Dynetics, Inc. and Subsidiaries v. United States

In the United States Court of Federal Claims

No. 12-576T

(E-Filed: May 31, 2015)

)

DYNETICS, INC. and SUBSIDIARIES, ) Cross-Motions for Partial

) Summary Judgment; RCFC 56(a);

Plaintiff, ) I.R.C. § 41; Treasury Regulation

) §1.41-4A; Funded Research

v. ) Exception

)

THE UNITED STATES, )

)

Defendant. )

)

David M. Wooldridge, Birmingham, Ala., for plaintiff.

Jason Bergmann, Trial Counsel, with whom were Caroline D. Ciraolo, Principal Deputy

Assistant Attorney General; David I. Pincus, Chief, Court of Federal Claims Section,

Mary M. Abate, Assistant Chief, Court of Federal Claims Section , Commercial

Litigation Branch, Civil Division, United States Department of Justice, Washington,

D.C., for defendant.

OPINION and ORDER

CAMPBELL-SMITH, Chief Judge

This is a tax refund case. Dynetics, Inc. (Dynetics or plaintiff) is an engineering

company headquartered in Huntsville, Alabama. Plaintiff filed amended tax returns for

three tax periods seeking a refund based on certain research tax credits to which it claims

entitlement under § 41 of the Internal Revenue Code (I.R.C.), which governs “Credit for

increasing research activities.” I.R.C. § 41. Defendant, the Internal Revenue Service

(IRS or defendant), disallowed plaintiff’s refund claims.

On September 7, 2012, plaintiff timely filed its complaint in this court. While

plaintiff’s complaint is based on tax refunds it claims for work performed on more than

100 contracts, the parties have asked this court to evaluate plaintiff’s claims on only 7 of

those contracts, which the parties refer to as sample contracts.

While a taxpayer must establish a number of elements to qualify for a research tax

credit under § 41, at this point in the case, the parties seek the court’s assistance with

resolving their dispute on only one such element. Under § 41, a taxpayer may not claim a

research tax credit if that research was “funded by any grant, contract, or otherwise by

another person (or governmental entity).” I.R.C. § 41(d)(4)(H).

Presently before the court are the parties’ fully briefed cross-motions for partial

summary judgment on the funded research question, brought under Rule 56(a) of the

Rules of the United States Court of Federal Claims (RCFC). The parties ask this court to

determine whether the research performed by Dynetics under each of the seven sample

contracts was “funded” under the governing Internal Revenue Code and Treasury

regulations.

After consideration of the parties’ briefing and evidentiary support, the court

GRANTS defendant’s motion for partial summary judgment on the funded research

question, and DENIES plaintiff’s cross-motion for partial summary judgment on the

funded research question.

I. Background

A. Cross-Motions for Partial Summary Judgment

Defendant filed a motion for partial summary judgment on the funded research

question. Def.’s Mot., Aug. 7, 2014, ECF No. 35-1. Plaintiff filed its cross-motion for

partial summary judgment on the funded-research question. Pl.’s Mot., Aug. 20, 2014,

ECF No. 37-1. Defendant filed its response. Def.’s Resp., Sept. 26, 2014, ECF No. 40.

Plaintiff filed a reply. Pl.’s Reply, Oct. 22, 2014, ECF No. 41.

Defendant also filed various exhibits in support of its motion. Exs. 1.1 to 69, ECF

Nos. 30-2 to 32.9. Plaintiff likewise supported its motion with both affidavits and

exhibits. Exs. A to P, ECF No. 37-2.

In reviewing the parties’ briefing, there were several questions on which the court

felt it would benefit from additional explanation. Accordingly, on January 28, 2015, the

court issued an order posing a number of questions to the parties, and requesting

comment. Order Supp. Br., ECF No. 42.

2

On February 19, 2015, each party filed a supplemental brief in support of its

motion for partial summary judgment. Pl.’s Supp. Br., ECF No. 45; Def.’s Supp. Br.,

ECF No. 46. On February 26, 2015, each party filed a reply. Pl.’s Reply to Def.’s Supp.

Br., ECF No. 47; Def.’s Reply to Pl.’s Supp. Br., ECF No. 48.

The court is grateful to both parties for their supplemental briefing, which has

been helpful in resolving their cross-motions.

B. Sample Contracts

Each of the sample contracts is known by an alpha-numeric code assigned by

Dynetics for internal contract management purposes. Like the parties, the court refers to

each contract by this code.

Dynetics was awarded the AF007 contract (contract no. F08630-03-C-0034) by

the United States Air Force Research Laboratory, pursuant to which it was “to develop

and test 14 tailkits capable of carrying 21,600 pound of ammunition for deployment at a

specified target.” Ex. 12; Pl.’s Mot. 38. The AF007 contract was a cost-plus-fixed-fee

contract. Id. at DYN 953.

The AMS01 contract (subcontract no. 017-O2K1) was issued to Dynetics by

Aviation & Missile Solutions, LLC (AMS) as a subcontract. Ex. 51, at DYN 7568.

The prime contract was issued to AMS by the U.S. Army Aviation and Missile Command

(AMCOM). Id. at DYN 7569. AMCOM is a specialized research and development

command with the Army Research Development and Engineering Command. Pl.’s Mot.

42. AMS is a joint venture between Dynetics and one other company, Camber. Id. at 43.

The work performed by Dynetics under the AMS01 contract was performed on task

orders issued as fixed-price-level-of-effort. Id. at 45-46; Def.’s Mot. 38. According to

Dynetics, work on the AMS01 contract included “develop[ing] models and simulations to

evaluate the effectiveness of missile defense systems, [as well as] developing technology

and designing hardware that would enable the integration of applicable devices onto

applicable platforms. [In addition, Dynetics] designed, analyzed, and tested warheads,

fuzes, fuse systems, and technologies to integrate fuzes and warheads in constrained

weapons systems.” Pl.’s Mot. 43.

The AR005 contract (contract no. DAAH01-02-C0080) was issued to Dynetics by

the U.S. Army Aviation & Missile Command. Ex. 27, at DYN 58336. The AR005

contract included both fixed-price and cost-plus-fixed-fee line items. Id. at DYN 58339-

41. As relevant to this motion, defendant objects only to expenses Dynetics claims under

the cost-plus-fixed-fee line items. See Def.’s Mot. 27. According to Dynetics, its work

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on the AR005 contract included developing “calibration shelters for Humvees that were

deployed ‘in theater’” by the Army. Pl.’s Mot. 50. The purpose of this project was to

“make it easier for soldiers to calibrate their equipment in the field rather than evacuating

it for calibration.” Id.

The BOE12 contract (contract no. 100267) was issued to Dynetics by The Boeing

Company. Ex. 40, at DYN 41546. The BOE12 contract was a time-and-materials

contract. See id. at DYN 41557-58. According to Dynetics, its work on the BOE12

contract included “assisting in the development of a system to defend the United States

against long-range (i.e., intercontinental) ballistic missile attacks.” Pl.’s Mot. 59.

The NT001 contract (contract no. MDA908-99-D-0001) was issued to Dynetics by

the Defense Intelligence Agency (DIA) Missile & Space Intelligence Center (MSIC). Ex.

34, at DYN 8064. DIA is a combat support agency within the U.S. Department of

Defense. The NT001 contract is a cost-plus-fixed-fee contract. Id. at DYN 8067.

According to Dynetics, it was assigned tasks “associated with gaining an understanding

[of] foreign missile systems and the United States’ capability of defending against threats

posed by those foreign systems.” Pl.’s Mot. 64.

The UAH01 contract (subcontract no. SUB2004-025) was issued to Dynetics by

the University of Alabama, Huntsville (the University) as a subcontract. Ex. 18, at DYN

1700. A cooperative agreement was issued to the University by the National Aeronautics

and Space Administration (NASA)/Marshall Space Flight Center. Id. at DYN 1701.

The UAH01 contract was a cost-plus-fixed-fee level-of-effort contract. Id. at DYN 1700.

Under the UAH01 contract, Dynetics performed various tasks in support of the National

Space Science & Technology Center. Pl.’s Mot. 70.

The AR009 contract (contract no. DAAH01-02-C-R170) was issued to Dynetics

by the U.S. Army Aviation & Missile Command. Ex. 47, at DYN 6933. The AR009

contract was a fixed-price level-of-effort contract. Under the AR009 contract, Dynetics

was asked to “design, develop, and test aerodynamic vehicles, including missiles,

aviation systems, and targets [, and it] used aerodynamic engineering techniques to

develop or design proposed missiles or analyze properties of proposed missiles.” Pl.’s

Mot. 53 (internal citation omitted).

II. Legal Standards

A. Jurisdiction

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The United States Court of Federal Claims shall have jurisdiction to render

judgment upon any claim against the United States founded either upon the Constitution,

or any Act of Congress or any regulation of an executive department, or upon any express

or implied contract with the United States, or for liquidated or unliquidated damages in

cases not sounding in tort. 28 U.S.C. § 1491(a)(1)(2012). This court has jurisdiction,

concurrent with the district courts, over “[a]ny civil action against the United States for

the recovery of any internal-revenue tax alleged to have been erroneously or illegally

assessed or collected, or any penalty claimed to have been collected without authority or

any sum alleged to have been excessive or in any manner wrongfully collected under the

internal-revenue laws.” 28 U.S.C. § 1346(a)(1); see also Intersport Fashions West, Inc. v.

United States, 84 Fed. Cl. 454, 456-57 (2008) (finding jurisdiction over tax refund claim).

That the court has jurisdiction over plaintiff’s claim is undisputed.

B. Summary Judgment

Summary judgment is appropriate “if the movant shows that there is no genuine

dispute as to any material fact and the movant is entitled to judgment as a matter of law.”

RCFC 56(a); see Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986); Celotex

Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). A genuine dispute is one that “may

reasonably be resolved in favor of either party.” Liberty Lobby, 477 U.S. at 250.

“As to materiality, the substantive law will identify which facts are material. Only

disputes over facts that might affect the outcome of the suit under the governing law will

properly preclude the entry of summary judgment.” Id. at 248.

The moving party carries the burden of establishing its entitlement to summary

judgment. Celotex Corp., 477 U.S. at 322-23. Once that burden is met, the onus shifts to

the non-movant to identify evidence demonstrating a dispute over a material fact that

would allow a reasonable finder of fact to rule in its favor. Liberty Lobby, 477 U.S. at

256.

In considering a motion for summary judgment, the court does not weigh each

side’s evidence but, rather, must draw all inferences in the light most favorable to the

nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587-

88 (1986). Where, as here, the parties have filed cross-motions for summary judgment,

the court evaluates each motion on its own merits and makes all reasonable inferences

against the party whose motion is under consideration. Marriot Int’l Resorts, L.P. v.

United States, 586 F.3d 962, 968-69 (Fed. Cir. 2009). To the extent there exists a

genuine issue of material fact, both motions must be denied. Id. at 969.

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The court evaluates the parties’ motions for partial summary judgment under these

standards.

C. Tax Refund Claims

It is well settled that in a tax refund case, like this one, there is a presumption of

the correctness of the findings of the Commissioner of Internal Revenue. See, e.g.,

Bubble Room, Inc. v. United States, 159 F.3d 553, 561 (Fed. Cir. 1998); Estate of

Rubinstein v. United States, 119 Fed. Cl. 658, 667 (2015) (“[T]he assessment made by

the [IRS] is presumed to be correct and this places an obligation on the taxpayer . . . to

rebut a presumption of correctness.”) (quotation marks omitted).

In a tax refund case, the ruling of the Commissioner of Internal

Revenue is presumed correct. To rebut this presumption of correctness, the

taxpayer must come forward with enough evidence to support a finding

contrary to the Commissioner’s determination. In addition, the taxpayer has

the burden of establishing entitlement to the specific refund amount claimed.

Bubble Room, Inc., 159 F.3d at 561 (internal citations omitted). “[I]n a refund suit, a

taxpayer has the burden of proving by a preponderance of the evidence that the

assessment or determination is incorrect and the correct amount, if any, of tax.” Cook v.

United States, 46 Fed. Cl. 110, 116 (2000) (citing Helvering v. Taylor, 293 U.S. 507,

515 (1935) (“[u]nquestionably the burden of proof is on the taxpayer”)).

The court considers plaintiff’s claim in light of these burdens of proof.

D. Research Tax Credit

The Internal Revenue Code specifies when a taxpayer may take a credit for

“qualified research expenses (QREs).” I.R.C. § 41(a)-(b). Qualified research excludes

“[a]ny research to the extent funded by any grant, contract, or otherwise by another

person (or governmental entity).” I.R.C. § 41(d)(4)(H) (funded research exception).

The regulations implementing § 41 similarly state that

[q]ualified research does not include any research to the extent funded by

any grant, contract, or otherwise by another (or governmental entity). To

determine the extent to which research is so funded, § 1.41-4A(d) applies.

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Treas. Reg. § 1.41-4(c)(9)). In turn, § 1.41-4A(d) further explains that research is funded

under either of two circumstances. First, research is funded if the taxpayer receives

payment that is not “contingent on the success of the research.” Treas. Reg. § 1.41-

4A(d)(1).

Research does not constitute qualified research to the extent it is funded by

any grant, contract, or otherwise by another person (including any

governmental entity). All agreements (not only research contracts) entered

into between the taxpayer performing the research and other persons shall be

considered in determining the extent to which the research is funded.

