Petition for Writ of Certiorari — Boeing Co., The v. United States, (2009) (No. 1302)

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Supreme Court, U.S.

FILED

ie. 091302 APR 23 200

OFFICE OF THE CLERK

Bn Whe

Joupreme Court of the Anited tates

THE BOEING COMPANY,

Petitioner,

UNITED STATES OF AMERICA,

Respondent.

On Petition For A Writ Of Certiorari

To The United States Court Of Appeals

For The Federal Circuit

PETITION FOR A WRIT OF CERTIORARI

AND APPENDIX VOLUME I

J. MICHAEL LUTTIG CHARLES .J. COOPER

Executive Vice President Counsel of Record

& General Counsel MICHAEL W. KIRK

GRANT M. DIXTON HOWARD C. NIELSON, JR.

LYNDA GUILD SIMPSON DAVID LEHN

Tue BOEING COMPANY COOPER AND KIRK, PLLC

100 North Riverside 1523 New Hampshire Ave., N.W.

Chicago, IL 60606 Washington, D.C. 20036

(312) 544-2800 (202) 220-9600

(202) 220-9601 (fax)

ccooper@cooperkirk.com

Counsel for

April 23, 2010 The Boeing Company

COCKLE LAW BRIEF PRINTING CO (800) 225-6964

OR CALL COLLECT (402) 342-2831

QUESTIONS PRESENTED

1. Whether the Due Process Clause of the Fifth

Amendment permits an appellate court to adopt a

new legal rule, inconsistent with its own prior ruling

in the same case, and then apply it retroactively to

the record established in the trial court pursuant to

the prior ruling, without remanding to afford the

parties the opportunity to prove their case under the

new rule.

2. Whether the Due Process Clause of the Fifth

Amendment perinits the Government to maintain a

claim while simultaneously asserting the state se-

crets privilege to bar presentation of a prima facie

valid defense to that claim.

3. Whether the Government may te:minate a

government contract for default on the ground that a

contractor has failed to make adequate progress

toward timely completion of that contract where the

Government has not set a valid deadline for com-

pleting the contract.

LIST OF PARTIES

Pursuant to Rule 14.1(b) and Rule 29.6, the fol-

lowing list identifies all the parties to the proceeding

before the United States Court of Appeals for the

Federal Circuit:

McDonnell Douglas Corporation, appellant below,

was a wholly owned subsidiary of The Boeing Com-

pany prior to January 1, 2010. On January 1, 2010,

McDonnell Douglas Corporation was merged into The

Boeing Company, which brings this petition for a writ

of certiorari as the corporate successor to McDonnell

Douglas Corporation. The following publicly held

companies own ten percent or more of the out-

standing stock of The Boeing Company: State Street

Corporation and its subsidiary State Street Bank and

Trust Company as the trustee of The Boeing Com-

pany Employee Savings Plan Master Trust; Evercore

Trust Company, N.A. as the investment manager of

The Boeing Company Employee Savings Plan Master

Trust.

General Dynamics Corporation, appellant below,

has no parent corporation. No publicly held company

owns ten percent or more of the stock of General

Dynamics Corporation.

The United States.

ill

TABLE OF CONTENTS

Page

LE vi

OPINIONS AND ORDERS BELOW.................... 1

a csidusinweninaters 1

CONSTITUTIONAL AND REGULATORY PRO-

_ 2

EEE 2

STATEMENT OF THE CASE.........................2000 6

ss cccncsccedsucosececevesees 6

B. Performance and Termination................... 6

C. The First Round of Litigation ................... 9

DD. The Second Round of Litigation................ 10

E. The Third Round of Litigation .................. 14

REASONS FOR GRANTING THE PETITION.... 18

I. The Federal Circuit’s Adoption and Ap-

plication of a New Legal Rule without

Remanding Violates Due Process and

Conflicts with this Court’s Precedents

and the Decisions of Other Circuits. ........ 18

A. The Federal Circuit’s Refusal to Re-

mand Conflicts with This Court’s

a EE Se a ee ee 19

B. The Court of Appeals’ Refusal to Re-

mand Creates a Conflict with Other

Circuits. ........ Ts atin 21

TABLE OF CONTENTS — Continued

Page

C. The Federal Circuit’s Immediate Ap-

plication of Its New Test Prevents

Contractors from Presenting Newly

Relevant Argument and Evidence....... 23

Il. The Federal Circuit’s Rule Permitting the

Government to Prosecute a Claim While

Asserting the State Secrets Privilege to

Foreclose a Valid Defense to That Claim

Violates Due Process and Conflicts with

the Decisions of this Court and of Other

eee 28

A. The Federal Circuit’s State Secrets

Analysis Deprives Defendants of Due

Process in Conflict with This Court’s

aa eeenueeie 29

B. The Federal Circuit’s State Secrets

Analysis Conflicts with the Decisions

ry eds 33

Ill. The Federal Circuit’s New Ad Hoc Rule

for Default Terminations Will Destabilize

An Important Area of the Law................... 34

1) _______ RIN See er RED RE nt ene ATS FERS ena RA ONES 40

TABLE OF CONTENTS — Continued

Page

Appendix Documents

Volume I

McDonnell Douglas Corporation v. United States

(“MDC 14”), 567 F.3d 1340 (Fed. Cir. 2009)........... la

McDonnell Douglas Corporation v. United States

(“MDC 12”), 323 F.3d 1006 (Fed. Cir. 2003)......... 37a

McDonnell Douglas Corporation v. United States

(“MDC 10”), 182 F.3d 1319 (Fed. Cir. 1999)......... 74a

McDonnell Douglas Corporation v. United States

(“MDC 13”), 76 Fed. Cl. 385 (Ct. Cl. 2007).....106a

Volume II

McDonnell Douglas Corporation v. United States

(“MDC 11”), 50 Fed. Cl. 311 (Ct. Cl. 2001)......... 258a

McDonnell Douglas Corporation v. United States

(“MDC 9”), 40 Fed. Cl. 529 (Ct. Cl. 1998)............. 299a

McDonnell Douglas Corporation v. United States

(“MDC 5”), 37 Fed. Cl. 270 (Ct. Cl. 1996)........... 369a

McDonnell Douglas Corporation v. United States

(“MDC 4”), 35 Fed. Cl. 358 (Ct. Cl. 1996)............. 4lla

McDonnell Douglas Corporation v. United States,

Nos. 2007-5111, 5131 (Nov. 24, 2009)......-..-.-0-.... 462a

TABLE OF AUTHORITIES

Page

CASES

Aero Mayflower Transit Co. v. ICC, 699 F.2d

I, a seineieinaianen 23

Al-Haramain Islamic Found., Inc. v. Bush, 507

AG BEDS (BE Cae. BOOT). ccccccccccccsccccccsccscccesessseces 4, 29

American Sheet Metal Corp., 99-1 BCA 430,329

iia iaenttaldaealdiclaliitatianhinsiiid 37

Arar v. Ashcroft, 585 F.3d 559 (2d Cir. 2009) .............. 4

AST Anlagen-Und Sanierungstechnik GmbH,

04-1 BCA 932,558 (ASBCA 2004)..................ccceee eee 37

Austin v. United States, 509 U.S. 602 (1993) ............ 32

Bareford v. General Dynamics Corp., 973 F.2d

I salen 29, 33

Boute v. City of Colombia, 378 U.S. 347 (1964)......... 19

Bowman Transp., Inc. v. Arkansas-Best Freight

i ig ee es Be CR ictcinicinieninittntstnnnnnnincss 19

Boyd v. United States, 116 U.S. 616 (1886),

overruled in part on other grounds, 425 U.S.

EEE) SaRRSUPE REI Pcs eee oor 32

Brinkerhoff-Faris Trust & Sav. Co. v. Hill, 281

| | SEE ee eee aa nae ao Na 21

Brinley v. Commissioner, IRS, 782 F.2d 1326

ASEM ip rannede ero Urer EO naar tone eT UO 22

Darwin Constr. Co. v. United States, 811 F.2d

Sea

vil

TABLE OF AUTHORITIES — Continued

Page

De Vito v. United States, 413 F.2d 1147 (Ct. Cl.

aed 36

Decker & Co. v. West, 76 F.3d 1573 (Fed. Cir.

RITTER es Aarne RT ELE Le. BENIN RRS EE 20, 32, 36

Divecon Servs., LP, 04-2 BCA 432,656 (GSBCA

ESTEE Ate MSN EE rch vee Be ee ae EEE BE ee 37

El-Masri v. United States, 479 F.3d 296 (4th

i, IO ee En oO See earls 4, 34

Fisher v. United States, 425 U.S. 391 (1976)............. 32

Gonzales v. United States, 348 U.S. 407 (1955)......... 19

Harlan Bell Coal Co. v. Lemar, 904 F.2d 1042

I 22

Hatch v. FERC, 654 F.2d 825 (D.C. Cir. 1981) ....21, 22

Hepting v. AT&T’ Corp., 439 F. Supp. 2d 974

ES ESR a ED One: 29

Hertz Corp. v. Friend, 1308. Ct. 1181 (2010)............ 19

Ideal Elec. Sec. Co. v. International Fid. Ins.

Co., 129 F.3d 143 (D.C. Cir. 1997) ..............ee ee 33

In re United States, 872 F.2d 4172 (D.C. Cir.

EEE DS ae TR LENE DEES AERO EE sees a nde 29, 33

Jones v. Flowers, 547 U.S. 220 (2006)......................4. 20

Kasza v. Browner, 133 F.3d 1159 (9th Cir. 1998) ...... 34

King v. United States, 37 Ct. Cl. 428 (1902).............. 36

Lachance v. Erickson, 522 U.S. 262 (1998)................ 19

TABLE OF AUTHORITIES — Continued

Page

Lanzen Fabricating, Jnc., 93-3 BCA 426,079

I a caasunsumieunbisiad 37

Lindsey v. Normet, 405 U.S. 56 (1972)....................... 32

Lisbon Contractors, Inc. v. United States, 828

Feed CO Cs CAR. BIT) cccesitctscecccesceveroccccsesees passim

Logan v. Zimmerman Brush Co., 455 U.S. 422

SP UIIITITT iciscleccsieiaiacectasuahsipsccioetlamsiniaaeenadanmaslinadiissiueaiaeininenaaiemees 19, 32

Lyons v. Johnson, 415 F.2d 540 (9th Cir. 1969).........33

Malone v. United States, 849 F.2d 1441 (Fed.

I a eee iiamioeaia Yy

Marx v. Director, OWCP, 870 F.2d 114 (3d Cir.

Scie ccc haadiciabisceditentseile mlacinibadegliusenenianedienmaniieiiinies 22

McDonnell Douglas Corporation v. United States

(“MDC 14”), 567 F.3d 1340 (Fed. Cir. 2009) ..... passim

McDonnell Douglas Corporation v. United States

(“MDC 12”), 323 F.3d 1006 (Fed. Cir. 2003) ..... passim

McDonnell Douglas Corporation v. United States

(“MDC 10”), 182 F.3d 1319 (Fed. Cir. 1999) ............... 1

McDonnell Douglas Corporation v. United States

(“MDC 13”), 76 Fed. Cl. 385 (Ct. Cl. 2007)...........0..... ]

McDonnell Douglas Corporation v. United States

(“MDC 11”), 50 Fed. Cl. 311 (Ct. Cl. 2001).................. I

McDonnell Douglas Corporation v. United States

(“MDC 9”), 40 Fed. Cl. 529 (Ct. Cl. 1998)................... 1

McDonnell Douglas Corporation v. United States

(“MDC 5”), 37 Fed. Cl. 270 (Ct. Cl. 1996)...........0....... |

TABLE OF AUTHORITIES — Continued

Page

McDonnell Douglas Corporation v. United States

(“MDC 4”), 35 Fed. Cl. 358 (Ct. Cl. 1996) ............0...... 1

Millipore Corp. v. Travelers Indem. Co., 115

ee es Ls soeuuvepmeaiininesasoen ss 22

Mohamed v. Jeppesen Dataplan, Inc., 579 F.3d

943, en banc granted, 586 F.3d 1108 (9th Cir.

FREI RE RSE SS REED, SHS lire Cee oS aor eT 4

Molerio v. FBI, 749 F.2d 815 (D.C. Cir. 1984)......29, 33, 34

Motorola Computer Sys., Inc., 87-3 BCA 420,032

ER ET Ae

M.V.I. Precision Machining, Ltd., 91-2 BCA

| FS RS ie i eae 37

Noriega v. Pastrana, 1305. Ct. 1002 (2010)................5

One 1958 Plymouth Sedan v. Pennsylvania,

te NY eI sin’ sasdcueseieessesedsncnesdaaseceeiacens 20, 32

Peabody Coal Co. v. Ferguson, 140 F.3d 634 (6th

RRR Fa PS Se Ee eileen me ia nape oe ae ORE 22

Rahman v. Chertoff, 530 F.3d 622 (7th Cir.

RR ae Tage ESE ES INES REN SIN D9 Sc 4

Singh v. INS, 213 F.3d 1050 (9th Cir. 2000).............. 22

Technocratica, 06-2 BCA 433,316 (ASBCA 2006)....... 37

Technocratica, 94-2 BCA 426,606 (ASBCA 1993)....... 37

Tenenbaum v. Simonini, 372 b.3d 776 (6th Cir.

ERAN AL ee 2 EE REE Ao ae Ce 34

United States v. James Daniel Good Real Prop.,

Ue, IN isis icconsssssceserenss'cscnsslecencaces 20, 33

TABLE OF AUTHORITIES — Continued

Page

United States v. Reynolds, 345 U.S. 1

SEN IN oisdikdisiiuindusiatiitendiicentidadandsdsuamiisininanbains 11, 29, 30, 31

United States v. Winstar Corp., 518 U.S. 839

RRA RAS I UE AAR AT Sa eae eRe Se ON EC) 39

Universal Fiberglass Corp. v. United States, 537

ee Ss SIE STEED tesdciniicitchinantcapiaciniinentdinnimeebsnsien 38

Upwest Corp., 01-2 BCA 931,474 (PSBCA 2001) ...... 37

Wilner v. NSA, 592 F.3d 60 (2d Cir. 2009)... 4

Zuckerbraun v. General Dynamics Corp., 935

Pe Os WE noc 33

OTHER

| GS REESE eee ase a eee PRR ARS oe 2

a ee I niiisiichinbsicinsindioneristuanbeddeininchentesanebeeucis 9

Federal Acquisition Regulation (48 C.F.R.)

a Sa EE SN ce a 32

Federal Acquisition Regulation (48 C.F.R.)

| __REER ASIN Esaea eS oR EEN RS eo NE OD 10

Federal Acquisition Regulation (48 C.F.R.)

REE Ea ee a 36

Federal Acquisition Regulation (48 C.F-R.)

iis Sal aalachicd sneidadidipsodeneetvinesnennns 8

Federal Acquisition Regulation (48 C.F.R.)

§ 52.249-9( a 111) (1984)...............ccccccccscereees 2, 8, 35

Federal Acquisition Regulation (48 C.F.R.)

FC Rea LEI De SO a oe 10

TABLE OF AUTHORITIES — Continued

Page

U.S. Government Accountability Office, GAO-09-

326SP, Defense Acquisitions: Assessments of Se-

lected Weapon Programs 4 (Mar. 2, 2009)......... 35, 36

Donna Miles, Tanker Solicitation Seeks Fair

Competition, Best Value, American Forces

OS EWEN, OR. BG, BPI ccc ecesécccoscceccscccccesceseseses 35

Barack Obama, Memorandum for the Heads of

Executive Departments and Agencies, Mar. 4,

SE NES SCS GES SEA tr es ie an 35

PETITION FOR A WRIT OF CERTIORARI

The Boeing Company, as corporate successor to

the McDonnell Douglas Corporation (“McDonnell

Douglas”), respectfully petitions for a writ of certio-

rari to review the judgment of the United States

Court of Appeals for the Federal Circuit.

OPINIONS AND ORDERS BELOW

The opinions of the Federal Circuit (App. 74a-

105a, 37a-73a, la-36a) are reported at 182 F.3d 1319,

323 F.3d 1006, and 567 F.3d 1340. That court’s order

denying McDonnell Douglas’ combined petition for

rehearing and rehearing en banc (App. 462a) is

unreported. Pertinent opinions of the United States

Court of Federal Claims (App. 4lla-46la, 369a-410a,

299a-368a, 258a-298a, 106a-257a) are reported at 35

Fed. Cl. 358, 37 Fed. Cl. 270, 40 Fed. Cl. 529, 50 Fed.

Cl. 311, and 76 Fed. Cl. 385.'

JURISDICTION

The Federal Circuit entered final judyment on

June 2, 2009, and denied McDonnell Douglas’ timely

petition for rehearing and rehearing en banc on

' References to the appendix included with this petition are

designated as “App. .” References to the joint appendix filed

with the Federal Circuit are designated as “JA .

November 24, 2009. App. la-36a, 462a. On January

22, 2010, and March 12, 2010, the Chief Justice

extended the deadline for filing this petition for a writ

of certiorari, first to March 24, 2010, and then to

April 23, 2010. Docket No. 09A-678. The jurisdiction

of this Court is invoked under 28 U.S.C. § 1254(1).

CONSTITUTIONAI. AND

REGULATORY PROVISIONS INVOLVED

The Fifth Amendment to the United States Con-

stitution provides in pertinent part: “No person shall

... be deprived of life, liberty, or property, without

due process of law... .”

Section 52.249-9(a)(1)(ii) of the Federal Acquisi-

tion Regulations, 48 C.F_R. § 52.249-9(a)(1)(1i) (1984),

states: “The Government may ... , by written Notice

of Default to the Contractor, terminate this contract

in whole or in part if the Contractor fails to ...

|plrosecute the work so as to endanger performance of

this contract.”

INTRODUCTION

This case arises from the Government's 1991

default termination of its contract with McDonnell

Douglas and General Dynamics (“Contractors”) to

design and build the A-12 “stealth” aircraft. Over the

course of almost two decades of litigation, the Federal

Circuit has twice denied Contractors due process,

created multiple circuit splits, and thrown previously

settled law in a critical area of government contracts

jurisprudence into complete disarray. If allowed to

stand, the court’s rulings may well unjustly deprive

Contractors of billions of dollars. This Court’s review

is necessary to settle these important legal issues and

to resolve these conflicts among the circuits.

