ORDER: April 3, 2015

ORDER: April 3, 2015

CBCA 2727, 2951, 3445, 3461, 3539, 3558, 3884, 4006

KEPA SERVICES, INC.,

Appellant,

v.

DEPARTMENT OF VETERANS AFFAIRS,

Respondent.

William L. Bruckner and Nicholas A. Arcamone of Bruckner Law Firm, APC, San

Diego, CA; and Linda L. Shapiro, Timothy F. Noelker, and Scott F. Lane of Thompson

Coburn LLP, St. Louis, MO, counsel for Appellant.

Cecily Chambliss, Office of General Counsel, Department of Veterans Affairs,

Washington, DC; and Helen S. Henningsen, Office of General Counsel, Department of

Veterans Affairs, Milwaukee, WI, counsel for Respondent.

LESTER, Board Judge.

Appellant, Kepa Services, Inc. (Kepa), filed a motion for a protective order on

February 12, 2015, asking the Board to stop, or at least place limits upon, an audit being

conducted by the Office of Inspector General (OIG) for the Department of Veterans Affairs

(VA or agency). Kepa has declined to comply with the OIG’s audit requests pending

resolution of its motion.

CBCA 2727, 2951, 3445, 3461, 3539, 3558, 3884, 4006

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Background

These consolidated cases encompass eight appeals of twenty-four separate claims, all

of which arise out of a fixed-price contract with the VA, contract no. VA101CFM-C-0093

(contract 0093). That contract relates to work associated with gravesite expansion and

cemetery development at the Abraham Lincoln National Cemetery in Elwood, Illinois. We

previously discussed some of the discovery and schedule issues associated with these appeals

in Kepa Services, Inc. v. Department of Veterans Affairs, CBCA 2727, et al., slip op. at 2-6

(Feb. 19, 2015), to which we refer for background. As we stated in that order, we deferred

resolution of the current motion to allow the parties to provide the Board with further

briefing relating to Kepa’s request for a protective order. See id. at 2 n.1.

In December 2014, after these appeals had been filed, the VA contracting officer

contacted the VA OIG, asking it to initiate an audit of Kepa’s claims. Since 1993, the VA

OIG’s Office of Contract Review has conducted pre- and post-award audits of certain VA

contracts pursuant to a memorandum of understanding between the VA and the OIG. In the

most recent version of that agreement, now titled “Intra-Agency Agreement Between the

Office of Inspector General and the Office of Acquisition, Logistics, and Construction,”

dated September 2014, the VA OIG, in exchange for reimbursement for its services from the

VA, has agreed to conduct contract audits and compliance reviews as requested by the VA,

including “reviews of claims as requested by VA [contracting officers].” Agreement ¶¶ 3(e),

5(a). The VA has indicated in a declaration from one of the Directors of the OIG’s Office

of Contract Review that “[a]n audit of a claim is only conducted at the request of a

contracting officer.” Declaration of Michael Grivnovics ¶ 3 (Mar. 3, 2015).

On February 3 and 4, 2015, the VA OIG issued at least three letters – one to Kepa;

one to a subcontractor with claims in these consolidated appeals, Poettker Construction

Company (Poettker); and one to a third-tier subcontractor – requesting information relating

to the claims now pending before the Board. The OIG represented in the letters that the

“objectives of [its] review” were “to (1) review the quantum (amount of the monetary

adjustment) aspect of the claims and determine the reasonableness, allocability, and

allowability of the claimed amounts, and (ii) determine if the claimed costs . . . are acceptable

as a basis for negotiation or settlement based on the certified claim and supporting records.”

The VA OIG did not serve subpoenas along with the letters.

Kepa and its subcontractor, Poettker, immediately objected to the OIG letters,

objecting to the scope of the OIG’s requests and insisting that “any documentation requested

or submitted needs to . . . come through the attorneys.” Appellant’s Motion, Exhibit E

(e-mail message from Poettker counsel to VA counsel (Feb. 5, 2015)). Kepa has represented

that, at a subsequent meeting between the parties and the VA OIG on February 11, 2015, the

CBCA 2727, 2951, 3445, 3461, 3539, 3558, 3884, 4006

3

OIG represented that its procedures were not negotiable, that the OIG would continue to

communicate directly with third-tier subcontractors and would not include Kepa’s or

Poettker’s counsel in those communications, and that it would not negotiate the scope of its

requests. Appellant’s Motion at 5.

On February 12, 2015, Kepa filed its motion for a protective order, asking the Board

to stop the VA “from continuing to harass Appellants, as well as third-tier subcontractors,

by circumventing the Board’s rules on the conduct of discovery.” Appellant’s Motion at 1.

It complained that “the VA is proceeding in its audit as if this litigation does not exist.” Id.

