Amicus Curiae Brief — AT & T Corp. v. United States, 124 S. Ct. 56 (2003) (No. 02-1569)

if Supreme Court, O'S

a FILED

Y JUN 3.9 2002

No. 02-1569 OFFICE OF THE CLEKS

Jn the Supreme Court of the Gnited States

AMERICAN TELEPHONE & TELEGRAPH Co.

and

LUCENT TECHNOLOGIES INC.,

Petitioners,

v. -

THE UNITED STATES,

Respondent.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Federal Circuit

BRIEF OF THE NATIONAL DEFENSE INDUSTRIAL

ASSOCIATION AND THE GOVERNMENT

ELECTRONICS AND INFORMATION TECHNOLOGY

ASSOCIATION AS AMICI CURIAE IN SUPPORT OF

PETITIONERS

Roy T. ENGLERT, JR.*

MAX HUFFMAN

Robbins, Russell, Englert,

Orseck & Untereiner LLP

1801 K Street, N.W.

Suite 41]

Washington, D.C. 20006

(202) 775-4500

* Counsel of Record

AW ? ‘¥

i

TABLE OF CONTENTS

Page

pp ee ae) fy | ES ery ee 1

INTEREST OF THE AMICI CURIAE ............00005: l

to eer rere eee er Tr rere l

pe en rer rrr re rT rrr Tree re 3

I. REVIEW IS NEEDED TO ADDRESS THE

CONFUSION REGARDING A

CONTRACTOR’S RIGHT TO A REMEDY

WHEN A CONTRACT OR ITS TERMS ARE

II. THE PANEL DECISION WARRANTS REVIEW

BECAUSE OF ITS FAR-REACHING EFFECT

AND THE INDEFENSIBLE BURDEN PLACED

ON THE DEFENSE CONTRACTING

UE N58 eo a OE se CAG rd ebb eeiaees 14

eR Per ee Pon ree Ere ee Sere ree ye 20

TABLE OF AUTHORITIES

Page(s)

Cases ;

AT&T v. United States, 177 F.3d 1368

Ce RO eee ere 9

Applied Devices Corp. v. United States, 591 F.2d 635

ee Serr er ee ee eee Tee ee 12

Barrett Refining Corp. v. United States, 242 F.3d 1055

Ee Be ee eo eer re Pere 5,8,9,17

li

TABLE OF AUTHORITIES—Continued

Page(s)

Beta Sys., Inc. v. United States, 838 F.2d 1179

os | eerrerrwer Peper er rrr 7,20

Campbell v. TVA, 421 F.2d 293

CA, SOE. ke hekiwaken uch eee kkbneeeeees 12

Cessna Aircraft Co. v. Dalton, 126 F.3d 1442

Ce, Goa. Wee ues keene de lee ees 6,9

Chris Berg, Inc. v. United States, 426 F.2d 314

(ee Er rere sy re re ree 13

Clark v. United States, 95 U.S. 539 (1877) ......... passim

Girling Health Sys., Inc. v. United States, 949 F.2d

BR re: Ba Fae oo ks wa ie eee 6

Gold Line Refining, Ltd. v. United States, 54 Fed. Cl.

POE cio ps See eka he tae eae ees 17

Gould, Inc. v. United States, 935 F.2d 1271

Ce: Cae. Ee ED no eh bk Honea coeuess 12

Gould, Inc. v. United States, 67 F.3d 925

ty Bem, iS errr 6,10,12,17

Hercules, Inc. v. United States,

SOG UIE. GET CIS oo coe oe knse the eeeennseeeere 6

John Doe Agency v. John Doe Corp., 493 U.S. 146

CRUD ~\-0-<-2-0n o-sapeeaie ee dike ed eae as 14

Johnson Mgmt. Gp. CFC, Inc. v. Martinez

308 F.38 1205 Gee, CM. BOG 5 ks skis ck vcenaes 14,17

LaBarge Prods., Inc. v. West, 46 F.3d 1547

CP. Ga. Sees + 6s be neeeeesas seskeeuktenas 12

La Gloria Oil & Gas Co. v. United States, 56 Fed. Cl.

eh Eo ok. nn oes ch oe eeeokeee ene 17

ee

aaa

ili

TABLE OF AUTHORITIES—Continued

Page(s)

Marathon Oil Co. v. United States, 177 F.3d 1331

ES ee 4

Mobil Oil Expl. & Prod. Southeast, Inc. v. United

States, 330 U.S. G04 (2000) ..... 6.2... eee, 411,14

National Park Hospitality Ass'n v. Department of

RR ere 6

Northrop Grumman, Inc. v. United States, 47 Fed. Cl.

teehee EEGs aca Kwmrs wes ks 9,16

Sola Elec. Co. v. Jefferson Elec. Co., 317 U.S. 173

EE eRe EEG eek aWh ss oak cases esa ce uues 19

ce A tS Te) 16

United Int'l Investigative Servs. v. United States

og es YE ef) 19

United States v. Amdahl Corp., 786 F.2d 387

SE ee 10,12

United States v. American Renaissance Lines, Inc.,

me wie Fee a, UM. ISTE) ... ww we ccc cceee 13

United States v. Winstar Corp., 518 U.S. 839 (1996) . 4,5,11

Urban Data Sys., Inc. v. United States, 699 F.2d 1147

Pe aad ke hak a Wn «0.00 080 4- 12

Statutes and Regulations:

Defense Appropriations Act of 1987, Pub. L. No. 100-

212, § 8118, 101 Stat. 1329-84 (Section 8118) .. passim

Ne) 10 |

I ES nn cos cov ceceedecccaveevss 6

a ne ee 6

iV

TABLE OF AUTHORITIES—Continued

Page(s)