First, the Federal Circuit denied Contractors the

most elemental feature of due process: fair notice of

the governing legal standard and an opportunity to

prove their case in the trial court under that stan-

dard. After initially directing the trial court to apply

its clear, long-standing rule for evaluating default

terminations — a rule it expressly prescribed as the

“controlling standard” in this very case — the Federal

Circuit, upon next review, sua sponte embraced an

entirely different, “ad hoc” approach materially indis-

tinguishable from one it had expressly rejected in its

previous decision. Without remanding, the Federal

Circuit then adjudicated Contractors’ rights itself,

applying its newly minted test to the pre-existing

record, even though the case had been litigated under

the very different rule it had previously mandated.

The Federal Circuit’s ruling conflicts with the deci-

sions of this Court and other circuits and introduces

substantial uncertainty regarding the principles of

due process governing appellate adjudication. Fur-

thermore, the grave miscarriage of justice worked by

the appellate process in this case manifestly warrants

the exercise of this Court’s supervisory authority.

Indeed, in view of the Federal Circuit’s patent error,

summary reversal of this ruling is warranted.

Second, the Federal Circuit earlier worked an

equally grave violation of Contractors’ due process

rights in this case by allowing the Government to

press its claim for default termination while simul-

taneously upholding the Government’s assertion of

the state secrets privilege to bar Contractors from

asserting a valid defense to that claim. In addition to

conflicting with bedrock principles of due process

embraced by this Court’s precedents, the Federal

Circuit’s ruling creates a conflict among the circuits

on the effect of the Government’s invocation of the

state secrets privilege. This case thus presents an

important question regarding the accommodation of

fundamental due process concerns with the needs of

national security. Moreover, it comes to this Court at

a time when the state secrets privilege is being as-

serted with growing frequency, and the need for

clarity and uniformity on its scope and impact could

not be more compelling.” And because this case pre-

sents the issue in the less politically charged context

of a government contract dispute, it offers a rare op-

portunity to provide clarity in a vital area of the law

* See, e.g., Wilner v. NSA, 592 F.3d 60, 77 n.8 (2d Cir. 2009);

Arar v. Ashcroft, 585 F.3d 559 (2d Cir. 2009); Mohamed v.

Jeppesen Dataplan, Inc., 579 F.3d 943, en banc granted, 586 F.3d

1108 (9th Cir. 2009); Rahman v. Chertoff, 530 F.3d 622, 624-25

(7th Cir. 2008); Al-Haramain Islamic Found., Inc. v. Bush, 507

F.3d 1190 (9th Cir. 2007); El-Masri v. United States, 479 F.3d

296 (4th Cir. 2007).

“in a manner that is insulated from the pressures of

the moment.” Noriega v. Pastrana, 130 S. Ct. 1002

(2010) (Thomas, J., joined by Scalia, J., dissenting from

denial of petition for writ of certiorari) (quotation

marks omitted). This Court should take that oppor-

tunity.

Finally, the Federal Circuit’s new ad hoc ap-

proach for reviewing government default ter:mina-

tions of fixed-price contracts represents a_ stark

change in settled law, upon which public contractors

have long relied in calculating the risks of doing busi-

ness with the United States. The new approach is

flawed and unworkable and will breed uncertainty

and arbitrary outcomes at a time when the Govern-

ment has publicly renewed its interest in fixed-price

contracting. Indeed, the court’s new approach may

produce an unexpected and grossly unjust multi-

billion dollar forfeiture in this case alone. And

because it is highly unlikely that any other Circuit

will address the issue of government contracts law

presented here, the issue is ripe for review by this

Court at this time.*

* Petitioner agrees that the additional issues presented by

General Dynamics Corporation in its petition for a writ of cer-

tiorari also warrant this Court’s attention, Petition for Writ of

Certiorari, The Boeing Company v. United States, No. (April

23, 2010), and joins General Dynamics’ request that the Court

review those issues, which equally affect both Petitioners.

STATEMENT OF THE CASE

A. The A-12 Contract

In 1988, Contractors entered into a fixed-price

research-and-development contract with the United

States Navy to develop the “A-12 Avenger,” a state-of-

the-art carrier-based “stealth” attack aircraft. App.

39a. The contract required Contractors first to devel-

op a design for the aircraft acceptable to the Navy,

and then to manufacture eight test aircraft of in-

creasing complexity, with the first to be delivered in

June 1990 and the remaining seven to be delivered on

specified dates thereafter. App. 4a. The eighth test

aircraft was to be a fully operational prototype. App.

260a. The A-12 contract also gave the Navy options to

purchase four production lots of aircraft. App. 5a. The

Navy exercised its first option (“Lot I”) in May 1990

for six production aircraft, which were to be delivered

between June 1991 and May 1992. App. 5a. The

contract also provided for six phases of testing by

Contractors, to be completed by April 1993, as well as

contractor support for additional Navy testing and

training until June 1996. App. 4a-5a, 119a.

B. Performance and Termination

Performance commenced in January 1988. From

the beginning, Contractors’ progress was hampered

because the Air Force refused to share classified

information and stealth technology from other pro-

grams, contrary to the mutual expectations and under-

standing of Contractors and the Navy. See, e.g., App.

393a & n.9. Further, as the Navy well understood,

deviations from schedule and specifications are all

but inevitable in research-and-development programs

like this one, which seek to advance the state of the

art. See, e.g., App. 124a, 117a-48a; JA 15,623, 16,541,

71,217; 48 C.F-R. § 35.002.

Accordingly, the Navy and Contractors agreed

early on to address technical issues as they arose,

rather than attempt to adhere rigidly to contract

schedule and specifications. App. 5a; JA 2,279-80. By

1989, the Navy knew that the original schedule for

delivery of the eight test aircraft would not be

achieved and that the aircraft would exceed the origi-

nally specified weight. See, e.g., JA 2,269-70, 18,936;

App. 447a.

In June 1990, Contractors projected that first

flight would be delayed unuil between July and Sep-

tember 1991, and that there would be a correspond-

ing slippage of twelve to fourteen months for the

remaining contract work. Although Contractors thus

missed the milestone for delivering the first test

aircraft, the Navy took no action to terminate the

contract. App. 5a. To the contrary, on August 17 the

Navy unilaterally issued a contract modification,

called “P00046,” as “a first step” toward establishing

a more realistic contract completion schedule. See JA

2,368. This modification set a new schedule for de-

livering the eight test planes, but did not address the

schedule for subsequent stages of perforinance. App.

6a. Because the original schedule for the subsequent

perforinance was irreconcilable with (and therefore

displaced by) PO0046, there was no longer any bind-

ing completion date for the entire contract. App. 16a,

3la, 110a-lla, 243a-44a. The Navy and Contractors

intended to negotiate a new schedule for the remainder

of the contract effort after they agreed on the A-12

design. See, e.g., JA 1,067-68, 2,360-61, 2,368, 71,088.

Contractors continued to perform, at a cost to

them of $120-150 million per month. App. 7a. During

the fall of 1990, the parties resolved all outstanding

design issues. App. 125a-30a. Among other things, the

Navy accepted Contractors’ modified weight projec-

tions. App. 288a. Concluding that “technical concerns

had been addressed and resolved to its satisfaction|[,]

[t]he Navy accepted plaintiffs’ design for the A-12 in

November 1990.” App. 130a.

Rather than re-establish a reasonable completion

schedule, as the parties had intended, however, the

Navy abruptly issued a cure notice in December 1990

and, on January 7, 1991, terminated the contract for

default pursuant to Federal Acquisition Regulation

(“FAR”) 52.249-9(a)(1)(ii). That provision authorized

termination for default if Contractors “failled] to .. .

[p}rosecute the work so as to endanger performance of

this contract.” 48 C.F.R. § 52.249-9(a)(1)Gii) (1984);

App. 8a-9a.* As grounds, the Navy asserted Contractors’

* The Government also invoked FAR 52.249-8(a)(1)(ii), the

analogous regulation governing the production option exercised

by the Government. As relevant here, there is no material differ-

ence between these two provisions.

projected failure to meet (1) the interim P00046

schedule, (2) the original Lot 1 production schedule

(though displaced by P00046, see App. 16a, 243a), and

(3) original design requirements — particularly,

weight requirements — even though the Navy had

accepted a modified design just weeks before (see App.

129a-30a & n.11). JA 18,297.

Based on this claimed default, the Navy not only

refused to reimburse Contractors for more than $1.2

billion in out-of-pocket costs incurred before ter:nina-

tion, it also demanded that Contractors return ap-

proximately $1.35 billion in allegedly unliquidated

progress payments. App. 9a-10a. To date, approximately

$1.5 billion in interest has accrued on the principal

balance claimed by the Government.

C. The First Round of Litigation

In June 1991, Contractors sought review of the

Navy’s decision in the Court of Federal Claims under

the Contract Disputes Act, 41 U.S.C. § 609(a). Al-

though that statute required Contractors to initiate

this action, they are the plaintiffs in name only. “[A]

government decision to terminate a contractor for

default is a government claim,” Malone v. United

States, 849 F.2d 1441, 1443 (Fed. Cir. 1988), and the

Government, accordingly, had the burden of proving

that its default termination, and a potential multi-

billion dollar penalty, were justified, Lisbon Contrac-

tors, Inc. v. United States, 828 F.2d 759, 764 (Fed. Cir.

1987). Contractors argued that the Government could

not satisfy its burden and that the termination should

therefore be converted into one for the convenience of

the Government. See FAR 49.401(b), 52.249-9(g). Con-

tractors also sought their unreimbursed costs in-

curred in performing the contract.

After several years of litigation, the trial court

held that the default termination could not be sus-

tained because it had been pretextual, and the con-

tracting officer had not exercised reasoned discretion

in invoking this draconian remedy. App. 343a-44a.

That court also expressly rejected the Government’s

arguments that Contractors had repudiated the

contract or otherwise failed to give adequate assur-

ances of performance. App. 458a-6la. The court

awarded Contractors $1.2 billion in unreimbursed

costs, plus interest. App. 367a-68a.

The Federal Circuit reversed, holding that “be-

cause the terimination for default was predicated on

contract-related issues, it was within the discretion of

the government.” App. 75a-76a. The court remanded

for determination of whether the Government could

prove that Contractors were in default. App. 104a-O5a.

D. The Second Round of Litigation

On remand, the trial court sustained the default

termination based solely on its finding that Contrac-

tors would not have met the December 1991 “first

flight” milestone set by P00046. App. 255a-75a. That

court rejected all other grounds for default termi-

nation the Government alleged including that

Contractors could not meet weight and other

specifications, that Contractors’ financial condition

threatened performance, and (once again) that

Contractors failed to give adequate assurances of

performance. See, e.g., App. 264a-65a.

That court also rejected Contractors’ “superior

knowledge” defense, which was premised on the Gov-

ernment’s “duty to disclose critical inforimation to a

contractor that is necessary to prevent the contractor

from unknowingly pursuing a ruinous course of ac-

tion,” App. 96a (quotation marks omitted). The court

fuund that this duty extended to the Air Force’s

extensive knowledge of stealth technology, and Con-

tractors argued that they could have used that supe-

rior knowledge to avoid the extensive, duplicative,

and time-consuming efforts they expended to solve

technical problems in designing the A-12. App. 38la.

82a & nn.6-7; see also App. 137a n.16 (Deputy

Assistant Secretary of Defense for Procurement

“relented” in her opposition to “putting the A-12 out

for bids on a fixed-price contract ... only with

assurance that the Government would share its

stealth technology with the contractors. Otherwise,

she predicted, it cannot be done.”).

The Government, however, invoked the state

secrets privilege to block discovery relating to its

superior knowledge. App. 383a-86a. That privilege

applies if “there is a reasonable danger that compulsion

of the evidence will expose military matters which, in

the interest of national security, should not be

divulged.” United States v. Reynolds, 345 U.S. 1, 10

(1953). The trial court found that Contractors could

“present a prima facie case based on A-12 program

inforsnation alone.” App. 394a-95a, 402a; see also App.

293a-94a. But the court sustained the privilege and

rejected the defense because, it concluded, the

“superior knowledge issues in this case cannot be

litigated safely.” App. 292a-93a.

In its 2003 decision (“MDC 12”), the Federal Cir-

cult vacated the judyment in favor of the Government

and remanded. The appellate court “reaffirinled] . . .

that the test ... adopted in Lishon [Contractors, Inc.

v. United States, 828 F.2d 759 (Fed. Cir. 1987)], as

further explained in this opinion, controls the review

of default ter:mination for failure to make progress.”

App. 58a. Specifically prescribing Lisbon as “the

controlling standard” in this case, App. 72a-73a, the

court held that the Government — which “bore the

burden of proof in justifying a default termination” —

must show “‘reasonable belief on the part of the

contracting officer that there was no reasonable

likelihood that the contractor could perform the entire

contract effort within the time remaining for contract

performance,” App. 52a (quoting Lishon, 828 F.2d at

765) (emphasis added).

The Federal Circuit further held that, under Lis-

bon, the trial court’s finding that Contractors would

not have met P00046's first flight date in December

1991 was “insufficient to sustain a default termina

tion in this case.” App. 47a. It vacated the trial court's

ruling that the default terinination was justified and

remanded for further proceedings “because the

Court of Federal Claims did not apply the controlling

standard under Lisbon to this case.” App. 72a. The

court specifically directed that “on remand, once the

Court of Federal Claims determines the performance

required by the contract and the contract completion

date, it can then decide ... whether the government

has met its burden” of justifying the default termina-

tion under Lisbon. App. 57a (emphasis added); see

also App. 56a (“the Court of Federal Claims will first

have to decide the actual performance that the con-

tract requires and the amount of time remaining for

performance”) (emphasis added). For, as the court ex-

plained, “[uJnless the contracting officer had deter-

mined the entire effort required under the contract

and the time left to complete the contract, it would be

difficult, if not impossible, for him to resolve whether

‘there was no reasonable likelihood that the con-

tractor could perforin the entire contract effort within

the time remaining for contract performance.” App.

56a (quoting Lisbon, 828 F.2d at 766) (emphasis

altered).

Turning to the superior knowledge defense, App.

39a-42a, 58a-72a, the Federal Circuit rejected Contrac-

tors’ argument that the Government could not, consis-

tent with due process, both continue to assert its claim

for default termination and also invoke the state

secrets privilege to foreclose Contractors’ superior

knowledge defense to that claim. App. 69a-70a.

Asserting that Contractors had “conflate[d] rules

governing criminal and civil proceedings,” the court

concluded that the trial court had not erred in

barring Contractors’ defense while allowing the

Government’s claim to proceed. App. 69a.

E. The Third Round of Litigation

On remand, the trial court specifically deter-

mined that “(t]he contract had no completion date at

termination, seemingly leaving the court without a

basis for finding a reasonable belief on the part of the

contracting officer that the contractors would not

complete the work on time.” App. 243a-44a. Under

Lisbon’s plain language, and MDC 12’s even plainer,

repeated remand instructions quoted above, the

Government could not prove that Contractors had

failed to make sufficient progress toward timely

completing the entire contract effort if there was no

valid completion date. App. 109a-lla. Rather than

vacate the default termination, however, the trial

court turned again to the interim, partial PO0046

schedule and used it as a “yardstick” for measuring

performance under Lisbon; it concluded that the “trial

record supplies reasons that a contracting officer

might have deemed himself insecure if he were

considering the period of performance identified as the

‘yardstick.’” App. 21la (emphasis added).

Given that the P00046 yardstick “use[d] a con-

tract period before the ultimate completion date” and

addressed only one of more than 80 contract line

items, the court had to acknowledge that its analysis

showed only that “the contractors were behind sched-

ule at termination according to a self-contained series

of milestones, not in relation to the entire contract,”

App. 206a (emphasis added), as Lisbon and MDC 12

required. Indeed, the trial court openly acknowledged

that its analysis could not be squared with the MDC

12 mandate if that mandate’s words were construed

“to mean exactly what they appear to mean.” App.

256a n.92. The court thus defied the Federal Circuit’s

specific remand instructions; readopted its prior, re-

jected analysis; and conceded as much. App. 196a.

In its decision in 2009 (“MDC 14”), the Federal

Circuit agreed “that the contract, as modified by

P00046, does not provide a definite contract comple-

tion date.” App. 16a, 3la. Under the Lisbon-MDC 12

rule, therefore, it should have reversed the trial court’s

decision sustaining default termination. Instead, the

Federal Circuit affirmed, candidly acknowledging that

it was now adopting an analysis that “may appear

different from the one [it had] previously instructed

the trial court to perforin.” App. 30a n.4. That court

invoked supposed authority under the law of the case

doctrine to justify its acknowledged “depart[ure]”

from MDC 12. Id. Whereas MDC 12 identified Lisbon

as the “controlling standard,” under which the trial

court must determine “the performance required by

the contract and the contract completion date” as a

prerequisite to sustaining the default termination,

App. 57a, MDC 14 ruled that “because the modified

A-12 contract does not contain a fixed completion

date, a Lisbon analysis cannot be strictly applied,”

App. 3la; see also App. 17a (refusing to “apply the

Lisbon test literally”).

Instead, MDC 14 created a new “ad hoc, factual

inquiry,” requiring a terinination for default to be up-

held, even absent a contract completion date, if the

Government shows that, in light of “all relevant cir-

cumstances,” “the contracting officer was reasonably

justified in feeling insecure about the contractors’ rate

of progress.” App. 22a, 29a (emphasis added). The

court held that “[o]nce the Government has met this

burden of proving that timely perforinance is beyond

the contractors’ reach, the contractors have the bur-

den of going forward to prove either that they were

making progress such that timely completion of the

contract was not endangered or that there was ex-

cusable delay.” App. 3la. The court thus not only

shifted to Contractors the burden of proof on what

had been the ultimate question under the Lisbon-

MDC 12 rule — whether “timely completion of the

contract” is endangered — but also removed altogether

the only objective metric — a completion date — by

which that inquiry could be answered.

