Degree, and a minimum one year of experience or equivalent training with unmanned aircraft systems and remotely piloted aircraft systems. Id. at 5. The Contract was valued at $5,640,750 for one year, with three one-year option periods, for a maximum total value of $22,563,000. Id. at 3. The base period of performance began October 1, 2012, and concluded on September 30, 2013. Id.

The Contract required DCE to provide intelligence, surveillance, and recon- naissance support at Creech Air Force Base in Indian Springs, Nevada, using two drone platforms. Id. at 2 – 3. The non-combat platform, the MQ-9 Carolina reaper, provided reconnaissance support and was piloted by two DCE employees with one Air Force supervisor. Id. at 3. The Contract required DCE to provide four employees, seven days a week, with maximum shifts of twelve hours on this platform. Id. at 4. The second platform, the B/MQ-7 Predator Prime Drone, was a reconnaissance platform with a multispectral targeting system, capable of employing two Hellfire anti-armor missiles. Id. The Predator platform was supported by one DCE employee operating an imagery control system, while an Air Force servicemember piloted the drone and operated the payload console. Id. The Contract prohibited DCE employees from operating either the piloting or payload systems on the Predator. Id. at 5. The Contract required DCE to provide three employees per day, seven days a week, for maximum shift lengths of twelve hours on this platform. Id. at 4. DCE executed the first year of the Contract successfully and the CO rated DCE favorably. Id. at 5 – 6. The Government exercised DCE’s first option on September 2, 2013. Id. at 5.

On July 10, 2014, Air Force Colonel Nathan Jessup ordered DCE employee William Santiago and Air Force Major Loudon Downey to provide air support for an ongoing operation. Id. at 6. At 0815, Maj Loudon Downey set the drone to autonomous piloting and took a break, while Santiago stayed at the imagery console. Id. Shortly after, Santiago identified the target they had been monitoring. Id. Col. Jessup ordered Santiago to take control of the payload console and prepare to fire; Santiago, knowing the terms of the Contract regarding payload, initially hesitated before yielding. Id. at 6 – 7. At 0817, Col. Jessup received positive identification of the target and ordered Santiago to fire a Hellfire missile. Id. at 7. Santiago did so, in violation of the Contract terms; the target was destroyed but the missile also killed two civilian bystanders in the process. Id.

On July 12, 2014, two days later, the Wall Street Journal published an article on the incident. Id. The Chairman of the United States Senate Committee on Armed Services strongly advised Air Force Vice Chief of Staff, General Sam Weinberg to terminate the Contract with DCE. Id. Afterwards, General Weinberg contacted ACO Carl Hammaker and advised him to terminate the Contract. Id. ACO Hammaker then met with CO Jonathan Ross and Air Force counsel JA Preston to discuss the contract, and General Weinberg was not present. Id. at 8. After a forty-five-minute meeting, the three agreed that termination for default was the best course of action. Id. On July 13, 2014, ACO Hammaker mailed a typewritten cure notice to DCE stating the Government was considering terminating the Contract for default due to DCE’s “failure to satisfy ‘other provisions’ of the Contract” under FAR 52.249-8 (a) (1)(iii) and that the Government might terminate the Contract if DCE did not cure the problem within ten days. Id.

On July 16, 2014, the Chief Executive Officer of DCE and DCE’s general counsel met to discuss their course of action. Id. On July 21, 2014, DCE responded that they could not correct a past action but that Santiago had been removed from the Contract and the company. Id. On August 6, 2014, ACO Hammaker terminated the Contract for failure to comply with Contract Section C.6 and stated DCE had ninety days to appeal the decision to the agency board of contract appeals or twelve months to bring action in the COFC. Id. at 9. DCE elected not to pursue further action. Id.

On October 9, 2014, CO Matthew Markinson replaced CO Ross, and continued his work reprocuring the drone support contract. Id. On July 20, 2015, CO Markinson issued a solicitation for a reprocurement contract, with proposals due on August 31, 2015. Id. at 10. Two firms — DCE and Guantanamo Drones, LLP — submitted proposals; DCE’s submission was identical in price to its original proposal from years earlier. Id. at 11. On September 13, 2015, CO Markinson awarded the Reprocurement Contract to Guantanamo Drones for a yearly value of $9,230,000. Id.

