Sufi Network Services, Inc. v. United States

In the United States Court of Federal Claims

No. 11-453C

(Filed: December 7, 2015)

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SUFI NETWORK SERVICES, INC., *

*

* Claim for Overhead and Profit as a

Plaintiff, * Mark-up on Recovery of Attorneys’

* Fees; Start Date for Running of

v. * Interest on Attorneys’ Fees and

* Expenses; Proposed Change in

Method for Determining Attorneys’

THE UNITED STATES, * Fees.

*

Defendant. *

*

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Frederick W. Claybrook, Jr., with whom was Brian T. McLaughlin, Crowell & Moring

LLP, Washington, D.C., for Plaintiff.

Douglas T. Hoffman, with whom were Benjamin C. Mizer, Principal Deputy Assistant

Attorney General, Robert E. Kirschman, Jr., Director, and Steven J. Gillingham, Assistant

Director, Commercial Litigation Branch, Civil Division, U.S. Department of Justice,

Washington, D.C., for Defendant.

OPINION AND ORDER

WHEELER, Judge.

This case is before the Court on remand from the U.S. Court of Appeals for the

Federal Circuit. SUFI Network Servs., Inc. v. United States, 785 F.3d 585 (Fed. Cir. 2015).

In the decision reviewed on appeal, this Court had awarded attorneys’ fees to SUFI with

interest, but had denied SUFI’s request for overhead and profit on attorneys’ fees. SUFI

Network Servs., Inc. v. United States, 113 Fed. Cl. 140 (2013). The Federal Circuit

affirmed this Court’s award to SUFI of $697,702.50 in attorneys’ fees and $25,486.81 in

expenses, but vacated and remanded this Court’s ruling with respect to interest, overhead,

and profit. SUFI, 785 F.3d at 595. The parties have briefed these issues on remand. Oral

argument is unnecessary.

In considering SUFI’s cross-appeal for recovery of overhead and profit, the Federal

Circuit observed that “[u]nder applicable common law, damages for breach of contract

should place the wronged party in as good a position as it would have been had the

breaching party fully performed.” Id. at 594 (citing Mass. Bay Transp. Auth. v. United

States, 129 F.3d 1226, 1232 (Fed. Cir. 1997)). The Federal Circuit concluded that “we

vacate the trial court’s denial of overhead and profit and remand with instructions that the

trial court apply law consistent with this opinion.” Id. at 595. The Federal Circuit thus left

it to this Court to determine, based upon the common law of damages, whether and to what

extent SUFI should recover overhead and profit on its attorneys’ fees claim.1

Discussion

This case is part of a much larger series of administrative appeals and breach of

contract actions spanning ten years of litigation, in which there have been thirteen decisions

from the Armed Services Board of Contract Appeals (“ASBCA”), five decisions from this

Court, and two appeals to the Federal Circuit.2 One additional appeal concerning the

finality of the ASBCA’s February 3, 2015 decision on the merits is still pending before the

Federal Circuit. SUFI CFC V, 122 Fed. Cl. 257 (2015), appeal filed, No. 11-804 (Sept.

24, 2015). The overall dispute stems from a planned fifteen-year contract to provide long-

distance telephone services in the lodging guest rooms on Air Force bases in Germany.

The contracting parties were SUFI and the Air Force Non-Appropriated Funds Purchasing

Office (“Air Force”). The contract was cut short by the Air Force’s material breaches of

contract.

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SUFI’s assertion that the Federal Circuit mandated the award of overhead and profit on attorneys’ fees to

SUFI is incorrect. See Pl.’s Oct. 19, 2015 Br. at 1 (citing SUFI Network Servs., Inc. v. United States, 785

F.3d 585, 594-95 (Fed. Cir. 2015)). The Federal Circuit’s mandate simply requires this Court to review the

issue again by applying principles of common law damages instead of the Federal Acquisition Regulation.

