GOVERNMENT CONTRACT COSTS, PRICING & ACCOUNTING REPORT

Transcription

1 Reprinted with permission from Government Contract Costs, Pricing & Accounting Report, Volume 10, Issue 1, K2015 Thomson Reuters. Further reproduction without permission of the publisher is prohibited. For additional information about this publication, please visit GOVERNMENT CONTRACT COSTS, PRICING & ACCOUNTING REPORT JANUARY 2015 VOLUME 10 ISSUE 1 1 Whose Burden Is It, Anyway?: Implications Of The Federal Circuit Determination That The CDA Statute Of Limitations Is Nonjurisdictional Richard C. Johnson and Ashley N. Barbera Amen 1 In a surprising decision, the U.S. Court of Appeals for the Federal Circuit ruled in Sikorsky Aircraft Corporation v. United States 2 that the Contract Disputes Act's six-year statute of limitations, set forth at 41 USCA 7103(a)(4)(A), is not jurisdictional. 3 In so doing, the Circuit overturned a number of its own prior decisions stating precisely the opposite. 4 Sikorsky involved a Government claim for approximately $80 million arising from the contractor's alleged noncompliance with Cost Accounting Standard 418. The Government's claim and the ensuing litigation were factually and legally complex, and resulted in six written decisions issued by Judge Lettow of the U.S. Court of Federal Claims. 5 Two of these decisions, Sikorsky II and Sikorsky V, addressed the timeliness of the Government's claim. 6 In Sikorsky II, the COFC rejected the Government's pro ered standard for accrual of CAS noncompliance claims and found that there was a genuine dispute of material fact as to when the government was on notice of Sikorsky's alleged CAS violation, including the necessary element that the CAS noncompliance was material. 7 In Sikorsky V, after a ve-day trial on statute of limitations and CAS noncompliance issues, the COFC ruled that the Government's claim was timely, but that Sikorsky's accounting practice did not violate CAS The Government appealed the trial court's CAS 418 decision to the Federal Circuit. Sikorsky crossappealed the court's nding that the Government's claim was timely, arguing in part that the lower court erred in treating the statute of limitations issue as an a rmative defense for which Sikorsky bore the burden of proof. 9 Sikorsky argued that the CDA statute of limitations is jurisdictional, and thus the Government, as the proponent of the court's jurisdiction, bore the burden of proving that its claim was timely. 10 In response, the Government defended the lower court's determination that the claim was timely, but challenged certain facets of the court's analysis. 11 Most signi cantly, the Government argued that the trial court had applied the incorrect legal standard for determining accrual of a CAS noncompliance claim. 12 The Federal Circuit held that the CDA statute of limitations is not a jurisdictional requirement, despite its numerous prior decisions holding that the requirement is jurisdictional. 13 The Circuit explained that its earlier decisions were e ectively overruled by the U.S. Supreme Court's 2013 decision in Sebelius v. Auburn Regional Medical Center, described as the latest in a series of Supreme Court opinions that have articulated 1 Richard C. Johnson is a Member and Ashley N. Barbera Amen is an Associate at Smith Pachter McWhorter PLC.

2 a more stringent test for determining when statutory time limits are jurisdictional. 14 The Court looked to Auburn Regional s readily administrable bright line' rule, under which the inquiry is whether Congress has clearly stated that the rule is jurisdictional; absent such a clear statement, [the Court has] cautioned [that] courts should treat the restriction as nonjurisdictional in character.' 15 After examining the language and context of the CDA statute of limitations, the Federal Circuit held that 7103 does not have any special characteristic that would warrant making an exception to the general rule that ling deadlines are not jurisdictional. 16 The Circuit's ruling in this regard has several implications for the adjudication of future contractor and Government claims. First, the relegation of the CDA statute of limitations to the role of a rmative defense will result in the burden of proof resting with the party raising the defense, rather than with the proponent of a board or court's jurisdiction. Second, the treatment of the CDA limitations period as an af- rmative defense may raise Maropakis 17 implications and require contractors seeking to use the defense to rst submit to the contracting o cer a claim asserting that the Government's claim was untimely. Finally, because the Court declined to discuss the merits of the underlying statute of limitations question, the appropriate standard for accrual of Government CAS noncompliance claims remains clouded. Burden of Proof Prior to Sikorsky, most published decisions placed the burden of proving that a claim was timely on the proponent of the court or board's jurisdiction. Thus, the party that submitted a claim had the burden of proving that its claim was timely. As the ASBCA explained in Raytheon Missile Systems, [b]y advocating in response to Raytheon's motion that its decision is valid the government is e ectively the proponent of our jurisdiction and therefore bears the burden of proving it under these circumstances. 