SOG ee 0 RE A RENE 15,18

Department of Defense Directive 5000.1, 4 D.9.g

CRUPER CRE a ei ewes eh des eee ee eeEe* ES 15,18

Miscellaneous:

H.R. Rep. No. 100-410, 100th Cong., 1st Sess. (1987) ... 15

H.R. Conf. Rep. No. 100-498, 100th Cong.,

PP BENGE Sewanee ceds see receneenrs 15,18

S. Rep. No. 100-326, 100th Cong., 2d Sess. (1988) ..... 17

Norman R. Augustine & Robert F. Trimble, Procurement

Competition at Work: The Manufacturer's Experience,

© FALE F.C BO. SOP CEOOD 66 ck ee ecceetansves 15

Richard E. Speidel, Contract Excuse Doctrine &

Retrospective Legislation: The Winstar Case,

Bk WU bi FO 8 600A RK eee oe RKO 19,20

Kate Stith, Congress’ Power of the Purse, 97 YALE L.J.

RNR CE oki HRS REEEAE RON ERE Or 16

INTEREST OF THE AMICI CURIAE'

Amicus curiae National Defense Industrial Association

(NDIA) is a nonpartisan, nonprofit international organization

representing more than 1000 companies and 24,000 individuals

from the defense and national industrial bases. NDIA’s mission

is to provide a forum for the interchange of ideas between the

government and industry to address problems of joint concern,

including business and technical aspects of the government

acquisition and procurement process. NDIA members support

our national defense by contracting with the government to

provide vital military equipment, weapons, and machinery.

Amicus curiae Government Electronics and Information

Technology Association (GEIA) is an organization of “high-

tech” companies that contract to provide the government with

electronics and information technology solutions. Members of

GEIA have thousands of contracts with the federal government

and derive a substantial percentage of their annual revenues

from these contracts.

NDIA and GEIA believe that the Federal Circuit’s decision

will prevent defense contractors, including members of amici

organizations, from obtaining traditional and appropriate con- —

tract remedies when the contractors incur losses on illegal

contracts or contracts with illegal terms. Some members of

amici organizations face in other litigation the same issue that

is before the Court in the petition.

STATEMENT

This litigation arises out of a contract entered into at the end

of 1987 between petitioner AT&T, a defense contractor, and the

United States Navy, to engineer and develop the “Reduced

Diameter Array,” a subsystem of the “Surveillance Towed-

- Array Sensor System,” designed to detect the most advanced

' The parties’ letters of consent to the filing of this brief have been

lodged with the Clerk of the Court. Pursuant to Rule 37.6 of the

Rules of this Court, amici curiae state that no counsel for a party has

written this brief in whole or in part and that no person or entity, other

than the amici curiae, their members, or their counsel, has made a

monetary contribution to the preparation or submission of this brief.

Soviet submarines. Pet. App. 34a-35a.? The contract was a

“fixed-price” contract under which petitioner committed to do

all research, development, and testing, and to deliver an “engi-

neering development model.” Petitioner successfully performed

the contract at a total cost vastly in excess of the fixed contract

price (even after certain adjustments). Jbid.

A completely lawful fixed-price contract, of course, would

have placed on petitioner the risk that the cost of this cutting-

edge research and development would be much more than the

price. But the price term of contract at issue was not lawful,

precisely because Congress was fed up with the Navy’s practice

of routinely putting such risks entirely on contractors. The

fixed-price term in the contract violated the Defense

Appropriations Act of 1987, Pub. L. No. 100-212, § 8118, 101

Stat. 1329-84 (Section 8118), which provided in part:

None of the funds provided for the Department of Defense

in this Act may be obligated or expended for fixed price-

type contracts in excess of $10,000,000 for the develop-

ment of a major system or subsystem unless the Under

Secretary of Defense for Acquisition determines, in

writing, that program risk has been reduced to the extent

that reasonable pricing can occur, and that the contract type

permits an equitable and sensible allocation of program risk

between the contracting parties[.]

Petitioner sued in the Court of Federal Claims, seeking to have

the contract reformed into a “cost reimbursement” contract, to

correct the illegal price term. In the alternative, petitioner

sought relief in quantum meruit for the value of the benefit

conferred on the Navy. Pet. App. 109a.

The litigation ultimately made it to the en banc Federal

Circuit, which held in an opinion by Judge Newman that the

2 Though both AT&T and Lucent Technologies are petitioners, there

was only one contract, and we will refer to “petitioner” to avoid

confusion. No issue before the Court turns on any difference in the

interests of AT&T and Lucent.

3

illegal price term did not render the entire contract void ab

initio. Pet. App. 48a. The court also stated the various remedies

potentially available to a contractor that has fully performed its

responsibilities under a contract that contains an illegal term,

including sustaining the contract, reforming the contract, and

granting recovery under an implied-in-fact contract. Jbid.

On remand, the Court of Federal Claims dismissed the suit

for failure to state 2 claim. A Federal Circuit panel affirmed

over a strong dissent by Judge Newman, the author of the en

banc opinion. Pet. App. 2a. The panel held that petitioner’s

ability to bring a cause of action seeking a remedy on the con-

tract turned on whether Section 8118 was intended to be

“enforced” through private \awsuits. Jd. at 8a. The panel also

suggested that petitioner had waived any right to contest the

price term in the contract by failing to protest the form of the

contract during the bidding process. Jd. at 13a-14a.

The unsettled state of the law within the Federal Circuit

demonstrates a need fox this Court to intervene. Because the

complaint has been dismissed for failure to state a claim (after

ten years of litigation), the petition presents a pure issue of law

for this Court’s review. This case is therefore an excellent

vehicle for this Court to answer the simple, broadly applicable

question whether an aggrieved contractor can pursue contract-

law remedies when one or more terms of the contract are illegal.