It asserted that field auditors were directly contacting employees of Kepa, Poettker, and

third-tier subcontractors, “sidestepping the attorneys and needlessly duplicating and

frustrating the parties’ ongoing discovery efforts”; that they were “demanding documents and

answers without regard to relevance, burdens, or that which has already been provided or

requested through other means”; that the VA OIG was demanding responses to document

production requests and written questions in eight or nine days, in violation of the Board’s

discovery rules; and that the VA OIG was essentially harassing Kepa and Poettker. Id. at

1-2. The VA responded that the VA OIG audit is proper.

Discussion

The VA’s Right to Conduct an Audit

Kepa asks us to suspend the VA OIG’s audit because it is intended to harass and that,

to the extent that we do not suspend it, we require the VA OIG to go through counsel in

conducting its audit and to comply with the Board’s discovery rules. In response, the VA

asserts that the VA OIG is entitled to conduct its audit in the manner that it wishes and that

the VA OIG derives its authority to do so from three separate sources: (1) the Inspector

General Act of 1978 (IG Act), 5 U.S.C. app. 3 §§ 1-13 (2012); (2) the contract clause at 48

CFR 52.215-2, Audit and Records – Negotiation (March 2009); and (3) the Board’s general

discovery rules. We address each of these sources below.

I.

Authority under the Inspector General Act

First we consider the VA’s assertion that the VA OIG is entitled to audit Kepa’s

claims, without running its audit requests through counsel, under the authority granted by the

IG Act.

The main purpose of the IG Act is to ensure that the OIGs have the power to ferret out

fraud, waste, and abuse in federally funded programs:

CBCA 2727, 2951, 3445, 3461, 3539, 3558, 3884, 4006

4

The Inspector General Act of 1978 established an office of inspector general

in 15 federal departments and agencies. 5 U.S.C. app. § 1 et seq. (1982). The

enactment reflected congressional concern that fraud, waste and abuse in

United States agencies and federally funded programs were “reaching

epidemic proportions.” S. Rep. No. 1071, 95th Cong., 2d Sess., reprinted in

1978 U.S. Code Cong. & Ad. News 2676, 2679. To attack the problem, audit

and investigative functions within each of the departments were centralized

under one high-level official, an Inspector General, who was given broad

powers to seek out fraud and waste in agency operations and programs.

5 U.S.C. App. §§ 2, 4. In agencies with existing auditing or investigative

units, the functions of these units were transferred to an Inspector General,

5 U.S.C. App. §§ 2, 4.

United States v. Westinghouse Electric Corp., 788 F.2d 164, 165 (3d Cir. 1986). Although

the Act was amended in 1982, its purposes remained the same: to charge the OIG “with

combating fraud, waste and abuse.” Id.

Congress indicated that, to achieve this goal, the various OIGs would be able “to

conduct and supervise audits and investigations relating to the programs and operations” of

federal agencies, 5 U.S.C. app. 3 § 2(1) (2012), for the purpose of promoting “efficiency”

and detecting “fraud and abuse.” Id. § 2(2)(A), (B). The Act “grants inspectors general

broad discretion to determine which investigations and audits are necessary to its mission,

authorizing them ‘to make such investigations and reports relating to the administration of

the programs and operations of the applicable establishment as are, in the judgment of the

Inspector General, necessary or desirable.’” University of Medicine & Dentistry of New

Jersey v. Corrigan, 347 F.3d 57, 61 (3d Cir. 2003) (quoting 5 U.S.C. app. 3 § 6(a)(2)).

To allow each Inspector General to discharge his or her duties under the IG Act,

“Congress gave the Inspector General broad subpoena power.” Westinghouse Electric, 788

F.2d at 165; see Burlington Northern Railroad Co. v. Office of Inspector General, Railroad

Retirement Board, 983 F.2d 631, 641 (5th Cir. 1993) (quoting Westinghouse with approval).

The statute expressly permits the Inspector General to subpoena from private entities all

information necessary for the OIG’s performance of the functions assigned by the IG Act:

In addition to the authority otherwise provided by this Act, each Inspector

General, in carrying out the provisions of this Act, is authorized . . . to require

by subpoena the production of all information, documents, reports, answers,

records, accounts, papers, and other data in any medium (including

electronically stored information, as well as any tangible thing) and

documentary evidence necessary in the performance of the functions assigned

CBCA 2727, 2951, 3445, 3461, 3539, 3558, 3884, 4006

5

by this Act, which subpoena, in the case of contumacy or refusal to obey, shall

be enforceable by order of any appropriate United States district court.