18 In contrast, however, the trial court in Sikorsky treated the statute of limitations argument as an a rmative defense for which Sikorsky bore the burden of proof. 19 One of Sikorsky's arguments on appeal was that the lower court had erred in its application of the burden of proof, and that the standard from Raytheon Missile Systems and similar cases should have been applied. 20 In holding that the CDA statute of limitations is not jurisdictional, the Federal Circuit e ectively relegated the limitations argument to the role of an a rmative defense. [T]he party raising an a rmative defense bears the burden of proof. 21 Accordingly, in future litigation, the party asserting that a claim is untimely will bear the burden of proving that accrual occurred more than six years before the claim was submitted. Maropakis Implications Additionally, the restriction of the CDA statute of limitations to the role of an a rmative defense raises Maropakis questions. In Maropakis, the Federal Circuit held that a contractor seeking an adjustment of contract terms must meet the jurisdictional requirements and procedural prerequisites of the CDA, whether asserting the claim against the government as an a rmative claim or as a defense to a government action. 22 If this requirement were held to apply to a CDA statute of limitations defense, a contractor wishing to challenge a Government claim as untimely would be required to submit an independent claim to the CO asserting the untimeliness of the Government's claim, and await denial of that claim prior to proceeding further with the defense in its principal action. While such a result appears absurd on its face, contractors seeking to avoid needless procedural obstacles to having their claims heard must necessarily take it into account. Indeed, the illogical procedural contortions required by this approach were aptly explained by the COFC in Sikorsky I: Approximately seven months after Sikorsky led its complaint, on June 17, 2010, the Federal Circuit issued its decision in Maropakis, 609 F.3d In light of Maropakis, out of an abundance of caution, Sikorsky led a second claim with its contracting o cer reiterating the same a rmative defenses found in its complaint in this court... The contracting o cer stated that he lacked authority to act on this second claim because of the related litigation in this court... Sikorsky considered the contracting o cer's response a denial of its claim and led a second complaint in this court addressing this response by asserting its a rmative de- 2 K 2015 Thomson Reuters

3 fenses anew... The court consolidated the two cases one month later. 23 The COFC denied the Government's motion to dismiss the second complaint, explaining that Sikorsky need not be put to the Hobson's choice of preserving its a rmative defenses only through its original complaint or not at all. 24 Certainly, the Federal Circuit's holding in Maropakis should not apply to the statute of limitations a rmative defense. The holding in Maropakis, by its own terms, applies only to contractor defenses seeking an adjustment of contract terms. 25 Several court and board decisions have used this language to narrow the scope of Maropakis. As Judge Lettow explained in Sikorsky I, Maropakis is distinguishable from the instant case... Maropakis holding only extends to counterclaim defenses that seek contract modi cation... The Maropakis plainti sought an extension of time, which is typically considered an equitable adjustment and resolved under doctrines concerning contractual changes. By contrast, Sikorsky's a rmative defenses are traditional common law defenses that are independent of the means by which a party seeks equitable adjustment to a government contract. 26 Similarly, in AFSA International Construction Industry and Trade, Inc., the ASBCA held that the contractor's defense that the government waived both the completion dates and its right to collect liquidated damages does not seek an adjustment or modi cation of the contract terms; it simply maintains the government waived rights already granted by the contract. Nothing in Maropakis requires the submittal of a CDA claim before such a defense can be advanced. 27 While these decisions narrowing the scope of Maropakis are encouraging, they are not binding on future courts and boards. Accordingly, until the Federal Circuit clari es the holding in Maropakis or Congress amends the CDA, 28 a conservative approach is the only completely safe alternative. The Standard for Accrual of CAS Noncompliance Claims Remains Unresolved Finally, the Federal Circuit's determination that the CDA statute of limitations is not jurisdictional allowed K 2015 Thomson Reuters the court to avoid the underlying question of when Government claims for CAS noncompliance accrue. Typically, decisions involving CAS noncompliance claims have applied the traditional standard for determining claim accrual, established in Gray Personnel, Inc., of examin[ing] the legal basis of the claim. 