ARGUMENT

I. REVIEW IS NEEDED TO ADDRESS THE

CONFUSION REGARDING A CONTRACTOR’S

RIGHT TO A REMEDY WHEN A CONTRACT OR

ITS TERMS ARE INVALID

It is impossible to overstate the radical nature of the deci-

sion below. The panel majority did not hold that some particu-

lar contract remedy is unavailable on the facts of this case.

Rather, it held that a// contract remedies are unavailable unless

the statute making a contract term illegal gives rise to an express

or implied private right of action. No corresponding doctrine

shackles the government’s right to use self-help or otherwise

4

obtain relief when it discovers that it would be better off without

an illegal contract term. This new doctrine that the contractor

always (or almost always) loses when a contract contains an -

illegal term is alarming to amici, and provides disincentives for

the government to adhere to the will of Congress when entering

into any of an enormous variety of contracts.

When one side has fully performed its obligations under the

contract, and the price term of the contract is illegal, it makes no

sense to interpret the statute rendering the term illegal — rather

than the Contract Disputes Act, which allows an aggrieved gov-

emmment contractor to sue — to determine whether the aggrieved

contractor can sue in contract or quasi-contract. The panel

below has — over a strong dissent by Judge Newman, the author

of a prior en banc opinion in this same case — followed a train

of reasoning that undermines the common law and the legal

scheme understood and relied on by the defense contracting in-

dustry. In so doing, the panel created and applied special rules

applicable only to government contracting, although this Court

has recently noted that the United States is not exempt from the

body of law that applies generally to contracts between private

individuals. Mobil Oil Expl. & Prod. Southeast, Inc. v. United

States, 530 U.S. 604, 607-608 (2000) (citing United States v.

Winstar Corp., 518 U.S. 839, 895 (1996) (plurality opinion)).°

The holding below breaks from this Court’s decision in

Clark v. United States, 95 U.S. 539 (1877), where a contractor

3 See also Marathon Oil Co. v. United States, 177 F.3d 1331, 1341

(Fed. Cir. 1999) (Newman, J., dissenting) (urging application of “simple

contract principles” to hold government fiscally responsible for making

contract impossible to perform), rev’d sub nom. Mobil Oil Expl.& Prod.

Southeast, Inc. v. United States, 530 U.S. 604 (2000). Judge Newman’s

dissenting opinion in Marathon, disagreeing with Judges Plager and

Rader, was issued 13 days before her en banc opinion in this case, dis-

agreed with by Judges Rader (in concurrence) and Plager (in dissent).

This Court vindicated Judge Newman’s view. The issues in Marathon

(Mobil) and this case are not the same, but in both cases Federal Circuit

judges have advanced special rules to help the government escape

ordinary contract doctrines.

was field entitled to quantum meruit recovery from the govern-

ment when the express contract was unenforceable because it

was not (as required by statute) in writing. The decision below

also conflicts with the Federal Circuit’s own recent decisions,

including Barrett Refining Corp. v. United States, 242 F.3d

1055 (Fed. Cir. 2001), holding that quantum valebant recovery

is available to a contractor that has fully performed a contract

with an illegal price term. And the final panel decision below,

which.does not even follow the logical path on which the en

banc court set the liti gation, is the result-of misguided attempts

to apply a confused body of Federal Circuit case law. The

inconsistency in rules regarding an aggrieved contractor’s right

to a remedy against the federal government, in the circuit with

exclusive appellate jurisdiction over these cases, puts members

of amici organizations out to sea with little confidence that the

rules applied in one case can also be relied on in any future

situation. The inconsistency will remain unless this Court

grants review to clear up the confusion.

A. Courts Regularly Replace Invalid Contract Terms with

Implied Terms. The process of discerning implied contract

terms to supplant those that are invalid by operation of law has

long been recognized. See Clark, 95 U.S. at 542 (allowing

recovery “as upon an implied contract for a quantum meruit” for

full performance of obligations under a contract that was un-

enforceable under a federal statute requiring military contracts

to be in writing). This well-established doctrine, under which

government contractors are subject to and may rely on the same

body of contract law that regulates the dealings of private

parties, has heretofore been the basis of the defense contracting

industry’s understanding of its legal rights in cases like the one

before the Court. See Winstar Corp., 518 U.S. at 895 & n.39

(plurality opinion) (citing cases).

~~ Under the modern procurement contracting framework, the

availability of a suit on a contract by an aggrieved contractor

against the United States government is beyond cavil. The

Tucker Act is an express grant of jurisdiction to the Court of

Federal Claims for suits “upon any express or implied contract

ERS Sra a

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with the United States.” 28 U.S.C. § 1491(a)(1); see Hercules,

Inc. v. United States, 516 U.S. 417, 423 (1996). And the

Contract Disputes Act (CDA), 41 U.S.C. §§ 601-613, applies to

“any express or implied contract * * * entered into by an

executive agency for * * * the procurement of property”

(Section 602(a)(2)), and allows a contractor to “bring an action

directly on the claim in the United States Court of Federal

Claims” (Section 609(a)(1)); see Cessna Aircraft Co. v. Dalton,

126 F.3d 1442, 1447 (Fed. Cir. 1997); see also National Park

Hospitality Ass'n v. Department of Interior, 123 S. Ct. 2026,

2028-2029 (2003). Such contract claims against the United

States are “grounded in the CDA.” Cessna, 126 F.3d at 1447.

But the Federal Circuit, in its most recent opinion below,

ignored petitioner’s right of action under the CDA and asked

instead whether Section 8118 provided a private nght of action.