5 U.S.C. app. 3 § 6(a)(4) (emphasis added).

Nevertheless, it is clear that the IG’s authority is not unlimited, since, when Congress

provided the OIGs with these powers, it “also prohibited any government agency from

transferring its program operating responsibilities to an Inspector General.” Winters Ranch

Partnership v. Viadero, 123 F.3d 327, 330 (5th Cir. 1997); see Burlington Northern

Railroad, 983 F.2d at 641 (“an Inspector General’s investigatory powers generally [do not]

extend to matters that do not concern fraud, inefficiency, or waste within a federal agency”);

S. Rep. No. 95-1071, at 28 (1978), reprinted in 1978 U.S.C.C.A.N. 2676, 2703 (“Broad as

it is, the Inspector and Auditor General’s mandate is not unlimited.”). But see Westinghouse

Electric, 788 F.2d at 170-71 (finding that OIG subpoena issued to support Defense Contract

Audit Agency audit was within purposes of, and authority granted by, the IG Act).

To the extent that an entity wants to challenge a subpoena that an OIG issues under

the purported authority of the IG Act, or to the extent that an OIG wants to enforce such a

subpoena, the IG Act specifically provides that such subpoenas are “enforceable by order of

any appropriate United States district court.” 5 U.S.C. app. 3 § 6(a)(4). Pursuant to that

provision, the United States district courts have exclusive jurisdiction to decide whether to

enforce, as well as whether to quash, an IG subpoena. See, e.g., University of Medicine

& Dentistry of New Jersey, 347 F.3d at 63; Inspector General of the United States

Department of Agriculture v. Glenn, 122 F.3d 1007, 1009 (11th Cir. 1997); Greene v.

Philadelphia Housing Authority, 789 F. Supp. 2d 582, 586 (E.D. Pa. 2011), aff’d, 484 F.

App’x 681 (3d Cir. 2012). “As a general proposition, an investigative subpoena” of an

Inspector General “will be enforced if the ‘evidence sought . . . [is] not plainly incompetent

or irrelevant to any lawful purpose’ of the agency.” United States v. Aero Mayflower Transit

Co., 831 F.2d 1142, 1145 (D.C. Cir. 1987) (quoting Endicott Johnson Corp. v. Perkins, 317

U.S. 501, 509 (1943)); see Resolution Trust Corp. v. Frates, 61 F.3d 962, 965 (D.C. Cir.

1995) (in extraordinary circumstances, court may inquire into the agency’s motives “if the

recipient of a subpoena makes ‘an adequate showing that the agency is acting in bad faith or

for an improper purpose, such as harassment’” (quoting Aero Mayflower, 831 F.2d at

1145)).1

1

The OIG also has subpoena power to require access to records from contractors and

subcontractors for audit purposes in certain circumstances under 41 U.S.C. § 4706(c). The

VA does not rely upon that statute in its briefing, and we do not address it here.

CBCA 2727, 2951, 3445, 3461, 3539, 3558, 3884, 4006

6

We discuss the power that the OIGs have to compel compliance with their

investigatory requests only to contrast it with the situation here. In this instance, the VA OIG

did not issue a subpoena. Instead, it merely issued administrative audit letters, which, at

most, request voluntary compliance by the recipient. Unlike a subpoena, there is nothing in

the audit letters that could be construed as compelling Kepa to respond to the VA OIG’s

requests. Although Kepa challenges the allegedly harassing and inappropriate manner in

which the VA OIG is seeking information, Kepa has the right – which it has exercised –

simply not to comply. Unless and until the VA OIG issues subpoenas to Kepa and its

subcontractors, the VA OIG has no ability under the IG Act to take any action against Kepa

to compel compliance. See United States ex rel. Richards v. De Leon Guerrero,

No. 92-00001, 1992 WL 321010, at *13 (D.N. Mar. I. July 24, 1992) (discussing how, absent

its subpoena power under the IG Act, the OIG’s auditing power would be illusory because

the OIG would have no ability to compel compliance), aff’d, 4 F.3d 749 (9th Cir. 1993). If,

in the future, the OIG issues subpoenas to Kepa and its subcontractors, we would lack

authority to interfere with that exercise of authority or to decide whether the subpoenas were

issued for a proper purpose. Kepa and/or its subcontractors would have to challenge those

subpoenas, if they thought a challenge appropriate, before a United States district court. In

the current circumstances, though, the VA OIG has not utilized his authority under the IG

Act – through issuance of a subpoena – to compel Kepa or its subcontractors to submit to an

audit. As a result, to the extent that the VA is seeking to compel Kepa’s participation in an

audit, it must find (unless and until the VA OIG decides to issue a subpoena) another source

of authority to compel compliance.2

II.