After one year, the Reprocurement Contract was renewed. Id. at 12. After its completion, Termination Contracting Officer (TCO) Kenneth Kendrick recommended that it was in the Government’s best interest to assess the excess costs of the Reprocurement Contract to DCE, for a total of $7,178,500. Id. On October 30, 2017, CO Markinson sent DCE a letter demanding payment; DCE refused to pay any of the cost. Id. at 13.

On November 5, 2017, TCO Kendrick issued a CO’s final decision formally demanding payment of the requested reprocurement costs. Id. DCE filed suit on January 2, 2018, challenging the propriety of the termination for default and the assessment of excess costs. Id. COFC found the termination for default was proper but that the Government was not entitled to the excess costs of reprocurement. Id. at 1.

ARGUMENT

I.   ACO Hammaker Did Not Abuse His Discretion in Terminating DCE for Default

Termination for default is an extraordinary sanction that the government should not apply unless circumstances require it. See DeVito v. United States, 413 F.2d 1147, 1153 (Ct. Cl. 1969). In penalizing contractors with contract forfeiture, the government levies a harsh penalty for failure to comply with terms of the agreed contract. See id. (stating the government is “lenient” in granting extensions for performance because “it is more interested in production than in litigation”). Therefore, the decision to terminate a contract for default inherently invites scrutiny and, as part of the notice process, grants the contractor the opportunity to challenge the method of termination.

In the instant case, ACO Hammaker terminated the Contract with DCE by following correct procedures and ensured DCE had the opportunity to file a timely appeal. Order at 9. This included properly applying guidelines set forth in the FAR, as well as correctly exercising his discretion when he terminated the Contract. FAR 49.402-3. First and foremost, we ask that this Court reverse COFC’s determination that this case was subject to review in the first instance; alternatively, we ask this Court to find that ACO Hammaker followed proper procedure in terminating the Contract with DCE for default.

A.  COFC Erred in Determining That the Termination of DCE’s Contract Was Subject to Review

COFC committed reversible error when it determined the method of termination of DCE’s contract was subject to review beyond the one-year appeal period outlined in the notification letter. Order at 9. Specifically,  COFC relied on the Fulford doctrine in reaching its decision. Order at 14 – 15. In short, the Fulford doctrine allows contractors to reset the appeals timeframe, allowing them to delay an appeal on the method of termination until a significant monetary interest has been established. Fulford Mfg. Co. v. United States, ASBCA No. 2143, et al., 1955 WL 808, at 15. In the instant case, the application of the Fulford doctrine allowed DCE to delay their appeal on the termination for default until the final decision on the reprocurement costs, which was delivered on November 5, 2017. Order at 15–16. While the application of the Fulford doctrine in COFC is discretionary, this Court can distinguish the instant case because DCE had a substantial monetary interest at the time of termination, not merely at the point reprocurement costs were assessed. In sum, it was the termination that gave DCE grounds to appeal based on the original ninety-day deadline requiring their claim for review be dismissed as untimely.

In its decision, COFC cites to Fulford and Roxco Ltd. v. United States, to justify the review extension in the instant case. Roxco, Ltd. v. United States, 60 Fed. Cl. 39 (Fed. Cl. 2004); Order at 15. The Court incorrectly relied upon Roxco because in that case, at the point of termination, there was no monetary interest outside of the equitable adjustment of costs. Roxco, Ltd., 60 Fed. Cl. at 43 – 44. This distinguishes it from the instant case because, unlike in Roxco, DCE had a substantial monetary interest at the point of termination. Order at 3. The original contract issued to DCE was valued at a total of $22,563,000, or $5,640,750 per year. Id. At the point of termination, just two of the four possible years into the Contract, DCE had received $11,281,500, leaving more than $11,281,500 left unclaimed. Id. at 9. Given DCE had received favorable ratings in Contract execution, and CO Ross stated he would give DCE the Contract for at least a third year but for the default, it stands that DCE had a monetary interest of between $5,640,750 and $11,281,500 at the point of termination. Id. at 6. In Roxco, the construction company had no financial interest beyond the equitable adjustment costs. 60 Fed. Cl. at 43 – 44. DCE, however, had a substantial monetary interest at the point of termination and should therefore not receive the benefit of Roxco. See Order at 3.