Attempting to justify its abrupt repudiation of

the Lisbon-MDC 12 rule, the Federal Circuit invoked

what it characterized as “the unique facts of this case

and the disadvantage [the court] faced [in MDC 12]

when deciding the case without the benefit of suffi-

cient fact findings from the trial court.” In particular,

the court lamented that MDC 12’s “specific instruc-

tion” for the trial court to determine “the contract

completion date ... , if read literally, turns out to be

difficult to apply.” App. 15a (emphasis added).

MDC 12, however, had already considered the

“unique facts of this case.” That court was fully aware

of the parties’ “differing views of the contract comple-

tion date,” including Contractors’ position “that no

such date existed.” App. 56a.” But MDC 12 never

suggested that Lisbon would not apply absent a

completion date; on the contrary, it specifically noted

that “it would be difficult, if not impossible,” for the

Government to carry its burden of justifying the

default termination absent such a date. Jd. Further-

more, MDC 12 had squarely rejected the Govern-

ment’s arguments then: (i) that “the circumstances

in this case are so different that [the court] should

not seek guidance from precedent” such as Lisbon;

(ii) that default termination should therefore be as-

sessed solely by looking “at the contractors’ conduct

in context, in all the facts and circumstances,” and

(iii) that default termination “was appropriate here

given the Contractors’ admitted inability to meet an

interim contract milestone, the alleged impossibility

for the aircraft design to meet contract specifications,

and the Contractors’ request for a restructuring of the

agreement.” App. 50a; JA 90,075-76 (oral argument).

Yet, MDC 14 later invoked these same essential argu-

ments in upholding the default termination. MDC 14

thus embraced an analysis materially indistinguish-

able from that expressly rejected by MDC 12.

Despite the crucial differences in proof between

its new ad hoc approach and the clear rule it discarded,

the Federal Circuit, incredibly, did not remand to

* As discussed below, lack of a completion date at termi-

nation hardly rendered this case “nique” or the Lisbon analysis

“difficult to apply.” See infra, Part III.

require the Government to meet its new burden or to

afford Contractors a chance to rebut’ the

Government’s showing, to present defenses under the

new standard, or to meet the burden the court had

newly shifted to them. Rather, the court applied its

new test to the record formed under the funda-

mentally different Lisbon-MDC 12 rule. Thus, the

court sustained the default termination because it

believed, based on its own interpretation of the facts,

that the Government “was justifiably insecure about

the contract’s timely completion” and because Con-

tractors neither proffered “record evidence to show

... that they could have completed the contract on

any date” nor argued on appeal “that their failure to

make progress could be excused.” App. 30a (emphasis

added). Of course, Contractors had had neither

reason nor opportunity to make either showing.

REASONS FOR GRAN'TING THE PETITION

I. The Federal Circuit’s Adoption and Ap-

plication of a New Legal Rule without

Remanding Violates Due Process and

Conflicts with this Court’s Precedents

and the Decisions of Other Circuits.

In MDC 12, the Federal Circuit clearly directed

that this case be litigated and decided under the

Lisbon rule. As this Court’s precedents and the deci-

sions of other circuits make clear, once the appellate

court changed the applicable legal standard, the Due

Process Clause entitled Contractors, as a matter of

basic fairness, to a remand so they could present

argument and evidence made newly relevant by the

Federal Circuit’s about-face. Had they been afforded

that opportunity, Contractors almost certainly would

have prevailed.

A. The Federal Circuit’s Refusal to Re-

mand Conflicts with This Court’s

Precedent.

“tT Jhe Due Process Clauses protect civil litigants

who seek recourse in the courts, either as defendants

hoping to protect their property or as plaintiffs at-

tempting to redress yrievances.” Logan v. Zimmer-

man Brush Co., 455 U.S. 422, 429 (1982). Due process

manifestly requires “notice and a meaningful oppor-

tunity to be heard.” Lachance v. Erickson, 522 U.S.

262, 266 (1998). More specifically, a “party is entitled,

of course, to know the issues on which decision will

turn.” Bowman Transp., Inc. v. Arkansas-Best Freight

Sys., Inc., 419 U.S. 281, 289 n.4 (1974). Consequently,

when a court “overrules a consistent line of ... deci-

sions with the retroactive effect of denying a litigant

a hearing in a pending case, it thereby deprives him

of due process of law.” Bouie v. City of Colombia, 378

U.S. 347, 354 (1964); see also Gonzales v. United

States, 348 U.S. 407, 414 & n.5 (1955).

It follows that a court must remand when it

announces a rule different from the one under which

the case has been litigated. This principle is so funda-

mentally obvious that courts ordinarily apply it as a

matter of course. For example, in Hertz Corp. uv.

Friend, this Court recently adopted a jurisdictional

test for identifying a corporation’s principal place of

business that differed materially from the standard

under which the parties had litigated the case. 130

S. Ct. 1181, 1186-87, 1191-94 (2010). Even though the

plaintiffs had not previously challenged the defen-

dant’s declaration relating to its principal place of

business, this Court vacated the decision below and

remanded to afford the respondents “a fair opportu-

nity to litigate their case in light of [its] holding.” Jd.

at 1195.

These bedrock principles of due process apply

with special force here, for it is well-established that

default termination is “a drastic sanction,” Lisbon,

828 F.2d at 765 (citation omitted), indeed, “a species

of forfeiture,” Decker & Co. v. West, 76 F.3d 1573,

1580 (Fed. Cir. 1996). As this Court has repeatedly

emphasized, the Due Process Clause is vitally im-

portant in the forfeiture context. See, e.g., Jones v.

Flowers, 547 U.S. 220 (2006); United States v. James

Daniel Good Real Prop., 510 U.S. 43, 52, 62 (1993);

see also One 1958 Plymouth Sedan v. Pennsylvania,

380 U.S. 693, 700 (1965) (“forfeiture proceeding is

quasi-criminal in character”).

Furthermore, MDC 12 had specifically mandated

that Contractors’ challenge to the default termination

be litigated under the Lisbon-MDC 12 rule. Accord-

ingly, MDC 14’s failure to remand after announcing

its new approach was particularly egregious. Because

Contractors never had a meaningful opportunity to

adduce evidence and argument mad2 relevant by

MDC 14’s new approach, that decision denied them

due process of law. See Brinkerhoff-Faris Trust & Sav.

Co. v. Hill, 281 U.S. 673, 677 (1930).

B. The Court of Appeals’ Refusal to Re-

mand Creates a Conflict with Other

Circuits.

Consistent with this Court’s decisions, many cir-

cuits have held that the Due Process Clause requires

remand when an appellate court announces a new

controlling rule, to permit a party to present its case

under the new rule. The decision below therefore cre-

ates a conflict among the circuits on an important

issue relating to the fundamental procedural fairness

of litigation in the federal courts.

Thus, in Hatch v. FERC, after the parties liti-

gated before the ALJ under one standard, the Federal

Energy Regulatory Commission on appeal denied

petitioner’s claim by “adoptling] a stricter interpre-

tation of [the relevant statutory provision] than had

heretofore prevailed.” 654 F.2d 825, 830 (D.C. Cir.

1981). The D.C. Circuit observed that “when ... the

change [in the controlling standard] is a qualitative

one in the nature of the burden of proof so that ad-

ditional facts of a different kind may now be relevant

for the first time, litigants must have a meaningful

opportunity to submit conforming proof.” Id. at 835.

The court accordingly ruled that due process required

the Commission to allow the petitioner “to submit any

additional relevant evidence . .. he may have in order

to meet the new standard.” Jd. at 837.

Similarly, in Harlan Bell Coal Co. v. Lemar, an

employer initially submitted to the ALJ sufficient

evidence to defeat an employee’s benefits claim under

the then-controlling standard. 904 F.2d 1042, 1044

(6th Cir. 1990). After the ALJ had closed the record,

however, the Sixth Circuit reinterpreted that stan-

dard in another case. Jd. at 1044-45. On appeal the

Board applied the new standard to the extant record,

finding the employer’s evidence inadequate. Id. at

1045. The Sixth Circuit reversed because the em-

ployer had “been effectively deprived of the opportu-

nity to rebut evidence now supporting issues that did

not exist at the time of its ALJ hearing.” Jd. at 1049.

Explaining that the employer’s “night to a hearing

encompasses not only the right to present evidence,

but also the right to rebut the [employee’s] claims .. .

under the correct legal standards,” the court ruled

that “due process considerations” required that the

employer “must be granted an opportunity to present

evidence directed at the [newly adopted] standards as

such evidence is necessary to the full presentation of

{the employer’s] defense.” Jd.; see also, e.g., Peabody

Coal Co. v. Ferguson, 140 F.3d 634, 637 (6th Cir.

1998); Singh v. INS, 213 F.3d 1050, 1054 (9th Cir.

2000); Millipore Corp. v. Travelers Indem. Co., 115

F.3d 21, 33-34 (1st Cir. 1997); Marx v. Director,

OWCP, 870 F.2d 114, 121 (3d Cir. 1989); Brinley v.

Commissioner, IRS, 782 F.2d 1326, 1336 (5th Cir.

1986); Aero Mayflower Transit Co. v. ICC, 699 F.2d

938, 942 (7th Cir. 1983).

C. The Federal Circuit’s Immediate Ap-

plication of Its New Test Prevents

Contractors from Presenting Newly

Relevant Argument and Evidence.

Relying on MDC 12’s clear mandate, Contractors

maintained in the trial court and on appeal that de-

fault termination was improper because “the contract

had no completion date for the ‘entire contract effort’

at termination, leaving no possibility that the con-

tracting officer reasonably concluded the contractors

would not complete the work on time.” App. 234a,

242a-46a, 15a-16a. So clear was the MDC 12 mandate

that Contrac-tors had no reason to anticipate MDC

14’s adoption of a new, ad hoc approach closely

resembling one MDC 12 had rejected, \et alone

attempt to show that the Government could not meet

its burden under that new approach. Nor could they

reasonably have foreseen the need to proffer “record

evidence to show ... that they could have completed

the contract on any date,” or to argue on appeal “that

their failure to make progress could be excused,” App.

30a-3la, for these issues arise under the then-

controlling Lisbon-MDC 12 rule only if the Govern-

ment first proves a binding date for completing the

entire contract. Certainly Contractors could not have

anticipated that the Government’s failure to carry

its burden under Lisbon-MDC 12 would require

Contractors to prove that they were making adequate

progress toward a nonexistent completion date.

Had the Federal Circuit remanded the case after

altering the governing standard, Contractors almost

certainly would have prevailed. Instead, the appellate

court drew its own factual conclusions out of a gar-

gantuan record, making findings directly contrary to

those of the trial court — seemingly, without even

realizing that it had done so. In concluding that “the

contracting officer was reasonably justified in feeling

insecure about the Contractors’ rate of progress,” App.

29a (emphasis added), MDC 14 relied on (1) Con-

tractors’ projected failure to meet the P00046 delivery

schedule for the first eight test aircraft, (2) supposed

concerns about Contractors’ financial ability to per-

forin the contract, and (3) Contractors’ statements

made while negotiating for an equitable contract

restructuring and resisting unwarranted attempts to

hold them to waived or superseded milestones and

specifications. App. 25a-29a. Although the trial court

had found, based on these matters, that Contractors

might not have met the interim milestones imposed by

P00046, that court had expressly disclaimed the con-

clusion that they endangered timely performance of

the entire contract. See, e.g., App. 206a, 212a-13a. On

the contrary, that court found:

¢ the contracting officer was “not par-

ticularly concerned” about the projected “fail-

ure to meet the [P00046) delivery schedule.”

App. 218a n.73;

¢ the Navy saw a projected nine-month

delay in first flight as “realistic and ac-

ceptable,” App. 18la n.44, 276a-77a n.11;

¢ Contractors’ “financial condition was

not endangering performance of the A-12

contract,” App. 28la-82a;

* “lelvidence at trial established that

plaintiffs’ financial ability was not a concern”

of the contracting officer, App. 282a;

¢ “(tjJhe contractors’ requests to re-

structure the contract were not declarations

of financial inability or unwillingness to per-

form,” App. 225a;

¢ the contracting officer “did not be-

lieve that the contractors would not per-

form,” App. 283a;

¢ the senior Defense Department offi-

cial spearheading the A-12 contract termina-

tion “had no concern that the contractors

were incompetent or otherwise unable to

handle the A-12 contract,” App 171la n.35;

and

¢ the contractors “were committed to

performing the A-12 contract until the date

of termination,” App. 227a.

These undisturbed findings, amply supported by

the evidentiary record, alone appear to preclude a

finding under MDC 14 that “the contracting officer

was reasonably justified in feeling insecure about the

Contractors’ rate of progress.” App. 20a (emphasis

added). Had they been afforded an opportunity on

remand, Contractors could have further negated any

such conclusion by tailoring their arguments and

evidence to the new, ad hoc approach. They could also

have established both “that they were making pro-

gress such that timely completion of the contract was

not endangered,” and “that there was excusable

delay,” either of which would have provided a

complete defense to default termination under MDC

14’s new approach. App. 30a.

While it is unclear what might constitute “timely

completion” of the entire contract absent a valid com-

pletion date, Contractors could have proved that they

would have met any reasonable completion schedule.

In late 1990, Contractors and the Government had

similar internal projections of the entire schedule

leading to contract completion. JA 26,307; 92,112-13.

These internal schedules, which were satisfactory to

the Government, would have extended all milestones

by roughly the same amount of time that PO00046 had

extended delivery milestones for the first eight test

aircraft. Jd. At termination, Contractors were on

track to meet the later milestones these schedules

projected. Indeed, the Navy itself estimated just

before termination that the flight test program had a

reserve of more than 40 aircraft months, as long as

first flight occurred by the fourth quarter of 1992,

which was a conservative projection at the time of

termination. JA 26,6348; App. 178a n.44” Further,

* The Federal Circuit noted that Contractors projected test-

ing and evaluation to be completed 27 months after the orivinal

contract specified. App. 26a. The original testing-and-evaluation

(Continued on following page)

Contractors could have shown that the Government

caused much of the delay early on by directing

Contractors to focus on weight reduction rather than

schedule compliance. App. 447a.

In short, Contractors almost certainly would have

prevailed if given the opportunity to prove their case

under MDC 14’s new ad hoc test. Bedrock principles

of due process thus required the court to remand for

further proceedings. Indeed, so glaring is the Federal

Circuit’s departure from fundamental canons of due

process set forth in this Court’s controlling precedents

that summary reversal, with a remand to the trial

court for further proceedings, may be warranted as

ax! alternative to plenary review.

milestone did not, however, survive P00046’s extension of the

earlier milestones on which it depended, cf. App. 15a-16a, and

Contractors’ projection closely aligned with P00046, which

extended by up to 25 months the delivery milestones for the first

eight test airplanes. See JA 15,657. Had the parties believed the

extra two-month delay was significant, Contractors easily could

have compressed the lengthy contract testing period, as

evidenced by the ample flight-test program reserve.

il. The Federal Circuit’s Rule Permitting the

Government to Prosecute a Claim While

Asserting the State Secrets Privilege to

Foreclose a Valid Defense to That Claim

Violates Due Process and Conflicts with

the Decisions of this Court and of Other

Circuits.

Fundamental fairness does not permit the Gov-

ernment to assert a multi-billion-dollar claim against

a defendant while refusing to disclose secret informa-

tion that would dei. at that claim. Here, the Govern-

ment asserted a default ter:mination claim and then

invoked the state secrets privilege to bar Contractors

from proving their prima facie valid superior knowl-

edge defense to that claim. By allowing the default

terinination claim to proceed, MDC 12 violated ele-

mental due process and created a conflict with this

Court’s decisions and those of every other circuit that

has addressed the issue.

Tellingly, the Government has embraced these

due process principles when the shoe is on the other

foot and it is attempting to defend against a claim.

Indeed, earlier in this very case, the Government

insisted that, if the court converted the termination

for default to one for convenience, Contractors’ claim

for contractual payments should nonetheless be de-

nied because a potential government defense to that

claim would depend upon privileged state secrets.

The Government argued: “As a matter of law, ‘if the

privilege deprives the defendant of information that

would otherwise give the defendant a valid defense to

the claim, then the Court may grant summary judg-

ment to the defendant.’” Def.’s Br. Regarding Effect of

State Secrets and Mot. for Reconsideration 11 n.2

(Mar. 28, 2001) (quoting Bareford v. General Dynam-

ics Corp., 973 F.2d 1138, 1141 (5th Cir. 1992)); see

also App. 373a-80a, 394-98a. The Government has

repeatedly taken the same position in other cases.

See, e.g., Al-Haramain Islamic Found., Inc. v. Bush,

507 F.3d 1190, 1197 (9th Cir. 2007); Hepting v. AT&T

Corp., 439 F. Supp. 2d 974, 985-86 (N.D. Cal. 2006);

In re United States, 872 F.2d 472, 477 (D.C. Cir. 1989);

Molerio v. FBI, 749 F.2d 815, 819 (D.C. Cir. 1984).

This is exactly Contractors’ position: their prima

facie valid defense to the Government’s default termi-

nation claim cannot be litigated because the Govern-

ment asserted the state secrets privilege. Private

parties defending against a Government claim are

entitled to at least the same due process protections

as the Government. Indeed, it is especially unfair to

permit the Government to use the state secrets

privilege both offensively and defensively in the same

case, always to Contractors’ disadvantage.

A. The Federal Circuit’s State Secrets

Analysis Deprives Defendants of Due

Process in Conflict with This Court’s

Precedents.

Invoking this Court’s decision in United States

v. Reynolds, 345 U.S. 1 (1953), and circuit court

decisions following it, the Federal Circuit ruled that

Contractors were precluded from asserting their su-

perior knowledge defense to the Government’s default

terinination claim because, “when a properly invoked

claim of State Secrets privilege undercuts a civil

litigant’s opportunity to prove its case, the interests

favoring protection of the state secret always prevail.”

App. 66a-69a, 71a. But Contractors did not dispute

that genuine state secrets must always be protected;

rather, they argued that permitting the privilege to

preclude their prima facie valid defense requires, as a

matter of due process, dismissal of the Government’s

default termination claim. The Due Process Clause

will not permit the Government both to assert a claim

and then to ensure its own victory by asserting the

privilege to preclude its opponent from raising a valid

defense.