Amounts payable under any agreement that are contingent on the success of

the research and thus considered to be paid for the product or result of the

research (see § 1.41-2(e)(2)) are not treated as funding.

Treas. Reg. § 1.41-4A(d)(1). Under § 1.41-4A(d)(1), if a taxpayer is paid for the results

of the research regardless of whether those results are successful, the research is funded,

and the taxpayer is ineligible for a tax credit. Alternatively, if payment is “contingent on

the success of the research and thus considered to be paid for the product,” the research is

not funded, and the taxpayer is eligible for the tax credit, assuming satisfaction of

remaining § 41 requirements.

Second, research is funded if the taxpayer performing research for another person

or governmental entity “retains no substantial rights” in the research. Treas. Reg. § 1.41-

4A(d)(2).

If a taxpayer performing research for another person retains no substantial

rights in research under the agreement providing for the research, the

research is treated as fully funded for purposes of section 41(d)(4)(H), and

no expenses paid or incurred by the taxpayer in performing the research are

qualified research expenses. For example, if the taxpayer performs research

under an agreement that confers on another person the exclusive right to

exploit the results of the research, the taxpayer is not performing qualified

research because the research is treated as fully funded under this paragraph

(d)(2). Incidental benefits to the taxpayer from performance of the research

(for example, increased experience in a field of research) do not constitute

substantial rights in the research.

Treas. Reg. § 1.41-4A(d)(2).

III. Discussion – Whether Payment was Contingent on the Success of Research

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Plaintiff makes a number of arguments in support of its position that the research it

performed under each of the seven sample contracts was not funded, that is, it would be

paid for the results of the research only if those results were successful.

First, plaintiff argues that it had an established course of dealing with its

contracting partner in each of six sample contracts, in which, regardless of the plain terms

of each contract, it was expected to produce a successful result in order to receive

payment. Next, plaintiff argues that each of the seven sample contracts included either an

inspection clause or a warranty clause that expressly put Dynetics at financial risk of not

being paid unless the results of its research were successful. Plaintiff relies most heavily

on these two arguments.

In addition, plaintiff argues that it faced certain risks if it failed to produce

successful research, that termination clauses in each sample contract put it at risk of

nonpayment, and that in the case of three sample contracts, the fact that the contract was

initially issued as an undefinitized contract put it at risk.

Defendant responds in opposition to each argument, insisting that under each

sample contract, Dynetics would be paid regardless of whether its research was

successful or not. In addition, defendant argues that Dynetics failed to retain substantial

rights in the results of its research for two sample contracts. Accordingly, argues

defendant, even if Dynetics was able to show that its research was not funded for these

two contracts, Dynetics would still be ineligible for the tax credit. Plaintiff disagrees,

insisting it did retain substantial rights in the results of the research for both sample

contracts.

The court considers plaintiff’s arguments in turn, and then defendant’s argument.

A. Course of Dealing

Dynetics argues that a course of dealing existed between it and its contracting

partner in each of six of the sample contracts at issue in this motion, through which it was

obligated to deliver a particular result, not merely a number of hours of service or a level

of effort.1

1

Dynetics makes no argument that a course of dealing existed for the UAH01

contract. See Pl.’s Mot. 70-73 (offering no course of dealing argument for the UAH01

contract); Pl.’s Reply 11-14 (making no argument that the UAH01 contract was

ambiguous).

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Dynetics understood, based on its long-term relationships with its customers

that it had to successfully produce a product within the estimated cost to

receive any payment in some cases and to secure future work under the

contract in other cases. In both circumstances, Dynetics bore the financial

risk of failed research.

Pl.’s Mot. 22. In Dynetics’ view, under the course of dealing established with its

contracting partners, each of the six sample contracts functioned as a fixed-price

contract under which Dynetics was obligated to “produce a product,” and for

which Dynetics would be paid a fixed price, regardless of its actual costs. See id.

Defendant argues first that plaintiff’s course of dealing argument is parol

evidence. Def.’s Resp. 15-16. The court may only consider such evidence if the

contracts are ambiguous. Def.’s Resp. 15-16. Defendant insists they are not. Def.’s

Resp. 15-16.

Second, defendant asserts that even if the court were to consider plaintiff’s

argument, the evidence might reflect that Dynetics “had a unilateral policy that it would

continue performing research, at its own expense, in order to generate the desired

outcome, after the ceiling price of a contract or task order had been reached,” but such

evidence falls well short of showing a “joint understanding” between Dynetics and its

contracting partners. Id. at 16-17.

Defendant is correct as to both of its arguments.

1. Parol Evidence

A party’s “attempt to vary the clear meaning of [a contract] in accordance with the

parties’ course of dealing is improper under the parol evidence rule.” Alves v. United

States, 133 F.3d 1454, 1459 (Fed. Cir. 1998) (internal quotation marks omitted).

When construing a contract, a court first examines the plain meaning

of its express terms. The parol evidence rule is a rule of substantive law that

prohibits the use of external evidence to add to or otherwise modify the terms

of a written agreement “in instances where the written agreement has been

adopted by the parties as an expression of their final understanding. The rule

thus renders inadmissible evidence introduced to modify, supplement, or

interpret the terms of an integrated agreement. Evidence of the parties’

course of dealing constitutes this kind of parol evidence that is prohibited by

the rule. If the terms of a contract are clear and unambiguous, they must be

9

given their plain meaning—extrinsic evidence is inadmissible to interpret

them.

Barron Bancshares, Inc. v. United States, 366 F.3d 1360, 1375-76 (Fed. Cir. 2004)

(emphasis added) (internal citations and quotation marks omitted).

The Federal Circuit has described the circumstance in which a contract might be

deemed ambiguous. “When a contract is susceptible to more than one reasonable

interpretation, it contains an ambiguity. To show an ambiguity[,] it is not enough that the

parties differ in their respective interpretations of a contract term. Rather, both

interpretations must fall within a zone of reasonableness.” Metric Constructors, Inc. v.

NASA, 169 F.3d 747, 751 (Fed. Cir. 1999) (internal citations and quotation marks

omitted).

Plaintiff initially made no argument that any of the six sample contracts were

ambiguous. See Pl.’s Mot. 22-23. In its reply brief, plaintiff argued that, assuming

contractual ambiguity was necessary for consideration of any course of dealing, each

contract was in fact ambiguous. See Pl.’s Reply 10-14.

Dynetics argues that during the briefing of this motion, the parties “have disagreed

about the rights and obligations of Dynetics and the United States pursuant to these

contracts . . . demonstrating that the contracts are unclear and ambiguous.” Pl.’s Reply

11. Plaintiff is mistaken. The mere fact that the parties disagree is not evidence of

contractual ambiguity. See Metric Constructors, Inc., 169 F.3d at 751.

Plaintiff further argues that various contracts: (1) incorporate FAR provisions that

rely on a term that is never defined (AF007, AMS01, NT001); (2) contain more than one

inspection clause (AMS01 and AR009); (3) fail to include the appropriate inspection

clause (AR005); or (4) were modified frequently by the parties, suggesting a lack of

clarity (BOE12). See Pl.’s Reply 11-14.

Regarding the “undefined terms,” Dynetics points to “best efforts” in various

contracts, “allowable cost” in at least the AF007 and NT001 contracts, and the basis for

invoice “approval” in at least the AMS01 contract. Even if the court were to assume that

ambiguity in the contracts existed, it would be a patent ambiguity, because the terms

about which plaintiff now complains are found in the FAR—the provisions of which are

incorporated expressly in the contract. Under the patent ambiguity doctrine, contract

ambiguities must be read in the government’s favor due to the contractor’s duty to

inquire. Gen. Eng’g & Mach. Works v. O’Keefe, 991 F.2d 775, 781 (Fed. Cir. 1993).

The Federal Circuit has made clear that “[a]lthough we do not wish to penalize a

10

contractor because of a contract that was poorly drafted by the government, the very fact

that [a] contract is patently ambiguous places a burden on the contractor to seek

clarification. . . . [If the contractor] failed to do so[,] it must . . . lose on its claim . . . .”

Interstate Gen. Gov’t Contractors, Inc. v. Stone, 980 F.2d 1433, 1436 (Fed. Cir. 1992).

Thus, even if a patent ambiguity existed, Dynetics could not benefit from it.

Further, Dynetics makes no argument regarding how the terms it now considers

ambiguous are relevant to the question of whether any of the six sample contracts

required Dynetics to produce a particular product, rather than to provide hours of service

or a level of effort. And if the allegedly ambiguous terms on which Dynetics asks the

court to focus do not speak to the issue of what the contracts required Dynetics to do,

plaintiff’s course of dealing argument is unavailing.

Regarding the inspection clauses, as discussed infra Parts III.B.–F, Dynetics’

arguments do not persuade either that the inspection clauses put it at financial risk, or that

it was unclear which inspection clause applied to which contract. Moreover, even if

multiple or missing inspection clauses caused ambiguity—as Dynetics’ claims—the

ambiguity would be a patent ambiguity, and this fails to assist Dynetics. See Interstate

Gen. Gov’t Contractors, Inc., 980 F.2d at 1436.

That a contract is modified, as the BOE12 contract was many times, is not itself

evidence of ambiguity. As plaintiff itself noted, “[t]he award of the [BOE12] contract did

not authorize any work. Boeing would then modify the contract to add a new line item

that would both allot funds and specify the work required to be done.” Pl.’s Mot. 59-60.

Plaintiff makes no argument, nor could it, that the plain text of any of the six

sample contracts was “susceptible to more than one reasonable meaning” as to whether

Dynetics was responsible for delivering a particular result for the contracted price—as it

would be in a fixed-price contract—or whether it was responsible only for delivering a

certain number of hours of service or a certain level of effort—as it would be in the cost-

reimbursement, time-and-materials, and fixed-price level-of-effort contracts at issue here.

Plaintiff’s attempts to identify ambiguities are not convincing. Accordingly, in deciding

the parties’ cross-motions for partial summary judgment, the court does not consider the

parole evidence plaintiff seeks to introduce regarding its course of dealing with each of

its six contracting partners.

Nonetheless, the court is mindful that the sample contracts at issue in this motion

are but a few of the contracts at issue in this matter. Solely for the purpose of providing

the parties with information that might prove useful to them in resolving their remaining

11

disputes, the court addresses plaintiff’s course of dealing argument, including all

evidence filed by Dynetics.2

2. Whether a Course of Dealing Existed Between Dynetics and its Contracting

Partners

Course of dealing relies on a “shared understanding” between the parties, which in

certain situations can be used to clarify or supplement written contractual terms. See

Sperry Flight Sys. Div. of Sperry Rand Corp. v. United States, 548 F.2d 915, 923 (Ct. Cl.

1977) (“[A] course of dealing can supply an enforceable term to a contract (or may even

supplement or qualify that contract) provided that the conduct which identifies that

course of dealing can reasonably be construed as indicative of the parties’ intentions—a

reflection of their joint or common understanding.”).

Plaintiff’s evidence of a joint or common understanding is limited to affidavits,

see Exs. B-I, six of which are provided by Dynetics’ employees. Defendant responds that

“[f]or five of the contracts (AF007, AR005, BOE12, AR009, and AMS01), Dynetics

presents evidence only of its own understanding of its commitments and obligations and

no admissible evidence of the state of mind of the other contracting parties.”

Review of each affidavit shows that defendant is correct, Dynetics either states its

own unilateral contract management practices, or states its position on what it believes its

contracting partner “understood.”

To protect its reputation and demonstrate its commitment to providing

desired results within its estimated costs, Dynetics would have taken any cost

overruns out of its fee rather than ask the government for more money.

2

Plaintiff filed eight affidavits in support of its course of dealing argument. See

Exs. B-I. Defendant objects to the court’s consideration of one affidavit in its entirety, as

well as to specified paragraphs in the remaining affidavits. Def.’s Objections to Evidence

Submitted by Plaintiff in Support of Its Cross-Motion for Partial Summary Judgment,

ECF No. 40-1 (Def.’s Objs.); Supplemental Declaration of Jason Bergmann in

Opposition to Plaintiff’s Cross-Motion for Summary Judgment, ECF No. 40-2. As the

court does not consider plaintiff’s course of dealing argument in its resolution of the

parties’ cross-motions, it is unnecessary to rule on defendant’s objections to plaintiff’s

evidence. The parties should draw no inference as to the admissibility of plaintiff’s

evidence from the mere fact that for the limited purpose of assisting the parties in

resolving the remainder of their disputes, the court considers plaintiff’s evidence in its

entirety.

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Hug Aff. ¶ 19, Ex. E (AF007).

Both Dynetics and the U.S. Army understood that Dynetics would rework

any defective or unacceptable products produced under the AR005 contract

at its own cost, regardless of whether the product was required by a fixed-

price or cost-plus-fixed-fee CLIN.

Williams Aff. ¶ 14, Ex. D (AR005).

During our relationship with Boeing, we made Boeing aware of Dynetics’

commitment to delivery [of] technically superior products within the cost

estimates provided.

Bendickson Aff. ¶ 25, Ex. I (BOE12).

It was Dynetics’ practice to rework any defective or unacceptable work

product required by the contract at its own cost, regardless of the terms of the

contract. [The U.S. Army] was aware of Dynetics’ commitment to provide

a technically superior product within the cost estimates, even if that meant

reworking the product at its own cost.

Walker Aff. ¶ 22, Ex. H (AR009).