When the operation of law has rendered a term of a purport-

ed contract invalid, a court will ask whether the party asserting

the nght to recovery can establish the existence of the contract

based on well-understood contract principles. See Hercules,

516 U.S. at 423-424. Proof of an implied-in-fact contract re-

quires proof of the elements of an express agreement — includ-

ing consideration, mutuality of intent, and definiteness of terms.

Girling Health Sys., Inc. v. United States, 949 F.2d 1145, 1146-

1147 (Fed. Cir.1991). This Court and lower courts have readily

found that the contract is proved when it “has been wholly or

partially executed and performed on one side.” Clark, 95 U.S.

at 542; see Gould Inc. v. United States, 67 F.3d 925, 930 (Fed.

Cir. 1995) (Gould II) (“[A] contractor can be compensated

under an implied-in-fact contract when the contractor confers a

benefit to the government in the course of performing a govern-

ment contract that is subsequently declared invalid.”). Once the

contract is proved, the illegal terms are replaced with implied

terms as necessary for the agreement to be complete. See ibid.

(“[I}t is only fair and just that the Government pay for goods

delivered or services rendered and accepted under [the

contract].”); Clark, 95 U.S. at 542.

Cee

7

The doctrine of contract reformation is also used in suits

under the CDA. Beta Sys., Inc. v. United States, 838 F.2d 1179,

1185 (Fed. Cir. 1988). In Beta Systems, an economic price

adjustment clause in a procurement contract was invalid for

violating the Defense Acquisitions Regulation (DAR). Jd. at

1184. Ifleft untouched, the invalid clause would have inured to

the government’s benefit at the expense of the contractor. Jd. at

1185. The court held that it was mutual mistake of the parties

that allowed the illegal term to find its way into the contract,

and that contract reformation was available to alter the price

clause such that it would not violate the DAR. /d. at 1186.

B. The Tortured Litigation Below Reflects the Confusion

in the Federal Circuit Case Law. The tortured history of this

litigation, culminating in the panel decision below — holding

that petitioner’s right of recovery on its contract is determined

by whether Section 8118 provides a private right of action —

demonstrates the problems inherent in allowing the tangle of

different rules promulgated by the Federal Circuit and the Court

of Federal Claims to exist side by side.

The fact of the Navy’s violation of Section 8118 in its

contract with petitioner, as well as other contracts currently in

litigation, is not a matter of dispute, but the issue presented in

the petition — whether contract remedies are available to an

aggrieved government contractor suing under the CDA — has

utterly confounded the courts below. In five decisions produc-

ing nine separate opinions, the Federal Circuit and the Court of

Federal Claims have variously held:

(1) the violation of Section 8118 rendered the contract void

ab initio, and recovery should be allowed to the contractor

on a quantum meruit basis (Court of Federal Claims, see

Pet. App. 104a-135a);

(2) the violation rendered the contract void ab initio, and

the Court of Federal-Claims may not award equitable relief

on a contract claim, so the case should be dismissed (see

Pet. App. 75a-lu3a (Plager, J., over dissent by Newman,

J.));

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(3) despite the Navy’s violation of Section 8118, the

contract was not void ab initio, and on remand the Court of

Federal Claims should consider what contract remedy is

available to the contractor (see Pet. App. 33a-72a

(Newman, J., with concurrence by Rader, J., and over

dissent by Plager, J.));

(4) the valid contract contained a pricing provision violat-

ing Section 8118, but Section 8118 does not create a cause |

of action in favor of the aggrieved contractor, so the suit

should be dismissed for failure to state a claim (Court of

Federal Claims, see Pet. App. 21a-32a); and

(5) Section 8118 was violated, but is to be enforced through

legislative oversight, rather than through a private right of

action; also, the contractor waived any argument that the

price clause of the contract is invalid, so the dismissal for

failure to state a claim is affirmed (see Pet. App. la-18a

(Rader, J., over dissent by Newman, J.)).

The multitude of different holdings, and inconsistency

between the holdings, reflects the extraordinary uncertainty to

which contractors are subjected when evaluating contracting

opportunities.

The most recent (and, unless reviewed by this Court, case-

dispositive) panel decision creates conflict with several of the

Federal Circuit’s own recent precedents. Presented with an

opportunity to resolve the conflict by again taking this case en

banc, the Federal Circuit denied the petition for rehearing. Pet.

App. 19a-20a. As petitioner correctly observes (Pet. 22), such

intra-circuit inconsistency takes on special importance — for pur-

poses of this Court’s review — when the case arises within the

Federal Circuit’s exclusive jurisdiction.

In Barrett Refining, another panel of the Federal Circuit —

on which the author of the opinion below sat — took 4

functionally identical scenario and reached a result diametrically

opposed to the panel decision below. Barrett Refining relied in

part on the en banc decision in the litigation now before the

Court to conclude that a contract with an illegal price term was

9

not void ab initio, and then held that recovery was available in

quantum valebant. Barrett Refining involved four supply con-

tracts between the plaintiff contractor and the United States to

supply military jet fuel. Jd. at 1058. The price term in the con-

tracts involved a base price plus a price adjustment clause, but

the price adjustment clause turned out to be unenforceable for

violating the Federal Acquisitions Regulations. bid. After the

contractor had fully performed under the contracts, and the base

price of the contract was paid, the contractor sued seeking dam-

ages for the difference between the base price and the actual fair

market value of one contract. Jbid. The United States counter-

claimed, seeking to collect the amount that it had paid in excess

of fair market value on the three other contracts. Jbid. The

court held that the invalid price clause in the contract did not

render the contract void ab initio, relying in part on the en banc

decision in the litigation before the Court. Jd. at 1060 n.2 (“The

determination * * * that only the price escalation term was un-

enforceable and invalid, and that the entire contract was not in-

valid, is consistent with our case law.” (citing AT&T v. United

States, 177 F.3d 1368 (Fed. Cir. 1999) (en banc))). The Barrett

Refining court then held that the parties were operating under a

contract, so an implied price term could be discerned — and

quantum valebant relief was available. Jd. at 1059 (citing Nor-

throp Grumman Corp. v. United States, 47 Fed. Cl. 20, 40-41

(2000)).* The court held that both the contractor and the gov-

ernment should be allowed to prove on remand that the fair

market price differed from the base price that was paid.

