June 1, 1999

Federal Circuit Round-up

Holland & Knight Newsletter
David S. Black

The U.S. Court of Appeals for the Federal Circuit recently issued a number of important decisions that will have a direct impact on government contractors. These decisions will alter the negotiating balance between contractors and the government, in areas as diverse as disputes, delays and bid protests.

E. R. Mitchell Construction Co. v. Richard J. Danzig, Secretary of the Navy, No. 98-1483 (Fed. Cir. May 10, 1999).

In a major decision for government contractors that perform construction and systems work for the federal government, the Federal Circuit held in E.R. Mitchell Construction that a subcontractor delayed by the government may recover its indirect costs - even if the prime contractor suffered no delay. Under well-established law, if the government causes delay on the critical path of a project - i.e., causes delay to the critical sequence of project events - the government must compensate the contractor for the delay. Compensation includes the overhead costs that the contractor continued to bear during the delay, overhead that could not be "absorbed" by the stalled government project. To recover these damages, a prime contractor must prove its unabsorbed overhead using the Eichleay formula, which the Federal Circuit has repeatedly endorsed. In E.R. Mitchell Construction, the court reversed the Armed Services Board of Contract Appeals, and held that subcontractors, through the prime contractor, may also recover delay-related damages under Eichleay, so long as the government knew of the subcontractors' critical delay.

Alfa Laval Separation, Inc. v. United States, No. 98-5087 (Fed. Cir. May 7, 1999).

To prevail in a bid protest, the protester normally must show: (1) that the government made some significant error in the procurement, and, (2) that had it not been for the government's error, the protester had a "substantial chance" of winning the contract award. This latter criterion - the protester's burden of showing "prejudice" due to the government's error - has traditionally been a major obstacle in bid protests brought before the General Accounting Office. In Alfa Laval Separation, the Federal Circuit, reversing the Court of Federal Claims, adopted a more liberal reading of "prejudice." The court held that even though the protester's price was "colossal[ly]" higher than the awardee's, the Court of Federal Claims erred in holding that a huge price difference alone was enough to conclude that the protester had not shown "prejudice," i.e., had no "substantial chance" of award. The Court held that price differences should be considered in weighing the protester's prejudice; the Court stressed, though, that such differences should be only part of a broader assessment of whether the protester enjoyed a substantial chance of award, absent the government's error.

Alliant Techsystems, Inc. v. United States, Nos. 98-5016, -5044 (Fed. Cir. May 28, 1999).

The situation arises too often in federal contract administration: the contracting officer directs work that the contractor thinks far exceeds the contract's requirements, and the contractor contests the order. The contracting officer says that his final decision on the contractor's claim will be issued in 60 days or more - and in the meantime, the contractor must perform the contested work because the Disputes clause calls for continued performance, even if the parties are in dispute. How, then, is the contractor to escape this quandary? In Alliant Technologies, the Federal Circuit offered a solution: declaratory relief. Judge Bryson, writing for the court, made it clear that under Congress' 1992 expansion of the Court of Federal Claims' jurisdiction, a contractor may seek prompt declaratory relief from the Court of Federal Claims, even if the contracting officer has refused to issue a formal "final decision" on the contractor's claim for relief. The court also made it clear, however, that the contractor must abide by the declaratory judgment of the court; if the contractor does not, and violates the continuing performance obligations under the Disputes clause, the contractor risks default.

American Telephone & Telegraph Company v. United States, No. 95-9153-9154 (Fed. Cir. May 26, 1999) (en banc).

In the mid-1980s, Congress grew increasingly concerned that the Navy was using fixed-price contracts for high-risk research-and-development contracts. Accordingly, Congress in 1987 passed Section 8118 of the Defense Appropriations Act. Section 8118 barred the Defense Department from entering into fixed-price contracts for research and development of major systems. Notwithstanding Section 8118, the Navy shortly thereafter entered into a fixed-price research-and-development contract with AT&T.

Although AT&T finished the contract, AT&T incurred huge cost overruns, which AT&T sued to recover. AT&T argued in the Court of Federal Claims that the contract was void ab initio, because it had been entered into in violation of Section 8118, and so should be "reformed" into a cost-reimbursement contract. The Court of Federal Claims disagreed, but certified the question for immediate appeal to the Federal Circuit. The original panel on appeal held that the contract was void ab initio, but also held that as a result AT&T could make essentially no further recovery on an invalid contract. That panel decision was subsequently vacated, and reheard en banc. In the en banc decision, Judge Newman, writing for the court, noted that the legislative history of Section 8118 - both before and after its passage - shows that Congress did not intend for Section 8118 to be used to invalidate otherwise sound, fully performed contracts. The court concluded that the contract was not void ab initio, and remanded the case to the Court of Federal Claims. Judge Rader, joined by Chief Judge Mayer and Judge Lourie, concurred in the result because, in their view, the Defense Department had properly concluded that Section 8118 did not apply to contracts of this size. Judge Plager, in a spirited dissent, argued that the plain language of Section 8118 rendered the AT&T contract void ab initio.

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