As noted in COFC’s decision, the purpose of applying the Fulford doctrine to contract appeals cases is to prevent both the contractor and government from litigating an issue in which they have only a nominal monetary interest. Order at 15. As the monetary interest being disputed by DCE in the instant case totals $7,178,500, which is either two million dollars more or four million dollars less than the remaining cost of the Contract depending on the number of options exercised, DCE had a substantial monetary interest at the point of termination, negating COFC’s application of the Fulford doctrine as a means of preventing unnecessary litigation. Id. Therefore, this Court should reverse COFC’s decision allowing the review of the government’s termination for default of DCE’s contract and dismiss the review of the termination for default in the instant case.

B.   COFC Did Not Err in Deciding ACO Hammaker Did Not Abuse His Discretion in Terminating DCE for Default

In determining that DCE’s contract should be terminated for default, ACO Hammaker applied proper discretion as outlined in the FAR and was not unduly influenced to terminate the Contract for default. The Default Clause in this Contract granted the Government the authority to terminate the contract if DCE actually failed to perform its contractual obligations. FAR 52.249-8. The effect of a termination for default is to make the government not liable for the contractor’s costs on undelivered work. FAR 49.402-2(a). As the government has the option to terminate through multiple methods (i.e., default, convenience, or no-cost cancelation), it is required to conduct a thorough review of the contract terms and the nature of the breach to deter- mine the proper course of action. See FAR 49.402-3. The Default Clause is not a tool for terminating a government contract where such a termination would constitute “an abdication of responsibility.” See Composite Laminates v. United States, 27 Fed. Cl. 310, 326 (1992) (quoting Schlesinger v. United States, 390 Fed. Cl. 702, 708 (1968)). Where the government fails to apply reasoned discretion in terminating a contract for default, the termination is converted to a termination for the convenience of the government, which imposes less stringent penalties on the contractor. Schlesinger, 390 Fed. Cl. at 710.

FAR 49.402-3, Procedure for Default, lays out clear guidance for executing a termination for default. The procedure ensures the ACO’s discretion in terminating the contract is adequately guided and constrained. See FAR 49.402-3. The procurement official charged with terminating the contract must rely on his own independent judgment, grounded in the instant circumstances as applied to the relevant regulations. See FAR 49.402-3(f). COFC found, where the relevant official is improperly influenced to exercise the government’s right to terminate for default, proper discretion has not been exercised. See Fairfield Sci. Corp. v. United States, 61 F.2d 854, 862 (Ct. Cl. 1979). In the instant case, ACO Hammaker followed the procedure for default as outlined in FAR 49.402-3 and was not improperly influenced to terminate the Contract for default.

Prior to exercising discretion, a contracting officer must provide adequate notice to the contractor and take procedural steps as outlined in the FAR. Specifically, under FAR 49.402-3(b), the ACO must refrain from issuing a show-cause notice without the CO’s prior approval. Here, ACO Hammaker acted diligently by meeting with both CO Ross and Air Force counsel J.A. Preston prior to any action. Order at 8. All parties concluded that termination for default was the most appropriate course of action and that the Contract should be terminated as soon as possible. Id. As the cure notice was not submitted to DCE until after this meeting,  id., the requirements of FAR 49.402-3(d) are satisfied. ACO Hammaker also complied with the FAR 49.402-3(d) and (e)(1) requirements by providing DCE with proper notice, a ten-day window to correct the relevant problem(s), and supplementary notice of termination for default after DCE provided its initial response. Order at 18 – 19. The notice and response constituted sufficient action under the conditions laid out in the FAR. FAR 49.402-3(d), (e)(1).