Authority under the “Audit and Records – Negotiations” Contract Clause

The VA asserts that it is entitled to compel Kepa to participate in an audit under 48

CFR 52.215-2(c), the “Audit and Records” clause contained in Kepa’s contract.3

2

Kepa complains that the VA OIG may have sent audit letters to an unknown

number of third-tier subcontractors and that those subcontractors should not have to respond

to the letters. During a telephonic status conference on March 24, 2015, however, counsel

for Kepa and the subcontractor assisting Kepa in this litigation, Poettker, indicated that they

do not represent any of the third-tier subcontractors. Because they do not represent the

third-tier subcontractors, there is no basis for them to complain about the VA OIG’s possible

contacts with those subcontractors or about the possibility that those subcontractors might

voluntarily comply with OIG audit requests. See Model Rules of Prof’l Conduct R. 4.3, 4.4

(2013).

3

The VA does not contend that it has any audit rights under 48 CFR 52.215-2(b).

That provision entitles the contracting officer to examine the contractor’s records and to audit

CBCA 2727, 2951, 3445, 3461, 3539, 3558, 3884, 4006

7

Subsection (c) of that clause provides that, if a contractor “has been required to submit

certified cost or pricing data in connection with any pricing action relating to this contract,

the Contracting Officer . . . shall have the right to examine and audit all of the Contractor’s

records” related to the proposal for, discussions conducted on the proposal for, pricing of,

and performance of the contract, subcontract, or modification associated with the pricing

action. Id. Federal Acquisition Regulation (FAR) 15.403-4 identifies the circumstances

under which certified cost or pricing data is necessary, which include, as relevant to this

order, “[t]he modification of any sealed bid or negotiated contract” that exceeds the current

threshold of $700,000. See 48 CFR 15.403-4(a)(1)(iii). The clause at FAR 52.215-21,

“Requirements for Certified Cost or Pricing Data and Data Other Than Certified Cost or

Pricing Data – Modifications” (Alternate II), which is incorporated into Kepa’s contract, see

Appeal File, Tab 1 at 61, sets forth various exceptions that, depending on the circumstances,

eliminate the need for certified cost or pricing data when a contract is modified. 48 CFR

52.215-21(a); see id. 15.403-1(b). It also indicates that no certified cost or pricing data is

required for a modification meeting the $700,000 threshold until “after agreement on price.”

Id. 52.215-21(b)(2).

The VA does not allege that Kepa has ever previously submitted certified cost or

pricing data under this fixed-price contract.4 Instead, it contends that, under its contract,

Kepa would have to submit such data for any contract modifications exceeding $700,000.

Respondent’s Response Brief at 5-6. Because one of the twenty-four claims at issue in these

consolidated appeals exceeds the $700,000 threshold,5 the VA contends, Kepa is required to

submit certified cost or pricing data in support of that claim, which provides the VA

incurred costs, but only under cost-reimbursement, incentive, time-and-materials, labor-hour,

and price-redeterminable contracts. Id. Because Kepa’s contract was for a fixed price, that

provision does not apply here.

4

Kepa indicates that, because the original contract award was based upon adequate

price competition, there was no original requirement to submit certified cost or pricing data.

Appellant’s Reply at 3; see 48 CFR 15.403-1(b)(1) (prohibiting contracting officer from

obtaining cost or pricing data after determining that prices are based on adequate price

competition). It also asserts that it has never submitted certified cost or pricing data to

support any of its claims in these appeals. Appellant’s Reply at 3.

5

Kepa indicates that, although one of its claims exceeds the $700,000 threshold,

none of its subcontractor’s claims meet that threshold, such that the VA has not identified

any basis for the VA OIG’s right to access its subcontractors’ books and records.

Appellant’s Reply at 1.

CBCA 2727, 2951, 3445, 3461, 3539, 3558, 3884, 4006

8

contracting officer with a contractual right to audit all of Kepa’s books and records relating

to all of its pending claims. Id.

The VA has provided us with nothing to support its position that Kepa was required,

is required, or will be required to submit certified cost or pricing data in the circumstances

of these cases. For whatever reason (which the record does not reflect), Kepa was not

required to, and did not, submit certified cost or pricing data before it submitted its claims

to the contracting officer, perhaps because negotiations never reached the point where

certified cost or pricing data would be required. That distinguishes these consolidated cases

from the situation in Aerospatiale Helicopter Corp., DOT BCA 1905, et al., 89-1 BCA

¶ 21,559, which the VA cites as support. In that case, one of our predecessor boards, in

finding that the contract’s “Audit” clause applied to require the contractor to submit to an

audit, determined that the appellant and its subcontractor both “ha[d] submitted cost or

pricing data to the [agency], within the meaning of paragraph (c) of the Audit clause,

triggering the obligations flowing from that submission, as described in the Audit clause.”