29 Thus, the ASBCA held in Lockheed Martin Corp. that a Government claim based on a contractor's alleged CAS noncompliance accrues when the Government has actual or constructive knowledge of the government's payment of increased costs to appellant under its government contracts, resulting from alleged CAS noncompliance. 30 The Government in Sikorsky, however, set forth a unique argument that had not been considered in prior CAS noncompliance cases. 31 Relying on the Supreme Court's 1967 decision in Crown Coat Front Co. v. United States, 32 the Government asserted that a claim under a government contract does not accrue until the completion of administrative proceedings contemplated and required by the provisions of the contract.' 33 Accordingly, the Government argued that the corporate administrative CO had to follow the contract procedures set forth in Federal Acquisition Regulation before the contract would permit assertion of the claim. These procedures were not completed, and the Government's right to assert a claim did not accrue, until the Government issued a nal determination of CAS noncompliance and directed Sikorsky to submit a cost-impact proposal by Nov. 28, 2008; and Sikorsky failed to meet this deadline. The COFC rejected this argument, nding that Crown Coat had been superseded by the CDA, which enacted a regime that bears little resemblance to the hodgepodge of overlapping, confusing, and often con icting procedures and remedies' at issue in Crown Coat. 34 Further, nothing in the clauses set forth at FAR serves to delay accrual of a Government claim. 35 The court also noted that the Government's argument would allow the Government to delay the statute of limitations inde nitely simply by refraining from issuing a determination of noncompliance or from requesting a cost impact. This court cannot, however, permit a single party to postpone unilat- 3

4 erally and inde nitely the running of the statute of limitations.' 36 Accordingly, the COFC applied the traditional accrual standard, examining when the Government knew or should have known of the alleged CAS noncompliance. 37 On appeal, the Government challenged the accrual standard applied by the trial court. Asserting that CAS claims are special, the Government reiterated its argument that no CAS non-compliance claim accrues until mandatory administrative negotiations [those established by FAR pt. 30 and the related FAR clauses] concerning a price adjustment have commenced, and have reached an impasse. 38 The Government also reasserted that these mandatory procedures constitute events necessary to permit assertion of a CAS noncompliance claim under the FAR de nition of accrual. 39 Because the Federal Circuit a rmed the trial court on the merits of the CAS 418 noncompliance issue, it declined to consider the appropriate standard of accrual for a CAS noncompliance claim. As a result, there may remain some lingering issue as to what accrual standard should govern such claims. While the existing trial-level case law on the subject applies the traditional accrual standard, 40 in the absence of an appellate decision on the subject, the Government will likely continue to argue that CAS noncompliance claims do not accrue until the completion of mandatory procedures under FAR Given the massive audit backlog at the Defense Contract Audit Agency, there is a powerful incentive for the Government to seek out ways e ectively to vitiate the force of the six-year limitations period, both in the CAS arena and elsewhere. 41 Conclusion The Federal Circuit's decision in Sikorsky will likely reverberate through lower court and board decisions for some time to come. Contrary to most existing case law, the burden for proving that a claim is barred by the CDA statute of limitations will now rest with the party asserting timeliness as an a rmative defense. Further, until the Federal Circuit clari es its holding in Maropakis, a prudent contractor should adopt a conservative approach and submit an a rmative claim to the CO whenever it intends to assert that a Government claim is time-barred. Finally, the Government will likely continue to argue that CAS noncompliance claims do not accrue until the completion of mandatory procedures under FAR ENDNOTES: 2 Sikorsky Aircraft Corp. v. U.S., No , -5099, 2014 WL (Fed. Cir. Dec. 10, 2014). 