[I]t was Dynetics’ practice to finish any incomplete work or repair any

deficient products at its own costs (regardless of whether Dynetics was

technically obligated to do so under the contract), rather than risk losing

future work under the Omnibus 2000 contract or any other contract with

AMCOM.

Miller Aff. ¶ 29, Ex. C (AMS01).

It was Dynetics’ practice to rework defective or unacceptable deliverables at

its own costs, regardless of whether the terms of the contract imposed this

requirement on Dynetics.

Nicaise Aff. ¶ 14, Ex. G (All contracts).

Regarding the sixth contract, the NT001 contract with the Missile and Space

Intelligence Center (MSIC), Dynetics filed affidavits from a current Dynetics employee

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who was previously a MSIC employee, Patrick Keller, and a retired MSIC contracting

officer, Steven Thomason. See Exs. B (Thomason) & F (Keller).

Mr. Thomason affirms that he was the contracting officer for the NT001 contract

during the relevant time period, July 1, 2002 through June 30, 2005. Thomason Aff. ¶ 4.

Mr. Thomason provided statements regarding his management of the NT001 contract.

In working with Dynetics on the [NT001] Contract, I made it clear

that I expected all tasks to be completed within the amount listed in each

delivery order and that I would not modify the delivery orders to allot

additional funds if Dynetics was unable to complete the task within the funds

originally allotted, barring some unforeseen circumstance that was outside of

Dynetics’ control.

Thomason Aff. ¶ 15.

Dynetics also knew if a deliverable for a task was incomplete or

defective[,] it was unacceptable. Furthermore, Dynetics was aware that I

would expect the company to go back and rework any unacceptable

deliverables at its own cost and that I would not authorize additional funds

to rework a defective deliverable.

Id. ¶ 17.

Dynetics relied on these paragraphs in the Thomason affidavit to argue that “even

if the [NT001] contract were not ambiguous, the long-term course of dealing, which had

been accepted by both parties, would supplement the contract by reflecting the parties’

intent.” Pl.’s Reply 14. Dynetics is mistaken. If the NT001 contract is not ambiguous,

the court may not consider parol evidence, including the parties’ alleged course of

dealing. See. e.g., Barron Bancshares, 366 F.3d at 1375-76.

Dynetics also failed to show that Mr. Thomason had the authority to make the

types of changes to the NT001 contract that he asserts he made—that is, managing the

contract effectively as a fixed-price contract, despite the fact that the express terms of the

written contract provided for a cost-plus-fixed-fee contract.

The NT001 contract expressly incorporated a Limitation of Cost clause. Ex. 34, at

DYN 8099 ¶ I.75 (FAR 52.232-20 Limitation of Cost (Apr. 1984)). In relevant part,

FAR 52.232-20 provides that,

14

[t]he Contractor is not obligated to continue performance under this contract

(including actions under the Termination clause of this contract) or otherwise

incur costs in excess of the estimated cost specified in the Schedule, until the

Contracting Officer (i) notifies the Contractor in writing that the estimated

cost has been increased and (ii) provides a revised estimated total cost of

performing this contract.

FAR 52.232-20(d)(2). Simply put, under the Limitation of Cost clause, if the allocated

funds for the NT001 contract were exhausted, Dynetics was not obligated to continue

work. Dynetics argues that, in effect, Mr. Thomason had the authority to disregard the

plain language of the contract, as provided in the Limitation of Cost clause, and compel

Dynetics to produce unfunded work. But Dynetics fails to show that Mr. Thomason had

any such authority.

In fact, the express terms of the NT001 contract show otherwise. The contractual

terms indicate that such a change was outside of Mr. Thomason’s authority, and that

changes to the contract were to be made by written order. The NT001 contract expressly

incorporated a Changes clause enumerating the six type of changes a contracting officer,

like Mr. Thomason, was authorized to make to the contract—by written order. See Ex.

34, at DYN 8101 (incorporating FAR 52.243-2 Changes–Cost-Reimbursement (Aug.

1987) – Alternate II). Those six changes were: (1) description of services to be

performed; (2) time of performance; (3) place of performance; (4) drawings, designs, or

specifications under certain circumstances; (5) method of shipment or packing of

supplies; and (6) place of delivery. FAR 52.243-2 Alt. II.

Nothing in the Changes clause could be read to authorize a contracting officer to

make any change to the NT001 contract other than by “written order.” Furthermore,

nothing in the Changes clause could be read to authorize a contracting officer to override

the express terms of the contract and to change it from a cost-plus-fixed-fee contract to a

fixed-price contract—by either written order or oral understanding. The changes to the

NT001 contract for which Dynetics relies on Mr. Thomason’s affirmations are beyond

his authority, as set forth in the Changes clause, and nothing in the record suggests that

Mr. Thomason had authority over the NT001 contract beyond that provided in the

Changes clause. See Thomason Aff. ¶¶ 7-8 (describing contracting officer duties and

authority). In addition, nothing in the record suggests that Mr. Thomason, a former

MSIC employee, had authority to present MSIC’s position on its management of the

NT001 contract.

Dynetics also filed an affidavit from Mr. Keller, who in his previous role as

15

MSIC Deputy Director was responsible for the overall execution of the MSIC’s mission.

Keller Aff. ¶ 4. Mr. Keller affirmed that “his primary area of expertise is the technical

aspects of the weapons systems involved in the [Defensive Systems Analysis] contracts.”

Id. ¶ 5. Mr. Keller did not state that he had any personal knowledge about or

involvement with the NT001 contract during his MSIC employment, or for that matter,

during his current employment with Dynetics. The only mention of the NT001 contract

by Mr. Keller was his statement that “Contract MDA908-99-D-0001 was one of DSA

contracts awarded to Dynetics by MSIC. It was issued to Dynetics in 1999 and was

given the project code NT001 by Dynetics.” Id. ¶ 6. While true, this statement provides

no support for Dynetics’ assertions of a course of dealing under the NT001 contract.

As defendant correctly points out, Dynetics has failed to provide the requisite

evidence of any “joint understanding” between it and each of its contracting partners.

Def.’s Resp. 16-17.

3. “All Agreements”

Finally, Dynetics argues that the Treasury regulations “require” the court to

consider the “agreements” it had with its contracting partners. See Pl.’s Reply 10.

Dynetics insists:

[T]he course of dealing and understandings with the government reflect

agreements between Dynetics and the government with respect to the

research and development done under the contracts. These “agreements” are

required to be considered by the Treasury Regulations. Treas. Reg. § 1.41-

4A(d)(1) (“All agreements (not only research contracts) entered into between

the taxpayer performing the research and other persons shall be considered

in determining the extent to which the research is funded.”). Therefore, even

if not permitted in the contract interpretation context, the course of dealing

must be considered pursuant to the Treasury Regulations when determining

the “funding” issue.

Id. But, Dynetics is mistaken; the Treasury regulations require no such thing. First,

Dynetics assumes what it seeks to prove, in particular, that it had an “agreement” with

any of the six contracting partners for which it has pressed this argument. Second, the

agreement contemplated in the Treasury regulation is not present here. The term

“agreement” is defined in the FAR, which governs government contracts like those at

issue here. An “agreement” is defined as a “written instrument of understanding,” that is

“not a contract.” FAR 16.702(a), 16.703(a). Clearly, the reference to “agreements” in

16

the Treasury regulations does not encompass what Dynetics asserts is a course of dealing

between it and its contracting partners.

For all these reasons, if any of the six sample contracts were ambiguous, which

they are not, see supra Part III.A.1., and the court considered plaintiff’s affidavits in their

entirety, a question on which it makes no decision, see supra note 2, plaintiff’s evidence

would still fail to show a joint understanding that would support a finding that a course of

dealing existed between Dynetics and any of its contracting partners in the AF007,

AR005, NT001, BOE12, AR009, or AMS01 contracts.

B. Inspection Clauses – AF007 and NT001 Contracts

Incorporated into the AF007 contract as the inspection clause is FAR 52.246-8

Inspection of Research and Development–Cost-Reimbursement (May 2001). Ex. 12, at

DYN 957. Dynetics argues that this inspection clause is like one at issue in the contract

discussed in Fairchild Industries, Inc. v. United States, 71 F.3d 868, 873 (Fed. Cir. 1996).

Given the similar inspection clauses, Dynetics urges that its contract is like the contract in

Fairchild, which the Federal Circuit found “demonstrate[d] the shift of risk to the

contractor.” Pl.’s Mot. 41 (citing Fairchild, 71 F.3d at 873).

Dynetics is mistaken in its reading of Fairchild. The flaw in Dynetics’ position is

that it assumes the Federal Circuit based its decision on the incorporated inspection

clause alone. The appellate court did not. Rather, it clearly based its decision on the text

of the contract, as well as on the inspection, rejection, and payment clauses incorporated

into the contract. Fairchild, 71 F.3d at 871 (“The . . . contract provided that the Air Force

was obligated to pay for the research only if Fairchild produced results that met the

contract specifications, in accordance with certain provisions of the Defense Acquisition

Regulations (DAR).”).

The contract between Fairchild and the Air Force called for Fairchild to produce

two prototype aircraft, according to a “contract [that] contained over 1,000 pages of

technical specifications that required Fairchild to meet specific design, construction,

quality, and performance standards.” Fairchild, 71 F.3d at 870. The contract included

express language by which Fairchild accepted responsibility for producing the prototype

aircraft, known as a Next Generation Trainer (NGT). According to the contract, “[t]he

contractor hereby accepts Total System Responsibility for the NGT System,” with “total

system responsibility” defined as the

responsibility for the installation and integration of the NGT system

elements, i.e., its systems, subsystems, components, support equipment, and

17

software/data; including the responsibility for undertaking any and all actions

necessary to assure that the total system will meet all requirements as defined

in the system specification . . . as identified in . . . this contract.

Fairchild, 71 F.3d at 871 (emphasis added). Thus according to the contract language,

Fairchild explicitly accepted responsibility for doing whatever was necessary to produce

prototype aircraft in compliance with the contract specifications. See Fairchild, 71 F.3d

at 870. Unlike the contractor in Fairchild, Dynetics makes no assertion that it expressly

accepted contractual responsibility for producing any product.

The Federal Circuit in Fairchild also relied on two DAR provisions that were

incorporated into the contract: one governing inspection and rejection, DAR 7-302.4,

and the other covering payments, DAR 7-302.2.3 “If the work was deemed unacceptable,

the Air Force could either (1) reject the work, (2) require Fairchild to correct the work at

its own expense, or (3) accept the work subject to an equitable price reduction.”

Fairchild, 71 F.3d at 870 (citing DAR 7-302.4 (1976)). Fairchild would be paid for

“work product delivered and accepted.” Fairchild, 71 F.3d at 870 (citing DAR 7-302.2

(1976)).

The Fairchild inspection clause, which included rejection language, is

included below.

(a) All work under this contract shall be subject to inspection and test by

the Government, to the extent practicable, at all times (including the period

of performance) and places, and in any event prior to acceptance. . . .

(b) The Government may reject any work that is defective or otherwise

not in conformity with the requirements of this contract. If the Contractor

fails or is unable to correct or to replace such work within the delivery

schedule or such later time as the Contracting Officer may authorize, the

Contracting Officer may accept such work at a reduction in price which is

equitable under the circumstances.

3

The Defense Acquisition Regulations (DAR) were included as Title 32 of the

Code of Federal Regulations until April 1, 1984. See FMC Corp. v. United States, 853

F.2d 882, 884 n.2 (Fed. Cir. 1988). Thus, the cited DAR are available as 32 C.F.R. § 7-

302.4 and 32 C.F.R. § 7-302.2.

18

DAR 7-302.4 (a)-(b) (emphasis added).

The relevant portion of FAR 52.246-8, the inspection clause incorporated into the

AF007 contract—on which Dynetics relies, is as follows: “The Government has the right

to inspect and test all work called for by the contract, to the extent practicable at all

places and times, including the period of performance, and in any event before

acceptance.” FAR 52.246-8(c). Dynetics is correct that the inspection language in FAR

52.246-8(c) is like that found in DAR 7-302.4(a), the provision at issue in the Fairchild

case. But the rejection language found in DAR 7-302.4(b) is wholly absent from FAR

52.246-8, and Dynetics makes no assertion that such language was incorporated

independently into the AF007 contract.

Finally, the payments clause in the Fairchild contract provided that “[t]he

Contractor shall be paid . . . [at] the prices stipulated herein for work delivered or

rendered and accepted . . . .” DAR 7-302.2.

The payments clause incorporated in the AF007 contract is FAR 52.216-7

Allowable Cost and Payment (Dec. 2002). See Ex. 12, at DYN 964. Dynetics makes no

argument that the payments clause in the AF007 contract included similar language to the

payment clause in Fairchild that limited payment to work that the government

“accepted.” Nor is such language apparent in a review of FAR 52.216-7.

The Federal Circuit found that Fairchild was entitled to the research credit,

because “[t]he contract explicitly placed solely on Fairchild the risk of failure of every

line item . . . . The items to be produced were not commodities: all required research,

development, and testing, to meet complex contract specifications.” Fairchild, 71 F.3d at

873. The same cannot be said of the AF007 contract. Dynetics did not bear such risk.

Notwithstanding Dynetics’ arguments to the contrary, any similarity between the

AF007 contract and the contract in Fairchild is limited to the inspection clause. The

AF007 contract included no language that directed Dynetics to accept responsibility for

producing a product. The AF007 contract did not include rejection language; nor did it

limit payment to work the government accepted. The limited similarity between the

inspection clauses does not support a finding that the AF007 contract was like the

contract in Fairchild. Throughout its arguments based on the various inspection clauses

relevant to the sample contracts, Dynetics has attempted to liken the sample contracts to

the contract in Fairchild. For the same reasons discussed herein, none of the sample

contracts are like the contract in Fairchild.