2

The ASBCA’s thirteen reported opinions are referred to as “SUFI ASBCA I” through “SUFI ASBCA

XIII”. Likewise, the previous opinions in this case, No. 11-453, and its related case, No. 11-804C, are

referred to, in chronological order, as “SUFI CFC I” through “SUFI CFC V.” SUFI ASBCA I, ASBCA

No. 54503, 04–1 BCA ¶ 32606 (Apr. 22, 2004); SUFI ASBCA II, ASBCA No. 54503, 04–2 BCA ¶ 32714

(Aug. 17, 2004); SUFI ASBCA III, ASBCA No. 54503, 04–2 BCA ¶ 32788 (Nov. 1, 2004); SUFI ASBCA

IV, ASBCA No. 55306, 06–2 BCA ¶ 33444 (Nov. 8, 2006); SUFI ASBCA V, ASBCA No. 55306, 07–1

BCA ¶ 33485 (Feb. 7, 2007); SUFI ASBCA VI, ASBCA No. 55306, 07–1 BCA ¶ 33535 (Mar. 21, 2007);

SUFI ASBCA VII, ASBCA No. 55948, 08–1 BCA ¶ 33766 (Jan. 9, 2008); SUFI ASBCA VIII, ASBCA

No. 55306, 09–1 BCA ¶ 34018 (Nov. 21, 2008); SUFI ASBCA IX, ASBCA No. 55306, 09–2 BCA ¶ 34201

(Jul. 15, 2009); SUFI ASBCA X, ASBCA No. 55306, 10–1 BCA ¶ 34327 (Dec. 14, 2009); SUFI ASBCA

XI, ASBCA No. 55306, 10–1 BCA ¶ 34415 (Apr. 5, 2010); SUFI ASBCA XII, ASBCA No. 55306, 15-1

BCA ¶ 35,878 (Fed. 2, 2015); SUFI ASBCA XIII, ASBCA No. 55306, 15-1 BCA ¶ 35,992 (May 20, 2015);

SUFI CFC I, 102 Fed. Cl. 656 (2012); SUFI CFC II, 105 Fed. Cl. 184 (2012); SUFI CFC III, 108 Fed. Cl.

287 (2012), aff’d in part, rev’d in part, 755 F.3d 1305 (2014); SUFI CFC IV, 113 Fed. Cl. 140 (2013), aff’d

in part, vacated in part, 785 F.3d 585 (2015); SUFI CFC V, 122 Fed. Cl. 257 (2015), appeal filed, No. 11-

804 (Sept. 24, 2015); SUFI Network Servs., Inc. v. United States, 755 F.3d 1305 (Fed. Cir. 2014); SUFI

Network Servs., Inc. v. United States, 785 F.3d 585 (Fed. Cir. 2015).

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A. Overhead and Profit on Attorneys’ Fees

Cumulatively, SUFI has succeeded in its quest to be compensated for the Air

Force’s breaches, including the recovery of lost profits and overhead caused by the Air

Force’s conduct. In the breach damages award exceeding $110 million, SUFI established

its entitlement to more than $58 million in lost profits. SUFI also received overhead

compensation relating to its performance of extra work under the contract. The issue now

remaining is whether SUFI should receive additional profit and overhead as a mark-up on

the attorneys’ fees of its outside law firm, Crowell & Moring.

SUFI contends that it should receive a 25 percent profit on Crowell & Moring’s

attorneys’ fees, based upon two provisions included in Modification 007 to the contract,

dated February 18, 2000. These two provisions state as follows:

3.11.1 “Additional Work Requested”

Additional work requested by the LFM [Lodging Facilities

Manager] not specified in the contract will be the responsibility

of the Lodging operation to fund. This pertains to items such

as office moves, additional phones, and other requests not

covered under this contract. The LFM must submit a request

for proposal to the Contractor specifying the work to be

accomplished and the time frame required. The Contractor

will respond within 15 duty days and provide a technical

proposal and cost proposal of no more than 25% over cost to

the Lodging Manager and [Air Force] at no additional charge

to the government.