In Reynolds, the plaintiffs sued the Government

in tort and sought disclosure of a classified report

withheld under the state secrets privilege. 345 U.S. at

3-5. Upholding the Government’s assertion of privi-

lege, the Court distinguished a criminal defendant

from a civil plaintiff asserting a claim for monetary

relief against the Government: “[I]n the criminal

field, ... the Government can invoke its evidentiary

privileges only at the price of letting the defendant go

free,” for “it is unconscionable to allow [the Govern-

ment] to undertake prosecution and then invoke its

governmental privileges to deprive the accused of

anything which might be materia! to his defense.” Jd.

at 12. But this “rationale has no application,” the

Court held, “in a civil forum where the Government is

not the moving party, but is a defendant only on

terias to which it has consented.” Jd.

Relying on this discussion in Reynolds, the Fed-

eral Circuit held that Contractors had “conflate[d]

rules governing criminal and civil proceedings, ele-

vating this civil contract dispute into the consti-

tutional territory of a criminal] prosecution.” App. 69a.

Concluding that “(t]he Contractors are not at jeop-

ardy from an attack on them by the government,” the

court ruled that due process did not foreclose the

Government from proceeding with its default termi-

nation claim, even as Contractors were barred from

presenting their prima facie valid superior knowledge

defense. App.70a.

In fact, however, this Court’s decisions in Rey-

nolds and other cases show that the Government’s

default ter:nination claim here must be denied. Con-

trary to the Federal Circuit’s decision, Contractors

are at jeopardy — from a staggering multi-billion

dollar forfeiture claim asserted against them by the

Government — and due process entitles them to

dismissal of that claim because the Government’s

invocation of the privilege bars them from raising a

valid defense.

Reynolds did not specifically address the situa-

tion here, where the Government is the moving party

asserting a civil penalty claim. But Reynolds’ ration-

ale concerning criminal defendants nonetheless plain-

ly applies: just as in the criminal context, it is clearly

unconscionable to allow the Government both to assert

a multi-billion dollar civil penalty claim against

Contractors and also to “invoke its governmental

privileges” to bar them from presenting a valid de-

fense to that claim.’

Indeed, other decisions of this Court unambigu-

ously hold that due process guarantees a civil de-

fendant “an opportunity to present every available

defense.” Lindsey v. Normet, 405 U.S. 56, 66 (1972);

see also Logan, 455 U.S. at 429. The underlying risk

in civil and criminal cases involving the state secrets

privilege is the same: if the Government can both

assert a claim and invoke the privilege to bar a

defense to that claim, it can distort the court’s fact-

finding process to its advantage. As this Court has

explained, “(t]he purpose of an adversary hearing is

to ensure the requisite neutrality that must inform

all governmental decision-making. That protection is

of particular importance here, where the Government

* Indeed, termination for default is a “species of forfeiture,”

Decker & Co., 76 F.3d at 1580, and settled law holds that a

“forfeiture proceeding is quasi-criminal in character.” One 1958

Plymouth Sedan, 380 U.S. at 700 (applying the Fourth

Amendment's exclusionary rule in forfeiture proceeding); see

also, e.g., Austin v. United States, 509 U.S. 602 (1993) (finding

that forfeiture constituted punishment for purposes of the Ex-

cessive Fines Clause of the Eighth Amendment); Boyd v. United

States, 116 U.S. 616 (1886) (applying the Self Incrimination

Clause of the Fifth Amendment in forfeiture proceeding)

(overruled in part on other grounds, Fisher v. United States, 425

U.S. 391 (1976)). And default termination can have other quasi-

criminal consequences as well, including debariuent from public

contracting. See FAR § 9.406-2(b)(1).

has a direct pecuniary interest in the outcome of the

proceeding.” James Daniel, 510 U.S. 55-56. The Fed-

eral Circuit’s state secrets ruling thus violates due

process and directly conflicts with this Court’s clear

precedents.

B. The Federal Circuit’s State Secrets

Analysis Conflicts with the Decisions

of Other Circuits.

Consistent with this Court’s civil due process

precedents, “[mJost courts that have discussed the

state secret privilege have adopted the position that,

if privileged information would establish a valid de-

fense, then the court ought to dismiss the plaintiffs’

case.” Bareford, 973 F.2d at 1143 (citing Zuckerbraun

v. General Dynamics Corp., 935 F.2d 544, 547 (2d Cir.

1991), In re United States, 872 F.2d at 476, 481 (D.C.

Cir. 1989), and Molerio, 749 F.2d at 821, 825).* In

Molerio, for example, the plaintiff claimed that the

FBI, its director, and its former personnel officer had

illegally refused to hire him. 749 F.2d at 819. Then-

Judge Scalia, writing for the court, held that two of

the counts were “properly dismissed” because the

* Moved by similar concerns about fairness, courts have

likewise not allowed civil plaintiffs to assert other types of

privileges to foreclose a valid defense. See, e.g., Ideal Elec. Sec.

Co. v. International Fid. Ins. Co., 129 F.3d 143, 151-52 (D.C. Cir.

1997) (attorney-client privilege); Lyons v. Johnson, 415 F.2d 540,

542 (Sth Cir. 1969) (Fifth Amendment privilege against self-

incrimination).

Government’s assertion of the state secrets privilege

with respect to evidence of “the genuine reason for

denial of employment” prevented the defendants from

asserting a “valid[] ... defense.” Jd. at 825-26. In-

deed, other than the Federal Circuit here, all of the

circuits addressing this issue have — often building on

Molerio — made clear that a civil claim should be

dismissed if the state secrets privilege forecloses a

valid defense. See also El-Masri v. United States, 479

F.3d 296, 309 (4th Cir. 2007); Tenenbaum v. Simonini,

372 F.3d 776, 777 (6th Cir. 2004); Kasza v. Browner,

133 F.3d 1159, 1166 (9th Cir. 1998). The point of these

cases is this: if the state secrets privilege requires a

defendant to lay down its shield, due process requires

the plaintiff to lay down its sword.

By embracing a contrary approach, the decision

below creates a conflict among the circuits on an im-

portant question regarding the accommodation of

fundamental due process concerns with the needs of

national security. This Court’s review is thus urgently

needed to correct the decision below and restore clar-

ity and uniformity in this critical area of the law.

Ill. The Federal Circuit’s New Ad Hoc Rule

for Default Terminations Will Destabilize

An Important Area of the Law.

The Federal Circuit’s new, ad hoc approach to

default terminations is unworkable, unfair to contrac-

tors, and potentially very costly to the Government.

It will have significant adverse consequences for the

Government’s extensive contracting programs. See

U.S. Government Accountability Office, GAO-09-

326SP, Defense Acquisitions: Assessments of Selected

Weapon Programs 4, 6 (Mar. 2, 2009) (“GAO Report” ].

The Government’s renewed emphasis on fixed-

price contracts, which are directly governed by FAR

§ 52.249-9 (at issue here) and analogous default

termination provisions, renders the Federal Circuit’s

novel interpretation especially momentous. See, e.g.,

Barack Obama, Memorandum for the Heads of Execu-

tive Departments and Agencies, Mar. 4, 2009; Donna

Miles, Tanker Solicitation Seeks Fair Competition,

Best Value, American Forces Press Service, Feb. 24,

2010. Because the Federal Circuit has exclusive

appellate jurisdiction of challenges to such terinina-

tions, the decision below effectively creates a national

rule implicating all future government contracts of

this kind. Clarifying the standard for terminating

such contracts is thus an issue of exceptional im-

portance that warrants this Court’s attention.

Given the special rules that already apply in this

area, the approach adopted below is unnecessary to

protect the Government’s interests and will create

perverse incentives for arbitrary governmental ac-

tion. Unlike a private party, the Government may

terminate a contract for convenience at any time and

for virtually any reason, without liability for breach,

simply by paying for work already perforined plus

limited settlement costs. But if the Government ter-

minates for default, it is not liable even for work the

contractor already has performed. On the contrary,

this “drastic” remedy may entitle the Government “to

the repayment of advance and progress payments”

that have not been liquidated. Decker & Co., 76 F.3d

at 1580; FAR § 49.402-2. Absent bad faith, the only

consequence to the Government if a court rules that

the “default decision represented an abuse of dis-

cretion” is that termination is converted “into one for

the convenience of the Government.” Darwin Constr.

Co. v. United States, 811 F.2d 593, 597 (Fed. Cir.

1987).

These rules incentivize the Government to ter-

minate for default and take its chances in subsequent

litigation. To temper the consequences of such a

“drastic sanction,” which effects a forfeiture of con-

tractors’ rights, courts have long insisted upon clear,

strict standards to guard against arbitrary default

terminations. See, e.g., De Vito v. United States, 413

F.2d 1147, 1153 (Ct. Cl. 1969); King v. United States,

37 Ct. Cl. 428, 436 (1902).

Lisbon and MDC 12 struck a “praymatic,” care-

fully calibrated “balance” between “the judicial aver-

sion to default terminations” and the Government’s

right “to receive that for which it contracted” by

adopting clear, fair rules for deter:mining when sched-

ule delays warrant the drastic sanction of default

termination. App. 50a-51la. In complex contracts where

delays are commonplace, see GAO Report 6, 10-11,

the requirement that default termination be based on

the contracting officer’s reasonable belief that there is

no reasonable likelihood that the contractors will

perform “the entire contract effort” by the “contract

completion date” provides a rule that is both work-

able and fair.

Contrary to the court’s assertions below, nothing

about the lack of a valid contract completion date

renders Lisbon “unworkable” or unsound. In fact,

without clear guidance for when a contract must be

completed, it is not only unreasonable, but also logic-

ally impossible to conclude that there is no reason-

able likelihood of timely completion. App. 55a. Nor

does the Government’s inability to meet its burden

under Lisbon without a valid completion date make

that decision “difficult to apply.” Indeed, the Boards of

Contract Appeals — “whose specialized expertise with

government contracts is entitled to respect,” App.

52a-53a n.2 — have had no difficulty applying Lisbon

to contracts lacking a “reasonable and_ specific

completion date,” repeatedly holding that in such

circumstances “the Government could not rationally

terminate for default for failure to make progress,

since there was no objective against which the

contractor’s progress could be judged.” Divecon Servs.,

LP, 04-2 BCA 932,656 at 161,634-35 (GSBCA 2004).”

* See Technocratica, 06-2 BCA 933,316 at 165,190 (ASBCA

2006); AST’ Anlagen-Und Sanierungstechnik GmbH, 04-1 BCA

132,558 at 161,043-44 (ASBCA 2004); Upwest Corp., 01-2 BCA

731,474 at 155,393 (PSBCA 2001); Amerwan Sheet Metal Corp.,

99-1 BCA 430,329 at 149,994-95 (GSBCA 1999): Technocratica,

94-2 BCA 926,606 at 132,370 (ASBCA 1993); Lanzen Fabricating,

Inc., 93-3 BCA 426,079 at 129,609 (ASBCA 1993); M.V.I.

Precision Machining, Ltd., 91-2 BCA 923,898 at 119,741 (ASBCA

1991); Motorola Computer Sys., Inc., 87-3 BCA 420,032 at

101,416 (ASBCA 1987).

Applying Lisbon in this way does not disadvan-

tage the Government. Unlike a private party, the

Government always possesses the power unilaterally

to impose a reasonable completion date against which

to measure a contractor’s progress. App. 60a. Re-

quiring the Government to impose a clear completion

date before penalizing a contractor for failing to make

progress toward timely completion is just what basic

fairness requires. further:more, courts have recog-

nized a narrow exception to the requirement for a

completion date in the exceptional case, unlike this

one, where a contractor is “making no progress at

all,” and the evidence shows that progress will never

resume. Universal Fiberglass Corp. v. United States,

537 F.2d 393, 397 (Ct. Cl. 1976). These rules, as well

as the government-friendly rules governing default and

convenience terminations discussed above, more than

suffice to protect the Government’s legitimate interests.

Unlike Lisbon, it is the ad hoc approach ordered

by the court below that is unworkable and unfair.

At best, the new approach is arbitrary and un-

predictable, turning on any conccivable subjective

circumstance, apparently including failure to meet

milestones and specifications that the Government

previously waived. Compare App. 25a-27a, with App.

60a-6la. At worst, the new approach is circular and

incoherent, requiring an ungrounded prediction of

whether “timely” performance is endangered, despite

the absence of an enforceable completion date.

By replacing the Lisbon test with this flawed ad

hoe approach, the decision below will increase the

Government's already substantial incentive to default

terminate, regardless of whether that remedy is jus-

tified. Moreover, the new approach reverses the Gov-

ernment’s incentive to forthrightly reset waived or

superseded schedules: while the Government cannot

prevail under Lisbon absent a valid completion date

(unless the contractor is making no progress whatso-

ever), the new approach holds the Government to a

less-demanding standard when there is no contract

completion date than when there is one. Without a

definite deadline, contractors will be unable to know

whether their progress is adequate, and courts will lack

an objective basis for judging the reasonableness of a

Government claim that it “feel/s/ insecure about the

contractors’ rate of progress.” App. 24a-3la (emphasis

added).

The result will be an inevitable decrease in pre-

dictability, with a concomitant increase in unwar-

ranted default ter:ninations and litigation disputing

them. And while the ruling below will inure to the

Government’s benefit here, over time it will most likely

harm the Government, as contractors either refuse to

enter fixed-price contracts or demand a preminm to

compensate for the heightened risk of arbitrary or

unjustified forfeitures. See United States v. Winstar

Corp., 518 U.S. 839, 913 (1996) (Breyer, J., concurring).

Contrary to the Federal Circuit's suggestion, see

App. 35a-36a, its decision will not be limited to the

facts of this case or rare cases. Schedule waivers and

realignments are typical of Government contracts,

especially complex R&D contracts such as this one.

And default terminations of contracts lacking a valid

completion date are not particularly unusual, either,

as indicated by the numerous Boards of Contract

Appeals cases cited above. Further, the frequency of

such default teriminations undoubtedly will increase

now that the Government’s incentive to re-establish a

valid completion schedule has been replaced with an

incentive to leave the completion date undefined.

CONCLUSION

For the foregoing reasons, this petition for a writ

of certiorari should be granted. As an alternative to

plenary review, this Court may wish to consider sum

marily reversing the judyinent below, with instruc-

tions to remand the case to the trial court to afford

Contractors an opportunity to satisfy the Federal

Circuit’s new test for reviewing a default termination.

April 23, 2010 Respectfully submitted,

J. MICHAEL LuwiiG CHARLES J. COOPER

executive Vice President Counsel of Record

& General Counsel! MiIcHABL W. KikkK

GRANT M. DIXTON Howakb CC, NIELSON, Jk

LYNDA GUILD SIMPSON DAVID LEHN

THE BOEING COMPANY COOPER AND KIKK, PLLC

100 North Riverside 1523 New Hampshire Ave , N.W.

Chicago, IL 60606 Washington, D.C. 200386

($12) 544-2800 (202) 220-9600

(202) 220-9601 (fax)

ccooper@cooperkirk.com

Counsel for

The Boeing Company

MCDONNELL DOUGI.AS CORPORATION,

Plaintiff-Appellant, and GENERAT.

DYNAMICS CORPORATION,

Plaintiff-Appellant, v.

UNITED STATES, Defendant-Appellee.

2007-5111, 2007-5131

UNITED STATES COURT OF APPEATS

FOR THE FEDERAT. CIRCUIT

567 F.3d 1340; 2009 U.S. App. LEXIS 11716

June 2, 2009, Decided

COUNSEL: Charles J. Cooper, Cooper & Kirk,

PLLC, of Washington, DC, argued for plaintiff-appel-

lant. McDonnell Douglas Corporation. With him on

the brief were Michael W. Kirk, Howard C. Nielson,

Jr. and D. John Sauer. Of counsel on the brief were

Caryl A. Potter, III, and Elizabeth A. Ferrell, Sonnen-

schein, Nath & Rosenthal, LLP, of Washington, DC;

and J. Michael Luttig, The Boeing Company, of

Chicago, Illinois.

Donald B. Verrilli, Jr., Jenner & Block, LLP, of Wash-

ington, DC, argued for plaintiff-appellant General

Dynamics Corporation. With him on the brief were

David A. Churchill; and Linda L. Listrom, of Chicago,

Illinois.

Bryant G. Snee, Deputy Director, Commercial Liti-

gation Branch, Civil Division, United States De-

partment of Justice, of Washington, DC, argued for

defendant-appellee. With him on the brief were

Jeanne KE. Davidson, Director, and Patricia M.

McCarthy, Assistant Director. Of counsel was Kirk T.

Manhardt, Deputy Director. Of counsel on the brief

were Wendell A. Kjos and Mark A. Romano, Office of

the General Counsel, United States Department of

the Navy, of Arlington, Virginia.

Gregory A. Smith, Cooley Godward Kronish LLP, of

Reston, VA, for amicus curiae National Defense In-

dustrial Association. With him on the brief was David

E. Fletcher, of Washington, DC. Of counsel on the

brief was Ralph C. Nash, Jr., George Washington

University Law School, of Washington, DC.

JUDGES: Before MICHEL, Chief Judge, MOORE,

Circuit Judge, and HUFF,* District Judge.

OPINION BY: MICHEL

OPINION

MICHEL, Chief Judge.

This case arises from the government’s default

terinination in 1991 of a contract between the United

States Navy (“the government”) and two contractors,

McDonnell Douglas Corporation (“MDC”) and Gen-

eral Dynamics Corporation (“GD”) (collectively “con-

tractors”) to develop a carrier-based stealth aircraft,

the A-12 Avenger. The contractors challenge the

* Honorable Marilyn L. Huff, District Judge, United States

District Court for the Southern District of California, sitting by

designation.

judgment of the Court of Federal Claims in favor of

the government. McDonnell Douglas Corp. v. United

States, 76 Fed. Cl. 385 (2007) (“McDonnell Douglas

XIII”). We heard oral argument on December 3, 2008.

Because the overall evidence of record supports a

conclusion that the government was justified in

terminating the contract for default, we affirin.