Id. at 108,579. Because the contractor submitted cost or pricing data in support of a

proposed contract modification, the “Audit” clause gave the Government a contractual basis

for conducting an audit of the contractor’s costs after the modification request ripened into

a dispute. Id. at 108,580.

The VA has fallen short in establishing a current, or even a potential future, right to

audit under FAR 52.215-2(c). The FAR clause to which the VA cites “pertain[s] to the need

for a contractor to submit cost or pricing data in connection with the pricing of a contract

change or modification . . . and the right of the Government to examine that data for a period

of up to 3 years after final contract payment.” Hardrives, Inc., IBCA 2319, et al., 93-2 BCA

¶ 25,779, at 128,298 (1992). The VA has made clear that neither before nor during the

pendency of these appeals has Kepa ever submitted such certified data. Now that the appeals

are here before the Board, we, rather than the contracting officer, will decide the cases based

upon actual evidence submitted to the Board, and, absent a negotiated amicable resolution

of these appeals between the parties resulting in a formal contract modification, there will

be no need for the contractor to submit certified cost or pricing data. Id. (the “action before

this Board is an appeal from the contracting officer’s . . . decision on [the contractor’s] CDA

claims and does not involve the pricing of a contract change or modification”). Because the

audit provision of FAR 52.215-2(c) applies only if the contractor “has been required to

submit certified cost or pricing data,” and because Kepa has not and, at least in the present

circumstances of these appeals, will not have to submit certified cost or pricing data, the

clause does not currently give the VA a contractual right to audit.

The VA also asserts that it has a separate contractual right to audit under FAR

52.215-2(f)(2), which provides that “[t]he Contractor shall make available records relating

CBCA 2727, 2951, 3445, 3461, 3539, 3558, 3884, 4006

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to appeals under the Disputes clause or to litigation or the settlement of claims arising under

or relating to this contract until such appeals, litigation, or claims are finally resolved.”

48 CFR 52.215-2(f)(2). Yet, FAR 52.215-2(f) makes clear that this provision applies only

to “the records, materials and other evidence described in paragraphs (a), (b), (c), (d), and (e)

of this clause.” Id. 52.215-2(f). That is, paragraph (f) provides that the contractor must

maintain and make available records subject to paragraphs (a) through (e) of the clause for

three years after final payment, but paragraph (f)(2) extends that time if a matter covered by

paragraphs (a) through (e) has been appealed under the Disputes clause, is in litigation, or

is in settlement discussions. Id. Interpreting paragraph (f) as only extending the time for

audit of materials covered in paragraphs (a) through (e) is consistent with the fact that FAR

52.215-2 implements the audit rights that Congress created in 10 U.S.C. §§ 2306a and 2313

and in 41 U.S.C. §§ 3501-3509 and 4706, which is plainly evident from the language of

paragraphs (a) through (e) of FAR 52.215-2, as well as the three-year audit period language

in paragraph (f). None of those statutes permits expanded audit rights – beyond the

circumstances contemplated in paragraphs (a) through (e) of FAR 52.215-2 – if the

contractor files an appeal or engages in litigation. The audit right provision in paragraph

(f)(2) applies only if and after the Government establishes that paragraph (a), (b), (c), (d), or

(e) of the clause applies.6 Because the VA has not established that it has a right to audit

6

That the scope of paragraph (f)(2) is limited by paragraphs (a) through (e) of FAR

52.215-2 is further evidenced by the clause’s regulatory history. Earlier versions of the

clause now at FAR 52.215-2 even more clearly stated that, although the contractor was

required to make records available for audit by specific entities in certain circumstances for

three years from final payment, the audit period for those particular records and by those

particular entities was extended if the contractor filed an appeal under the contract’s Disputes

clause. See, e.g., 45 Fed. Reg. 43741, 43754-55 (June 30, 1980) (NASA Procurement

Regulation § 7-104.42 (contract clause): “materials described in (b), (c) and (d) above shall

be made available” for three years from final payment “and for such longer period, if any,

as is required . . . by (1) and (2) below,” including “(2) Records which relate to appeals under

the ‘Disputes’ clause of this contract . . . shall be made available until such appeals . . . have

been disposed of”); 40 Fed. Reg. 48314, 48318 (Oct. 14, 1975) (Federal Procurement

Regulation § 1-16.901-23A, Standard Form 23-A, General Provisions (Construction

Contract): although paragraphs (b) and (c) provide Comptroller General access to records

relating to agency contracts for three years after final payment, “[t]he periods of access and

examination described in (b) and (c) [relating to Comptroller General access to contract

records], above, for records which relate to . . . appeals under the ‘Disputes’ clause of this

contract . . . shall continue until such appeals . . . have been disposed of.”). Nothing that we

see in the Federal Register notices promulgating FAR 52.215-2 indicates that its drafters

intended, in making slight alterations to the language of paragraph (f), to expand the

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under paragraphs (a) through (e) of FAR 52.215-2, it cannot rely upon paragraph (f)(2) as

an independent basis for audit rights.