Beyond basic procedural steps, ACO Hammaker was required to consider all relevant circumstances regarding DCE’s performance while not “blindly accept[ing] directions from others.” See FAR 49.402-3(f); McDonnell Douglas Corp. v. United States, 35 Fed. Cl. 358, 369 (1996), rev’d, 182 F.3d 1319 (Fed. Cir. 1999). While DCE contends the contract termination was de facto directed by General Weinberg, there is no evidence to substantiate a claim that General Weinberg directed the Contract be terminated under this condition. Order at 7. Specifically, General Weinberg directed the contract be terminated in general, to which ACO Hammaker responded he would proceed with termination for default. Order at 7 – 8. While ACO Hammaker may have been influenced to terminate the contract itself, the method was up to his discretion based on the circumstances. See Lafayette Coal Co., ASBCA No. 32174, 89-3 BCA ¶ 21,963, at 110,482. ACO Hammaker had the power to terminate for default, for convenience, or at no cost, and made the affirmative, independent choice to proceed with a default termination. See FAR 49.402-3. Further, after discussion with CO Ross and Air Force counsel Preston, ACO Hammaker still viewed default as the proper means of termination. Order at 8.

Unlike in Darwin v. United States, or Schlesinger, ACO Hammaker was not instructed to seek termination of a contractor for actions unrelated to contractor performance. See Darwin Const. Co. v. United States, 811 F.2d 593, 597 (Fed. Cir. 1987); Schlesinger, 390 Fed. Cl.at 709. Here, DCE’s conduct on July 10, 2014, was an inseverable part of the Contract performance and was a serious breach of the Contract terms. ACO Hammaker received direction based on the performance of the Contract, selected the means of termination, and executed his duty with full consideration of the contract. Order at 8.

Furthermore, nothing in the Contract stated the termination decision must be made specifically and solely by the CO. In Securiforce International America, LLC v. United States, 879 F.3d 1354, 1364 (2018), the Court of Appeals for the Federal Circuit held that default language in contracts (generally stating “the Government” must make a termination decision) does “not require a decision by a particular official but only a reasonable conclusion that there was no reasonable likelihood the contractor would perform within the time remaining.” In other words, it clearly is recognized that many people provide input in the decisions to terminate a contract and inclusion of other parties in that decision is not wholly inappropriate. Therefore, under FAR 49.402-3 and applicable case law, the termination for default was valid.

ACO Hammaker’s procedural adherence and independent decision-making were both proper and supported by his application of the factors outlined in FAR 49.402-3(f), which directs the contracting officer to consider:

(1)  The terms of the contract and applicable laws and regulations.
(2)  The specific failure of the contractor and the excuses for the failure.
(3)  The availability of the supplies or services from other sources.
(4)  The urgency of the need for the supplies or services and the period of time required to obtain them from other sources, as compared with the time delivery could be obtained from the delinquent contractor.
(5)  The degree of essentiality of the contractor in the Government acquisition pro- gram and the effect of a termination for default upon the contractor’s capability as a supplier under other contracts.
(6)  The effect of a termination for default on the ability of the contractor to liquidate guaranteed loans, progress payments, or advance payments.
(7)  Any other pertinent facts and circumstances.

As noted in Lafayette Coal Co. v. United States, “Failure to consider one or more of the factors should not invalidate a termination for default where the totality of circumstances demonstrates a reasonable exercise of discretion.” Lafayette Coal Co., ASBCA No. 32174, 89-3 BCA ¶ 21,963, at 110,482. ACO Hammaker’s steps in determining termination for default were necessary and complied with the applicable guidance. Order 18 – 19.

Here, the relevant portions of FAR 49.402-3(f) were, primarily, the terms of the Contract: the specific failure of the contractor, the excuses for the failure, the essentiality, and other pertinent factors. Given the nature of the Contract and available evidence, the availability of supplies, urgency, and effect on loans were largely irrelevant. As demonstrated in his discussions with CO Ross and Air Force counsel, ACO Hammaker properly considered the relevant factors. Order at 18 – 19. The Contract was subject to termination for default under the Default Clause and FAR 52.249-8. The specific failure and other pertinent factors were similarly weighed, as the impact of DCE’s actions included the loss of life, impact on mission readiness, and the ability of similar programs to function. Order at 8. Further, DCE’s excuses were unacceptable as the conduct by its employee fell outside of the terms of the Contract, both for actions taken and the shift worked. Order at 19. The final condition, essentiality, works in favor of the Government. As noted in the record, the Contract was essential to combat operations. Id. Therefore, ACO Hammaker’s decision to terminate for default, despite the importance of the Contract, should serve as an indication of the careful and deliberate nature of consideration applied to the decision.