3.11.2 “Facility Renovations”

The LFM must notify the contractor before an existing building

is scheduled for renovation so the contractor may remove any

existing telephones, frames, and other equipment. The LFM

must notify the contractor 60 days in advance for a major

renovation (i.e. and [sic] entire building) and 30 days in

advance for a minor renovation (i.e., individual rooms or

floors. Contractor shall submit a proposal of no more than 25%

over cost to LFM and [Air Force] in three separate areas: 1)

removal of equipment prior to renovation; 2) cost of

reinstalling the system temporarily based on LFM

requirements during renovation if so desired; 3) and full

reinstallation of phone system when the building is ready again

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for occupancy. [Air Force] and SUFI Network Service will

work together on a fair and reasonable cost plus price that is

agreeable to both parties prior to the start of any work.

(PX 58 at 1-2.)

These contract provisions on their face do not apply to SUFI’s claim for recovery

of attorneys’ fees, and would not justify a mark-up on attorneys’ fees. Neither section

3.11.1 nor 3.11.2 references anything about attorneys’ fees or legal costs. Based upon the

plain language of the clauses, they apply to “office moves, additional phones, and other

requests [from the government] not covered under this contract,” as stated in clause 3.11.1,

and to “major” and “minor” renovations requiring the removal of “existing telephones,

frames, and other equipment,” as stated in clause 3.11.2.

Logic would support a distinction between contract performance work managed by

SUFI under sections 3.11.1 and 3.11.2, and legal work managed and performed by SUFI’s

outside law firm. A negotiated profit and overhead rate would be entirely appropriate for

SUFI’s contract work, and indeed SUFI received this compensation as a mark-up on its

claims. However, the Court is not aware of any contractual basis to grant SUFI a 25

percent mark-up on legal work performed by Crowell & Moring. Such a mark-up would

have the effect of increasing Crowell & Moring’s hourly billing rates by 25 percent for no

apparent reason. SUFI does not cite any other contract provision supporting its claim for

overhead and profit on fees.

Lacking any contractual basis for recovery, the Court will turn to the elements for

establishing recovery under the common law of damages. Common law breach of contract

damages “are recoverable where: (1) the damages were reasonably foreseeable by the

breaching party at the time of contracting; (2) the breach is a substantial causal factor in

the damages; and (3) the damages are shown with reasonable certainty.” Sys. Fuels, Inc.

v. United States, 666 F.3d 1306, 1311 (Fed. Cir. 2012) (citing Ind. Mich. Power Co. v.

United States, 422 F.3d 1369, 1373 (Fed. Cir. 2005)). Examining SUFI’s claim for a

profit and overhead mark-up on Crowell & Moring’s attorneys’ fees, the Court finds that

SUFI does not satisfy any of these three criteria.

First, looking to the foreseeability that a breaching party would expect to be

charged for profit and overhead on top of attorneys’ fees, the Court does not see any

circumstances under which such a mark-up would be foreseeable. Profit normally is

viewed as a reward for having assumed a business risk of some kind. See Howard O.

Hunter, Modern Law of Contracts § 14:10 (2015). Here, SUFI did not assume any risk in

having an outside law firm prepare a contract claim on a contingent fee basis. If the claim

were successful, as this one was, SUFI would receive a large sum from the Government,

and it would owe the law firm an agreed percentage for the law firm’s efforts. If the claim

was not successful, SUFI presumably would not owe the law firm anything, except

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perhaps for expenses.3 There is no risk to SUFI in this arrangement, and thus no basis for

the breaching party to believe that SUFI should receive a profit on top of the legal fees.

Compensation for overhead seemingly would be appropriate if SUFI had played

some role, and had expended some time and effort, in assisting or overseeing the law

firm’s claim-preparation tasks. However, there is no evidence that SUFI played any

significant role in this process. Given the contingent fee arrangement with Crowell &

Moring, SUFI would have no reason or interest to oversee or manage the law firm’s work.