19

Dynetics adds that it was put at financial risk by the plain text of certain other

provisions in FAR 52.246-8, insisting that

FAR § 52.246-8 gives the government the right [to] require replacement or

correction of “work not meeting contract requirements.” FAR § 52.246-8(f).

Furthermore, if the contractor fails to proceed with “reasonable promptness

to perform required replacement or correction, the Government may (i) [b]y

contract or otherwise, perform the replacement or correction, [and] charge

the Contractor any increased cost.” FAR § 52.246-8(g)(1).

Pl.’s Mot. 41. But, Dynetics has not fully considered the FAR provision on which it

relies.

FAR 52.246-8(f) provides that

[a]t any time during contract performance . . . the Government may require

the Contractor to replace or correct work not meeting contract requirements.

. . . Except as otherwise provided in paragraph (h) below, the cost of

replacement or correction shall be determined as specified in the Allowable

Cost and Payment clause, [FAR 52.216-7] but no additional fee shall be paid.

FAR 52.246-8(f).

A review of FAR 52.216-7, the payments clause incorporated into the AF007

contract, shows that reimbursable costs include those “for items or services purchased

directly for the contract.” FAR 52.216-7(b)(1)(i). There is no mention of excluding costs

incurred to replace or correct work not meeting standards. As defendant correctly points

out, while the contractor will be paid “no additional fee” for replacement or correction,

“the denial of a ‘fee’ merely limits the contractor’s profit for the corrective work, but it

does not preclude the contractor from recovering its costs.” Def.’s Resp. 11. Dynetics

makes no assertion that in replacing or correcting its work it would not be paid. Nor does

the language of FAR 52.246-8(f) support such a position.

Under FAR 52.246-8(g), the government may charge the contractor for “increased

cost” if the government has to perform the replacement or correction. FAR 52.246-

8(g)(1)(i). However, as Dynetics correctly states, the government may only do so “[i]f

the Contractor fails to proceed with reasonable promptness to perform required

replacement or correction.” Id. Dynetics could be at financial risk under FAR 52.246-

8(g)(1), but only if it “fails to proceed with reasonable promptness” to make the

replacement or correction. FAR 52.246-8(g)(1). And, this risk is not attributable to the

20

failure of the research, which is the sole risk relevant to the tax credit. See Treas. Reg. §

1.41-4A(d)(1) (“Amounts payable under any agreement that are contingent on the success

of the research and thus considered to be paid for the product or result of the research . . .

are not treated as funding.”).

Dynetics’ arguments that FAR 52.246-8, as incorporated into the AF007 contract,

put it at financial risk are unpersuasive.

The NT001 contract incorporated FAR 52.246-5 Inspection of Services–Cost-

Reimbursement (Apr. 1984). Ex. 34, at DYN 8075. The inspection language in FAR

52.246-5(c) is identical to that in the inspection clause incorporated into the AF007

contract, FAR 52.246-8(c), with the exception that FAR 52.246-5(c) provides for the

inspection of “services,” rather than “work.”

As it did with the AF007 contract, Dynetics argues that the inspection language in

the NT001 contract, which incorporates FAR 52.246-5(c), is similar to that in DAR 7-

302.4(a) and puts it at the same risk as in Fairchild. Pl.’s Mot. 68. But, as previously

discussed, any similarity in the inspection language of FAR 52.246-5(c) and DAR 7-

302.4(a), without more, is insufficient to put Dynetics at financial risk.

C. Inspection Clauses – AR009 and AMS01 Contracts

The AR009 contract expressly incorporated two different clauses for inspection of

research and development; one pertained to fixed-price contracts (FAR 52.246-7) and the

other to cost-reimbursement contracts (FAR 52.246-8). Ex. 47, DYN 6946. The AR009

contract is a firm-fixed-price, level-of-effort contract (FFP-LOE) for labor costs. See id.

at DYN 6954.

The AMS01 contract expressly incorporated four different inspection clauses,

respectively for fixed-price contracts (FAR 52.246-4), cost-reimbursement contracts

(FAR 52.246-5), time-and-material and labor-hour contracts (FAR 52.246-6) and

research and development contracts (short form) (FAR 52.246-9). See Ex. 51, at DYN

7579. Plaintiff explained that multiple inspection clauses were included in the AMS01

contract because the contract permitted “fixed rate[], fixed-price and/or cost plus fixed

fee task orders.” Pl.’s Supp. Br. 17 (quoting Ex. 51, at DYN 7570). The parties agree

that there are only five task orders at issue under the AMS01 contract, and all are FFP-

LOE. Pl.’s Mot. 45-46 (“Each task order was issued on a fixed-price level of effort

21

basis.”);4 Def.’s Mot. 38 (“The five task orders provided for work on a fixed-rate level-

of-effort basis.”).

In arguing that it was put at financial risk by the inspection clause contained in

each contract, Dynetics relied only on the fixed-price inspection clauses. See Pl.’s Mot.

58 (FAR 52.246-7 under AR009); Id. at 49 (FAR 52.246-4 under AMS01). But, plaintiff

did not explain how it could be at financial risk under any inspection clause, given the

definition of a FFP-LOE contract provided in the FAR:

A firm-fixed-price, level-of-effort term contract is suitable for investigation

or study in a specific research and development area. The product of the

contract is usually a report showing the results achieved through application

of the required level of effort. However, payment is based on the effort

expended rather than on the results achieved.

FAR 16.207-2 Firm-Fixed-Price, Level-of-Effort Term Contracts – Application

(emphasis added). The court asked the parties to reconcile arguments based on the fixed-

price inspection clauses with the definition of a FFP-LOE contract provided in FAR

16.207-2. See Order Supp. Br. 4-5.

Dynetics responded that “in the case of both the AR009 and AMS01 contracts, the

government defined deliverables that were expected as a pre-requisite to payment.” Pl.’s

Supp. Br. 14-15. While acknowledging that “in theory” a contractor could satisfy FFP-

LOE contract requirements by providing a specified level of effort, Pl.’s Supp. Br. 14,

Dynetics argued that the AR009 and AMS01 contracts were not “typical” FFP-LOE

contracts. Pl.’s Reply to Def.’s Supp. Br. 10. Rather, in Dynetics’ view, both contracts

“appear to be hybrids, calculating a fixed price based on effort, but requiring delivery of

specified items as a condition for payment.” Id.

As an example of deliverables, Dynetics points to Technical Directive Order 8

(TDO 8) issued under the AR009 contract, which required Dynetics to “develop and

deliver a long list of hardware items.” Pl.’s Supp. Br. 15 (citing Ex. 48, at DYN 62475).

Review of TDO 8 shows that Dynetics is correct. TDO 8 required Dynetics’ effort on

“Flight Hardware Fabrication” in support of “several flight tests to demonstrate

4

In its supplemental briefing, Dynetics seems to argue the task orders were fixed

price, rather than firm-fixed-price, level-of-effort. See Pl.’s Supp. Br. 17-18. The record

is clear, however, that the five task orders were firm-fixed-price, level-of-effort, with the

government purchasing a specified number of labor hours. See Ex. 52, at 64293 (Task

Order 27); Ex. 53, at DYN 64342 (Task Order 34); Ex.54 at DYN 64555 (Task Order

53); Ex. 55 at DYN 65341 (Task Order 60); Ex. 56 at DYN 65373 (Task Order 64).

22

hypervelocity performance.” Ex. 48, at DYN 62475. Dynetics was required to “fabricate

to print . . . hardware items in accordance with the design drawings provided . . . .” Id.

A list of twenty different hardware items, in various quantities, followed. Id. at DYN

62475-76.

According to Dynetics, “[s]eeking specified deliverables is directly contrary to the

applicable uses of [a] FFP-LOE [contract] under the FAR, which states that this contract

form may only be used where ‘the work cannot otherwise be clearly defined.”’ Pl.’s

Supp. Br. 15 (quoting FAR 16.207-3(a)). Plaintiff is mistaken, however, in its reliance

on this provision of the FAR.

The AR009 contract is a research & development contract. Ex. 47, at DYN 6933

item 15 (“Kind of Contract: Research and Development Contract”). As used in FAR Part

35 (Research and Development Contracting), the term “development” means

the systematic use of scientific and technical knowledge in the design,

development, testing, or evaluation of a potential new product or service (or

of an improvement in an existing product or service) to meet specific

performance requirements or objectives. It includes the functions of design

engineering, prototyping, and engineering testing. . . .

FAR 35.001. Part 35 of the FAR governing “contracting methods and contract type”

provides that a FFP-LOE contract “may be useful for,” inter alia, “developing system

design concepts.” FAR 35.006(d) (citing FAR 16.207, Firm-Fixed-Price, Level-of-Effort

term contracts). Thus, a FFP-LOE contract is contemplated for development, and

development includes prototyping and engineering testing, all of which require

production of hardware. Contrary to Dynetics’ assertion, a specific deliverable does not

contravene the FAR provisions governing FFP-LOE contracts.

Dynetics adds that under the AMS01 contract, the government “likewise sought

specific deliverables.” Pl.’s Supp. Br. 17. Unlike in its argument for the AR009 contract,

Dynetics provided no specific examples from the task orders in the record. Regardless,

for the reasons explained above, any argument based on the mere requirement of a

deliverable would be insufficient to show that the AMS01 contract was other than a FFP-

LOE contract.

Dynetics also argued that both contracts seemingly functioned as hybrid contracts

because the government permitted Dynetics to “vary its hours ‘by plus or minus 10%

provided the total price for that specific [Technical Directive Order] option exercise is

not exceeded.”’ Id. at 16 (citing Ex. 47, at DYN 6949). Dynetics reasons that “[i]f the

23

government was just buying the ‘effort’ there would be no reason to vary the hours,

because hours would be all that Dynetics was providing.” Id.

Review of the AR009 contract shows that the government specified the labor mix

for each option, including the specific positions and the number of hours for each

position. See Ex. 48, at DYN 6947. For example, an option would specify a certain

number of hours of program manager time, senior engineer time, engineer time, etc. Id.

As Dynetics correctly points out, the government allowed it to shift time from one

position to another, for example by using more engineer time but less senior engineer

time, provided it did not exceed the total dollar amount contracted for that option. Id. at

DYN 6949. The government simply allowed Dynetics some flexibility and discretion in

the labor mix of the “effort” it provided. Contrary to Dynetics’ assertion, nothing in this

labor mix flexibility shows the government was buying anything other than a level of

effort.

Dynetics relied on a case from the U.S. Department of Agriculture Board of

Contract Appeals (Board). In its briefing, Dynetics argued that the Board considered a

contract “similar” to the AR009 and AMS01 contracts, and agreed “to treat the contract

as firm-fixed-price, despite the contractor’s claim that it understood the contract to be

fixed-price, level of effort.” Pl.’s Supp. Br. 18-19 (citing In re Mangi Envtl. Grp., Inc.,

AGBCA Nos. 2005-101-1, 2005-102-1, 2005-103-1, 06-1 BCA ¶ 33,233 (Mar. 7, 2006)).

In that case, the contractor attempts to argue—during a dispute over costs it

incurred above the contract amount—that because it had understood the contract to be

FFP-LOE, not fixed-price, it was entitled to recover payment for its costs above the

contracted dollar amount. Mangi, Fact 22. The Board found that the contract was firm-

fixed-price; that is what the contract expressly stated, and during the bidding process, the

contractor had acknowledged as much, in writing. Accordingly, this board case provides

Dynetics with no support.

Plaintiff has not shown that either the AR009 or AMS01 contract was anything

other than a firm-fixed-price, level-of-effort contract. As plaintiff correctly

acknowledged, in such a contract, the contractor only needs to provide a certain level of

effort in order to be paid for its work. See Pl.’s Reply to Def.’s Supp. Br. 10. Dynetics

has not shown that it was put at financial risk by the terms of any inspection clause

incorporated into either the AR009 or AMS01 contract.

D. Inspection Clause – AR005 Contract

24

The AR005 contract includes three different line items, fixed price, cost-plus-

fixed-fee and cost-reimbursement. The fixed-price line items provided for hardware

production, the cost-plus-fixed-fee line items covered a specified number of hours of

engineering services, and the cost-reimbursement line items supported travel and other

direct expenses. (The latter two are referred to collectively as cost-reimbursement line

items.) See, e.g., Ex. 27, at DYN 58339-42.

Defendant objects only to expenses under the cost-reimbursement line items; it

makes no objection to expenses under the fixed-price line items. Def.’s Mot. 27.

According to defendant, Dynetics claimed QREs for wages in various amounts for each

of the three tax years at issue in this motion, and these are the expenses for which

defendant argues Dynetics may not take a tax credit under the AR005 contract. See id.