Lastly, any argument that the Government breached its obligations and that excuses DCE’s breach is unsupported by both facts and law. DCE con- tends the Government breached by failing to have the contractual number of supervisors present and had exceeded the length of the shift for a drone pilot. Order at 3. The fact that Santiago’s co-pilot stepped out for a moment does not result in the conclusion that there was a lack of supervision. It would be fair to assume that pilots step out to smoke, use the bathroom, etc. many times during the course of a shift and that does not result in a DCE pilot abandoned to their own devices. Moreover, Col. Jessup remained present and other members were in communication with Santiago ensuring that he had adequate and contractually required Air Force supervision. Order at 7.

With regard to the shift length, there is absolutely no evidence in the record to demonstrate Santiago was forced, or even asked, to remain on shift past his maximum time allowed. Santiago was as capable of ending his shift as the Air Force was. If anything, it was DCE’s failure to replace him with a fresh pilot in a timely manner that resulted in an excess amount of time on duty.

Securiforce International America, 879 F.3d at 1358, was a similar case where a contractor attempted to use an allegedly improper termination for convenience (qualified as a government breach) as an excuse for behavior that led to a default termination. The Federal Circuit found that even if there was factual evidence to suggest the Government’s actions contributed to the contractor’s default, “the delay was proximately caused by a lack of diligence” on the con- tractor’s part. Id. at 1367.

For the aforementioned reasons, if the Court determines that review of this issue is within its scope, it should affirm the decision of COFC and determine ACO Hammaker acted with proper discretion in terminating the Contract for default.

II.  The Lower Court Erred in Determining DCE Did Not Owe Reprocurement Costs to the Government

COFC was clearly erroneous in finding that the Government was not entitled to excess reprocurement costs from DCE. Given the relevant burdens and standards for determining whether reprocurement costs are appropriate and at what amount, COFC erred in its findings regarding the three factors from Cascade Pacific International v. United States, 773 F.2d 287, 294 (Fed. Cir. 1985), outlined below. Specifically, COFC did not consider the CO’s statutorily granted discretion and inappropriately made conclusions based on evidence not found in the record. See Lafayette Coal Co., ASBCA No. 32174, 89-3 BCA ¶ 21,963, at 110,482.

The Government met its burden to warrant issuance of excess reprocurement costs. COFC’s decision is not supported by substantial evidence in the record and lacks sufficient analysis to justify upholding its decision; as a result, we ask that this court determine that the Government is owed excess reprocurement costs and remand on the matter of the amount owed.

A. Burden

The government “bears the initial burden of demonstrating that it acted reasonably and in accordance with the procedures set out in the contract for calculating damages.” Seaboard Lumber Co. v. United States, 48 Fed. Cl. 814, 819 (2001), aff’d, 308 F.3d 1283 (Fed. Cir. 2002). “‘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) (quoting Mega Constr. Co. v. United States, 29 Fed. Cl. 396, 484 (1993)); Armour of America v. United States, 96 Fed. Cl. 726, 759 (2010).

Where a contractor’s breach results in the necessity for reprocurement of substantially similar goods or services, “the burden of proving the effects of changes in the reprocurement contract terms on the contract price is properly placed on the breaching contractor.” Seaboard Lumber Co., 308 F.3d at 1301.

1.   Standards for Assessing Reprocurement Costs

The government may claim reprocurement costs in accordance with FAR 52.249-8(b), which in relevant portion states:

If the Government terminates this contract in whole or in part, it may acquire, under the terms and in the manner the Contracting Officer considers appropriate, supplies or services similar to those terminated, and the Contractor will be liable to the Government for any excess costs for those supplies or services.