Cessna Aircraft also expressly rejects the Navy’s argument

that a contractor “lack[s] standing to contest matters relating to

4

Barrett Refining relied on Northrop Grumman to support its holding

that guantum valebant relief was an available remedy in a suit on an

implied-in-fact contract. Northrop Grumman is one of the Section 8118-

type cases that, were it still in litigation, would be forced to navigate the

inconsistent Federal Circuit decisions in this case. See 47 Fed. Cl. at 35-

36 (contract was subject to the versions of Section 8118 enacted for fiscal

years 1990-1992).

iii A renner

10

the Navy’s compliance with funding statutes” unless a “private

right of action exists under the * * * Act with respect to such

matters.” 126 F.3d at 1447. The contractor in that case sued

claiming loss because the Navy entered a contract in violation }

of the Antideficiency Act. Specifically, the contractor argued |

that the Antideficiency Act prohibited a particular price clause |

in a multi-year contract to provide training for “undergraduate

naval flight officers.” In rejecting the Navy’s argument that the

contractor must demonstrate the existence of a private right of

action under the Antideficiency Act, the court held that the suit

was brought under the CDA, on an implied-in-fact contract

theory, and should be permitted. Ibid. “Cessna’s claims [are]

‘grounded in the CDA.’ * * * The fact that Cessna argues that

the Navy violated the Antideficiency Act and attendant

regulations * * * [does] not mean that Cessna is seeking relief

under the Antideficiency Act.” Jbid. Although the court then

held that the Antideficiency Act had not been violated (id. at

1452), Part II of its opinion (id. at 1447-1448) stood, until now,

as the Federal Circuit’s definitive rejection of the argument the

Navy has now successfully pressed on a divided panel.

In Gould IT, the contractor won a bid for a multi-year con-

tract to produce radios for the Navy according to certain speci-

fications. 67 F.3d at 927. The specifications were claimed to be

inadequate, and the contractor incurred development costs sig-

nificantly in excess of the fixed contract price. Jbid. The

contractor argued that the Navy’s failure to supply a “stable de-

sign” for the contract rendéred the contract illegal under a

statute requiring the agency head to find “that there is a stable

design for the property to be acquired and that the technical

risks associated with such property are not excessive.’” Jbid.

(quoting 10 U.S.C. § 2306(h)(1)(D)). The Navy argued in

response that such an illegality meant that the contracting

officer lacked authority to enter the contract. Jd. at 929. But

“it is only fair and just that the Government pay for goods de-

livered or services rendered and accepted under’” the contract.

Id. at 930 (quoting United States v. Amdahl Corp., 786 F.2d

387, 392-393 (Fed. Cir. 1986)). The court held that, if the

id

11

contractor had rendered performance under a contract with an

illegal price term, the contractor was entitled to relief under an

implied-in-fact contract. Jbid.

Had the panel decision below followed, somehow distin-

guished, or even disagreed with the court’s precedents allowing

implied-in-fact contract relief — and specifically rejecting any

rule that would require the term-invalidating statute to provide

for a private cause of action — contractors and future litigants

would at least have some definite rules by which to conduct

their business. Another en banc opinion could have definitively

reconciled the conflict. But the Federal Circuit’s failure to clean

its own house allows the uncertain state of the law to remain,

and calls for review by this Court.

C. The Failure To Apply Contract Doctrine To This Case

Is Wrong. Not only does the confused assortment of rules re-

garding what to do when a government contract includes an

illegal term or illegal terms warrant review in order to provide

clarity and consistency in the field, the decision below is

manifestly incorrect and should be reversed. The fallacy in the

lower courts’ reasoning does not turn on their understanding of

Section 8118. The fallacy is in over-complicating this case,

which raises nothing more than a contract-law question of what

measure of compensation is due to a contractor that has fully

performed its obligations under a valid contract when the price

term of the contract is declared illegal — or otherwise unen-

forceable (see Clark, 95 U.S. at 542).

“(Where a parol contract has been wholly or partially exe-

cuted and performed on one side, the party performing * * *

will be entitled to recover such value as upon an implied con-

tract.” Clark, 95 U.S. at 542. Petitioner’s right to a remedy in

this case is a creature of contract law, to which the United States

Government is subject when it chooses to enter into the domain

of commerce. See Mobil Oil Expl., 530 U.S. at 608; Winstar,

518 U.S. at 895 & n.39 (plurality opinion). Section 8118 plays

a role — like the statute at issue in Clark, where a contract for the

rental of the plaintiff's steamship was unenforceable because

not reduced to writing — of stating that the price term in the con-

Sei Sai ASS aS aS aD

12

tract cannot be enforced as written. A suit on the contract is

brought under the CDA, and jurisdiction is vested in the Court

of Federal Claims by the Tucker Act. And the rules of contract

law applicable to implied-in-fact contracts state that when one

party to a contract has fully performed its obligations, and the

other party has accepted performance while at all times acting

as if under a contract, the fact that the contract contains illegal

or unenforceable terms does not erase the contractor’s right to

recovery. See Clark, 95 U.S. at 544; Gould IT, 67 F.3d at 930

(contractor should be given the opportunity to prove that it

conferred a benefit while performing a contract with the govern-

ment and that its performance entitles it to relief). In addition

to implied-in-fact contract, the contract reformation doctrine

permits a court to rewrite an invalid term in order to do justice

to the parties’ intent. See, e.g., LaBarge Prods., Inc. v. West, 46

F.3d 1547, 1552 (Fed. Cir. 1995). The manifest injustice to

petitioner and to myriad others similarly situated, including

members of amici organizations, of permitting the government

not to compensate contractors fairly for their products and

labors, also counsels for this correct application of contract law.