I. BACKGROUND

This American version of Jarndyce and Jarndyce

has entered its eighteenth year of litigation. The de-

tailed facts have been repeated many times pre-

viously. See, e.g., McDonnell Douglas XIII; McDonnell

Douglas Corp. v. United States, 323 F.3d 1006 (Fed.

Cir. 2003) (“McDonnell Douglas XII”); McDonnell

Douglas Corp. v. United States, 50 Fed. Cl. 311 (2001)

(“McDonnell Douglas XI”); and McDonnell Douglas

Corp. v. United States, 182 F.3d 1319 (Fed. Cir. 1999)

(“McDonnell Douglas X”). As we are writing what

necessarily will become “McDonnell Douglas XIV,” we

will only provide a summary of relevant facts here.

A. The A-12 contract

In January 1988, the Navy awarded the contrac-

tors a fixed-price research and development contract

for the A-12 stealth aircraft. The full-scale engineer-

ing and development (“FSD”) contract was structured

as an incrementally funded, fixed-price incentive

contract with a ceiling price of $4,777,330,294. The con-

tract incorporated by reference Federal Acquisition

Regulation (FAR) 52.249-9 Default provision (Fixed-

Price Research and Development), which provides in

relevant part:

(a1) The Government may ... by

written Notice of Default to the Contractor,

terminate this contract in whole or in part if

the Contractor fails to —

(ii) Prosecute the work so as to en-

danger perforinance of this contract (but see

paragraph (a)(2) of this clause);

(2) The Government’s right to termi-

nate this contract under subdivisions (a)(1)(ii)

and (iii) of this clause may be exercised if the

Contractor does not cure such failure within

10 days (or more, if authorized in writing by

the Contracting Officer) after receipt of the

notice from the Contracting Officer speci-

fying the failure.

48 C.F.R. § 52.249-9 (1984).

Under the contract, the contractors were to de-

sign, manufacture, and test eight A-12 prototypes ac-

cording to a specified schedule, with the first aircraft

to be delivered in June 1990 (the “first flight” date)

and the remaining seven to be delivered monthly

through January 1991. The contractors were to con-

clude their testing of the aircraft by April 1993, the

completion time of the Navy’s technical evaluation

program (“[T'CHEVAL”). The contractors would also

support the Navy’s evaluation of the aircraft and

further provide training support for three years after

delivering training equipment to the Navy in June

1993. In addition, the contract gave the Navy the

option to purchase four production lots of aircraft. In

May 1990, the Navy exercised its option on Lot I for

six aircraft to be delivered between June 1991 and

May 1992.

B. Modification of the A-12 contract

From the start, the contractors encountered diffi-

culties in performing the contract, including meeting

the contract schedule and keeping the aircraft weight

within specifications. McDonnell Douglas XII, 323

F.3d at 1011. Two weeks before the first flight date,

the contractors reported to the Navy that the pro-

jected first flight date would be July-September 1991,

instead of June 1990 as originally agreed, and the

remainder of the contract work would be delayed a

corresponding twelve to fourteen months. They also

predicted that the cost of completing the contract

would exceed the ceiling price so substantially that it

would be “unacceptable” to the contractors. The con-

tractors asserted that a fundamental problem with

the FSD contract was its fixed-price structure and

proposed that the contract be modified.

At the end of June 1990, the contractors missed

the first flight date. The Navy did not terininate

the contract. Instead, the contracting officer sent a

letter to the contractors in July, expressing “serious

concern” regarding the deficient performance under

the contract. He warned that the contractors’ failure

to meet the first flight date “could jeopardize perfor-

mance of the entire [contract] effort.” He also asked

for the contractors’ plan to meet the rest of the origi-

nal schedule as well as their proposal for contract

revision.

As the parties failed to reach an agreement, on

August 17, 1990, the Navy unilaterally issued a con-

tract modification, P00046, which revised the proto-

type aircraft delivery dates but left Lot I and later

milestones intact. The delivery schedules are:

Aircraft Original P00046 Modified

Number Delivery Date Delivery Date

Prototype 1 June 1990 December 1991

2 July 1990 February 1992

3 August 1990 June 1992

4 September 1990 August 1992

5 October 1990 September 1992

6 November 1990 November 1992

7 December 1990 December 1992

January 1991 February 1993

Lot I June 1991

10 August 1991

ll October 1991

12 December 1991

13 March 1992

14 May 1992

C. Performance after contract modification

After the contract modification, more problems

arose concerning the performance of the contract.

During the months leading to terinination, the con-

tractors’ internal schedules showed that they would

not meet the P00046 modified first flight date in

December 1991. McDonnell Douglas XIII, 76 Fed. Cl.

at 401. Instead, they projected three more months’

delay with the first flight date in March 1992. By

December 1990, the contractors’ “confidence in the

March 1992 flight date [was further] reduced.” They

believed that such a date was achievable “only after

significant changes.”

At the same time, the contractors continued oper-

ations, spending $120-150 million of their own money

every month. McDonnell Douglas XIII, 76 Fed. Cl. at

427. In November 1990, the contractors submitted a

formal request to the Navy to restru: ture the contract

as a cost-reimbursement type contract. McDonnell

Douglas X, 182 F.3d at 1322.

D. The termination

The contractors’ continued difficulties in perforin-

ing the contract led the Department of Defense and

the Navy to question the viability of the project. On

Friday, December 14, 1990, then-Secretary of Defense

Dick Cheney directed the Secretary of the Navy to

show cause by January 4, 1991, why the A-12

program should not be terminated.

The following Monday, December 17, the Navy

issued a cure notice to the contractors, stating that

the government considered the contractors’ perfor-

mance under the contract “unsatisfactory.” In par-

ticular, the cure notice stated that the contractors

had “failed to fabricate parts sufficient to permit final

assembly in time to meet the schedule for delivery,”

and had “failed to meet specification requirements.”

The letter asserted that “these conditions [were] en-

dangering performance of [the] contract,” and that

unless these conditions were cured by January 2,

1991, the government might terminate the contract

for default.

In the following days, high-level meetings oc-

curred between the responsible government person-

nel and the contractors. McDonnell Douglas X, 182

F.3d at 1323. During these meetings, the contractors

asserted that they could not “get there if [they didn’t]

change the contract,” and that it “got to get reformed

to a cost type contract or [they could not] do it.” When

asked by the government if they could “correct defi-

ciencies to provide an aircraft that meets the require-

ments,” the contractors replied that “all deficiencies

cannot be corrected. ... Mother [NJature won’t allow

correction of all defects. We'll do the best we can and

the Navy has to decide if that’s good enough.”

On January 2, 1991, in responding to the cure

notice, the contractors admitted that they would “not

meet delivery schedules or certain specifi :tions of

the original contract, or the revised FSU delivery

schedule.” However, they denied that they were in

default because, in their view, the delivery schedules

were invalid. They asserted that “the furdamental

factual assumptions of the original contract, with

respect to schedule and achievability of certain speci-

fication requirements, were gravely mistaken,” and

therefore, “the schedules and certain other specifi-

cation requirements, such as weight, were impossible

to satisfy.” The contractors concluded that “[iJn these

circumstances, there [was] not an _ enforceable

schedule or specifications against which to measure

their performance.” They further declared that com-

pliance with the government’s demand to cure by

January 2, 1991 was “unachievable.”

However, the contractors stated that they were

“fully committed to the success of the [A-12] Program.”

They again submitted their proposal to restructure

the contract to a cost reimbursement contract. In ex-

change for that restructuring, the contractors wou'd

absorb a $1.5 billion fixed loss and would waive their

claims for equitable adjustment.

On January 7, 1991, Rear Admiral William

Morris, the contracting officer at the time, issued a

terinination letter to the contractors stating that the

government was terminating the A-12 contract due to

the contractors’ default. A few weeks later, the Navy

sent a letter to the contractors demanding the return

of approximately $1.35 billion in unliquidated pro-

gress payinents under the terminated contract.

McDonnell Douglas X, 182 F.3d at 1324.

10a

Il. LITIGATION HISTORY

A. The first round

In June 1991, the contractors sought relief in the

Court of Federal Claims under the Contract Disputes

Act, 41 U.S.C. § 609(a), requesting that the court: (1)

grant the contractors’ equitable adjustment claims,

(2) convert the government’s termination for default

into a termination for convenience, (3) deny the gov-

ernment’s demand for return of progress payments,

(4) award the contractors costs and a reasonable

profit under the contract, (5) award the contractors

settlement expenses, and (6) award damages for

breach of contract.

After several years of litigation, the Court ov

Federal Claims ruled that the government’s default

termination was invalid. McDonnell Douglas Corp.

v. United States, 35 Fed. Cl. 358, 368-71 (1996)

(“McDonnell Douglas IV”). It found that the con-

tracting officer failed to exercise “reasoned discretion”

before the default termination because Secretary

Cheney’s actions effectively forced the Navy to

terminate the A-12 contract for default. Jd. at 369-71.

Therefore, it vacated the government’s termination

for default and converted it into a termination for

convenience. Jd. at 361. The court ultimately denied

the government’s claim for return of $1.35 billion in

unliquidated progress payments, and entered judg-

ment of approximately $1.2 billion in favor of the

contractors. McDonnell Douglas Corp. v. United

lla

States, 40 Fed. Cl. 529, 555-56 (1998) (“McDonnell

Douglas IX”).

On appeal, we reversed, holding that because the

termination for default was related to the contractors’

performance, it was within the discretion of the

government. McDonnell Douglas X, 182 F.3d at 1321.

We remanded the case for the trial court to determine

whether the default termination was justified. /d.

B. The second round

After a six-week trial on remand, the Court of

Federal Claims ruled in favor of the government.

McDonnell Douglas XI, 50 Fed. Cl. at 319. The court

sustained the default termination based solely on the

contractors’ failure to meet the December 1991 first

flight date. Jd. at 315-19. It declined to base its de-

termination of justified default on the contractors’

alleged financial inability to perform the contract,

anticipatory repudiation, and failure to comply with

weight and other specification requirements. Jd. at

319-24. The court also rejected the contractors’ argu-

ments that the unilateral schedule was unreasunable

and therefore unenforceable, or, if enforceable then

the Navy waived the unilateral schedule and first

flight date of December 1991; that the contract was

commercially impossible to perform; and that the

Navy had to disclose its alleged superior knowledge

despite the assertion of the state secrets privilege. /d.

at 324-26. The court then entered judyinent in favor

of the government. /d. at 326.

12a

On appeal, we affirined the trial court’s de-

termination that the unilateral schedule imposed by

the government was enforceable and not waived, that

the Military and State Secrets privilege precluded

litigation of the contractors’ “superior knowledge”

claim, and that the government’s claim for progress

payments was not at issue in the case. McDonnell

Douglas XII, 323 F.3d at 1018-24. However, we held

that the trial court misapplied the controlling

standard in determining whether the default

termination was justified. Jd. at 1012-14. Therefore,

we again vacated and remanded. /d.

Specifically, we stated that a default te: mination

did not require “absolute impossibility of performance

or a contractor’s complete repudiation or abandon-

ment.” /d. at 1015. On the other hand, the govern-

ment cannot justify u default termination “based

solely on a contractor’s concerns about meeting a con-

tractual schedule milestone or specification require-

ments.” Jd. Instead, the government must establish

by a preponderance of the evidence of a “reasonable

belief on the part of the contracting officer that there

was no reasonable likelihood that the contractor

could perform the entire contract effort within the

time remaining for contract performance.” /d. at

1016. (citing Lisbon Contractors, Inc. v. United States,

828 F.2d 759, 765 (Fed. Cir. 1987)).

l3a

C. The third round

On remand, the Court of Federal Claims stated

as follows:

The case turns on whether the Circuit's

remand meant for the clauses, “entire con-

tract effort” and “contract completion date”

to mean exactly what they appear to mean —

the contractors’ expansive view; or whether

the remand permits our use of a more com-

pact yardstick — coinciding with the Govern-

ment’s restricted view. The Government did

not establish a contract closing date and the

contracting officer did not conduct a Lishon

analysis pnor to termination.

McDonnell Douglas XIII, 76 Fed. Cl. at 437 n.92. The

court concluded that the government could not “pre-

vail if the law requireld] an enforceable contract

completion date at termination,” but went on to state

that the government’s “burden of proof [did] not

necessarily require the Government to provide a

completion date for the entire contract effort.” Jd. at

388.

Based on its understanding that we “implied in

this case that a court may choose a reasonable period

of performance Lo use as uw measure of progress on the

contract,” id. at 420, the court found that the Navy’s

unilateral modification, POUO46, was a yardstick that

“enable[d] the court to consider the contractors’ pro-

gress in light of factors that are probative of their

ability and willingness to perforin,” id. at 389. Using

P00046 as the yardstick and considering “all of the

14a

relevant facts and testimony,” id. at 421, including

mitigating factors for the contractors, the court con-

cluded that the overall evidence of record supported

a conclusion that the government was justified in

tersninating the contract for failure to make progress,

id. at 430.

In addition, the trial court stated that the judg-

ment in the case mooted the government's alternative

argument that the contractors did not provide

adequate assurances to the contracting officer after

receiving the notice to cure. Jd. at 434.

The contractors timely appealed. We have juris-

diction pursuant to 28 USC. § 1295(a)(3).

Wl. DISCUSSION

A. Standard of review

Whether the government is justified in terminat

ing a contract for default is a question of law based on

factual underpinnings. McDonnell Douglas X, 182

F.3d at 1325. We review issues of law de novo, with-

out deference to the trial court. McDonnell Douplas

XII, 3823 F.3d at 1012 (citation omitted). However, we

will not disturb the trial court’s factual findings, such

us its evaluation of evidence of default, unless they

are clearly erroneous. /d.

15a

B. Analysis

1. Termination for failure to make progress

in the absence of a contract completion

date

In McDonnell Douglas XII, we quoted the

language from Lisbon in toto and directed the Court

of Federal Claims to determine “the perforimance

required by the contract’ and the contract completion

date.” 323 F.3d at 1018 (emphasis added, footnote

added). We acknowledge that this specific instruction,

if read literally, turns out to be difficult to apply. This

is largely due to the unique facts of this case and the

disadvantage we faced last time when deciding the

case without the benefit of sufficient fact findings

from the trial court. See id. at 1014.

The difficulty in strictly applying the Lisbon test

lies in the critical fact that P00046 revised the pro-

totype aircraft delivery dates but left Lot I delivery

‘ Generally, obligations arising from the exercise of an

option are part of a new contract only when the option was the

principal subject matter of the bargain, i.e., an option contract.

Alliant Techsystems, Inc. v. United States, 178 F.3d 1260, 1275

(Fed. Cir. 1999) (citing 3 Eric Mills Holmes, Corbin on Contracts

§ 11.1 (1996)). In this case, because the option to purchase Lot |

production aircraft is not the principal subject matter of the

original bargain, it is properly considered as part of the original

A-12 contract between the contractors and the government.

Thus, “the performance required by the contract” includes the

design, manufacturing, and testing of the eight prototype planes

under the FSD contract, the manufacturing and testing of the

six Lot I production aircraft, and other testing and supporting of

the project.

l6a

dates unchanged. As such, there is an overlap be-

tween the modified delivery schedule for the eight

prototype aircraft and the original delivery schedule

for the Lot I production aircraft. See Delivery Sched-

ules, supra. The government insists that the Lot I

schedule remains in effect because that portion of the

original contract was not modified by P00046. How-

ever, “[t]he A-12 contract was designed as a long-term

research and development effort, structured so that

each period of performance built upon preceding

work.” McDonnell Douglas XIII, 76 Fed. Cl. at 432.

Because the eighth test plane would serve as the

prototype for the Lot I aircraft, the contractors could

not have delivered Lot I aircraft according to the

original schedule as that would require delivering the

production aircraft prior to the prototype planes.

Therefore, we agree with the Court of Federal Claims

that the “[a]pplication of the contract in [the] manner

[advocated by the government] would be nonsensical.”

McDonnell Douglas XIII, 76 Fed. Cl. at 432. It follows

that the contract, as modified by P00046, does not

provide a definite contract completion date.” Id. at

401.

* The contractors offered legal principles, such as judicial

estoppel and waiver, to support this point. We do not believe it is

necessary to reach those arguments. Whether the contract has a

completion date is a question of fact. Common sense in this case

dictates the conclusion that “(t]he overlapping schedule offered

by the Government as a basis for assessing default is unrea-

sonable and likely unenforceable.” McDonnell Douglas XIII, 76

Fed. Cl. at 432.

17a

The contractors would have us apply the Lisbon

test literally and hold that the absence of a contract

completion date per se precludes the government from

ever justifiably terminating a contract for failure to

make progress. We cannot adopt such a broad cate-

gorical rule. The propriety of such a default terimi-

nation, even though ultimately a question of law, is a

fact-sensitive inquiry. The Lisbon test requires the

contracting officer’s reasonable belief that there was

no reasonable likelihood of timely completion. Lisbon,

828 F.2d at 765. Therefore, it is inevitable that some

case-by-case adjudication is required.

To be sure, just as the prior panel did, we re-

affirm that the test forinulated in Lisbon is a correct

standard for determining whether a default termi-

nation for failure to make progress is justified. How-

ever, this test was announced in view of the specific

facts presented in that case, where there was a

definite contract completion date. Lisbon, 828 F.2d at

761, 762. It did not address the situation where, as in

the present case, the contract does not specify a fixed

completion date. See United States v. Alaska S.S. Co.,

253 U.S. 113, 116, 40 S.Ct. 448, 64 L.Ed. 808 (1920)

(stating that a court “will deterinine only actual

matters in controversy essential to the decision of the

particular case before it,” and that it “is not em-

powered to decide .. . abstract propositions ... which

cannot affect the result as to the thing in issue in the

case before it”). As such, the Lisbon standard could

not be literally applied in every default termination

for failure to make progress case.

18a

We are confident that Lisbon does not, as the

contractors argue, foreclose a court’s review of a de-

fault te::nination for failure to make progress merely

because of an unascertainable contract completion

date. This is evident from Lisbon itself, in which the

court approved the Claims Court’s citation and

interpretation of Universal Fiberglass Corp. v. United

States, 210 Ct. Cl. 206, 537 F.2d 393, 397 (1976).