FAR 49.402-6 states any repurchase shall be for “the same or similar supplies or services” and purchased “as soon as practicable.”

Cascade Pacific International, 773 F.2d at 294, sets forth the test for determining whether the government’s assessment of excess reprocurement costs is allowable and reasonable under a three-pronged test: “(1) the reprocured supplies are the same as or similar to those involved in the termination; (2) the [g]overnment actually incurred excess costs; and (3) the [g]overnment acted reasonably to minimize the excess costs resulting from the default.” With regard to the third prong, Cascade uses several factors to determine if the government acted reasonably in reprocuring services. Id. More specifically, to recover reprocurement costs, the government must “act within a reasonable time of the default, use the most efficient method of reprocurement, obtain a reasonable price, and mitigate its losses.” Id.

2.   The Government Meets All Three Cascade Requirements and Is Entitled to Reprocurement Costs

Beginning with the first prong under Cascade, COFC found, and the Government agrees, that the reprocured services in this case are the same as or similar to the services involved in the termination. The standard for whether the reprocured service is sufficiently similar is whether or not the reprocured service was the work that the first contractor agreed to perform, and in a material manner that is similar to the contract first entered upon. United States v. Axman, 234 U.S. 36, 45 (1914). Clarified further, reprocurement damages have been barred when they “involved substantial and material changes in the physical nature of the performance, i.e., the work to be performed or the goods to be delivered, from the original contract to the re-let contract.” Seaboard Lumber Co., 308 F.3d at 1298 (emphasis added). Similarity does not require that the reprocured item be identical to the original contract specifications. Associated Traders, Inc. v. United States, 169 F. Supp. 502, 506 (Ct. Cl. 1959).

Furthermore, the CO has wide discretion in choosing which items to reprocure, and changes to the reprocurement contract may be within the “variation or deviation of contract terms within the contemplation of the parties in the broad grant of discretion to the contracting officer under the language of the Default article.” Astro-Space Labs., Inc. v. United States, 470 F.2d 1003, 1017 (Ct. Cl. 1972); Consol. Airborne Sys., Inc. v. United States, 348 F.2d 941, 948 (Ct. Cl. 1965). Additionally, changes in the specifications after the default do not invalidate the excess reprocurement cost assessment where the changes are “correction of errors or omissions, normal updating of specifications . . . so long as the specification changes do not go to the heart of the procurement by affecting function of product or by affecting repurchase cost.” Marmac Indus., Inc., ASBCA No. 12158, 72-1 BCA ¶ P9249, at 42,888.

It is clear the government is permitted to change the contract terms to adjust for errors and mistakes caused by the defaulted contract. Id. Such changes can occur without changing the nature of the work, and that is exactly what happened in the instant case. There can be no question it was the exact same type of work, which is all that is required per the test by the Supreme Court in Axman. United States v. Axman, 234 U.S. 36, 45 (1914). While the details varied, that is not the crux of the legal standard. The government initially purchased piloting drones, and those are what it repurchased. There is no penalty for the government learning from previous contracts to better streamline their acquisitions and provide necessary services in the most efficient way.

The Government also meets the second Cascade prong in that it actually incurred the claimed excess costs. Cascade Pac. Int’l, 773 F.2d at 294. The Government is entitled to $7,178,500.00 in excess reprocurement costs, established by calculating the difference between the cost of the two-year Contract with DCE and the cost of the two-year Reprocurement Contract with Guantanamo. Order at 12. COFC found the changes to the contract specifications did not increase the cost of performance and therefore did not analyze the amount of costs owed to the Government. Id. at 23. As such, it is appropriate for this Court to do so.

DCE argued to COFC that the reprocurement costs should be reduced due to the variances in the reprocurement contract terms. Id. at 21 – 22. COFC found, and the Government agrees, that the variances did not increase the cost of performance. Id. at 23. Despite the differences in the contract terms, ten of DCE’s twelve employees would still have been able to perform under the reprocurement contract. Id. at 22. Any other changes were deemed minor and within the CO’s discretion and therefore should not affect the amount of reprocurement costs owed to the Government. Id. at 23. There is no clear legal error or substantial evidence in the record to support overturning the lower court’s decision on this point.