The AR005 contract incorporated only one inspection clause—FAR 52.246-2

Inspection of Supplies–Fixed-Price (Aug. 1996). See Ex. 27, at DYN 58356. Defendant

acknowledges that the absence of an inspection clause for the cost-reimbursement line

items was an “oversight,” Def.’s Reply to Pl.’s Supp. Br. 9, likely attributable to the fact

that the initial undefinitized AR005 letter contract expressed the intent of the Army to

enter a fixed-price contract, which included no line items for engineering services, see

Ex. 26, at DYN 36187-90. Regardless of the reason, it is apparent that the AR005

contract includes both fixed-price and cost-reimbursement line items, while including

only a fixed-price inspection clause. The parties disagree on the consequence of this

oversight. Defendant has correctly described each party’s position as follows:

Defendant contends that the fixed-price clauses apply by their terms only to

the fixed-price CLINs, and the Court should read certain mandatory but

omitted cost-reimbursement FAR clauses into the contract under the

Christian doctrine.5 Disagreeing, Dynetics suggests that the Court must

apply the specific fixed-price clauses in the AR005 Contract both to the

fixed-price and cost reimbursement CLINs.

Def.’s Reply to Pl.’s Supp. Br. 9 (footnote added).

5

“Under the Christian doctrine, a court may insert a clause into a government

contract by operation of law if that clause is required under applicable federal

administrative regulations.” Def.’s Resp. 4-5 (quoting Gen. Eng’g & Mach. Works v.

O’Keefe, 991 F.2d 775, 779 (Fed. Cir. 1993); see also G.L. Christian & Assocs. v. United

States, 160 Ct. Cl. 1, 12 (1963) (holding that “there was a legal requirement that the

plaintiff’s contract contain the standard termination clause and the contract must be read

as if it did”)).

25

The court first considers plaintiff’s argument that FAR 52.246-2 applies to the

expenses for which it seek a tax credit, wages for engineering services. FAR 52.246-2

governs the inspection of “supplies,” which “includes but is not limited to raw materials,

components, intermediate assemblies, end products, and lots of supplies.” FAR 52.246-

2(a). Dynetics failed to offer an explanation as to how wages for engineering services

could fall within the definition of supplies provided in FAR 52.246-2.

Rather, Dynetics’ approach was to argue that, notwithstanding that the line items

in the AR005 contract were labeled expressly “cost plus fixed fee” e.g., Ex. 27, at DYN

58340, the contract as a whole was a firm-fixed-price contract, and thus the fixed-price

inspection clause, FAR 52.246-2, must apply to every line item. See Pl.’s Supp. Br. 9

(“Because [FAR 52.246-2] is the only [inspection] clause specifically incorporated into

the contract, it is relevant to the question of whether all of the work performed under the

AR005 contract is funded. . . . ”); Pl.’s Reply to Def.’s Supp. Br. 4 (“The AR005 contract

is designated by the government as “Firm-Fixed-Price”, notwithstanding the fact that

certain CLINs are paid on a cost reimbursement basis.) (internal citation omitted).

In support of this argument, Dynetics points to the first page of the AR005

contract, which is a form contract, Standard Form 30 (SF 30). See Pl.’s Reply to Def.’s

Supp. Br. 4 (citing Ex. 27, at DYN 58336). Item 1 on the first page of that contract is a

small box labeled “Contract ID Code,” below which are the typed words “Firm-Fixed-

Price.” Ex. 27, at 58336. In effect, Dynetics argues that the words typed into Item 1 state

what type of contract the AR005 contract is. Review of the SF 30, and its instructions,

shows that Dynetics is mistaken.

The SF 30 and its instructions are available in the FAR. See FAR 53.301-30

(Standard Form 30, Amendment of Solicitation/Modification of Contract). The following

instruction is provided for SF 30 Item 1: “Item 1 (Contract ID Code). Insert the contract

type identification code that appears in the title block of the contract being modified.”6

Thus, the term “firm fixed price” describes the “contract being modified,” that is

the earlier undefinitized letter contract, Ex. 26, not the definitized AR005 contract at

issue in this motion, Ex. 27. That the undefinitized letter contract was a firm-fixed-price

contract is undisputed. It is also irrelevant to this motion, as that contract included no

line items for engineering services, the only disputed expenses in this motion.

6

A copy of the form is also available on the General Services Administration

(GSA) website. GSA, http://www.gsa.gov/portal/forms/download/116158 (search “SF

30”) (last visited May 22, 2015).

26

Dynetics has failed to show either that the AR005 contract was a fixed-price

contract, or that the wage expenses for which it seeks a tax credit were supplies which

could fall within the fixed-price inspection clause, FAR 52.246-2, as incorporated in the

AR005 contract. Accordingly, it is unnecessary to consider defendant’s alternative

argument that the court should incorporate certain FAR provisions in the AR005 contract

as a matter of law under the Christian doctrine.

E. Warranty Clause – BOE12 Contract

Dynetics asserts it was put at financial risk under the Rejection, Warranty for

Services, and Warranty for Materials paragraphs of the Boeing Company General

Provisions for Labor Hour/Time & Material Contracts (GP3). See Pl.’s Mot. 63-64

(citing Pl.’s Ex. L ¶ 9 (Rejection), ¶ 11 (Warranty for Services), and ¶ 12 (Warranty for

Materials)). The GP3 is expressly incorporated into the BOE12 contract. See Ex. 40, at

DYN 41546, 41557-58.

Dynetics argues it was at financial risk because Boeing could reject

nonconforming services, and could either require Dynetics to reperform at its own

expense, or could obtain replacement services and charge Dynetics the cost for doing so.

See Pl.’s Mot 63 (citing Pl.’s Ex. L ¶¶ 9(a), 9(b), 11). Likewise, Dynetics argues that it

was responsible for correcting or replacing nonconforming materials at its own expense.

See id. (citing Pl.’s Ex. L ¶ 12).

The relevant clauses of the GP3 are included below.

REJECTION

a. If Seller [Dynetics] delivers nonconforming Services, Buyer [Boeing] may

require Seller to promptly correct or replace the nonconforming Services.

Redelivery to Buyer of any corrected or replaced Services shall be at Seller’s

expense, limited to Seller’s hourly rate as set forth in this contract, excluding

that portion of the rate attributable to profit.

b. In addition Buyer may (i) correct the nonconforming Services or (ii) obtain

replacement Services from another source at Seller’s expense.

Pl.’s Ex. L ¶ 9(a)-(b).

WARRANTY FOR SERVICES. Seller warrants that all Services performed

hereunder shall be performed by employees or agents of Seller who are

experienced and skilled in their profession and in accordance with industry

27

standards. Seller further warrants that all Services performed under this

contract, at the time of acceptance, shall be free from defects in workmanship

and conform to the requirements of this contract. Buyer shall give written

notice of any defect or nonconformance to Seller within one year from the

date of acceptance by Buyer. [“First provision”] Buyer may, at its option,

either (a) require correction or reperformance of any defective or

nonconforming Services, or (b) make an equitable adjustment in the price of

this contract. If Seller is required to correct or reperform the Services, such

correction or reperformance shall be at Seller’s expense. Any Services

corrected or reperformed shall be subject to this article to the same extent as

work initially performed. [“Second provision”] If Seller fails or refuses to

correct or reperform, Buyer may correct or replace with similar Services and

charge Seller for any cost to Buyer, or make an equitable adjustment in the

price of this contract.

Id. ¶ 11 (annotation added).

WARRANTY FOR MATERIALS

(a). . . . Buyer may, at its option, either (i) return for credit or refund or (ii)

require prompt correction or replacement of the defective or nonconforming

materials. Return to Seller of defective or nonconforming materials and

redelivery to Buyer of corrected or replaced materials shall be at Seller’s

expense.

Id. ¶ 12.

1. Paragraph 9(a) of the Rejection Clause and the “First Provision” of the

Paragraph 11 Warranty for Services Clause

Review of paragraph 9(a) shows that while Dynetics is correct that Boeing may

require it to “correct or replace the nonconforming [s]ervices,” it is incorrect that

Dynetics would be at financial risk in doing so. Dynetics relies on the term “seller’s

expense,” in paragraph 9(a). See Pl.’s Mot. 63 (“Boeing could reject nonconforming

services and require Dynetics . . . to “correct[] or replace[] Services . . . at Seller’s

expense.”) (quoting Pl.’s Ex. L ¶ 9(a)). But Dynetics omits mention of the fact that this

term is defined as “limited to Seller’s hourly rate as set forth in this contract, excluding

that portion of the rate attributable to profit.”

28

Thus when called upon by Boeing to correct or replace nonconforming services,

Dynetics is first paid its full hourly rate for producing the initial nonconforming services,

and is then paid its costs for reperforming those services, with the exception of its profit.

This is like the inspection clause in the AF007 contract, FAR 52.246-8(f). See supra Part

III.B. As discussed therein, the omission of further profit for reperforming

nonconforming services is not the type of risk contemplated under the Treasury

regulation. Dynetics was not at financial risk under the plain text of paragraph 9(a).

In considering Dynetics’ arguments under paragraph 11, it is apparent that the first

provision in that Warranty for Services clause addresses the same point as paragraph 9(a)

of the Rejection clause, that is Boeing’s rights in the face of Dynetics’ delivery of

nonperforming services. Reviewing the relevant sentences side-by-side is helpful in

appreciating the similarity.

Reperformance Requirement

Rejection – Warranty for Services –

Paragraph 9(a) Paragraph 11 “First provision”

If Seller delivers nonconforming Services, Buyer may . . . (a) require correction or

Buyer may require Seller to promptly reperformance of any defective or

correct or replace the nonconforming nonconforming Services . . . . If Seller is

Services. Redelivery to Buyer of any required to correct or reperform the

corrected or replaced Services shall be at Services, such correction or

Seller’s expense, limited to Seller’s hourly reperformance shall be at Seller’s expense.

rate as set forth in this contract, excluding Any Services corrected or reperformed

that portion of the rate attributable to shall be subject to this article to the same

profit. extent as work initially performed.

Pl.’s Ex. L ¶¶ 9(a), 11. The only real difference between paragraphs 9(a) and 11 is

the definition of “seller’s expense.” Paragraph 11 fails to include the dependent

clause “limited to Seller’s hourly rate as set forth in this contract, excluding that

portion of the rate attributable to profit.” In reading paragraph 11, the question is

whether the term “seller’s expense” should be read to include the definition set

forth in paragraph 9(a).7

7

The court asked the parties to comment on the definition of seller’s expense in

paragraph 9(a), and whether this definition would apply in paragraph 11, and whether

Dynetics would be at financial risk under this definition. Order for Supp. Br. 4.

Dynetics’ response was limited to stating that it understood that any reference to “Seller”

was a reference to Dynetics, followed by a repetition of its course of dealing argument.

See Pl.’s Supp. Br. 13.

29

“[T]he rule of thumb [is] that a term generally means the same thing each time it is

used,” which is known as the presumption of consistent usage. United States v.

Castleman, 134 S. Ct. 1405, 1417 (2014). However, “the presumption of consistent

usage readily yields to context, and a statutory term—even one defined in the statute—

may take on distinct [characteristics] from association with distinct statutory objects

calling for different implementation strategies. Utility Air Regulatory Grp. v. E.P.A., 134

S. Ct. 2427, 2441 (2014) (internal quotation marks omitted).

“The words of a contract are deemed to have their ordinary meaning appropriate to

the subject matter, unless a special or unusual meaning of a particular term or usage was

intended, and was so understood by the parties.” Lockheed Martin IR Imaging Sys., Inc.

v. West, 108 F.3d 319, 322 (Fed. Cir. 1997). “Under general rules of contract law we are

to interpret provisions of a contract so as to make them consistent.” Abraham v.

Rockwell Int’l Corp., 326 F.3d 1242, 1251 (Fed. Cir. 2003). “[A]n agreement is not to be

read in a way that places its provisions in conflict, when it is reasonable to read the

provisions in harmony . . . . [T]he provisions must be read together in order to implement

the substance and purpose of the entire agreement.” Air-Sea Forwarders, Inc. v. United

States, 166 F.3d 1170, 1172 (Fed. Cir. 1999). “A reasonable interpretation must assure

that no contract provision is made inconsistent, superfluous, or redundant.” Medlin

Const. Group, Ltd. v. Harvey, 449 F.3d 1195, 1200 (Fed. Cir. 2006) (internal quotation

marks omitted).

To read the term “seller’s expense” in paragraph 11 without the paragraph 9(a)

definition would mean that under paragraph 11, Dynetics must reperform at its own

expense, which is directly at odds with the plain text of paragraph 9(a), which states that

when reperforming, Dynetics will be paid its “hourly rate” (less its profit).

As both paragraphs 9(a) and 11 address the same point, under the presumption of

consistent usage, the court would read the definition for seller’s expense provided in

paragraph 9(a) into paragraph 11. Reading the paragraph 9(a) definition of seller’s

expense into paragraph 11 also would permit the court to interpret the contract provisions

consistently, without placing the two provisions in conflict with one another. See

Abraham, 326 F.3d at 1251; Air-Sea Forwarders, Inc., 166 F.3d at 1172. The converse,

reading the term seller’s expense in paragraph 9(a) as it is written in paragraph 11, would

render the dependent clause in paragraph 9(a) superfluous, making such an interpretation

unreasonable. See Medlin Const. Group, Ltd., 449 F.3d at 1200.

For these reasons, the court interprets the term “seller’s expense” in paragraph 11

to have the same meaning as in paragraph 9(a), that is Dynetics would be paid its “hourly

rate as set forth in this contract, excluding that portion of the rate attributable to profit.”

30

Under this reading, as discussed earlier, Dynetics was not at financial risk when called

upon to reperform nonconforming services.