This was a case of a novice government contractor turning over the complete claim

preparation work to an experienced and highly reputable law firm. Where SUFI did not

add anything material to the claim preparation effort, it is difficult to understand why SUFI

should receive an overhead component. The Air Force, as the breaching party, would not

have found it foreseeable to pay SUFI overhead for not doing any material work.

Second, in assessing whether the breach of contract is a substantial causal factor

for the claimed damages, the Court is simply unable to identify any damages. As noted

above, the Court does not see that the Air Force’s breach caused SUFI to lose any profit

or overhead relating to the law firm’s preparation of the claim. Simply put, the record

does not support a finding that any profit or overhead damages relating to attorneys’ fees

even exist. SUFI already has received rulings awarding lost profits and overhead as part

of its breach of contract claim. Thus, the breach of contract did not cause any additional

damages.

Third, in deciding whether SUFI has shown damages with reasonable certainty, the

only result the Court can reach with reasonable certainty is that no additional overhead

and profit are warranted. It stands to reason that where the Court is unable to identify any

damages, those damages cannot be shown with reasonable certainty. The record shows

that SUFI did not perform any of the work and did not incur any risk justifying a profit.

Therefore, SUFI has failed to establish any overhead or profit damages with reasonable

certainty. Further, the Court is not aware of any precedent supporting an overhead and

profit mark-up on an outside law firm’s fees, and the parties have provided none.

Accordingly, applying the common law of breach of contract damages, SUFI is not

entitled to any mark-up for overhead and profit on its law firm’s attorneys’ fees.

3

SUFI has not produced its contingent fee agreement with Crowell & Moring, ostensibly on attorney-client

privilege grounds, and thus the agreement is not part of the evidentiary record. The Court cannot determine

what the terms of the contingent fee agreement may be, a fact that is neither helpful nor hurtful to SUFI’s

claim. However, if the agreement had been helpful in some respect, presumably SUFI would have produced

it.

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B. Interest

The parties disagree on the date when interest should begin to run for attorneys’

fees, and whether the application of interest on expenses is still an open issue. Since

Crowell & Moring handled this matter on a contingent fee basis, SUFI received no legal

bills and incurred no liability for attorneys’ fees as the work was being performed. Indeed,

it is doubtful that as of today SUFI has paid anything to Crowell & Moring for attorneys’

fees because the Air Force’s obligation for breach damages to SUFI is not final. The

Government contends and the Court agrees that the earliest date of interest accrual would

be December 29, 2010, the date that SUFI submitted its claim for fees and expenses to the

contracting officer. Def.’s Nov. 9, 2015 Br. at 16-17. The date of the claim is the time

that SUFI formally put the Air Force on notice that payment of a sum certain would be

expected. Every day thereafter represents a day that SUFI was denied the use of the funds.

Therefore, starting interest on the date of claim submittal is a reasonable outcome, and

would be in line with the treatment of interest under the Contract Disputes Act, 41 U.S.C.

§ 7109(a) (2011). Although this case is not governed by the Contracts Disputes Act, the

parties likely would accept such a result as being typical in federal procurement law.

With regard to the running of interest on expenses, the Court agrees with SUFI that

the Government has waived the right to challenge the Court’s original judgment. Pl.’s

Oct. 19, 2015 Br. at 4-6. The Government did not appeal this Court’s ruling relating to

interest on expenses, and therefore the original ruling remains undisturbed. See SUFI IV,

113 Fed. Cl. 140 (2013).

C. Proposed Change in Presenting Attorneys’ Fees Claim

SUFI has recently raised for the first time that its attorneys’ fees calculation should

be based on the amount it is required to pay Crowell & Moring under the contingent fee

agreement, rather than using the traditional lodestar method previously presented. Pl.’s

Oct. 19, 2015 Br. at 7-10. As the Government points out, SUFI presented a traditional

lodestar method of rates multiplied by hours in its claim to the contracting officer, in its

complaint, in pretrial filings, during the trial, and on appeal to the Federal Circuit. Def.’s

Nov. 19, 2015 Br. at 19-28. During the entire trial, and the discovery leading up to trial,

the parties focused on the reasonableness of the attorneys’ hourly rates and the amount of

time spent.