In addition to the authorities discussed above, many

decisions of the Federal Circuit and other federal courts permit

recovery on an implied-in-fact contract when one or more terms

of a contract are illegal by operation of law. See Gould, Inc. v.

United States, 935 F.2d 1271, 1275 (Fed. Cir. 1991) (Gould J)

(“A court may grant equitable relief under an illegal contract if

the government received a benefit from the contractor’s

performance.”); Amdahl Corp., 786 F.2d at 395 (“[W]here

conforming goods or services have been delivered by a

contractor and accepted by the government, the contractor has

been held entitled to payment.”); Urban Data Sys., Inc. v.

United States, 699 F.2d 1147 (Fed. Cir. 1983); Campbell v.

TVA, 421 F.2d 293 (Sth Cir. 1969). The Federal Circuit has also

regularly granted contract reformation to correct illegality. See

Beta Sys., 838 F.2d at 1185 (reformation was appropriate when

the price adjustment clause did not cover contractor’s costs);

Applied Devices Corp. v. United States, 591 F.2d 635, 641 (Ct.

Cl. 1979) (plaintiff contractor was entitled to an equitable

reformation of the cancellation ceiling under the contract

because the contract was made in violation of law); Chris Berg,

Inc. v. United States, 426 F.2d 314, 315, 318 (reformation ap-

propriate when the Navy violated regulations by failing to

consider evidence of error resulting in an unreasonably low bid

price).

Consideration of the outcomes of various contract disputes

under the panel decision demonstrates the untenable nature of

its holding. The panel held that (1) the price term of the con-

tract was invalid, and (2) although the contract was not void ab

initio (per the en banc decision), no cause of action was avail-

able under Section 8118, the statute rendering the price term in-

valid. Therefore, petitioner had no right to recovery. This hold-

ing readily allows the following two hypothetical scenarios to

~ Occur:

¢ Contractor and Navy enter into a fixed-price contract

for $25 million, and contractor fully completes the

contract but incurs only $5 million — not $25 million or

anything close to it — in total costs. The Navy, using

Section 8118 as a sword, refuses to pay more than $7

million. Under the lower court’s holding, Contractor

cannot recover the remainder due, even though it took

the risk under the contract. Cf. United States v.

American Renaissance Lines, Inc., 494 F.2d 1059

(D.C. Cir. 1974) (holding that the government should

not be allowed to hide behind its own failure to follow

regulations and limit the private party to guantum

meruit recovery).

¢ Contractor and Navy enter a fixed-price development

contract that violates Section 8118. Contractor

discovers that its costs will exceed the contract price,

and the Navy refuses to restructure — so Contractor

ceases working. When the Navy sues on the contract,

the Contractor counter-claims arguing that the Navy

drove it into default. Under the en banc decision

below, the contract is enforceable, but under the panel

14

decision the Contractor has no claim for the violation

of Section 8118 — so the Navy wins on both claims.

In both hypothetical situations, and indeed in every imagin-

able situation subject to the panel decision, the risk of an illegal

term in acontract is borne solely by the contractor. Cf. Johnson

Mgmt. Gp. CFC, Inc. v. Martinez, 308 F.3d 1245, 1259 (Fed.

Cir. 2002) (Newman, J., dissenting in part) (“[T]he government

bears neither the responsibility for its error nor the obligation to

correct it to a mutually acceptable alternative.”). By contrast to

the results under the court’s holding, an appeal to the contract-

law doctrines of implied-in-fact contract and contract reforma-

tion produces consistent and defensible results. These rules that

are available to contracting parties in other sectors of the econo-

my should not be denied to defense contractors simply because

they do business with the United States. Cf. Mobil Oil Expl.,

530 U.S. at 607 (“When the United States enters into contract

relations, its nghts and duties therein are governed generally by

the law applicable to contracts between private individuals.”’’);

Johnson Mgmt. Gp., 308 F.3d at 1261 (“[T]he laws of contract

and the rules of fair dealing do not evaporate when the govern-

ment is a party. When a contract provision becomes illegal,

whether due to later-discovered error or statutory enactment, the

party that produced the illegality is liable for the injury caused

thereby.”).° Government contractors cannot maintain long-term

operation without the certainty that the rule of law provides.

Il. THE PANEL DECISION WARRANTS REVIEW

BECAUSE OF ITS FAR-REACHING EFFECT AND

THE INDEFENSIBLE BURDEN PLACED ON THE

DEFENSE CONTRACTING INDUSTRY

A. The Navy's Use of Fixed-Price Contracts Violated

Congress's Express Directive. Notwithstanding Section 8118

> See also John Doe Agency v. John Doe Corp., 493 U.S. 146, 158

(1989) (statement of Blackmun, J.) (“Simply because a party is a defense

contractor does not mean that all doubts automatically are to be resolved

against it * * *.”).

15

(quoted at page 2, supra), the Navy entered into a large number

of fixed-price contracts for systems development — contracts

that are subject to Section 8118, or the section’s equivalent in

subsequent appropriations acts — without seeking or receiving

prior written approval from the Under Secretary of Defense,

without any determination that program risk had been reduced

or that reasonable pricing could occur, and without regard for

the fact that program risk in the illegal fixed-price-type con-

tracts fell solely on the shoulders of the contractors. See Pet.