Lisbon, 828 F.2d at 765.

Universal Fiberglass involved a supply and

service contract for more than 12,000 mail delivery

trucks. 537 F.2d at 394. The contractor in that case

repeatedly failed to meet the installment delivery

schedule, even after several extensions of time. /d. at

394-95. It closed down almost all of the production

lines and laid off most of its labor force. Jd. at 395.

Meanwhile, a government audit showed that the

contractor was insolvent. Jd. Time and again, the

government asked the contractor to furnish its pro-

posed revised delivery schedule, but to no avail. /d.

The government issued a Preliminary Notice of

Default and gave the contractor ten days to cure all of

its defaults. Jd. at 396. After the contractors waived

its rights to the full ten-day notice period, the gov-

ernment promptly terminated the contract for failure

to make progress. /d.

* Universal Fiberglass was also cited with approval by the

previous two panels in deciding the present case. See McDonnell

Douglas X, 182 F.3d at 1328; McDonnell Douglas X/JI, 323 F.3d

at 1015.

19a

The Court of Claims held that the contract was

properly terminated for failure to make progress. Jd.

The court found that in the absence of a delivery

schedule, i.e., the contract completion date, the “cure

notice” served the purpose of advising the contractor

when the time for default has been reached. Jd. at

398. The court reasoned:

The contractor had already been asked

to submit a new delivery schedule and had

not done so. Nor had the contracting officer

learned, from the contractor or any other

source, any information to lead him to be-

lieve that deliveries would or could ever be

resumed. In such circumstances, a unilateral

delivery schedule prescribed by him would

have been an exercise in futility, except for

forensic purposes, should we be so foolish as

to give the absence of such a schedule any

lega’ significance or weight.

Id.

We realize that the facts in Universal Fiberglass

are not exactly the same as in the present case. First,

the difficulties in designing and manufacturing

stealth aircraft are incomparable tu those in making

small three-wheeled mail delivery trucks. More

importantly, as the contractors correctly point out, in

Universal Fiberglass, the contractor “was making no

progress at all, had never manufactured a vehicle

under the new specifications it had agreed to, did not

have the necessary parts and could not obtain them

and had allowed its labor force to wither away.” Jd. at

20a

398. In contrast, in the present case, “[dJespite de-

lays, the contractors continued operations. They were

spending $120 to $150 million of their own money

every month. They were committed to perfor: ming

the A-12 contract until the date of termination.”

McDonnell Douglas XIII, 76 Fed. Cl. at 427.

However, the contractors’ commitment to per-

forming the contract was not without conditions.

Starting from as early as June 1990, the ccitractors

had asserted that “the A-12 contractual schedule

[was] not achievable and need[ed] to be changed.”

They also predicted that the cost of completing the

contract would exceed the ceiling price so sub-

stantially that it would be “unacceptable” to the con-

tractors. Insisting that the A-12 project could not “be

accomplished under a fixed price type contract with-

out [solving] the financial, schedule and specification

problems,” the contractors proposed that the contract

be modified. The contractors maintained this position

throughout their performance of the A-12 contract.

After missing the original first flight date, “[tJhe

contractors were working to an aggressive schedule,

but they would not sign up for one.” McDonnell

Douglas XIII, 76 Fed. Cl. at 399. Because the con-

tractors rejected the government’s proposal of a bi-

lateral modification of the contract, the government

imposed the unilateral modification of the delivery

schedule for the prototype airplanes, P00046, “as a

first step in achieving the overall delivery schedule.”

McDonnell Douglas XIII, 76 Fed. Cl. at 400.

2la

P00046 extended the first flight date from June

1990 to December 1991. The contractors’ projected

delivery date, however, further slipped away. “Six

months prior to termination, the contractors projected

a twelve to fourteen-month delay in first flight [June-

August 1991]. By termination, the contractors’ ex-

pectations extended first flight to March 1992.”

McDonnell Douglas XIII, 76 Fed. Cl. at 422. In fact,

by December 1990, the contractors’ confidence in even

the March 1992 flight date was reduced. They

believed that such a date was achievable “only after

significant changes.” As the trial court found, “Navy

officials ... could not predict when the contractors

would deliver first flight.” McDonnell Douglas XIII,

76 Fed. Cl. at 401.

As the contractors themselves emphasize, “one

cannot test an aircraft before it has been built, nor

build a production airplane before developing its

prototype.” Therefore, without the timely delivery of

the prototype airplanes, there would be no basis for

the government to prescribe a new delivery schedule

for Lot I aircraft. In this sense, similar to the Court of

Claim’s opinion in Universal Fiberglass, we believe

requiring the contracting officer to artificially reset

the contract completion date would have been “super-

erogatory,” “except for forensic purposes.” See Uni-

versal Fiberglass, 210 Ct. Cl. at 217, 5387 F.2d 393.

Therefore, we agree with the trial court that this case

is similar to Universal Fiberglass in that

a schedule is not necessary because

the cure notice supplants the schedule and

22a

serves a similar function. The cure notice

lets a contractor know that even if per-

formance or delivery is not yet due, the

contracting officer believes the contractor

may not be making sufficient progress to

complete the contract on time. The burden is

then on the contractor to advise the Gov-

ernment how it will complete the project on

time, according to contract requirements.

Id. at 419.

One could analogize the per se rule advocated by

the contractors to an injunction against the govern-

ment. In granting or denying an injunction, a court

follows traditional equitable principles and “balances

the conveniences of the parties and possible injuries

to them” to arrive at a “nice adjustment and recon-

ciliation” between the competing claims. Weinberger

v. Romero-Barcelo, 456 U.S. 305, 312, 102 S.Ct. 1798,

72 L.Ed.2d 91 (1982). When a government contract is

terminated, there are two interests at issue — the

contractor’s interest in holding the government to its

obligation to carry out the contract, and the govern-

ment’s interest in not wasting taxpayer dollars. The

contractors in this case, however, would have us en-

join the government from ever terminating a contract

for failure to make progress based on a single factor —

the contract lacks a set completion date. We reject

such a per se rule because it serves only the con-

tractors’ interest. Instead, we favor an ad hoc, factual

inquiry that allows careful examination and weighing

of all relevant circumstances. See McDonnell Douglas

23a

XII, 323 F.3d at 1014 (stating that “[iJn determining

whether a default terrnination was justified, a court

must review the evidence and circumstances sur-

rounding the termination, and that assessment in-

volves a consideration of factual and evidentiary

issues”).

In fact, in our 2003 opinion, we provided the

same guida: ce, stating that to determine whether a

default termination is justified, “the trial court should

focus on the events, actions, and communications

leading to the default decision in ascertaining

whether the contracting officer had a reasonable

belief that there was no reasonable likelihood of

timely completion.” McDonnell Douglas XII, 323 F.3d

at 1017. Of course, in some cases, it is possible that a

conclusion drawn from a comparison of the entire

contract effort and the time remaining for contract

performance is so clear that it becomes dispositive.

See Lisbon, 828 F.2d at 765. However, in cases such

as the present one, where such a comparison is

inapplicable, the court must examine other factors,

including the contractor’s failure to meet progress

milestones, its problems with subcontractors and

suppliers, its financial situation, and its performance

history. See McDonnell Douglas XII, 323 F.3d at 1017.

Only after analyzing the totality of the circumstances

can a court determine whether a contractor failed to

“(plrosecute the work so as to endanger performance”

of the contract. See 48 C.F.R. § 52.249-9.

24a

2. Default termination of the A-12 contract

It is true that the A-12 contract, as modified by

F00046, lacks a definite contract completion date.

E owever, this single factor, even though important, is

insufficient to support the contractors’ contention that

the government cannot sustain the default termina-

tion. A court must also take into account other

relevant facts and testimony in deciding whether the

default termination was justified.

In Lisbon, we held that the government bears the

burden of justifying the propriety of a default

termination. 828 F.2d at 765. We also stated that “the

contracting officer’s termination decision [must] be

based on tangible, direct evidence reflecting the im-

pairment of timely completion.” McDonnell Douglas

XII, 323 F.3d at 1016 (citing Lisbon, 828 F.2d at 766).

The direct evidence includes the contractors’ “state-

ments that they could not meet the contract specifi-

cations, the contract delivery schedule, nor complete

performance at the specified contract price.” Jd. at

1013 (quoting McDonnell Douglas X, 182 F.3d at

1332). The direct evidence also includes the “con-

tracting officer’s testimony and contemporaneous

documents.” /d. at 1016. The Court of Federal Claims

made detailed factual findings based on the evidence.

McDonnell Douglas XIII, 76 Fed. Cl. at 422-30. After

reviewing the record, we see no clear error. Therefore,

we only highlight a few important aspects here.

25a

a. Contractors’ performance history and

failure to meet progress milestones

The contractors missed several milestones under

the origina] contract, the most significant of which, of

course, is the June 1990 first flight date. They also

missed the July 1990 delivery date for the second

prototype airplane. More tellingly, after the govern-

ment unilaterally modified the contract through

P00046, and in fact, in their response to the cure

notice, the contractors unequivocally stated that they

would not meet the revised delivery schedule for the

eight prototype airplanes. Instead, they projected

that the first flight date would be in March 1992,

three months after the date imposed in P00046. By

December 1990, the contractors were only “50%” con-

fident in this date, believing it was achievable “only

after significant changes.”

The contractors and the amicus curiae argue that

if we uphold the default termination here, the gov-

ernment may terminate for failure to make progress

a contract for any minor slippage in meeting any

insignificant interim milestone. This is an exaggera-

tion. First of all, due to the sequential “building

block” structure of the A-12 contract, delivery of the

prototype airplanes is not just any milestone. It is

certainly not an insignificant milestone. Quite to the

contrary, it is clearly one of the most important mile-

stones in the entire contract. This is because, as the

contractors admit, “one cannot test an aircraft before

it has been built, nor build a production airplane

before developing its prototype.”

26a

Second, the delay in the delivery schedule is

hardly just a minor slippage. The A-12 contract

provided the June 1990 first flight date. In other

words, it provided the contractors thirty months from

the contract award time (January 1988) to deliver the

first prototype plane. P00046, in extending the first

flight date to December 1991, gave the contractors 60

percent more time to reach this significant milestone.

Yet, the contractors, even though at first predicting

that they would, concluded that they could not meet

this schedule. In fact, they were not even sure if they

could deliver in March 1992. According to the con-

tractors’ own estimate, even assuming they could

meet the March 1992 first flight date, they would not

complete the design, manufacturing, and testing of

the aircraft until July 1995, two years and three

months after the Apnml 1993 TCHEVAL deadline

specified in the original contract.

More importantly, we are not upholding the

default termination “based solely on a contractor’s

concerns about meeting a contractual schedule

milestone.” McDonnell Douglas XII, 323 F.3d at 1015

(citing Lisbon, 828 F.2d at 765). As we explained

above, the contractors’ failure to meet progress mile-

stones is one factor to he considered in the totality-of-

the-circnmstances analysis. In this respect, we agree

with the trial court that

[mjissed milestones “indicate a pattern

of nonperformance and delay which should

not be ignored. Although not justifications

for default in themselves, they provide a

27a

context for understanding and evaluating

plaintiff’s continued problems.” Such infor-

mation should be relevant if we consider

whether a reasonable contracting officer

might reasonably have been concerned about

[the contractors’] ability to complete the

contract on time.

McDonnell Douglas X11, 76 Fed. Cl. at 426 (quoting

Universal Fiberglass, 537 ¥.2d at 397).

b. Contractors’ financial situation

Another piece of relevant inforimation we con-

sider when reviewing a default termination is the

contractors’ financial situation. “Ihe cost to complete

a contract — more particularly, the inability of a con-

tractor to perform a contract at the specified contract

price ... [is a] fundamental element | of government

contracts and [is] related to contract perforinance; as

such, [it is] highly relevant to the question of default.”

McDonnell Douglas X, 182 F.3d at 1328.

The A-12 contract as initially awarded had a

target contract price of $ 4,379,219,436 and a ceiling

price of $ 4,777,330,294. In June 1990, the contrac-

tors proposed that the fixed-price contract be modi-

fied because the cost of completing the contract would

exceed the ceiling price so substantially that it would

be “unacceptable” to the contractors.

The contractors repeatedly insisted on restruc-

turing the contract from a fixed-price contract to a

cost-reimbursement type contract. Even during the

28u

high-level negotiation meetings following the govern-

ment’s issuance of the cure notice, Mr. John

McDonnell, the CKO of MDC, asserted that the

contractors “can’t pet there if we don’t change the

contract,” and that the contract “has pot to yet

reformed to a cost type contract or we cannot do it.”

In their January 2, 1991, written response to the cure

notice, the contractors again submitted their proposal

to restructure the contract to a cost reimbursement

contract. In exchange for that restructuring, the con

tractors would absorb a $1.5 billion fixed loss and

would waive their claims for equitable adjustment.

The sizeable concession the contractors were willing

to make further illustrates the grave inadequacy of

the contract price.

Of course, the difficulty in the contractors’ finan

cial situation, in and of itself, may not be sufficient

to justify the default termination. See McDonnell

Douglas XI, 50 Fed. Cl. at 320-21 (ruling that the

contractors’ financial condition “was not endangering

performance of the A-12 contract”). However, in this

case, “inadequate financing is not collateral | because}

it pervades the entire contract.” Universal Fiberglass,

210 Ct. Cl. at 216. Indeed, in the months leading

to the termination, the contractors were spending

$120-150 million of their own money every month.

McDonnell Douplas XIII, 76 Fed. Cl. at 427. Captain

Lawrence Elberfeld, the Navy's A-12 Program Man-

ager, testified that the cost to complete the A 12

contract would be so “unthinkably” over the fixed-

price ceiling that the contractors’ internal “worst case

29a

estimate could bankrupt both corporations.” /d. at

429.

More importantly, Captain Elberfeld testified

that the cost overruns jeopardized the contractors’

performance because the contractor engaged in “cost

cutting efforts like reducing staff, eliminating over-

time, quick fixes that address and would remedy a

cash flow situation.” Jd. at 428. For example, around

the time when the contractors missed the original

first flight date, they removed 110 people from the A-

12 program. /d. Captain Elberfeld concluded that the

contractors’ cost cutting efforts to avoid bankruptcy

led to “more corner-culting and more incomplete ef-

fort and basically a longer process to get a product

that may not be the product that we desire or need

for the Navy.” /d. at 429.

ce. Conclusion

In summary, the government offered the con-

tracting officer’s testimony, the contractors’ state-

ments, and contemporary documents as direct evidence.

The evidence, such as the contractors’ performance

history (e.g., the failure to meet several milestones,

including the significant first flight), coupled with the

contractors’ dire financial difficulty, which negatively

impacted their performance under the contract,

shows that the contracting officer was reasonably

justified in feeling insecure about the contractors’

rate of progress. Therefore, the government has

30a

satisfied its burden to justify the default te:r:ni-

nation.*

Once the government has met this burden of

proving that timely performance is beyond the

contractors’ reach, the contractors have the burden of

going forward to prove either that they were making

progress such that timely completion of the contract

was not endangered or that there was excusable

delay. See Appeal of Mich. Joint Sealing, Inc., ASBCA

No. 41477, 93-3 BCA 26,011 (Apr. 26, 1993). On

appeal, the contractors assert no affirmative defense.

They proffer no record evidence to show, without con-

tract restructuring, that they could have completed

the contract on any date. Certain arguments, such as

waiver, are presented to support their proposition

that, at termination, the A-12 contract lacked an

enforceable completion date. Even if these arguments

could be interpreted as the contractors’ defenses, we

have already addressed them elsewhere in this

opinion. In conclusion, because the government was

justifiably insecure about the contract’s timely com-

pletion and the contractors do not argue that their

* Our current analysis may appear different from the one

we previously instructed the trial court to perform, specifically,

to determine the contract completion date. See McDonnell

Douglas XII, 323 F.3d at 1018. We believe that this is warranted

as under the law of the case doctrine, “it is not improper for a

court to depart from a prior holding if convinced that it is clearly

erroneous and would work a manifest injustice.” Arizona v.

California, 460 U.S. 605, 619, 103 S. Ct. 1382, 75 L. Ed. 2d 318

(U.S. 1983).

3la

failure to make progress could be excused, we sustain

the default termination of the A-12 contract.

3. Default termination without contracting

officer’s Lisbon analysis

The contractors and the amicus curiae also assert

that we cannot uphold the default termination be-

cause the contracting officer, Admiral Morris, did not

conduct the Lisbon analysis before the termination.

They base this argument on the trial court’s finding

that “Admiral Morris did not determine the entire

effort required and the time left to complete that con-

tract effort prior to termination.” McDonnell Douglas

XIII, 76 Fed. Cl. at 424 n.72; see also id. at 437 n.92

(concluding “the contracting officer did not conduct a

Lisbon analysis prior to termination”). This argument

is unpersuasive.

First of all, as we have stated earlier, because the

modified A-12 contract does not contain a fixed

completion date, a Lisbon analysis cannot be strictly

applied. Second, we previously stated that “the gov-

ernment is not required to establish that the con-

tracting officer conducted the analysis necessary to

sustain a default under the alternative theory.”

Empire Energy Mgmt. Sys. v. Roche, 362 F.3d 1343,

1357 (Fed. Cir. 2004); see also Christopher Vill., L.P. v.

United States, 360 F.3d 1319, 1337 (Fed. Cir. 2004)

(“This court sustains a default termination if justified

by circumstances at the time of termination, regard-

less of whether the Government originally removed

32a

the contractor for another reason.” (quoting Kelso v.

Kirk Bros. Mech. Contractors, Inc., 16 F.3d 1173, 1175

(Fed. Cir. 1994))).

The contractors and the amicus curiae attempt to

distinguish the present case from Empire Energy. The

amicus curiae emphasizes that there is a “critical

distinction between failure to make progress as the

asserted basis for default at the time of termination,

and failure to make progress as an alternative basis

for default, proven at trial, that supports an other-

wise unsustainable termination for failure to timely

deliver.” We discern no such distinction. In fact, the

amicus’s contention is illogical-it would have us, on

the one hand, uphold a default termination for failure

to make progress when the contracting officer never

even contemplated, much less evaluated, such a

basis; while at the same time, reject another default

termination for failure to make progress even though

the contracting officer explicitly asserted such a

basis.