The VA has failed to establish its contractual right to audit Kepa’s claims.

III.

The Board’s Discovery Rules

The VA finally asserts that, if nothing else, the VA OIG is entitled to conduct its audit

pursuant to the Board’s discovery rules. CBCA Rule 13(b) provides that “parties may obtain

discovery regarding any matter, not privileged, which is relevant to the subject matter

involved in the pending case, . . . including the existence, description, nature, custody,

condition, and location of any books, documents, electronically stored information, or other

tangible or intangible things.” 48 CFR 6101.13(b) (2014). Kepa, however, argues that the

Board’s rules do not permit an audit because the express language of CBCA Rule 13(a) limits

the available discovery tools to depositions, written interrogatories, requests for production

of documents, and requests for admission. See id. 6101.13(a).

Contrary to Kepa’s position, our rules do not preclude the Government from

conducting an audit of Kepa’s claims. Although our rules do not expressly mention the word

“audit,” we “construe our rules liberally to provide for the informal and just resolution of

matters before us.” Safe Haven Enterprises, LLC v. Department of State, CBCA 3871, et al.,

slip op. at 9 (Mar. 25, 2015) (citing 41 CFR 6101.1(c)). Further, “we are entitled to modify

our rules when necessary to achieve those goals.” Id. (citing 41 CFR 6101.1(d)).

circumstances under which an audit was contractually available beyond those identified in

paragraphs (a) through (e).

The Armed Services Board of Contract Appeals’ decision in Advanced Engineering

& Planning Corp., ASBCA 53366, et al., 03-1 BCA ¶ 32,157, aff’d in part on other grounds

sub nom. Johnson v. Advanced Engineering & Planning Corp., 292 F. Supp. 2d 846 (E.D.

Va. 2003), does not appear to be to the contrary. It is true that the board there “read [FAR

52.215-15(f)(2)] to provide that once a contractor’s request for equitable adjustment [(REA)]

reaches a claim or litigation stage, negotiation of the REA is subject to audit.” Id. at 158,991.

However, the REA there – seeking almost $2 million – far exceeded the threshold for the

submission of cost or pricing data under paragraph (c) of the clause, suggesting that the

contractor had, in fact, submitted such data at some earlier time. Accordingly, we do not read

Advanced Engineering to indicate that paragraph (f)(2) creates an independent and expanded

contractual right to audit records that is separate from and unrelated to paragraphs (a)

through (e). Even if it did, it is not binding on us.

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In Aerospatiale Helicopter Corp., one of our predecessor boards examined the

discovery rules that apply to the boards, as well as those that apply to federal courts, and it

recognized both the need for contractors to prove quantum using actual financial records and

the Government’s right thoroughly to evaluate that financial evidence:

[I]f [the contractor] does not offer [financial] records into evidence, so much

of its claims as relates to expenses incurred . . . may have to be dismissed for

a failure of proof.

This creates a reasonable expectation that [the contractor] will seek to

introduce all or a portion of such records at the trial, or testimony derived from

trial witnesses’ review of all or a portion of those records. A litigant, including

the government, is entitled to inspect documents which the other party might

offer into evidence or which might form the basis for witnesses’ testimony, and

to do so sufficiently in advance of trial to permit meaningful consideration of

their contents.

Even if the appellant does not contemplate offering any portion of its financial

records into evidence to support its monetary claim, that material is

nevertheless obtainable on discovery, as reasonably related to the subject

matter of the litigation. The right to have documents produced and to examine

them exists without regard to whether the claimant will offer those records into

the Board’s record and without regard to whether they will be admissible if

offered.

Id. at 108,576 (citations omitted; italics in original). It then recognized that “[t]his right of

a litigant to obtain, copy, and examine financial records as a part of discovery is broad

enough to include the right to have financial records examined by a person possessing the

special skills which may be required to properly examine and interpret those records, namely

an auditor.” Id.