On a strictly procedural note, FAR 49.402-6(c) requires that the demand for excess reprocurement costs be made after completion and final payment of the repurchase contract. See also Whitlock Corp. v. United States, 159 F. Supp. 602, 607 (Ct. Cl 1958). In the instant case, all procedural requirements were met, cementing the Government’s right to demand excess reprocurement costs in the amount of $7,178,500.

Finally, the Government acted reasonably to minimize excess costs resulting from the default. COFC’s decision on this point was clearly erroneous in that it failed to consider relevant evidence and made legal conclusions without evidence in the record to support such conclusions. Utilizing the three additional factors set forth in Cascade, it is clear COFC’s conclusion on this factor was inaccurate and unsupported by fact and law. Cascade Pac. Int’l, 773 F.2d at 294.

Turning to the first factor under this prong of the Cascade test on whether the Government acted within a reasonable time of the default, the Government moved with all appropriate expediency in reprocuring the drone services given the circumstances. Id. DCE argues that the intermittent thirteen months were unreasonable and during that time the Air Force’s retention pro- gram decreased the amount of available pilots, prejudicing DCE, Order at 25; however, that is both a factually and legally insufficient argument.

Factually speaking, the Government had a change in personnel, which required a requisite amount of time for a new contracting officer to not only learn his job, but to become familiar with the existing contracts and the new ones. Order at 25. Drone services were not the only thing on this CO’s plate at the time of reprocurement, and the Air Force does not have an unlimited supply of COs to assign to any matter that may arise. Order at 26. DCE qualifies this approach to the reprocurement as “lackadaisical,” but the evidence in the record shows deliberate and constant movements by CO Markinson. Order at 24. DCE’s classification of his actions is mere opinion unsupported by evidence or the standards of law applicable to this prong. Order at 9, 25; Cascade Pac. Int’l, 773 F.2d at 294. As a result, COFC was clearly erroneous in finding for DCE on this factor given the lack of sufficient evidence in the record to support its conclusion.

Legally speaking, and contrary to the lower court’s findings, DCE suffered no prejudice as a result of any perceived delay. COFC reasoned that DCE suffered prejudice as a result of the delay and the Air Force’s retention program and therefore the Government acted unreasonably, Order at 26; however, their conclusion ignores evidence in the record and lacks the requisite level of reasoning required to support its legal conclusion.

DCE presented no evidence of actual prejudice; rather, they presented some evidence of Guantanamo’s prejudice as a result of the retention program, but not their own. Order at 25–26. They also presented no evidence of increased costs or inability to hire qualified pilots as a result of the retention program. DCE suffered no prejudice as a result of any actions on the Air Force’s part. Nothing makes this point more clearly than the fact that DCE was able to submit an offer for the reprocurement contract at an identical price as their original offer that met the new terms of the contract. Order at 11. DCE suffered no actual increased costs, their ability to perform the contract did not decrease, and their ability to bid did not decrease. DCE did not suffer prejudice and cannot now claim that any delay was unreasonable. The lower court clearly erred by finding prejudice with insufficient evidence.

Another factor to consider in determining whether the Government acted reasonably is whether the Government used the most efficient method of reprocurement. Cascade Pac. Int’l, 773 F.2d at 294. Here, the Government conducted an open competition, including a resolicitation of the original bidders. Order at 10. Despite not directly requesting a bid from DCE, DCE submitted a bid. Order at 11. Any claim by DCE that the reprocurement process was flawed is void of prejudice and must fail.

The final factor to consider in determining the reasonableness of the Government’s actions is whether the Government obtained a reasonable price in the reprocurement. Order at 11. In the instant case, the Government followed reasonable business practices to ensure the reprocurement price was not inflated. Order at 23. Furthermore, the CO obtained competition to the maximum extent practicable for the repurchase as required by FAR 49.402- 6(b). COFC clearly erred by finding in favor of DCE on this factor, first by citing the fact that the Government should have negotiated with DCE to get a better price without citing to any evidence in the record. Order at 27. Second, COFC clearly erred by finding that the Air Force’s retention program had any impact on the reprocurement contract or DCE directly. Order at 28.