App. 112a. No dispute exists that Section 8118 has been

honored primarily in the breach. See Pet. App. 4a.

The Navy’s failure was part of a long-running practice of

turning a blind eye to the well-understood risks of fixed-price

development contracting, and ignoring Department of Defense

directives (DODD) and the relevant Federal Acquisitions

Regulation (FAR). See FAR, 36 C.F.R. § 35.006(c); DODD

5000.1, § D.9.g. Indeed, the FAR and DODD came about

largely in response to the spectacular failure of fixed-price,

“Total Package Procurement” contracts — including such well-

known programs as the development and production of the F-14

aircraft, which resulted in substantial cost overruns and required

“extraordinary relief” under the then-applicable Public Law No.

85-804, 72 Stat. 972 (1958). See generally Norman R.

Augustine & Robert F. Trimble, Procurement Competition at

Work: The Manufacturer ’s Experience, 6 YALEJ. ON REG. 333,

345-347 (1989). Even so, in the mid-1980s the Navy renounced

the FAR and DODD and returned to fixed-price development

contracting, to which practices Congress directed its attention

when enacting Section 8118: “The Committee is concerned

about the Navy’s policy regarding fixed-price contracting

** *” H.R. Rep. No. 100-410, 100th Cong., 1st Sess., at 203

(1987). The Conference Report accompanying Section 8118

stated: “The conferees also agree * * * with language

encouraging the Navy to review its policy in particular.” H.R.

Conf. Rep. No. 100-498, 100th Cong., 1st Sess., at 623 (1987).

Congress’s approach under Section 8118 was to impose

after-the-fact, quarterly reporting requirements about the

16

Defense Department’s compliance with the limitations on fixed-

price development contracts, in order to avoid “the appearance

of Congressional micromanagement.” H.R. Conf. Rep. No. 100-

498, at 623. Where Congress, when exercising its appropriations

powers, relinquishes any active oversight role, it is incumbent

on the judicial branch to ensure that constitutional separation of

powers is not upset. See generally Kate Stith, Congress’ Power

of the Purse, 97 YALE L.J. 1343, 1386-1387 (1988) (“[T]he

courts may be available to determine authoritatively whether the

operating branch of government has complied with the specified

limitations.”) (citing TVA v. Hill, 437 U.S. 153 (1978)). In its

decision below, the Federal Circuit panel abdicates its role.

B. Other Cases Implicating Section 8118 and Other Stat-

utes Are Placed in Uncertainty By the Panel Decision. Certio-

rari is also appropriate because of the impact on the defense

contracting :ndustry, and the possibie effect on the future ability

of the Department of Defense to find private companies willing

to undertake inherently speculative defense contracts.

Other contracts collectively worth hundreds of millions of

dollars, including contracts involving members of amici

organizations, also suffer the same malady under Section 8118.

Some of those contracts are the subjects of litigation, involving

issues identical to that raised in the petition, currently in the

Court of Federal Claims — and are bound by the panel decision

below. See Pet. 14 (citing three active suits by defense

contractors against the United States raising the same issue as

this case); cf., e.g., Northrop Grumman Corp., 47 Fed. Cl. at 26

(noting that “Congress precluded this type of contract during

three years of its performance,” and relying on the en banc

decision below to hold that the available remedies are implied-

in-fact contract, reformation, and enforcing the contract as it is

written). The case currently before the Court is the first Section

8118 case to reach final resolution in the Federal Circuit.

Hundreds of millions of dollars are at stake between these

various cases. Review by this Court will place at rest an issue

that promises to confound the lower courts and waste years and

millions of dollars in litigation. See Pet. 14-15.

Belo hs Pee oe ee

17

Beyond the cases implicating Section 8118 and its

successors, cases regularly come to the Court of Federal Claims

and the Federal Circuit raising analogous issues of illegality,

demonstrating that the problem of illegal terms in government

contracts is a recurring issue. In Johnson Mgmt. Gp., 308 F.3d

at 1253-1256, a contractual advance payments clause in a

service contract violated both the applicable statute and the

interpreting regulation, so ihe clause could not be enforced.

Over a dissent by Judge Newman (id. at 1259-1262), who

objected to placing the entire risk of the illegality on the

contractor, the contract was enforced without the illegal clause,

and without any remedy aimed at capturing the intent of the

illegal clause, because “the * * * contract, as a whole, remained

valid and enforceable.” Jd. at 1257 & n.4 (citing Urban Data

Sys., 699 F.2d at 1154). Both La Gloria Oil & Gas Co. v. Unit-

ed States, 56 Fed. Cl. 211, 224 (2003), and Gold Line Refining,

Ltd. v. United States, 54 Fed. Cl. 285, 298 (2002), raise the

issue from Barrett Refining -the measure of recovery available

to an aggrieved contractor that supplied fuel to the U.S. military

under a contract with an illegal price-adjustment clause. The

final holding in the tortured litigation below submits all such

cases that are active or yet to arise to uncertainty. See, e.g.,

Gould ITI, 67 F.3d at 930; cf. Pet. 15 (discussing the Navy’s

recent arguments in Gould that the litigaiion before this Court

established “the principle that funding statutes * * * are not

judicially enforceable by contractors”).