2. Paragraph 9(b) of the Rejection Clause and the “Second Provision” of the

Paragraph 11 Warranty for Services Clause

We turn now to Dynetics’ assertions of financial risk under paragraphs 9(b) and

11. It is apparent that both paragraphs address the same points, Boeing’s rights to correct

nonconforming services or replace those services with a contractor other than Dynetics.

Comparison of the two sentences side-by-side, however, reveals a significant difference.

Boeing’s Ability to Charge Dynetics for Replacement Services

Rejection – Warranty for Services –

Paragraph 9 (b) Paragraph 11 “Second provision”

In addition Buyer may (i) correct the If Seller fails or refuses to correct or

nonconforming Services or (ii) obtain reperform, Buyer may correct or replace with

replacement Services from another source at similar Services and charge Seller for any cost

Seller’s expense. to Buyer, or make an equitable adjustment in

the price of this contract.

Pl.’s Ex. L ¶¶ 9(b), 11. In both paragraphs 9(b) and 11, Boeing has the right to charge

Dynetics the cost of any replacement services it procured from another contractor. Id. ¶

9(b) (“Buyer may . . . obtain replacement Services from another source at Seller’s

expense.”); Id. ¶ 11 (“If Seller fails or refuses to correct or reperform, Buyer may . . .

replace with similar Services and charge Seller for any cost to Buyer.”). In paragraph

9(b), Boeing may resort to this option at any time. Id. ¶ 9(b). In paragraph 11, however,

Boeing may do so only “[i]f [s]eller fails or refuses to correct or reperform.” Id. ¶ 11.

“When a contract is susceptible to more than one reasonable interpretation, it

contains an ambiguity. To show an ambiguity[,] it is not enough that the parties differ in

their respective interpretations of a contract term. Rather, both interpretations must fall

within a zone of reasonableness.” Metric Constructors, Inc., 169 F.3d at 751 (internal

citations and quotation marks omitted).

The plain text of paragraphs 9(b) and 11 are ambiguous as to when Boeing could

charge Dynetics for its cost in securing replacement services—at any time, or only if

Dynetics fails or refuses to correct or reperform. The GP3 as a whole provides no further

information on this point. Either interpretation is within a zone of reasonableness. See

Metric Constructors, Inc., 169 F.3d at 751.

31

Under the doctrine of contra proferentem, any ambiguity in the BOE12 contract is

to be construed against the drafter. See LAI Svcs., Inc. v. Gates, 573 F.3d 1306, 1315

(Fed. Cir. 2009). The BOE12 contract, including the GP3, was drafted by Boeing. A

review of the texts clearly indicates that paragraph 11 is in Dynetics’ interest, and against

Boeing’s interest, because it limits the circumstances in which Boeing can go outside the

contract to secure replacement services at Dynetics’ expense. For this reason, the court

resolves the ambiguity between paragraphs 9(b) and 11 by reading the GP3 to permit

Boeing to charge Dynetics for similar services it obtains as set forth in paragraph 11, “[i]f

Seller fails or refuses to correct or reperform.”

In arguing that it was put at financial risk under paragraph 11, Dynetics overlooks

the portion of paragraph 11 that limits Boeing’s right to charge Dynetics for replacement

services only to when it first “fails or refuses to correct or reperform.” See Pl.’s Mot. 63

(“The warranty clauses of the General Provisions gave Boeing the right to request

correction or performance of defective or nonconforming services at the Seller’s expense

. . . .”) (citing Pl.’s Ex. L ¶ 11). While Dynetics is at risk under paragraph 11, this risk

results not from the failure of its research, but rather from any lack of response to a

rejection of its nonperforming services—that is, by either its failure or refusal to correct

or reperform. See Pl.’s Ex. L ¶ 11. This is not the risk contemplated by the Treasury

regulation, which is limited to the failure of the research. See infra Part III.G.

3. Paragraph 12

Finally, Dynetics claims it is at risk under paragraph 12, under which it provided

Boeing with a warranty for materials. It is unclear, however, how risk under paragraph

12, if such risk exists, is relevant to this motion. According to defendant, Dynetics

claims only wages as the expenses for which it seeks a tax credit. See Def.’s Mot. 33.

Dynetics says nothing to the contrary in its own motion. See id. at 58-64. If Dynetics

seeks a tax credit only for wages, it is unclear how a warranty for materials would be

relevant to the question of whether Dynetics was at financial risk in its research, for

which it incurred only expenses for wages. Dynetics says nothing on this point.

Having considered Dynetics’ arguments based on paragraphs 9(a), 9(b), 11 and 12

of the GP3, the court finds Dynetics’s arguments that it was put at financial risk under the

warranty and rejection clauses of the BOE12 contract to be unpersuasive.

F. Inspection Clause – UAH01 Contract

The warranty clause in the UAH01 contract is set forth in the contract itself; there

are no relevant incorporated FAR provisions. See Ex. 18, at DYN 1707 ¶ 1. Dynetics

32

argues that “[w]hile the UAH01 contract did not include any inspection provisions,8 the

warranty provision, as governed by Alabama law, gave UAH a right to recover the price

paid if the work delivered did not conform to the requirements of the contract.” Pl.’s

Reply 8 (quotation marks omitted) (footnote added).

The warranty clause on which Dynetics relies is included below in its entirety.

Standard of Performance. All services rendered by the Contractor and its

employees, agents, or representatives in performance of this Contract shall

conform to the highest standards of workmanship for the type of work

involved. Each of the Contractor’s employees performing services under this

Contract shall be well qualified for the services he or she is performing. The

Contractor warrants to the University that all work performed shall: (a)

conform in all respects to all requirements of this Contract; (b) be free from

all defects in materials and workmanship; and (c) be free from all defects in

design and be fit for its intended purposes.

Ex. 18, at DYN 1707 ¶ 1. Notably, the warranty clause includes no rejection or

reperformance provisions. In arguing it was at financial risk, Dynetics also relied on

certain Alabama state statutes:

Failing to deliver work meeting [the warranty clause] requirements gives rise

to a cause of action to seek return of funds already paid. Ala. Code § 7-2-

711 (where seller fails to deliver goods as warranted, buyer may, in addition

to other remedies, cancel contract and recover the price that has paid); Ala.

Code. § 7-2-714; Massey-Ferguson, Inc. v. Laird, 432 So. 2d 1259 (Ala.

1983) (damages for breach of express warranty include the difference in

value between the goods as warranted and value as delivered plus incidental

and consequential damages).

Pl.’s Mot. 71. In Massey-Ferguson, the Supreme Court of Alabama relied on section 7-2-

714 of the Alabama code in its calculation of damages for breach of warranty. Massey-

Ferguson, Inc., 432 So. 2d at 1264.

8

The UAH01 contract did include an inspection provision. “Inspection. The

University, through its authorized representatives, shall have the right at all reasonable

times to inspect or otherwise evaluate the work performed or being performed by the

Contractor.” Ex. 18, at DYN 1707 ¶ 2. Nothing in the text of the inspection clause puts

Dynetics at financial risk.

33

Under Lockheed Martin, any determination of risk must be made solely on the

“research agreement” between the parties, with no consideration of any external statute

not expressly incorporated in that agreement. Lockheed Martin Corp. v. United States,

210 F.3d 1366 (Fed. Cir. 2000). In Lockheed Martin, the Federal Circuit considered the

question of whether entitlement to the tax credit—which requires the taxpayer to show

both that it was put at financial risk by conducting the research and that it retained

substantial rights in that research—could be shown by reliance on a statute outside the

contract. Id. at 1370. The appellate court held that it could not.

We similarly reject the argument that the determination whether

Lockheed Martin retained “substantial rights” to its research can be found by

reference to export control laws and top secret classifications; they are also

irrelevant because they are outside of the research agreements. The

determination whether Lockheed Martin retained “substantial rights” must

be made by reference to the . . . contracts alone. The regulation’s focus on

the taxpayer’s right under the research agreements makes it clear that the

determination whether the taxpayer had the right to use the results of its

research without paying for that right must be determined by reference to the

research agreements.

Id. at 1375-76. The companion Treasury regulation governing whether the taxpayer is at

financial risk likewise focuses on the taxpayer’s right under the research agreements.

Research does not constitute qualified research to the extent it is funded by

any grant, contract, or otherwise by another person (including any

governmental entity). All agreements (not only research contracts) entered

into between the taxpayer performing the research and other persons shall be

considered in determining the extent to which the research is funded.

Treas. Reg. § 1.41-4A(d)(1) (emphasis added).

Dynetics points to no part of the UAH contract incorporating the Alabama state

statutes on which it relies to argue that it faced financial risk. Under Lockheed Martin,

the court is precluded from considering the impact of any statute outside of the UAH01

contract in determining whether Dynetics was at financial risk under the UAH01

contract. Dynetics made no argument that it was subject to financial risk under the plain

text of the warranty provision, and a review of the UAH01 contract fails to show that it

was.

G. Business Risk Arguments

34

Dynetics argues that it was put at financial risk by the uncertain nature of the

work, by the fact that it had to invest in staffing and resources with no commitment from

the government to pay those costs, and by the incremental orders placed under the

contracts. Pl.’s Mot. 32-37.

Dynetics argues that for at least four contracts—specifically, AR009, AMS01,

BOE12 and NT001—it was “uncertain” about the “nature of the work,” as the contracts

included “extremely broad statements of work that identified a wide range of work

Dynetics would be required to perform.” Id. at 32. Dynetics argues that “[b]ecause the

exact nature of the work could not always be described – or could not be described in a

manner to fully disclose all necessary information, Dynetics bore the risk that it would be

unable to complete the work within the price proposed, or at all.” Id. at 33.

Next, Dynetics argues that under the contracts, it was “required to incur the costs

associated with developing and maintaining the staffing and resources necessary to

support the work contemplated by the contract, but the government was not obligated to

issue more than a minimal amount of work under the contract.” Id. at 34-35. Dynetics

complains that it bore the risk of its efforts and investments, while the “government had

no obligation to continue to use those resources if the research was unsuccessful.” Id.

Dynetics further argues that six of the sample contracts (all but the AF007

contract) “contemplated an uncertain amount of work at the time the contract was

funded,” as certain contracts were Indefinite Delivery Indefinite Quantity (IDIQ), while

others “used options or modifications to order the vast majority of the work contemplated

by the contract.” Id. Dynetics asserts that it faced a financial risk because “[i]f the

research Dynetics performed under the initial tasks in these contracts was unsuccessful,

the government could have declined to issue any further work under the contract without

incurring any additional liability to Dynetics.” Id.

Defendant collectively characterizes these risks as business risks or economic

risks, none of which, it asserts, are the type of financial risk contemplated by the Treasury

regulation. Def.’s Resp. 23-25. In support of its position, defendant points to both the

relevant Treasury regulation, and the Federal Circuit’s interpretation thereof in Fairchild.

As provided in the Treasury regulation governing qualified research, “[a]mounts

payable under any agreement that are contingent on the success of the research and thus

considered to be paid for the product or result of the research . . . are not treated as

funding.” Treas. Reg. § 1.41-4A(d)(1).

35

As the Federal Circuit has explained,

[t]he inquiry turns on who bears the research costs upon failure, not on

whether the researcher is likely to succeed in performing the project. When

payment is contingent on performance, such as the successful research and

development of a new product or process, the researcher [Dynetics] bears the

risk of failure.

Fairchild, 71 F.3d at 873.

It is clear that none of plaintiff’s arguments suggest a circumstance under which it

will not be paid for the results of unsuccessful research. As this is the only financial risk

considered by the Treasury regulation in determining whether expenses are funded, that

is the only risk relevant in this motion. Plaintiff’s assertions of any other risk are

irrelevant to the court’s resolution of this motion.

H. Termination Clauses

Plaintiff also argues it was at risk from the FAR termination clauses incorporated

into each sample contract. Pl.’s Mot. 37. “In all cases, the government could terminate

the contract for convenience, and the government’s liability would be capped to work

done under the contract for convenience, and the government’s liability would be capped

to work done under the contract and certain unwinding costs.” Id. (citing FAR 52.249-1

to 52.249-7). Dynetics argues it was at risk because if the government terminated the

contract for convenience, it “would still be left with the costs and expenses arising from

developing the capabilities to do the full amount of work contemplated by the contract.”

Id.

Although it argued otherwise, Dynetics was not put at financial risk by the terms

of any FAR termination clause. As an example, FAR 52.249-6 Termination Cost-

Reimbursement (Sept. 1996) is incorporated into the AF007 contract. Ex. 12, at DYN

965. Under this termination clause, a contractor is entitled to receive all reimbursable

costs, together with reasonable costs of settlement of the terminated work. FAR 52. 249-

6(h) (1)-(3). In addition, the contractor is entitled to receive a portion of the fee payable

under the contract, which in the case of a termination for convenience, is “equal to the

percentage of completion of work contemplated under the contract.” FAR 52. 249-

6(h)(4).

Thus, if the government terminated a contract for convenience, the contractor

would receive all reimbursable costs for the work it had performed, together with a

36

comparable portion of its fee. While it is true that Dynetics would not have the

opportunity to earn its full fee, the loss of an opportunity for profit is not the type of

financial risk contemplated in the Treasury regulation. See Treas. Reg. § 1.41-4A(d)(1).