COFC failed to consider crucial evidence on this factor. First, as stated above, the FAR and case law gives the CO significant discretion in the reprocurement process. FAR 52.249-8; see Cascade Pac. Int’l, 773 F.2d at 294 (outlining the many factors the government can consider in the reprocurement process). COFC never mentioned the weight, if any, that the CO’s discretion was given. In fact, the Court’s analysis seems to indicate that it was not considered at all. Order at 26. COFC simply concluded that, since the pool of competent contractors in this field was limited, the Government had some sort of obligation to deal with DCE despite the termination for default. Id. at 28. Such a conclusion is clearly erroneous as it is not based on any legal standard and fails to consider relevant facts.

In addition, COFC did not consider the Government’s legal obligation to consider past performance as a part of the reprocurement. Again, the Court merely assumed without any justification that the limited pool of competent contractors required the Government to deal with DCE. Id. That conclusion was not based on any legal principle or specific fact from the record. In fact, legally the Government was under no obligation to solicit a bid from DCE on the reprocurement at all. Churchill Chem. Corp. v. United States, 602 F.2d 358, 364 (Ct. Cl. 1979).

In the instant case, DCE’s past performance rendered it an unacceptable option. The termination for default was proper; therefore, in a competitive solicitation DCE was at a marked disadvantage in comparison to other candidates without a termination for default on their record. Furthermore, the nature of their default involved the loss of innocent civilian life. Order at 7. While there is no legal standard for degrees of severity regarding terminations for default, the Government should not be penalized for considering the drastic nature and consequences of the default in this case when deciding whether to do business with DCE again.

Lastly, COFC improperly concluded that the Air Force retention program impacted the reprocurement. The decision below concluded that the Air Force retention program limited the amount of available pilots, but stopped there in its analysis. Id. at 26. COFC did not assess that conclusion specifically in light of DCE. As stated above, DCE was able to submit a bid for the reprocurement contract at the same price as the original contract and cited no difficulties or inabilities to perform the varied requirements. Id. at 11.

There was no evidence that a broad Air Force policy relating to a large group of personnel was targeted at this reprocurement contract, or even had an impact of any kind. COFC’s conclusion is without supporting evidence in the record. The Air Force is charged with a military mission related to national security, and its force-wide policies should not be penalized for all impacts they may have on existing or future contracts. To do so would be to set a dangerous precedent that may lead the Air Force to choose to execute its defense mission to best avoid contract issues, rather than effectively defend the country.

In sum, despite the COFC’s decision below, the Government has met its burden to assess reprocurement costs. COFC was clearly erroneous in its findings of facts that led it to conclude the Government was not entitled to reprocurement costs. COFC ignored numerous critical facts and its analysis ignored pertinent legal standards. For these reasons, the Government asks this court to reverse COFC’s decision and remand to COFC to award reprocurement costs in the sum of $7,178,500.

III.  Conclusion

The COFC found correctly for the Government in deciding that the termination for default was proper. ACO Hammaker followed all appropriate procedures in terminating DCE’s contract after DCE’s employee fired a weapon in clear violation of the Contract terms. Furthermore, any superfluous circumstances surrounding the termination for default do not rise to an abuse of discretion or an improper termination for default.

COFC erred, however, in finding that DCE did not owe the Government reprocurement costs on the heels of the termination for default. Improper consideration or no consideration was given to the CO’s discretion in reprocuring, or to the Government’s obligation to determine past performance. Furthermore, COFC was clearly erroneous in its consideration and application of the facts and law by failing to support its conclusions on the Cascade factors with any evidence in the record. Cascade Pac. Int’l, 773 F.2d at 294.

As a result, the Government now asks this honorable Court to find for the Government on both issues: the termination for default was proper and the Government is owed reprocurement costs in the amount of $7,178,500.

Respectfully submitted,

Bryan Medema
Trial Attorney

Rachel Van Maasdam
Trial Attorney

March 18, 2018
Attorneys for Government

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