Because the Government’s right to take discovery includes the need for available

discovery methods to be effective, the board in Aerospatiale Helicopter “conclude[d] that,

under the Board’s Rules of Procedure as well as under the general rules of discovery in

federal courts, in a Board proceeding a litigant against whom a monetary claim is being

prosecuted has a right to have the claimant produce for inspection and audit its records

relating to the incurred costs which form the basis for the claim.” Id. at 108,577; see Allied

Reclaiming Services, AGBCA 99-140-1, et al., 00-2 BCA ¶ 31,028, at 153,242 (citing

Aerospatiale in finding right to conduct audit during discovery); Hardrives, 93-2 BCA at

128,298 (audit “can be pursued during discovery, if necessary”); Inslaw, Inc., DOT BCA

CBCA 2727, 2951, 3445, 3461, 3539, 3558, 3884, 4006

12

1609, et al., 88-1 BCA ¶ 20,368, at 103,009 (1987) (“We believe that the right to obtain,

copy, and examine is broad enough to include the right to have financial records audited.”);

Arcon Pacific Contractors, ASBCA 25057, 81-2 BCA ¶ 15,225, at 75,403-04 (permitting the

Government “to examine appellant’s books and records to ascertain the amount of costs

incurred to the extent they are claimed to be damages suffered by appellant”).

Further, “from a purely practical standpoint . . . , it is in Appellant’s best interest to

provide the financial data requested to the Government.” Allied Reclaiming Services, 00-2

BCA at 153,241. It is the appellant’s burden to prove the quantum associated with its claims,

and, without adequate financial support, it will not meet that burden. Id. “Moreover, the

Government is entitled to protection from liability for unaudited amounts where it has

properly requested and been refused permission to conduct an audit in furtherance of its

discovery rights.” Arcon Pacific, 81-2 BCA at 75,404. Because Kepa has a vested interest

in ensuring that the VA has adequate access to Kepa’s financial records, we will provide the

parties an opportunity to develop an audit plan that meets their needs. If they are unable to

agree on such a plan that provides reasonable access to the VA auditors, the Board will

develop an audit plan itself based upon suggestions from the parties.

That being said, because the Board’s discovery rules are the VA’s only current means

of compelling Kepa’s participation in an audit, the VA must run that audit through Kepa’s

counsel, just as it would any other discovery request. Kepa complains that the VA OIG has

contacted, and intends to contact, Kepa’s and Poettker’s employees directly without the

involvement of Kepa’s counsel. This the VA OIG cannot do, absent counsel for Kepa’s

express permission. Because the VA’s counsel serves as the VA’s representative before the

Board, it is the VA counsel who is ultimately responsible for any and all discovery by the VA

in these consolidated appeals. Rule 4.2 of the American Bar Association Model Rules of

Professional Conduct (Model Rules) provides that a lawyer cannot “communicate about the

subject of the representation with a party the lawyer knows to be represented by another

lawyer in the matter, unless the lawyer has the consent of the other lawyer or is authorized

by law to do so.” Comment 7 to Model Rule 4.2 provides that, “[i]n the case of a represented

organization, this Rule prohibits communications with a constituent of the organization who

supervises, directs or regularly consults with the organization’s lawyer concerning the matter

or whose act or omission in connection with the matter may be imputed to the organization

for purposes of civil or criminal liability.” Although that comment limits the ban on contacts

to specific categories of a represented corporation’s current employees, the comment further

provides that, “[i]n communicating with a current . . . constituent of an organization, a lawyer

must not use methods of obtaining evidence that violate the legal rights of the organization.”

Accordingly, any effort to obtain documents from the company’s files through company

employees without the involvement of the company’s counsel “effectively circumvent[s] the

discovery process and prevent[s] the company from being able to argue against production.”

CBCA 2727, 2951, 3445, 3461, 3539, 3558, 3884, 4006

13

In re Shell Oil Refinery, 143 F.R.D. 105, 108 (E.D. La. 1992); see Inslaw, Inc., DOT BCA

1609, et al., 89-1 BCA ¶ 21,238, at 107,118 (1988) (“It is the general rule in discovery that

one litigant cannot interview and query key employees of an opposing party except with

consent of or in the presence of the latter’s counsel.”).

Even if (without deciding) there may be times when Rule 4.2 itself would not bar an

attorney from contacting low-level employees to obtain documents from an opposing

corporate party’s files, the attorney’s “receipt of [another party’s] proprietary documents in

this manner” would still be “inappropriate and contrary to fair play.” Shell Oil, 143 F.R.D.

at 108.7 Further, because the VA’s counsel is barred from gathering documentary evidence

from Kepa’s files by directly contacting Kepa’s employees, the VA’s counsel, to the extent

that the Board’s rules provide the authority for compelling audit compliance, cannot permit

a VA investigative auditor to do so. See Model Rules of Prof’l Conduct R. 5.3, 8.4(a); see

also ABA Comm. on Ethics & Prof’l Responsibility, Formal Op. 95-396 (July 28, 1995) (“A

lawyer may not direct an investigative agent to communicate with a represented person in

circumstances where the lawyer herself would be prohibited from doing so.”).8

As a result, to the extent that the VA wants to discover documents from Kepa under

the Board’s discovery rules, it either has to do so through Kepa’s counsel or has to obtain