More importantly, we are less concerned about

the label of the contracting officer’s action so long as,

in fulfilling his duty, the contracting officer exercised

reasoned judyiment and did not act arbitrarily. After

reviewing the record, we believe that the contractors

are not victims of arbitrary government action.

Admiral Morris testified that concerns about the A-12

Program “increased [and] the risks increased” in the

fall of 1990. Jd. at 424 n.70. The trial court found that

33a

lals the end of 1990 approached, |Ad-

miral Morris] was concerned that substantial

development on the aircraft had yet to occur.

He testified “[t]he contractors were indi-

cating that they were experiencing an over-

run that they could not absorb. Cost was

obviously a factor and their failure to

fabricate components, their failure to meet

schedule were clearly impacting cost.”

Id. at 423-24.

Admiral Morris also testified that in the weeks

leading to termination, the contractors “indicated

that they would not be able to meet the delivery

schedule that was currently in the contract. And they

would not be able to perforin the contract without

extraordinary relief or additional funding for the

contract.” Jd. at 424 (alterations omitted). He ex-

plained: “I didn’t know at that particular time when

in fact they would be able, if ever, to achieve

performance of the contract and I was hearing ‘we

will not’ or ‘we could not.’” Jd. (alterations omitted).

On December 17, 1990, Admiral Morris issued a

cure notice, warning the contractors that their per-

formance was “unsatisfactory” and the defect condi-

tions were “endangering performance” of the contract.

He explained that “[t]lhe purpose of the cure notice

was to advise the contractors they were failing to

make progress.” McDonnell Douglas XIIl, 76 Fed. Cl.

at 402. He testified that he “had been extremely

concerned with the communications coming in from

the contractors that unless extraordinary relief were

34a

provided, unless the contract were restructured into a

cost-type contract, that they could not or would not

perform, and that belief existed certainly on De-

cember 17th.”

Admiral Morris considered the problems of cost

overruns to be a “real issue.” McDonnell Douglas

XIII, 76 Fed. Cl. at 404. Even though he made an

effort to resolve the issue “within the context of the

contract” without restructuring the contract, “the

contractors were insisting upon Public Law 85-804

extraordinary relief.”” Even in their January 2, 1991,

written response to the cure notice, the contractors

again requested restructuring the contract to a cost

reimbursement contract. On Sunday, January 6,

1991, Acting Under Secretary of Defense Donald

Yockey told Admiral Morris that Secretary Cheney

would not provide 85-804 relief. As a result, Admiral

Morris thought that

he had three choices: to terminate the

contract for convenience, to terminate the

contract for default, or to do nothing. He

rejected the latter as ‘irresponsible,’ thus

focusing his attention on the other two

choices. He eliminated the termination for

convenience first, because he believed

* Pub. L. No. 85-804, 72 Stat. 972 (1958) (codified as 50

U.S.C. § 1431), authorizes the President of the United States to

grant agencies the power to provide extraordinary relief in

furtherance of national defense.

35a

Contractors to be in material breach of the

contract.

McDonnell Douglas X, 182 F.3d at 1328.

Record evidence shows that at the time of

termination, Admiral Morris was justifiably insecure

about the contract’s timely completion. In addition, “a

court’s review of a default justification does not turn

on the contracting officer’s subjective beliefs, but

rather requires an objective inquiry.” McDonnell

Douglas XII, 323 F.3d at 1016. In this regard, the

facts in the record are sufficient for the court, in a de

novo review, to sustain the default termination. See

Joseph Morton Co. v. United States, 757 F.2d 1273,

1277 (Fed. Cir. 1985) (“It is settled law that a party

can justify a termination if there existed at the time

an adequate cause, even if then unknown.”).

4. Conclusion

This is indeed an unfortunate case for all the

parties involved. We realize that the court is not in a

position to question the wisdom of the parties in

entering this contract and subsequently, in handling

problems in this case. Nevertheless, as the trial court

recognized, “the Government rarely terminates fixed-

price research and development contracts for default.”

McDonnell Douglas XIII, 76 Fed. Cl. at 418. We also

observe that the CEOs of both MDC and GD, in a

letter dated June 27, 1990, stated that “it was a

mistake for the U.S. Navy to stipulate this type of

contract and it was a mistake for the contractors to

36a

accept it. Both are at fault.” Alas, the law of contracts

does not allow us to deviate from established prin-

ciples of law and equity. We therefore hold that the

default termination of the A-12 contract is justified.®

However, we emphasize that terminating a govern-

ment contract for failure to make progress when the

contract does not specify a completion date is the

exception, not the norm. Therefore, we reiterate that

the Lisbon test remains good law and our conclusion

here is dictated by the unique facts of this case.

IV. CONCLUSION

For these reasons, the judyment of the Court of

Federal Claims is affirmed.

COSTS

Each party shall bear its own costs.

AFFIRMED

* The government argues that the contractors’ failed to

provide adequate assurance. As we hold that the default termi-

nation for failure to make progress is justified, we do not need to

reach this argument.

37a

MCDONNELL DOUGI.AS CORPORATION,

Plaintiff-Appellant, and

GENERAI. DYNAMICS CORPORATION,

Plaintiff-Appellant, v. UNITED STATES,

Defendant-Cross Appellant.

02-5034, 02-5035, 02-5046

UNITED STATES COURT OF APPEALS

FOR THE FEDERAT. CIRCUIT

323 F.3d 1006; 2003 U.S. App. LEXIS 4812; 60

Fed. R. Evid. Serv. (Callaghan) 1423

March 17, 2003, Decided

COUNSEL: Cary] A. Potter, III, Sonnenschein Nath

& Rosenthal, of Washington, DC, for plaintiff-appellant

McDonnell Douglas Corporation. With him on the

brief was Elizabeth A. Ferrell. Of counsel on the brief

was John W. Walbran, McDonnell Douglas Corporation,

of St. Louis, Missouri.

Donald B. Verrilli, Jr, Jenner & Block, LLC, of

Washington, DC, argued for plaintiff-appellant General

Dynamics Corporation. With him on the brief were

David A. Churchill and Thomas J. Perrelli. Of counsel

on the brief were Linda L. Listrom, and Gregory S.

Gallopoulos, Jenner & Block, of Chicago, Illinois. Of

counsel was Deanne E. Maynard.

David M. Cohen, Director, Commercial Litigation

Branch, Civil Division, Department of Justice, of

Washington, DC, argued for defendant-cross appellant.

With him on the brief were Robert D. McCallum, Jr.,

Assistant Attorney General; Bryant G. Snee, Assistant

38a

Director; Patricia M. McCarthy, Senior Trial Attorney,

and Lawrence N. Minch, Attorney. Of counsel on the

brief were George P. Williams, Wendell A Kjos, Robert

C. Manley, and Mark A. Romano, Navy Office of

General Counsel, Department of the Navy, of

Arlington, Virginia.

Richard G. Taranto, Farr & Taranto, of Washington, DC,

for amicus curiae appellants National Defense In-

dustrial Association.

Ralph C. Nash, Jr., of Washington, DC, for amicus

curiae Aerospace Industries Association. Of counsel

on the brief were Marcia G. Madsen and David F.

Dowd, Mayer, Brown, Rowe & Maw, of Washington,

DC.

JUDGES: Before MICHEL, CLEVENGER and

LINN, Circuit Judges.

OPINION BY: CLEVENGER

OPINION

This case arises from the government's default

termination in 1991 of a contract between the United

States Navy and defense contractors McDonnell

Douglas Corporation and General Dynamics Corpo-

ration (the “Contractors”) to develop a carrier-based

stealth aircraft. The Contractors challenge the

judyinent of the Court of Federal Claims in favor of

the government, McDonnell Douglas Corp. v. United

States, 50 Fed. Cl. 311 (Fed. Cl. 2001) (“McDonnell

Douglas XI’), and the government cross-appeals for

39a

the return of unliquidated progress payments. Since

the trial court misunderstood our mandate and

misapplied the controlling standard, we vacate its

judgment and remand. However, we see no error in

the trial court’s determination that the unilateral

schedule imposed by the government was enforceable

and not waived, that the Military and State Secrets

privilege precluded litigation of the Contractors’

“superior knowledge” claim, and that the government’s

claim for progress payments was not at issue in the

case.

Now in its twelfth year of litigation, this case

once again returns to this court. We have previously

provided in detail the facts underlying this contract

dispute. See McDonnell Douglas Corp. v. United

States, 182 F.3d 1319 (Fed. Cir. 1999) (“McDonnell

Douglas X”). Thus, we will only provide a summary of

the relevant background here.

In 1988, the Navy awarded McDonnell Douglas

Corporation (“MDC”) and General Dynamics Corpo-

ration (“GD”) a fixed-price contract with a ceiling

price of $4,777,330,294 to research and develop a

carrier-based “stealth” attack aircraft called the “A-12

Avenger.” Id. at 1322. The full-scale engineering and

development (“FSD”) contract required the Contractors

to design and build eight stealth aircraft according to

a specified delivery schedule, with the first aircraft to

40a

be delivered in June 1990 and the remaining seven

aircraft to be delivered monthly through January

1991. Id. The contract also gave the Navy the option

to purchase four production lots of aircraft, and the

Navy exercised its option on the first production lot in

May of 1990. McDonnell Douglas XI, 50 Fed. Cl. at

313.

From the outset, the Contractors encountered

difficulties in performing the contract, especially in

meeting the contract schedule and in keeping the

aircraft weight within specifications. McDonnell

Douglas X, 182 F.3d at 1322. In June of 1990, the

Contractors informed the Navy that they could not

deliver the first aircraft on time and that the cost of

completing the contract would substantially exceed

the ceiling price. Jd. As a solution, the Contractors

proposed to restructure the fixed-price agreement

into a cost-reimbursement contract. Jd. Despite the r

negotiations, the parties could not reach an agree-

ment on the proposed contract restructuring or on a

new delivery date. Jd. So, in August of 1990, the Navy

issued a unilateral schedule modification, continuing

the first flight and delivery date to December 31,

1991. Id.

Subsequently, more problems arose concerning

the FSD contract, leading the Department of Defense

(“DoD”) and the Navy to question the viability of the

project. Jd. at 1322-23. On December 17, 1990, Rear

Admiral William Morris, the contracting officer, sent

a cure notice to the Contractors, informing them of

his intention to terminate the contract for default

4la

hased on the Contractors’ failure to timely fabricate

the required parts and to meet specification require-

ments. See id. at 1323. In their response dated

January 2, 1991, the Contractors conceded that they

could not meet the new delivery schedule, but denied

that they were in default and asserted that the new

delivery schedule was invalid or unenforceable. /d. As

suggested cure, they again submitted a proposal to

restructure the FSD agreement to a cost-reimbursement

contract. Jd. In exchange for that restructuring, the

Contractors would absorb $1.5 billion in fixed loss

and would waive their claims for equitable adjust-

ment. /d.

After numerous meetings with DoD and Navy

principals, Admiral Morris terminated the contract

for default on January 7, 1991. /d. at. 1323-24. A few

weeks later, the Navy sent a letter to the Contractors

demanding the return of approximately $1.35 billion

in unliquidated progress payments under the termi-

nated contract. /d. at 1324.

In June of 1991, the Contractors sought relief in

the Court of Federal Claims under the Contract

Disputes Act, 41 U.S.C. § 609(a) (2000). After pro-

tracted litigation, the trial court held that the

Contractors’ performance did not constitute the basis

for the Navy’s decision to terminate, and the court

therefore converted the default termination into a

termination for convenience. McDonnell Douglas X,

182 F.3d at 1324. On appeal, we reversed that

judyment, holding that the termination was related

to the Contractors’ performance. Id. at 1326-29. We

42a

remanded the case to the trial court to determine

whether the default termination was justified. /d. at

1329.

After a six-week trial on remand, the Court of

Federal Claims ruled in favor of the Navy. McDonnell

Douglas XI, 50 Fed. Cl. at 319. The trial court

sustained the default based solely on the Contractors’

failure to meet the December 1991 first flight date.

Id. at 315-19. It declined to base its determination of

justified default on the Contractors’ alleged financial

inability to perform the contract, anticipatory repu-

diation, and failure to comply with weight and other

specification requirements. /d. at 319-24. Turning to

the Contractors’ defenses, the trial court) rejyected

their arguments that the unilateral schedule was

unreasonable and therefore unenforceable, or, if en-

forceable then the Navy waived the unilateral

schedule and first flight date of December 1991; that

the contract was commercially impossible to perform;

and that the Navy had to disclose its alleged superior

knowledge despite the assertion of the state secrets

privilege. /d. at 324-26. Having addressed those

issues, the Court of Federal Claims entered judyment

in favor of the government. /d. at 326.

After entry of judginent, the government asserted

its right to immediately collect from the Contractors

$1.35 billion in progress payments. Because the trial

court determined that the government did not submit

a counterclaim and that the unliquidated damayes

were not an issue in the litagation, the Court of

Federal Claims ruled “it was not necessary for this

43a

court to address what we consider to be an un-

derstanding among the parties that was outside the

focus of this case.”

The Contractors appealed the trial court’s judg-

ment and challenged the trial court’s construction of

our mandate, determination that the unilateral sched-

ule was enforceable and unwaived, and dismissal of

their “superior knowledge” claims. The government

cross-appealed for the return of the $1.35 billion in

unliquidated progress payments. We have jurisdiction

over this case pursuant to 28 U.S.C. § 1295(a\(3).

We review issues of law de novo, without

deference to the trial court. Bass Enters. Prod. Co. v.

United States, 133 F.3d 893, 895 (Fed. Cir. 1998). This

plenary review also applies to interpretations of our

own mandate. Engel Indus., Inc. v. Lockformer Co.,

166 F.3d 1379, 1382 (Fed. Cir. 1999). However, we

will not disturb the trial court’s factual findings, such

as its evaluation of evidence of default, unless they

are clearly erroneous. See Lisbon Contractors, Inc. v.

United States, 828 F.2d 759, 766 (Fed. Cir. 1987). A

factual finding is clearly erroneous when the reviewing

court is left with a “definite and fitin conviction that a

mistake has been committed.” United States v. United

States Gypsum Co., 333 U.S. 364, 395, 92 L. Ed. 746,

68 S. Ct. 525 (1948).

44a

On remand, the Court of Federal Claims sus-

tained the default termination based solely on the

Contractors’ conceded inability to make the December

1991 first flight date. McDonnell Douglas XI, 50 Fed.

Cl. at 315-19. As it explained, if it found that the first

flight date was reasonable, “the Circuit’s finding that

the Government’s decision to terminate for default

was performance-related will require us to rule for

defendant.” Jd. at 313. Thus, the trial court construed

our mandate as having disposed of certain issues

related to the merits of the default termination and

as limiting its inquiry to “whether the Navy’s

unilateral modification establishing a new schedule

for first flight was reasonable.” /d.

The Court of Federal Claims, however, miscon-

strued our mandate. Although the trial court believed

that we disposed of certain issues related to the

Navy’s justification for the default termination, a

plenary review of our opinion in McDonnell Douglas

X belies that proposition. See Engel Indus., 166 F.3d

at 1382 (“We review the interpretation of our own

mandate de novo.”).

In McDonnell Douglas X, we only addressed two

major issues: (1) the government’s challenge to the

trial court’s conversion of a default termination into

one for convenience; and (2) the Contractors’ cross-

appeal that the government was without power to

terminate an incrementally-funded contract for default.

45a

McDonnell Douglas X, 182 F.3d at 1325-32. We did

not reach the other appealed issues based on our

reversal of the conversion question.

In addressing the propriety of converting the

default termination, we first determined that the

Court of Federal Claims misinterpreted the holding of

Schlesinger v. United States, 182 Ct. Cl. 571, 390 F.2d

702 (Ct. Cl. 1968). McDonnell Douglas X, 182 F.3d at

1325-26. We explained that Schlesinger and its

progeny only barred terminations for default where

there is no nexus between the default termination

and the Contractors’ performance under the contract.

Id. We then ruled, based on the trial court’s findings

of fact, that the termination of the FSD contract for

default was related to the Contractors’ performance of

the contract and that a remand was necessary. /d. at

1326-29. We concluded our review of the conversion

issue by stating:

On remand, if the government can

establish that Contractors were in default,

then the termination for default would be

valid. See Lishon Contractors, Inc. v. United

States, 828 F.2d 759, 765 (Fed. Cir. 1987)

(holding that the government bears the

burden of proof with respect to the issue of

whether termination for default was justified).

Conversely, if the government is not able to

make this showing, then the default ter-

mination was invalid and Contractors would

46a

be entitled to a suitable recovery, presumably

under a termination for convenience theory.

Id. at 1329.

After vacating the trial court’s rulings on the

loss-ratio and doctrine of superior knowledge in light

of our disposition of the conversion question, id. at

1329-30, we addressed whether the government had

the authority to terminate for default an incrementally-

funded contract. Jd. at 1330. On that issue, we

determined that the government had that authority,

holding “only that the contract, throughout its terin,

embodied a duty to make progress toward the

ultimate end item.” /d. at 1332. We finished that

discussion by stating, once again:

The question of whether Contractors

satisfied their duty is of course that of

breach, and must be determined by taking

into account all of the relevant facts and

testimony, such as Contractors’ statements

that they could not meet the contract

specifications, the contract delivery schedule,

nor complete performance at the specified

contract price. See supra Part II.B. We leave

it to the trial court to resolve these issues in

the first instance.

Id. The conclusion section of our opinion reiterated

those limited rulings and instructed the trial court to

afford the parties an opportunity to litigate the

legitimacy of the default termination’s justification.

Id. at 1332-33.