The court further observes that in Fairchild, the Federal Circuit held that the

contractor was put at financial risk under the terms of its contract where the government

had in fact terminated Fairchild’s contract for convenience, prior to the completion of the

contract. Fairchild, 71 F.3d at 871 (“Fairchild and the Air Force agreed to termination for

convenience terms,” after Congress cancelled funding for the program.). Yet, even

though the contract in Fairchild included a termination clause and the government

actually did terminate the contract, there was no discussion in the Fairchild case about the

contractor’s financial risk resulting from the termination clause. Thus, Dynetics’

assertions are without meaningful support.

I. Undefinitized Contracts

The government initially issued three sample contracts as undefinitized contracts,

which Dynetics argues put it at risk. See Pl.’s Mot. 39-40 (AF007); 51 (AR005); 60

(BOE12). Because Dynetics did not explain how such a contract put it at risk, the court

asked Dynetics to provide supplemental briefing on this point. Order Supp. Br. 2.

Dynetics offered several arguments in response. First, Dynetics asserts that an

undefinitized contract is incomplete, and may lack relevant provisions, “such as price,

terms of payment, and inspection and acceptance rights and obligations.” Pl.’s Supp. Br.

3. Dynetics did not, however, indicate that any of the sample contracts at issue in this

motion lacked these relevant provisions.

Second, relying on case law, Dynetics asserts that an undefinitized contract may

be unenforceable and thereby leave it at risk of nonpayment. Id. at 3-4 (citing Trauma

Servs. Group Ltd. v. United States, 33 Fed. Cl. 426 (1995)). But, the agreement in

Trauma Services, on which Dynetics based its assertions, was a memorandum of

agreement (MOA), not a contract. Trauma Servs., 33 Fed. Cl. at 430-31. That a MOA

may be unenforceable is irrelevant to whether Dynetics was at risk here under either the

AF007 or BOE12 undefinitized contract.

The government responds that Dynetics was not at risk under any of the three

sample contracts. For the AF007 contract, the undefinitized contract included FAR

52.216-07 Allowable Cost and Payment (Dec. 2002), Ex. 12, at DYN 964, which

provided that “[t]he Government will make payments to the Contractor when requested

as work progresses.” FAR 52.216-7(a)(1). Contrary to Dynetics’ assertion that

37

undefinitized contracts may be incomplete, the AF007 included two pages of FAR

clauses. Ex. 12, at DYN 964-65.

With respect to the BOE12 contract, defendant correctly pointed out that the

undefinitized contract provided for payment to Dynetics in the event of contract

termination. Def.’s Reply to Pl.’s Supp. Br. 6-7 (citing Ex. 39, at DYN 41532).

In the event that a definitive subcontract is not executed because of the

inability of the parties hereto to agree upon the provisions of a definitive

subcontract, the Buyer, [Boeing], at its sole discretion, may terminate this

letter contract in accordance with the provision entitled “Termination for

Convenience,” and shall pay the Subcontractor [Dynetics] in accordance

therewith subject to the limitations contained herein, but with no allowance

for profit.

Ex. 39, at DYN 41532 ¶ 7. Dynetics’ only risk here was the possibility that it might not

earn a profit. Again, that is not the risk contemplated by the Treasury regulation. See

Treas. Reg. § 1.41-4A(d)(1).

While the AR005 contract was an undefinitized contract initially, none of the

expenses for which Dynetics claims a tax credit were incurred under that undefinitized

contract. Dynetics claims expenses only for wages incurred under the cost-plus-fixed-fee

contract line items for engineering services included in the later definitized contract. See

Def.’s Mot. 27; Ex. 27, at DYN 58340. Those line items were not included in the

undefinitized contract. Ex. 26, at DYN 36189-90. As Dynetics’ expenses were incurred

under the definitized contract, it is under that contract that it must show it was at risk.

See Treas. Reg. § 1.41-4A(d)(1) (“Amounts payable under any agreement that are

contingent on the success of the research and thus considered to be paid for the product or

result of the research . . . are not treated as funding.”) (emphasis added). Dynetics has

failed to do so here.

IV. Discussion – Whether Dynetics Retained Substantial Rights in the Results

of the Research

Defendant argues that because Dynetics did not retain substantial rights in the

results of the research under the UAH01 and NT001 contracts, it may not take a tax credit

for its incurred expenses under either contract. Def.’s Mot. 40-42.

As provided in the relevant Treasury regulation,

38

[i]f a taxpayer performing research for another person retains no substantial

rights in research under the agreement providing for the research, the

research is treated as fully funded for purposes of section 41(d)(4)(H), and

no expenses paid or incurred by the taxpayer in performing the research are

qualified research expenses.

Treas. Reg. § 1.41-4A(d)(2);9 see also Lockheed Martin Corp., 210 F.3d at 1374-75 (“If

the taxpayer does not have the right to use or exploit the results of the research, its

expenditures are not entitled to the tax credit . . . regardless [of] whether the taxpayer

receives some “incidental benefit” such as increased experience.”) (emphasis added).

A. UAH01 Contract

Defendant makes two arguments in support of its position that Dynetics did not

retain substantial rights in the results of its research for the University. Def.’s Mot. 41.

First, defendant points to the plain language of the contract, under which it argues that

Dynetics assigned “all rights in the results of its work” to the University. Id. (citing Ex.

18, at DYN 1709). Defendant also argues that Dynetics’ work under the UAH01 contract

was a “work for hire,” thus Dynetics retained no rights in that work. Id. Defendant first

relies on paragraph 24 of the UAH01 contract.

24. Patents.10 (a) [1st sentence] All rights, title, and interest in and to

inventions or other intellectual property rights conceived or reduced to

practice in the course of performance of the work called for by this Contract

are hereby vested in the University. [2d sentence] The contractor agrees to

promptly disclose to the University, in a format acceptable to the University,

9

Further, “[a] taxpayer does not retain substantial rights in the research if the

taxpayer must pay for the right to use the results of the research,” Treas. Reg. § 1.41-

4A(d)(3). The question of payment for the right to use the results of the research is not

an issue in this matter.

10

The “Construction Rules” included in the UAH01 contract provide that “[t]he

captions and headings in this Contract are for purposes of convenience and reference

only, and the words contained therein shall have no substantive effect and shall in no way

be held to explain, modify, or amplify the meaning of the sections and provisions of this

Contract to which they pertain.” Ex. 18, at 1711 ¶ 39(a). Further, “[t]he language in all

parts of this contract shall in all cases be simply construed according to its fair meaning

and not strictly for or against any party.” Ex. 18, at 1711 ¶ 39(d). Neither party

commented on the heading “Patents” in paragraph 24. According to the contract’s

Construction Rules, the court does not consider it when evaluating Dynetics’ rights.

39

any potentially patentable idea or concept conceived or reduced to practice

in the course of performance of the work called for by this Contract.

Ex. 18, at DYN 1709 ¶ 24(a) (annotation added).

Dynetics replies that while it may not have retained substantial rights in all its

work for the University, it retained substantial rights in certain work, specifically all

“non-patentable technology.” Pl.’s Mot. 72 (“Therefore, to the extent the research and

development activities undertaken in connection with the UAH contract result in products

or knowledge that is not patentable, rights to those products and solutions remain with

Dynetics.”). Dynetics points to Exhibit C to the UAH01 contract, the “NASA Grantee

New Technology Summary Report,” through which NASA requires any contractor, like

the University, or subcontractor, like Dynetics, to “report new technology” to it. Ex. 18,

at DYN 1705. Exhibit C provides that new technology “may be either patentable or non-

patentable,” and that NASA does not require the disclosure of “non-patentable new

technology.” Ex. 18, at DYN 1705.

Dynetics asserts that its work under the UAH01 contract—solving equations and

developing simulations to describe the deep space environment—is not patentable. Pl.’s

Mot. 72 (citing In re Bilski, 545 F.3d 943 (Fed. Cir. 2008) aff’d, Bilski v. Kappos, 561

U.S. 593 (2010)). Patentable inventions include “new and useful process, machine,

manufacture, or composition of matter,” 35 U.S.C. § 101, none of which, argues

Dynetics, would include the products and solutions it developed under the UAH01

contract. Pl.’s Mot. 72. Given that the results of the research under the UAH01 contract

were non-patentable, and that NASA did not require the disclosure of non-patentable new

technology, Dynetics concludes that such technical products and solutions as it ultimately

developed fell outside the second sentence in paragraph 24, and thus it retains substantial

rights in that technology. Pl.’s Mot. 72.

Defendant responds that Dynetics overlooks the first sentence of paragraph 24,

which “more broadly ‘vests in the University’ not just patentable ‘inventions’ but also

any ‘other intellectual property rights,’ such as the copyright in the computer code written

by Dynetics.” Def.’s Resp. 28. Dynetics offered no reply to this argument. See Pl.’s

Reply 19-20.

The Copyright Act defines a “computer program” as “a set of statements or

instructions to be used directly or indirectly in a computer in order to bring about a

certain result.” 17 U.S.C. § 101. “A computer program is a form of literary work, and

thus is copyrightable.” Greenberg v. National Geographic Soc., 533 F.3d 1244, 1262 n.6

40

(11th Cir. 2008).11 The owner of a copyright enjoys a number of exclusive rights under

the Copyright Act. See, e.g., Cambridge Univ. Press v. Patton, 769 F.3d 1232, 1242 n.5

(11th Cir. 2014) (citing 17 U.S.C. § 501(a)).

Even if Dynetics is correct that the results of the research on the UAH01 contract

were non-patentable technology, under the first sentence of paragraph 24, any other

intellectual property rights in those results, like copyright protections, would vest in the

University.

Dynetics bears the burden of showing it had substantial rights in the results of the

research. See Bubble Room, Inc., 159 F.3d at 561. In the face of paragraph 24, Dynetics

would have to show that the results of the research on the UAH01 contract fell entirely

outside the broad category of rights vested in the University—other intellectual property

rights conceived or reduced to practice in the course of performance of the work.

According to Dynetics’ own description of its work on the UAH01 contract—solving

equations and developing simulations to describe the deep space environment, Pl.’s Mot.

72—all its work fell within the protection of paragraph 24.

Considering the plain text of the UAH01 contract, and the work Dynetics

performed for the University, Dynetics has not carried its burden to show that it retained

substantial rights in that work. The court finds that Dynetics did not retain substantial

rights in the results of the research under the UAH01 contract.

As defendant has prevailed on its contractual argument, it is unnecessary to reach

defendant’s alternate work for hire argument.

B. NT001 Contract

With regard to the NT001 contract, defendant asks this court to consider Dynetics’

work under only one task order, Task Order 169. See Def.’s Mot. 42 n.15; Def.’s Resp.

29. According to defendant, the government issued Dynetics approximately 260 task

orders under the NT001 contract, however, defendant believes the parties can use this

11

Copyright issues are not assigned exclusively to the Federal Circuit. See 28

U.S.C. § 1295 (2012). “When the questions on appeal involve law and precedent on

subjects not exclusively assigned to the Federal Circuit, the court applies the law which

would be applied by the regional circuit.” Atari Games Corp. v. Nintendo of Am., Inc.,

897 F.2d 1572, 1575 (Fed. Cir. 1990). As this contract was performed in the state of

Alabama, which sits within the Eleventh Circuit, the court consults Eleventh Circuit law

on copyright issues.

41

court’s resolution of the substantial rights question for Task Order 169 to resolve the

same question for the remaining task orders.12 Def.’s Mot. 42 n.15. Accordingly, the

court considers only the question of whether Dynetics retained substantial rights to the

results of the research performed under Task Order 169 on the NT001 contract, and

offers no opinion on whether Dynetics retained substantial rights to the results of the

research on any other task order issued under the NT001 contract.

Defendant describes Dynetics’ work on the NT001 contract as “highly classified

intelligence research on foreign weapons systems.” Def.’s Resp. 29. In performing its

work on the NT001 contract, “Dynetics was required to comply with military security

requirements in accordance with DD Form 254, which classified the contract as ‘Top

Secret.”’ Def.’s Mot. 41; Ex. 34, at DYN 8125 item 1.

The parties disagree on whether the security requirements in DD Form 254 had

any effect on Dynetics’ right to use the results of the research, including the allocation of

intellectual property rights between Dynetics and the government.

1. Contract Provisions

a. DD Form 254 Security Requirements for Intelligence Information

The DD Form 254 is the Department of Defense Contract Security Classification

Specification, and is Attachment no. 2 to the NT001 contract. Ex. 34, at DYN 8125; Ex.

34, at 8089 (Section J List of Attachments). It is a two-page form, and in the case of the

NT001 contract, includes four additional, individually-typed “continuation sheets” that

include twenty-nine enumerated paragraphs providing further information about security

guidance and security requirements. Id. at DYN 8125-30. Further, paragraph 6 on

continuation sheet page 2, itself incorporates a separate two-page attachment, Attachment

no. 1, which includes an additional eleven enumerated paragraphs regarding the security

requirements for intelligence information. See id. at DYN 8127 ¶ 6, 8131-32.

12

In its reply, Dynetics interpreted defendant’s argument as challenging whether

Dynetics retained substantial rights in the results of the research only under Task Order

169, but not for work under any other task order. See Pl.’s Reply 19. This is an

inaccurate characterization of defendant’s argument. Defendant clearly stated that it

limited its argument to Task Order 169 only “for the purpose of this motion.” Def.’s

Mot. 42 n.15.

42

As provided in DD Form 254, Dynetics had access to intelligence information that

was SCI (Special Compartmented Information13) and non-SCI (top secret). See id. at

DYN 8125 items 10(e)(1), (2). Patrick Keller, a Dynetics employee knowledgeable

about the NT001 contract, testified about the distinctions among intelligence information

classifications. See Keller dep. 58:6-59:15, Dec. 12, 2013, Ex. 64.