Kepa counsel’s permission to deal with a particular individual or individuals in seeking

materials responsive to audit requests. We recognize, as did one of our predecessor boards,

that “[i]t is impracticable for [a contractor] to multiply its legal costs by having an attorney

present throughout a prolonged audit. Undeniably, in conducting an audit, auditors may need

to make inquiries as to how books and records are maintained in order to comprehend those

documents and to more efficiently perform the audit.” Inslaw, 89-1 BCA at 107,118. Were

there a contractual right to audit, “by accepting the contract with the Audit clause, [the

contractor would have] assumed the burden of having auditors at its place of business,

possibly for extended periods, notwithstanding the pendency of litigation,” so that auditors

arguably might not need counsel’s permission before seeking specific supporting financial

documentation from contractor employees. Id. Here, though, the VA has not identified a

viable basis for applying the contract’s Audit clause, leaving the Board’s discovery rules as

7

We make no judgment as to the application of this rule in fraud investigations or

criminal matters during active pending litigation. Our focus is solely upon the type of civil

commercial litigation pending before us.

8

For the reasons previously discussed, if the OIG were conducting this audit by

subpoena under its IG Act authority, we would have no authority to comment upon the extent

to which the OIG’s direct contact with contractor employees, without involvement of

counsel, would be appropriate. That would be a matter for the district court to address.

CBCA 2727, 2951, 3445, 3461, 3539, 3558, 3884, 4006

14

the only means of compelling Kepa’s compliance. Although the practicalities of an audit

make it seem likely that Kepa would want to agree to an audit procedure through which the

constant involvement of counsel was not necessary, that is Kepa’s decision to make in

consultation with its counsel. Nevertheless, to the extent that, in developing a proposed audit

plan with the VA, Kepa is unreasonable in accommodating the necessities of an efficient

financial audit or insists upon a procedure that is unwieldy, the Board will entertain a request

by the VA to extend the existing discovery completion deadline to account for the auditing

inefficiencies that may result.

The Scope of the Existing Audit Requests

Kepa requests that, if we permit an audit as a part of discovery, we limit the VA OIG’s

requests because they are “overly broad” and “go beyond records that are relevant to these

appeals.” Appellant’s Reply at 9. Kepa further asserts that many of the documents sought

are “already in the VA’s possession.” Id.

We see no need to limit the scope of the current audit requests at this time. On their

face, the requests seem fairly typical, and some are very narrowly tailored to ask for a

specific document. Our rules provide that a party may “obtain discovery regarding any

matter, not privileged, which is relevant to the subject matter involved in the pending case”

or that is “reasonably calculated to lead to the discovery of admissible evidence.” 48 CFR

6101.13(b). We generally apply the principles favoring discovery, and the concept of

relevance in discovery, broadly. Dawson Construction Co., VABCA 1967, 85-3 BCA

¶ 18,209, at 91,390. Although the Board can limit discovery that is “unreasonably

cumulative or duplicative, or is obtainable from some other source that is more convenient,

less burdensome, or less expensive,” 48 CFR 6101.13(c)(1), “[t]he fact that the moving party

is already in possession of documents it seeks to obtain by inspection, is not necessarily a

sufficient reason for denying discovery.” Cook v. Rockwell International Corp., 161 F.R.D.

103, 105 (D. Colo.1995); see Evergreen Trading, LLC v. United States, 80 Fed. Cl. 122, 136

& n.20 (2007) (“the fact that a discovery request may lead to the discovery of documents

already possessed does not necessarily bar that discovery”). Here, the VA OIG has indicated

that its process includes an effort to obtain information from the contracting officer and the

existing contract files before going to the contractor. Grivnovics Declaration ¶¶ 7, 9, 12. In

the context of an audit, it would seem too burdensome on the process to insist that the

auditors make sure that they seek only those documents that the VA does not already possess.

To the extent that, during the audit, Kepa finds the process unwieldy, it can renew its request

for some type of scope limitation, with more concrete examples of discovery abuse.

CBCA 2727, 2951, 3445, 3461, 3539, 3558, 3884, 4006

15

Decision

For the foregoing reasons, the Board GRANTS IN PART Kepa’s motion for a

protective order and otherwise DENIES that motion. The VA is entitled to undertake an

audit of Kepa’s claims at issue in these consolidated appeals, but, unless and until the VA

OIG issues a subpoena under the authority of the Inspector General Act, that audit is to take

place under the auspices of the Board’s discovery rules. The parties shall confer and jointly

propose a plan for permitting the VA OIG to conduct an efficient audit of Kepa’s claims no

later than Tuesday, April 14, 2015. To the extent that the parties cannot agree upon a joint

proposal, they may submit separate responses to this order by that date.

__________________________________

HAROLD D. LESTER, JR.

Board Judge