The defense contracting industry as a whole stands to suffer

if the holding below stands. Contractors, including many

members of amici organizations, that have rights to contract-

law remedies in the face of illegal contract terms but are

prevented from exercising those rights will suffer real and

immediate economic loss. Section 8118 and subsequent

versions of the statute were enacted to prevent just the concern

that arises in this case — that of “the contractor * * * sustaining

losses through unanticipated costs” on “development programs

involving such a high degree of innovation that realistic pricing

is not possible.” S. Rep. No. 100-326, 100th Cong., 2d Sess.,

18

at 104 (1988). After violating the statute in this case and others,

the Navy has been unsympathetic to requests to restructure the

contracts (see Pet. App. 35a), and has attempted to impose on

contractors the entire burden of the cost overruns. The decision

below allows the Navy to do just that. In an industry where

even contracts that do not result in protracted litigation over

cost overruns and illegal contract terms can provide “perilously

low levels of return for defense contractors,” Augustine &

Trimble, supra, at 344, the Navy’s conduct in these cases is

another risk that contractors can ill afford to bear.

Also, the Navy’s reliability as a contracting partner is at

stake in this litigation. During the time period when the con-

tract giving rise to this litigation was entered, the Navy

unabashedly entered into contracts with price terms violating

statute (Section 8118 and its successors), FAR, 36 C.F.R.

§ 35.006(c), and DODD 5000.1, | D.9.g. The Navy is able to

require the contractor to perform its obligations fully, as the

penalties for default on a government contract are

extraordinary. Finally, when one or more of the contract terms

are illegal. under the Federal Circuit rule the Navy escapes

responsihiiity for its obligations to comply with the law. Con-

tractors willingness and ability to enter into and perform

inherently speculative development contracts are, and will

continue to be, comipromised. See Augustine & Trimble, supra,

at 340 (emphasizing the value of “[s]upplier loyalties stemming

from good relationships” and adding, at roughly the time the

contract in this case was entered into, that “relationships

between the federal government and its prime contractor suppli-

ers are more strained today than ever before’). Congress sought

to avoid this very result, and the conference report noted the

need to “maintain the government’s credibility as a reliable

business partner,” and the challenges to doing so in the face of

inappropriate use of fixed-price development contracts. H.R.

Conf. Rep. No. 100-498, at 623.

C. The Panel’s Waiver Discussion Improperly Places the

Burden of Compliance on the Contractor. The court below

suggested that petitioner had waived its claim by voluntarily

19

entering into a fixed-price development contract. Pet. App.

1la-14a. The waiver discussion is another red herring masking

the salient issues that arise from the Navy’s violation of Section

8118 — how to define a term that is rendered non-existent by

operation of law.

The suggestion of waiver is also at odds with this Court’s

well-established rule. Circumstances certainly exist where a

contractor’s failure to raise an issue before entering into the

contract should constitute a waiver of that issue. See, e.g.,

United Int'l Investigative Servs. v. United States, 109 F.3d 734,

738 (Fed. Cir. 1997) (ambiguity in the specifications for the

contract was patent and should have been raised before bidding

on the contract). But this Court has consistently held that

waiver “will not be permitted to thwart the purposes of statutes

of the United States,” Sola Elec. Co. v. Jefferson Elec. Co., 317

U.S. 173, 176 (1942). A waiver rule regarding violations of

Section 8118 directly contradicts this Court’s authority, and

could have the effect of writing the doctrine of contract

illegality out of the law. If by entering into a contract with an

illegalterm, the parties waive the right to contest that term, no

party with standing to Sue could possibly contest the contract.

Indeed, the panel’s waiver discussion may yield another

perverse result. This litigation is ample evidence that, without

a suit on the contract by an aggnieved contractor, the Navy’s

violation of Section 8118 would go unchecked. To read Section

8118 as not affirmatively providing a cause of action is one

thing; it is something else entirely to read it as precluding a

cause of action grounded in principles of contract law or (under

the waiver discussion) as placing the burden on the contractor

to police the Navy’s compliance with federal statutory law at

the time of contracting. See Richard E. Speidel, Contract

Excuse Doctrine and Retrospective Legislation: The Winstar

Case, 2001 Wis. L. REV. 795, 818 & n.122 (“In most

government contracts, the markets are limited to competition

among private contractors seeking government business, and

the government has superior bargaining power with which to

call the shots.”).

20

A new waiver rule applicable to violations of Section 8118,

its successors, or other federal statutes will have very real and

immediate consequences for defense contractors. Members of

amici are alarmed that the panel below’s waiver discussion

might be read as Federal Circuit law. Those contractors who

remain in litigation against the United States over contracts

subject to Section 8118 (and subsequent iterations of the

statute), as well as contractors with provisions that are invalid

by operation of other federal statutes, face having their claims

thrown out because of improper invocation of a waiver rule.

Contracts not yet bid will also be subject to the rule. The

adhesion-contract negotiation process between the Department

of Defense and contractors in effect, if not in fact, precludes a

contractor from contesting specific terms of a contract during

the bidding process. See Speidel, supra, at 818; Pet. 4. The

speculative nature of development contracts, like the contract

underlying this litigation, also prevents a contractor from

reasonably assessing the cost and the nsk involved in

performing the contract. If entering into a contract without

objecting to its terms constitutes a waiver, contractors may be

relegated to the Hobson’s choice of choosing not to bid or

entering a contract relationship without legal protection.

CONCLUSION

For the foregoing reasons and those stated in the petition,

the petition for a wnt of certiorari should be granted.

6

In Beta Systems, the court specifically considered a waiver argu-

ment by the government and reached the opposite result from this case,

holding: “[I}t is not controlling whether or not Beta or the government

foresaw, or accepted the risk of failing to foresee, this defect in the

index.” 838 F.2d at 1186. Thus on this issue, as on the primary issue in

the case, inconsistent Federal Circuit case law leaves parties in an

unacceptable position

a

21

Respectfully submitted.

Roy T. ENGLERT, JR.

Counsel of Record

MAX HUFFMAN

Robbins, Russell, Englert

Orseck & Untereiner LLP

1801 K Street, N.W.

Suite 41]

Washington, D.C. 20006

(202) 775-4500

JUNE 2003