November 6, 2000

Federal Circuit Round-Up

Holland & Knight Newsletter
David S. Black

The United States Court of Appeals for the Federal Circuit has issued some decisions of note to federal contractors over the past few months.

Standard of Review in Post-Award Bid Protests Tightened

In this case, argued by Holland & Knight’s Craig Holman, the Federal Circuit announced a subtle but potentially significant tightening in the standard of review applied to procurement decisions in post-award bid protests. The court reaffirmed that the trial courts may not affirm procurement decisions by supplying post hoc rationales that justify administrative procurement decisions; rationales that were not, in fact, considered by the procurement official. Instead, the court applied the standards of the Administrative Procedures Act and concluded that federal courts “must judge the propriety of [a procurement decision] solely by the grounds invoked by the agency.”

The case involved the award of fixed-price, indefinite quantity contracts related to the Air Force’s Family Advocacy Program (FAP). According to the RFPs, award was to be made to the offeror with “the lowest-priced technically acceptable proposal with a low risk rating.” Price proposals were to be evaluated for “price realism, reasonableness, and completeness.” In performing its evaluation, the Air Force was to consider reasonableness by comparing the offerors’ salary data with the data provided by the incumbent contractors.

OMV challenged the award of the contract on the ground that the Air Force’s method of calculating the minimum acceptable salary levels was irrational. The Court of Federal Claims (COFC) agreed that the method employed by the Air Force was “perplexing,” but nevertheless denied OMV’s protest. The COFC reasoned that it was not necessary that the minimums be calculated in a rational way, as long as they were not so unreasonably low as to render the Air Force’s professional compensation analysis and subsequent award arbitrary or inconsistent with the RFP. The COFC then essentially performed its own analysis of the minimum acceptable salary requirements derived by the Air Force.

The Federal Circuit concluded that the COFC’s review was erroneous. Noting that a federal court is powerless to affirm an agency decision based on inadequate or improper grounds “by substituting what [the court] considers to be a more adequate or proper basis,” the Federal Circuit reasoned that “[t]he Air Force’s determination of minimum acceptable salary requirements cannot be justified on the ground that they were generally consistent with salaries set forth in the Occupational Outlook Handbook, because the Air Force did not use the Occupational Outlook Handbook for that purpose.” The Federal Circuit remanded the case to the COFC for a determination of whether the method actually employed by the Air Force to determine minimum acceptable salary requirements was irrational. OMV Medical, Inc. v. United States, No. 99-5098 (July 18, 2000).

Supreme Court Concludes Government Repudiated Contract

The Supreme Court reversed the Federal Circuit’s earlier decision, Marathon Oil Co. v. United States, 177 F. 3d 1331 (Fed. Cir. 1999), which in turn had reversed a monetary award by Court of Federal Claims to the plaintiffs, two oil companies. The case stemmed from the plaintiffs’ payment to the government of $158 million for prospective offshore oil leasing rights. The contract was contingent upon government regulatory approvals; the legal landscape changed, however, after the agreement was signed, when Congress subsequently raised new statutory obstacles to approval.

The key question before the Court was whether those subsequently passed laws, and the Department of the Interior’s resulting failure to approve the offshore projects, worked a repudiation of the contract.

Notably, the government did not argue here that its failure to approve was a protected “sovereign act”; the scope of that defense has been a hotly contested issue in other cases, including the Winstar cases that stem from the savings & loan failures. The Supreme Court rejected the other arguments raised by the government:

  • The Court found that the regulations cited in the agreement did not give Interior the authority to withhold approval.

  • Although the agreement was explicitly made subject to “all other applicable . . . regulations,” the Court read that standard provision to mean that the contract was conditioned only upon currently existing law. This is an important point; it suggests that the government increasingly will bear the risk if later changes to the law increase costs on government contracts.

  • The Court interpreted Interior’s statement that it would follow the new law as a constructive repudiation of the contract.

Because the Court concluded that the government had repudiated the contract, the Court held that the government must return the $158 million. Plaintiffs did not seek consequential damages, and the Court did not address whether such additional damages – beyond restitution – might be recoverable. Mobil Oil Exploration & Producing Southeast, Inc. v. United States, Sup. Ct. No. 99-244 (June 26, 2000).

“Delay” and “Disruption” Burdens of Proof Differ Greatly

Federal procurement law divides delay and disruption in construction projects. As the recent Sauer decision confirms, the two types of claims are very different – as are their respective burdens of proof.

The contractor’s claim of delay in Sauer failed for lack of proof. As the court observed, it was the contractor’s burden to show that the government – and the government alone – had caused delay to items scheduled on the critical path of the contractor’s work. The court concluded, as did the board below, that the government had produced more substantial evidence of delay – delay caused by other forces – on the record.

The court took a very different approach to the contractor’s claims of disruption – i.e., that the government’s interference had made the contractor’s work less efficient. (The contract at issue involved construction at a Navy submarine refit facility; the contractor claimed that the Navy allowed other contractors to interfere with the plaintiff’s work.) Although the board of contract appeals had rejected the contractor’s claims of disruption because the contractor had not been able to show delay, the Federal Circuit rejected that tangled approach. Instead, the Federal Circuit held that because disruption is quite distinct from delay, and so the board had failed to weigh the evidence thoroughly, the disruption claim was to be remanded to the board for further review. Sauer Incorporated v. Danzig, No. 99-1206 (July 20, 2000).

Contractors Not Bound by Government-Drafted Disputes Provisions

Sister cases, Maine Yankee and Northern States, stem from the nuclear power industry’s claims for millions of dollars spent in handling spent nuclear fuel. In 1982, Congress required nuclear power plants to enter into contracts with the Department of Energy for disposal of the plants’ spent nuclear fuel, “beginning not later than January 31, 1998.” Each contract had a disputes provision, which called for initial review of claims by the contracting officer, and then an appeal to an administrative board. The disputes clause, by its terms, covered “any delay in the delivery, acceptance or transport” of spent nuclear fuel by the Energy Department.

The government’s efforts to build facilities to receive the spent fuel were badly delayed, and the 1998 deadline has long passed. As a result, millions of dollars have been spent by the private contractors in handling spent fuel that the government had agreed to receive.

The plaintiff nuclear power producers bypassed the administrative disputes process, and brought suit directly in the Court of Federal Claims. The government moved to dismiss. The key question on these appeals, then, was whether the nuclear producers’ breach of contract claims were ones “arising under” the contract – that is, “whether the contractual provisions would provide adequate relief for this ‘particular dispute.’” If not, suit could properly be brought in the Court of Federal Claims.

The Federal Circuit held in the nuclear power producers’ favor, and concluded that the producers were not bound by the disputes clause of the standard contracts. In so holding, the court read the disputes clause narrowly against the government, and took a very dim view of the limited remedies available through the contractual disputes process. The court’s decisions suggest that when courts are assessing whether contractors are to be bound by a disputes provision drafted and imposed by the government, the courts will carefully assess whether the government-mandated disputes process will, indeed, yield an adequate remedy for the contractors’ claims. Maine Yankee Atomic Power Co. v. United States, Nos. 99-5138, -5139, -5140, and Northern States Power Co. v. United States, No. 99-5096 (Aug. 31, 2000).

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