May 9, 2017

Federal Circuit Denies Claim Under SCA Price Adjustment Clause for Pension Withdrawal Liability

Holland & Knight Government Contracts Blog
Terry L. Elling

Last month, the U.S. Court of Appeals for the Federal Circuit (CAFC) affirmed a decision of the U.S. Court of Federal Claims upholding and NASA’s denial of a claim in the amount of about $2 million for reimbursement pension withdrawal liability costs. Call Henry, Inc. v. United States, No. 2016-1732 (Fed. Cir.) (April 28, 2017). The costs were attributable to an under-funded pension plan required under a Collective Bargaining Agreement that were incurred when the contractor was deemed to have withdrawn from the plan after the employees voted to decertify the Bargaining Unit (the Teamsters) and to be represented by new bargaining unit (the International Association of Machinists and Aerospace Workers).

The CAFC held that the withdrawal liability costs were “independent of” the contractor’s obligation under the Service Contract Act (SCA) because they were incurred under a separate statute that governed employer’s liability under multi-employer pension plans, and not under the SCA. Accordingly, the CAFC determined that the liability did not relate to changes in the amount of prevailing wages and fringe benefits for which a contractor is otherwise entitled to an adjustment under the SCA Price Adjustment clause (FAR 52.222.43).

The CAFC rejected the contractor’s argument that the withdrawal liability costs should be treated as costs for fringe benefits it was required to provide under the CBA and SCA, distinguishing its earlier ruling in Lear Siegler Servs., Inc. v. Rumsfeld, 457 F.3d 1262, 1266−67 (Fed. Cir. 2006). In Lear, the CAFC held that increased costs that the contractor in that case had to pay for a defined health benefit plan were recoverable as they were required to be paid by the Government by operation of law under the SCA. The Court distinguished the pension liability withdrawal costs in Call Henry because they were imposed under a separate statute (the Multi-Employer Pension Plan Amendment Act of 1980, 29 U.S.C. § 1381, et seq.) and were therefore “independent of” the Contractor’s obligations under the SCA and, consequently, not recoverable under the SCA Price Adjustment clause.

The CAFC’s ruling is concerning in several regards.

  • It is difficult to comprehend as a matter of fact and law that the contractor’s pension withdrawal liability is truly independent of its obligations under the SCA and the terms of its Contract to pay fringe benefits required under a CBA such that the contractor should not be entitled to an adjustment for the increased costs of the benefits resulting from withdrawal from the pension plan. If not for the SCA’s obligation that a successor contractor pay wages and fringe benefits in compliance with an existing CBA, the contractor would have no obligation to participate in the pension plan under which it incurred the withdrawal liability.
  • The contractor has no real ability to control or limit its pension withdrawal liability (e.g., the contractor has no involvement in the pension administrator’s investment and management decisions that are often the cause of under- and unfunded liabilities, and similarly has no control over the Bargaining Unit’s and its member’s decisions to decertify the existing Union and association with a different one, which resulted in Call Henry’s deemed withdrawal from the pension plan).
  • On its face the CAFC’s decision would seem to apply to contracts and subcontracts subject to the Davis-Bacon Act as well, as the DBA and DBA Price Adjustment Clause are worded similarly to the SCA and SCA Price Adjustment Clause.

Absent a successful petition for rehearing, reversal by the Supreme Court, or an amendment to the SCA, however, all government contractors with contracts subject to the SCA should evaluate their existing contracts and opportunities to assess the impact of Call Henry, Inc., and take this impact into account to the extent they are able avoid or control pension withdrawal liabilities.

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