At no time until now has SUFI argued for the recovery of fees based upon its

contingent fee agreement. This 180 degree reversal has occurred despite the fact that

SUFI has refused to produce the contingent fee agreement with Crowell & Moring. SUFI

itself strongly asserted in a February 13, 2012 motion for summary judgment that

“contingent fee arrangements between the client and the attorney are to be disregarded

when setting the appropriate fee. . . .” Pl.’s Mot Summ. J. at 11. SUFI relied upon

Supreme Court precedent that a plaintiff may not recover an amount pursuant to a

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contingent fee agreement. Id. (citing City of Burlington v. Dague, 505 U.S. 557, 562-63

(1992) (rejecting supplement to lodestar method due to contingent fee arrangement);

Blanchard v. United States, 489 U.S. 87, 92-95 (1989) (rejecting the capping of a lodestar

award by a contingent fee arrangement). Similarly, SUFI failed to raise its new fee

calculation when, in ruling upon cross-motions for summary judgment, this Court

extensively discussed the fact that SUFI’s contingent fee arrangement did not bar SUFI’s

recovery of attorneys’ fees based upon hourly rates and time spent. SUFI CFC II, 105

Fed. Cl. 184, 192-95 (2012).

The triggering event to SUFI’s change of position is that this Court, and later the

ASBCA, greatly increased the damages award for the Air Force’s breach, and thus greatly

increased the amount of the contingent fee that SUFI would pay. Yet, the Court’s damages

award stems from the SUFI CFC III, decision, issued on November 8, 2012. See 108 Fed.

Cl. 287 (2012). SUFI could have raised its alternative theory for recovery of attorneys’

fees at any time after that date, but it failed to do so. SUFI could have informed the Federal

Circuit of this new position, but it did not. The Government relied upon SUFI’s lodestar

method of presentation at every step of this case, and now would have to formulate a brand

new mode of defense if SUFI were permitted to proceed. Under these circumstances,

SUFI is equitably estopped from changing its position. Birkelund v. United States, 135

Ct. Cl. 503, 512-13, 142 F. Supp. 459, 465 (1956).

Finally, the Court doubts that it has subject matter jurisdiction of SUFI’s

significantly revised claim under the contingent fee agreement because that claim has

never been presented to the contracting officer for a final decision. The Court

acknowledges that some claims may be revised in litigation without having to be presented

to the contracting officer. See, e.g., J.F. Shea Co. v. United States, 4 Cl. Ct. 46, 54 (1983)

(permitting revision of claim without submission to contracting officer). In this case,

however, an attorneys’ fees claim based upon a contingent fee agreement presumably

would be a drastically larger claim based upon very different legal theories of recovery.

Using typical contingent fee terms (because SUFI has not produced the actual agreement

here), a one-third recovery by the law firm could exceed $30 million, as opposed to the

$697,702.50 awarded by this Court and affirmed by the Federal Circuit. Such a claim

ought to be submitted initially to the contracting officer. This is not a circumstance where

plaintiff is correcting an error or adding a new legal basis for recovery.

For all of the foregoing reasons, the Court will not allow SUFI to change its method

for recovering attorneys’ fees to the amounts due under the contingent fee agreement.

Conclusion

Within fourteen days, on or before December 21, 2015, the parties shall file a joint

status report indicating whether any further proceedings are necessary in this case, and if

so, what those proceedings may entail.

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IT IS SO ORDERED.

s/Thomas C. Wheeler

THOMAS C. WHEELER

Judge

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