[SCI] means that it has to be protected with much greater care than –

if secret information is lost, it causes bad damage. . . . Secret, bad; top secret,

really, really bad; SCI; exceptional, extreme, grave, bad, serious

compromise. So you have the SCI caveat that means that it is more tightly

controlled than just regular top secret information . . . .

Id. at 58:16-59:1.

b. Task Order 169

Task Order 169 called for Dynetics to provide services in support of a “classified

foreign air-defense system” known internally as “Vorlon.” Def.’s Mot. 42. “The task

order employed Dynetics to prepare engineering drawings of the missile and to describe

the key physical and operational characteristics of certain sections of the missile in a

technical report.” Def’s Supp. Br. 7. According to Mr. Keller, Task Order 169 called for

Dynetics to perform an initial characterization of a foreign air defense system, which

involved analyzing hardware—a missile nose section and a control section. Keller Dep.

95:4-15, Dec. 12, 2013, Ex. 64.

Review of the task order itself shows that the Statement of Work described two

tasks, which required Dynetics to conduct analyses, prepare engineering drawings in both

hardcopy and softcopy (software) formats, identify key characteristics of specified

sections of a missile, perform laboratory tests, and document its findings in a report. Ex.

35, at DYN 9925. Dynetics’ work on Task Order 169 required deliverables of

engineering drawings and a technical report. Id. at DYN 9926.

2. Discussion

a. Right to Use or Exploit the Results of the Research

13

The DD Form 254 refers alternately to Sensitive Compartmented Information, Ex.

34, at DYN 8125 item 10(e)(1), and Special Compartmented Information, Ex. 34, at

DYN 8128 ¶ 16. The terms are used interchangeably.

43

Defendant argues that the intelligence information—either SCI or top secret—

Dynetics used in performing Task Order 169 permeated the results of that research, to the

point that the security requirements in the DD Form 254 prevented Dynetics from using

those results, just as the same security requirements prevented Dynetics from using the

intelligence information itself. See Def.’s Mot. 41-42; Def.’s Resp. 29 (“Because one

cannot segregate the results of Dynetics’ work on that task order from the ‘Top Secret’ or

‘SCI’ material that Dynetics was retained to characterize, Dynetics can have no right to

‘use or exploit the results of the research.”’); Def.’s Supp. Br. 8 (“[The DD Form 254]

provisions eliminate any right that Dynetics might otherwise possess to use or exploit the

results of its work on Task Order 169, because classified “intelligence information”

permeated such work.”).

As defendant points out in its supplemental briefing, the DD Form 254 places a

number of limits on use of intelligence information. See id. at 7-8. A sampling of

security restrictions includes the following.

Intelligence materials generated by your organization may be reproduced

without written permission exclusively for this contract.

Ex. 34, at DYN 8131 ¶ 4.

No authorization is granted to release intelligence material to any activity,

employee, or other person not directly engaged in providing services under

the contract unless specific written authorization for such release is received

from DIA/MSIC. This prohibition precludes release without authority to

another contractor (including a subcontractor), Government Agency, private

individual, or organization.

Id. at DYN 8131 ¶ 8 (emphasis added).

Upon completion of this contract, all materials provided to the contractor will

be returned to the Government unless written exception is provided to the

contractor. Materials generated by the contractor may be returned or

destroyed as directed.

Id. at DYN 8128 ¶ 10 (emphasis added).

All materials provided to the contractor under this contract are for the

exclusive use of this contract.

44

Id. at DYN 8128 ¶ 12.

In the face of these significant security restrictions, Dynetics makes several

arguments that it nonetheless retained the right to use the results of the research on Task

Order 169. Pl.’s Reply 19. First, Dynetics points to “skills and advancements” it

developed while working on Task Order 169.

[A]ny capabilities developed in the analysis of the Vorlon system, such as

advancements in preparing engineering drawings or improving the method

of identifying radio frequency, could be reused in subsequent work

performed by Dynetics because those skills and advancements are not

necessarily particular to the specific classified weapons system.

Id.

The governing Treasury regulation provides that “[i]ncidental benefits to the

taxpayer from performance of the research (for example, increased experience in a field

of research) do not constitute substantial rights in the research.”). Treas. Reg. § 1.41-

4A(d)(2). It is unclear how the accumulation of “skills and advancements” would be

other than an “incidental benefit,” and Dynetics is silent on this point.

Next, Dynetics asserts that it can “use its research results from Task Order 169 in

performing work for other intelligence agencies following authorization from MSIC.”

Pl.’s Reply 19 (emphasis added) (citing Ex. 34, at DYN 8130 ¶ 22); see also Pl.’s Supp.

Br. 11 (“Dynetics retains the rights in the products it develops (including those products

with intelligence information) for purposes of performing work pursuant to contracts with

MSIC or any other government agency (or private company) provided that MSIC agrees

to the transfer of such information.”) (citing Ex. 34, at DYN 8132 ¶ 11) (emphasis

added).

Dynetics does not address the obvious question of how it could have substantial

rights in the results of the research, if it needed the government’s “authorization” to use

those results. Nor do the particular DD Form 254 paragraphs cited by Dynetics in its

assertion of a right to use—paragraphs 11 and 22—provide it with support.

The contractor will not reproduce any SCI related material without written

permission from the [Contract Monitor]/[Special Security Officer]. When

such permission has been granted, the contractor will control and account for

such reproduction in the same manner as pertains to originals.

45

Ex. 34, at 8130 ¶ 22. Dynetics offers no explanation how, if it did receive permission to

reproduce “SCI related material,” it could “use its research results from Task Order 169

in performing work for other intelligence agencies,” as it asserts it can, Pl.’s Reply 19,

and still comply with the requirement in paragraph 22 that it “control and account for

such reproduction in the same manner as pertains to originals.” If Dynetics performed

work for another intelligence agency, it would cease to have control over that work, and

would be unable to comply with the security requirement in paragraph 22.

DD Form 254 attachment no. 1 paragraph 11 governs intelligence material, SCI

and non-SCI, and is included below.

Upon expiration of the contract, all substantive collateral intelligence

materials released to your company will be returned to the issuing agency for

disposition. In the event the contract is extended or a new similar contract

requiring the released data is initiated, it is the responsibility of the contract

monitor to effect an extension or document transfer with the [Defense

Intelligence Agency/Missile and Space Intelligence Center] [Special

Security Officer].

Ex. 34, at DYN 8132 attach no. 1 ¶ 11 (emphasis added). Paragraph 11 refers to either an

extension of the existing contract or the initiation of a new similar contract with MSIC.

Nothing in paragraph 11 could be read to suggest that Dynetics had the right to use the

results of the research, containing intelligence material, in performing work for “any

other government agency (or private company),” as Dynetics asserts it could. See Pl.’s

Supp. Br. 11.

In its supplemental briefing, Dynetics asserts that the security requirements in

Attachment 1 do not preclude it from using “the models, analyses, software

enhancements, or testing components developed under the NT001 contract in future

contracts,” as the intelligence material it used or generated “in many cases is severable

from the models and systems developed under the contract.” Id. Dynetics’ argument was

not specific to Task Order 169, but rather spoke generally about its work under the

NT001 contract. Id.

Defendant responds that Dynetics produced no “models, analyses, software

enhancements, or testing components” under Task Order 169, and thus its assertion of

severability is irrelevant to this motion.14 See Def.’s Reply to Pl.’s Supp. Br. 13.

14

Defendant acknowledges that “the degree of integration of Dynetics’ work product

with the intelligence information it concerned” will vary among the remaining task

46

Finally, Dynetics argues that in Lockheed Martin, the Federal Circuit rejected the

position that security classifications, like those found in DD Form 254, can deprive a

contractor of substantial rights in the results of the research. See Pl.’s Reply to Def.’s

Supp. Br. 5 (citing Lockheed Martin, 210 F.3d at 1375). Dynetics is mistaken in its

understanding of the Federal Circuit’s holding.

The government argued that Lockheed Martin lacked substantial rights in its

research because, inter alia, “top secret security provisions and export control laws . . .

restricted sales of products resulting from Lockheed Martin’s research.” Lockheed

Martin, 210 F.3d at 1373. The trial court found that Lockheed Martin lacked substantial

rights in the results of the research for a number of reasons, including that it “had to seek

prior approval from the State Department before entering into licensing agreements or

discussing with other customers technical information not in the public domain,” and that

“particular statutory provisions restricted Lockheed Martin’s exports.” Lockheed Martin,

210 F.3d at 1370.

On appeal, the Federal Circuit found that the export control laws and security

classifications upon which the trial court based its decision were outside the research

agreements, and thus irrelevant to the substantial rights determination. Lockheed Martin,

210 F.3d at 1375-76. The Federal Circuit was clear that a determination of whether the

contractor retained substantial rights “must be made by reference to the [relevant]

contracts alone.” Lockheed Martin, 210 F.3d at 1376; see also Treas. Reg. § 1.41-

4A(d)(2) (“If a taxpayer performing research for another person retains no substantial

rights in research under the agreement providing for the research, the research is treated

as fully funded . . . .”) (emphasis added).

As discussed supra Part III.B.1.a, the DD Form 254 is clearly part of the NT001

contract. As the decision in Lockheed Martin had nothing to do with the security

classifications themselves, this decision provides Dynetics with no support.

Dynetics has the burden to show that it has substantial rights in its research.

Although Dynetics has offered a number of arguments in furtherance of its claim that it

had the requisite substantial rights to the results of the research, the arguments are

unpersuasive. The security requirements simply leave Dynetics with no right to use

results that contained intelligence information, without government authorization. See,

e.g., Ex. 34, at DYN 8130 ¶ 22); Id. at DYN 8132 ¶ 11). Even with authorization,

Dynetics would not have had the right to freely transfer results with intelligence

orders, and that plaintiff’s severability argument could be relevant in considering

substantial right under other task orders. Def.’s Reply to Pl.’s Supp. Br. 13.

47

information. See e.g., Ex. 34, at 8130 ¶ 22. Although Dynetics advanced a severability

argument, it is highly unlikely that this was feasible for Task Order 169 considering the

work required.

b. Intellectual Property Rights

Dynetics also argues that the DD Form 254 is unrelated to the allocation between

it and the government of the intellectual property rights in the produced research results.

See Pl.’s Mot. 69. In its supplemental briefing, Dynetics urged that it retained intellectual

property rights in its research under FAR 52.227-11 Patent Rights—Retention by the

Contractor (June 1997), which was incorporated in the NT001 contract by reference.

Pl.’s Reply to Def.’s Supp. Br. 5 n.4 (citing Ex. 34, at DYN 8098).

Dynetics is correct that the NT001 contract does incorporate FAR 52.227-11. That

provision in relevant part provides that “[t]he Contractor may retain the entire right, title,

and interest throughout the world to each subject invention subject to the provisions of

this clause . . . .” FAR 52.227-11(b). An “invention” is defined as “any invention or

discovery which is or may be patentable,” FAR 52.227-11(a)(1), and a “subject

invention” is defined as “any invention of the contractor conceived or first actually

reduced to practice in the performance of work under this contract . . . ,” FAR 52.227-

11(a)(6).

Dynetics avers that the language of FAR 52.227-11 is “almost identical” to the

language in the patent rights clause incorporated in each contract in Lockheed Martin,

“which the Federal Circuit found conveyed substantial rights to the contractor.” Pl.’s

Reply to Def.’s Supp. Br. 5 n.4 (citing Lockheed Martin, 210 F.3d at 1377-78).

Again, Dynetics is correct. The patent rights clause in Lockheed Martin stated

that “[t]he Contractor may retain the entire right, title, and interest throughout the world

or any country thereof in and to each Subject Invention disclosed [ ], subject to the rights

obtained by the Government in paragraph (c) of this clause,” Lockheed Martin, 210 F.3d

at 1378, and this language is almost identical to FAR 52.227-11, as stated above. The

Federal Circuit characterized this rights clause as giving Lockheed Martin the “the right

to make and use patented inventions or to exclude unauthorized third parties from

making, using, or selling such inventions.” Id. at 1377.

That said, while FAR 52.227-11 does provide that Dynetics retains patent rights, it

does not vest—as Dynetics asserts—all “intellectual property rights” in Dynetics; rather

it provides rights only to “subject inventions.” Dynetics makes no argument that the

results of the research under Task Order 169—engineering drawings and a technical

48

report, Ex. 35, at DYN 9926—are patentable. And unless the research results for which

it claims it has substantial rights are patentable, the rights provided by FAR 52.227-11 are

irrelevant to the consideration of substantial rights in those research results.

For all the reasons stated, Dynetics has not carried its burden to show that it

retained substantial rights in its work on Task Order 169 under the NT001 contract. The

court finds that Dynetics did not retain substantial rights in the results of the research on

Task Order 169 under the NT001 contract.

V. Conclusion

For all the reasons discussed herein, the court GRANTS defendant’s motion for

partial summary judgment on the funded research question, and DENIES plaintiff’s

cross-motion for partial summary judgment on the funded research question.

The parties are directed to file a joint status report by Tuesday, June 30, 2015,

informing the court how they would like to proceed in this matter.

IT IS SO ORDERED.

s/ Patricia E. Campbell-Smith

PATRICIA E. CAMPBELL-SMITH

Chief Judge

49