47a

Our decision in McDonnell Douglas X did not

state whether there was in fact a default. Our ruling

had a limited scope, and we emphasized that point by

refusing to address the merits of the government's

default justification. Jd. at 1332 (“Of course, we do not

hold today that the government's default ter:mination

is justified.”). Neither the text of our opinion nor its

related judyment contained any indication, expressly

or by intimation, that we intended to limit the default

justification inquiry on remand to the reasonableness

of the December 1991 delivery date. And, there is

nothing in the trial court’s opinion that elucidates the

basis for its misinterpretation of our mandate. There-

fore, we must conclude that the Court of Federal

Claims misunderstood our mandate.

Because our decree does not require such a

result, the trial court’s finding that the unmet first

flight date in December 1991 was reasonable is

insufficient to sustain a default termination in this

case. See Lisbon, 828 F.2d at 765 (stating that “the

government did not, as it urges, satisfy its burden by

merely showing that the contractor was behind

schedule”). Consequently, the judgment in favor of the

United States cannot stand on that sole ground.

Although the parties have requested that we

finally dispose of this protracted litigation on appeal,

the record at this point does not permit us to do so. In

deter:inining whether a default termination was justi-

fied, a court must review the evidence and circumstances

surrounding the termination, and that assessment

involves a consideration of factual and evidentiary

48a

issues. See id. at 766-67 (reviewing trial court’s

factual findings and decision regarding default termi-

nation for clear error). Because the Court of Federal

Claims focused its ruling on the reasonableness of the

December 1991 date, it did not make adequate

findings on whether the Navy justifiably terminated

the Contractors for default. Mindful of our limited

role as a court of appeals, Baxter Healthcare Corp. v.

Spectramed, Inc., 49 F.3d 1575, 1585 (Fed. Cir. 1995)

(emphasizing that “we sit as a court to review claims

that a trial judge erred, and not as a court of first

instance”), we decline to resolve this dispute on an

incomplete record. Accordingly, we have no choice but

to vacate the trial court’s judyment and remand for

further proceedings.

On remand, the Court of Federal Claims must

address the issue that warranted a remand in

McDonnell Douglas X: “[W]|hether the government’s

default termination was justified, an issue upon

which we express or intimate no view.” McDonnell

Douglas X, 182 F.3d at 1321. However, the parties

could not agree in this appeal on the proper legal

standard applicable to that inquiry. Since the

determination of legal standards is a pure issue of

law, see Bayer AG v. Schein Pharms., Inc., 301 F.3d

1306, 1312 (Fed. Cir. 2002) (indicating that the choice

of legal standards is a legal question), we now re-

solve that dispute and clarify the requirements for

49a

determining whether the government has proved that

the Contractors were in default.

In this case, the government's authority to

terminate the contract for default derives from the

incorporated terms of FAR 52.249-9. That FAR clause

provides:

(al) The Government may, subject to

paragraphs (c) and (d) below, by written

Notice of Default to the Contractor, teriminate

this contract in whole or in part if the

Contractor fails to-

(ii) Prosecute the work so as to en-

danger performance of this contract (but see

subparagraph (a)(2) below);

48 C.F.R. § 52.249-9 (1984). The plain language of the

default provision permits termination whenever the

contractor fails to “[p]rosecute the work so as to

endanger performance of this contract.” /d.

The parties advance drastically opposite inter-

pretations of this default provision. The Contractors

contend that our precedent, such as Lisbon, permits a

default termination only upon repudiation or impos-

sibility of performance. As they explain, “a contractor’s

deficiencies must therefore be so severe as to be the

practical equivalent of a repudiation or abandonment

of the entire contract effort.” Because the Contractors

believe that “it must be clear that the contractor

cannot or will not complete perforinance,” they

50a

submit that it is improper to default terininate a

contractor merely because it is unable to meet an

interim contract milestone. The government, in

contrast, argues that the interpretation of this

specific default provision is an issue of first

impression and that the circumstances of this case

are so different that we should not seek guidance

from precedent. Rather, according to the government,

the default provision in this contract permits

termination whenever a contractor raises concerns

about its ability to satisfy a contractual requirement,

such as meeting a schedule or some specification

requirements. Under that construction of the default

clause, the government argues that default ter:nination

was appropriate here given the Contractors’ admitted

inability to meet an interim contract milestone, the

alleged impossibility for the aircraft design to meet

contract specifications, and the Contractors’ request

for a restructuring of the agreement.

We disagree with the parties’ interpretations of

the default clause in this contract. Contrary to the

Contractors’ position, the default provision does not

require absolute impossibility of performance or a

contractor’s complete repudiation or abandonment.

Discount Co. v. United States, 213 Ct. Cl. 567, 554

F.2d 435, 441 (Ct. Cl. 1977) (holding that “the default

clause in this contract did not require a finding that

completion within the contract’s time limitations was

impossible”); Universal Fiberglass Corp. v. United

States, 210 Ct. Cl. 206, 537 F.2d 393, 398 (Ct. Cl.

1976) (affirming default termination despite lack of

5la

express repudiation). Nor does the provision permit,

as the government implies, default termination based

solely on a contractor’s concerns about meeting a

contractual schedule milestone or specification require-

ments. See Lisbon, 828 F.2d at 765. Rather, the

proper interpretation of the default provision lies

somewhere between the parties’ extreme positions,

and should strike a balance between the judicial

aversion to default terminations, see J.D. Hedin

Constr. Co. v. United States, 187 Ct. Cl. 45, 408 F.2d

424, 431 (Ct. Cl. 1969) (stating that “a default termi-

nation is a drastic sanction which should be imposed

(or sustained) only for good grounds and on solid

evidence” (citation omitted)), and the fact that “the

Government, just as any other party, is entitled to

receive that for which it contracted and has the right

to accept only goods that conform to the specifi-

cation.” Cascade Pac. Int'l v. United States, 773 F.2d

287, 291 (Fed. Cir. 1985) (affirming finding of default

termination).

The pragmatic approach we adopted in Lisbon

achieves that desired balance and provides the proper

interpretation of the default clause.’ Like this case,

' Although the government distances itself from Lisbon in

this appeal, it relied on that precedent throughout the pro-

ceedings on remand. Indeed, the government urged the Court of

Federal Claims to apply the Lisbon standard in its opening

argument, during trial, in its closing statement, and in its post-

trial briefs. Our jurisprudence does not condone such a reversal

in position between trial and appeal. See Interactive Gift

Express, Inc. v. Compuserve Inc., 256 F.3d 1323, 1345 (Fed. Cir.

(Continued on following page)

52a

Lisbon involved a default termination of a contractor

for failure to prosecute with diligence, despite the fact

that the contractor still had time to complete

performance of the contracted project. Lisbon, 828

F.2d at 765-66. After determining that the govern-

ment bore the burden of proof in justifying a default

termination, id. at 765, we clarified that “the govern-

ment did not, as it urges, satisfy its burden by merely

showing that the contractor was behind schedule.” /d.

Rather, we construed the default provision to “require

reasonable belief on the part of the contracting officer

that there was no reasonable likelihood that the

contractor could perforin the entire contract effort

within the time remaining for contract performance.”

Id. (internal quotation marks and brackets omitted)

(quoting RFI Shield-Rooms, ASBCA Nos. 17374, 17991,

77-2 BCA P 12,714, 61,735 (Aug. 11, 1977), and citing

Discount, 554 F.2d at 441). Since then, we have

adopted that formulation as the controlling standard

in default cases involving a failure to make sufficient

progress. See, e.g., Danzig v. AEC Corp., 224 F.3d

2001) (“The doctrine provides that a party will be judicially

estopped from asserting a position on appeal that is directly

opposed to a position that the party successfully urged at trial.”).

* This standard is accepted and applied by the contract

boards and trial courts in reviewing default terminations for

failure to make progress. Indeed, the Boards of Contract

Appeals, whose specialized expertise with government contracts

is entitled to respect, have long adopted the Lisbon standard in

reviewing the government’s default termination of contractors

who allegedly failed to prosecute their work with diligence. See,

e.g., Bison Trucking & Equip. Co., ASBCA No. 53,390, 2001-2

(Continued on following page)

53a

1333, 1336-37 (Fed. Cir. 2000) (indicating that the

ASCBA properly applied the Lisbon standard in

reviewing a default termination for failure to make

progress). We again reaffirm in this case that the test

formulated in Lisbon controls the determination of

whether the government justifiably default terminated

a contractor for failure to make progress.

In applying that standard, we have required that

the contracting officer’s termination decision be based

on tangible, direct evidence reflecting the impairment

B.C.A. (CCH) P 31,654 (ASCBA Nov. 21, 2001); Thomas & Sons,

Inc., ASBCA No. 51,874, 01-1 B.C.A. (CCH) P 31,166 (ASBCA

Nov. 13, 2000); Santee Dock Builders, AGBCA No. 96-161-1, 99-1

B.C.A. (CCH) P 30,190 (AGBCA Dec. 17, 1998); Nat'l Interior

Contractors, Inc., ASBCA No. 46,089, 96-2 B.C.A. (CCH) P 28,370

(ASBCA May 23, 1996); Am. Intl Contractors, Inc./Capitol In-

dus. Constr. Groups, Inc., ASBCA No. 39,544, 95-2 B.C.A. (CCH)

P 27,920 (ASBCA Aug 31, 1995); Hillebrand Constr. of Midwest,

Inc., ASBCA No. 45,853, 95-1 B.C.A. (CCH) P 27,464, (ASBCA

Jan. 18, 1995); Mich. Joint Sealing, Inc., ASBCA No. 41,477, 93-

3 B.C.A. (CCH) P 26,011 (ASBCA Apr. 26, 1993), aff’d, 22 F.3d

1104 (Fed. Cir. 1994) (table); Skip Kirchdorfer, Inc., ASBCA Nos.

32,637, 35,074, 91-1 B.C.A. (CCH) P 23,380 (A.S.B.C.A. Sept. 13,

1990), aff’d, 944 F.2d 912 (Fed. Cir. 1991) (table); B.M.S., Inc.,

ASBCA No. 35,430, 90-2 B.C.A. (CCH) P 22,644 (ASBCA Jan.

26, 1990). Similarly, the Court of Federal Claims has applied the

Lisbon standard in reviewing default terminations for failure to

make progress. See, e.g., Morganti Nat'l, Inc. v. United States, 49

Fed. Cl. 110, 129-32 (Fed. Cl. 2001) (affirming default

termination), aff’d, 36 Fed. Appx. 452 (Fed. Cir. 2002); CJP

Contractors, Inc. v. United States, 45 Fed. Cl. 343, 371 (Fed. Cl.

1999) (reversing default); Interstate Gen. Gov't Contractors, Inc.

v. United States, 40 Fed. Cl. 585, 606-08 (Fed. Cl. 1998)

(reversing default).

54a

of timely completion. See Lisbon, 828 F.2d at 766 (“At

trial, the government did not offer direct testimony or

any other direct evidence on the time which it

estimated it would take Lisbon to complete the

contract.”). In other words, a court’s review of default

justification does not turn on the contracting officer’s

subjective beliefs, but rather requires an objective

inquiry. Id. at 766-67 (reviewing evidence underlying

government’s default termination). Although the

contracting officer’s testimony and contemporaneous

documents are relevant to that determination, id. at

766, the trial court may also consider other factors

usually relied upon by courts and contract boards,

such as a comparison of the percentage of work

completed and the amount of time remaining under

the contract, see, e.g., Thomas & Sons, Inc., ASBCA

No. 51,874, 01-1 B.C.A. (CCH) P 31,166 (ASBCA Nov.

13, 2000); Nat’ Interior Contractors, Inc., ASBCA No.

46,089, 96-2 B.C.A. (CCH) P 28,370 (ASCBA May 23,

1996); the contractor’s failure to meet progress mile-

stones, see, e.g., James E. Kennedy, Tr. v. United

States, 164 Ct. Cl. 507, 512 (1964); AAR Corp.,

ASBCA No. 16,486 et al., 74-2 B.C.A. (CCH) P 10,653

(A.S.B.C.A. Apr. 24, 1974); problems with subcon-

tractors and suppliers, see, e.g., Abcon Assocs., Inc. v.

United States, 49 Fed. Cl. 678, 686-87 (Fed. Cl. 2001);

the contractor’s financial situation, see, e.g., Universal

Fiberglass, 537 F.2d at 395-96, 398; as well as a

contractor’s perforinance history, see, e.g., Decker &

Co. v. West, 76 F.3d 1573, 1581 (Fed. Cir. 1996); and

other pertinent circumstances surrounding the de-

cision in order to determine whether the contracting

55a

officer had a valid basis for his conclusions. Lisbon,

828 F.2d at 766-67; see also Discount, 554 F.2d at 441

(“The record is plain, however, that the default

termination was not based on this demand per se but

rather on the over-all evidence of Discount’s failure to

prosecute diligently its work under the contract.”); L

& H Constr. Co., ASBCA No. 43,833, 97-1 B.C.A.

(CCH) P 28,766 (ASBCA Feb. 5, 1997) (“The Govern-

ment owes the contractor no less than an assessment

of all the relevant circumstances when it exercises its

discretion under the default clause.”).

Our precedent does not require, however, that

the contracting officer be correct in his assessment, as

the Contractors would have us rule. He only needs to

be “justifiably insecure about the contract’s timely

completion.” Discount, 554 F.2d at 441. Because the

inquiry is concerned with the contracting officer’s

reasonable belief rather than whether he was correct,

it would be impermissible “to show that after the

termination action events occurred which would have

permitted the contract to be completed by the

delivery date.” RFI Shield-Room, 77-2 B.C.A. (CCH)

P 12,714 (cited with approval by Lisbon, 828 F.2d at

765). A consideration of post-termination factors and

events would transform Lisbon’s “reasonable belief”

requirement into a demand that the contracting

officer have perfect foresight. Limiting the inquiry to

the time of the termination action reduces the po-

tential for hindsight bias. See RFI Shield-Room, 77-2

B.C.A. (CCH) P 12,714. Thus, the trial court should

focrs on the events, actions, and communications

56a

leading to the default decision in ascertaining whether

the contracting officer had a reasonable belief that

there was no reasonable likelihood of timely com-

pletion.

To make that determination, the Court of Federal

Claims will first have to decide the actual performance

that the contract requires and the amount of time

remaining for performance. See Lisbon, 828 F.2d at

766 (faulting the government for failing to provide

“direct evidence on the time which it estimated it

would take [the contractor] to complete the contract.”).

Unless the contracting officer had determined the

entire effort required under the contract and the time

left to complete the contract, it would be difficult, if

not impossible, for him to resolve whether “there was

no reasonable likelihood that the contractor could

perform the entire contract effort within the time

remaining for contract performance.” Id. at 765

(emphasis added and brackets omitted).

In this case, the parties do not agree on either of

those underlying issues. They each harbor differing

views of the contract completion date, ranging from

the opinion that no such date existed, to the notion

that the design and testing under the contract would

require at least four to five years, to the suggestion

that missing the first aircraft delivery date was

tantamount to failing to timely complete the contract.

In addition, the parties seem unsure whether the

contract solely requires delivery of the eight prototype

aircraft or whether the agreement also requires

delivery of the production lot purchased by the Navy

57a

under the contract’s option provisions. Given those

competing claims and the incomplete record before

us, we leave it to the trial court to determine on first

instance the actual performance required by the

contract and the amount of time remaining for that

performance.

To summarize, on remand, once the Court of

Federal Claims determines the performance required

by the contract and the contract completion date, it

can then decide, in light of the information upon

which the contracting officer relied in deciding to ter-

minate for default, whether the government has met

its burden of proving that the contracting officer had

a reasonable belief that there was no reasonable

likelihood that the contractor could perform the en-

tire contract effort within the time remaining for per-

formance.’ As we explained in McDonnell Douglas X:

On remand, if the government can

establish that Contractors were in default,

then the termination for default would be

valid. Conversely, if the government is not

able to make this showing, then the default

° Although the parties disagreed at oral argument whether

the trial court should show any deference to the contracting

officer’s decision, it is well-settled that the Court of Federal

Claims reviews the decision to terminate a contractor for default

de novo. See Wilner v. United States, 24 F.3d 1397, 1401 (Fed.

Cir. 1994) (en banc) (“[I}n court litigation, a contractor is not

entitled to the benefit of any presumption arising from the

contracting officer’s decision. De novo review precludes reliance

upon the presumed correctness of the decision.”).

58a

termination was invalid and Contractors

would be entitled to a suitable recovery,

presumably under a termination for conven-

ience theory.

McDonnell Douglas X, 182 F.3d at 1329 (citation

omitted). Whether the government has met its

burden is not an issue we reach here, since it is a

determination that we yield initially to the trial court

and on which we neither express nor intimate any

view. See Olson Plumbing & Heating Co. v. United

States, 221 Ct. Cl. 197, 602 F.2d 950, 955 (Ct. Cl.

1979) (stating that “whether the default te: mination

is proper depends upon the facts and circumstances of

each case”). Similarly, we decline to decide whether

the Court of Federal Claims needs to conduct

additional proceedings or admit additional evidence,

as those matters are better left to the trial court’s

broad discretion. We merely hold and reaffirm in this

case that the test we adopted in Lisbon, as further

explained in this opinion, controls the review of

default termination for failure to make progress.

Ill

We now turn to the other issues raised by

Contractors in this appeal. The Contractors challenge

the trial court’s dete: mination that the government’s

unilateral schedule was enforceable and not waived.

Moreover, they contend that it was reversible error to

preclude them from litigating their “superior

knowledge” claim based on the government's invo-

59a

cation of the Military and State Secrets privilege. We

address each contention seriatim.

After the Contractors failed to meet the June

1990 delivery date and the parties could not agree on

a new bilateral schedule, the Navy unilaterally imposed

a new delivery schedule through the issuance of

Modification No. P00046. Because the unilateral

schedule was allegedly not reasonable, the Contrac-

tors argue that the schedule is not enforceable. We

disagree.

If the government elects to permit a delinquent

contractor to continue performance past a due date as

it did in this case by waiving the June 1990 delivery

date, McDonnell Douglas XI, 50 Fed. Cl. at 315, the

government can establish a new contract completion

date, which will serve as a basis for default termi-

nation, either through a bilateral agreement with the

contractor or by unilateral action. DeVito v. United

States, 413 F.2d 1147, 1154-55, 188 Ct. Cl. 979 (Ct. Cl.

1969). If the government opts to act unilaterally

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