3 Section 7103(a)(4)(A) requires that [e]ach claim by a contractor against the Federal Government relating to a contract and each claim by the Federal Government against a contractor relating to a contract shall be submitted within 6 years after the accrual of the claim. A claim accrues when all events, that x the alleged liability of either the Government or the contractor and permit assertion of the claim, were known or should have been known. For liability to be xed, some injury must have occurred. However, monetary damages need not have been incurred. FAR See, e.g., Sys. Dev. Corp. v. McHugh, 658 F.3d 1341, 1347 (Fed. Cir. 2011) ( Contractor compliance with [the six-year] statutory time limit on the presentment of a claim to a CO is a jurisdictional prerequisite for any subsequent appeal of the CO's decision on that claim ); Arctic Slope Native Assoc., Ltd. v. Sebelius, 583 F.3d 785, 793 ( subject to any applicable tolling of the statutory time period, the timely submission of a claim to a contracting o cer is a necessary predicate to the exercise of jurisdiction by a court or a board of contract appeals over a contract dispute governed by the CDA ). 5 Sikorsky Aircraft Corp. v. U.S., 102 Fed. Cl. 38 (2011) (Sikorsky I); Sikorsky Aircraft Corp. v. U.S., 105 Fed. Cl. 657 (2012) (Sikorsky II); Sikorsky Aircraft Corp. v. U.S., 106 Fed. Cl. 571 (2012) (Sikorsky III); Sikorsky Aircraft Corp. v. U.S., 2012 WL (Fed. Cl. Sept. 25, 2012) (Sikorsky IV); Sikorsky Aircraft Corp. v. U.S., 110 Fed. Cl. 210 (2013) (Sikorsky V); and Sikorsky Aircraft Corp. v. U.S., 112 Fed. Cl. 313 (2013) (Sikorsky VI). 6 Sikorsky's corporate administrative contracting o cer issued a CO's nal decision asserting the CAS noncompliance claim on Dec. 11, Accordingly, for the Government's claim to be timely, the claim must have accrued no earlier than Dec. 11, Sikorsky II, 105 Fed. Cl at Sikorsky V, 110 Fed. Cl. at 223, Corrected Brief of Plainti -Cross Appellant at 4 K 2015 Thomson Reuters

5 62 64, Sikorsky Aircraft Corp. v. U.S., No , (Fed. Cir. Nov. 7, 2013). 10 Id. 11 Reply Brief for Defendant-Appellant at 42 60, Sikorsky Aircraft Corp. v. U.S., No , (Fed. Cir. Feb. 10, 2014). 12 Id. at See supra, note Sikorsky, 2014 WL , at *4 (citing Sebelius v. Auburn Reg'l Med. Ctr., 133 S. Ct. 817 (2013)). 15 Id. (quoting Auburn Regional, 133 S. Ct. at 824). 16 Id. at *5. 17 M. Maropakis Carpentry, Inc. v. U.S., 609 F.3d 1323 (Fed. Cir. 2010). 18 Raytheon Missile Sys., ASBCA No , 13 BCA 35, 241, at 173,016; see also The Boeing Co., ASBCA No , 2014 WL (Nov. 6, 2014) ( The government, as the proponent of the Board's jurisdiction, bears the burden of establishing subject matter jurisdiction by a preponderance of the evidence. ); Hanley Indus., Inc., ASBCA No , 14-1 BCA 35,500 ( Timely submission of a claim is a predicate to the Board's exercise of jurisdiction under the CDA... Appellant, as the proponent of this Board's jurisdiction, bears the burden of establishing subject matter jurisdiction by a preponderance of the evidence ). 19 Sikorsky V, 110 Fed. Cl. at 220 ( Sikorsky contends the government's claim is barred by the sixyear statute of limitations set forth in the CDA... Sikorsky carries the burden of proving the elements of this a rmative defense... and must establish the defense by a preponderance of the evidence ). 20 Corrected Brief of Plainti -Cross Appellant at 63 64, Sikorsky Aircraft Corp. v. U.S., No , (Fed. Cir. Nov. 7, 2013). 21 S.A.S. Bianchi Ugo fu Gabbriello, ASBCA No , 05-2 BCA 33089, at 164,024 (citing Bridgestone/Firestone Research, Inc. v. Automobile Club de L'Ouest de la France, 245 F.3d 1359, 1361 (Fed. Cir. 2001)). 22 Maropakis, 609 F.3d at Sikorsky I, 102 Fed. Cl. at Id. at Maropakis, 609 F.3d at Sikorsky I, 102 Fed. Cl. at 48 n ASFA Int'l Constr. Indus. & Trade, Inc., ASBCA No , 14-1 BCA 35,736, 2014 WL See Schooner and Kovacs, A rmatively Inef- cient Jurisprudence?: Confusing Contractors' Rights to Raise A rmative Defenses with Sovereign Immunity, 21 Fed. Circuit B.J 685, 723 (2012) (proposing that the CDA be amended to state that A contractor need not submit a claim to raise an a rmative defense to a government claim in an appeal to an agency board of contract appeals or in litigation in a Federal court ). 29 See Lockheed Martin Corp., ASBCA No , 12-1 BCA 35017, at 172,065 (citing Gray Pers., Inc., ASBCA No , 06-2 BCA 33,378, at 165,475); Raytheon Co., ASBCA No , 13 BCA 35,209, at 172,751 (same); Raytheon Missile Sys., ASBCA No , 13 BCA 35,241, at 173,017 (same). 30 Lockheed Martin Corp., ASBCA No , 12-1 BCA at 172, See Sikorsky II, 105 Fed. Cl. at 668 ( While other recent cases have held that a government CAS claim accrues directly and straightforwardly when the government should have known of its potential claim, none of these cases addressed the government's present argument ) U.S. 503 (1967). 33 Sikorsky II, 105 Fed. Cl. at 668 (citing Crown Coat, 386 U.S. at 511). 34 Id. at Id. at Id. at Id. at 672. The court also explained that [f]or a CAS 418 noncompliance claim to accrue, two conditions must be met. First, there must be a violation of CAS 418, which requires both that an indirect cost pool of a contractor contain costs that do not have the same or a similar bene cial or causal relationship to cost objectives' and that, if the costs were allocated separately, the resulting allocation would be materially di erent.' Second, the government must have actual or constructive notice of the CAS 418 violation. Id. (internal citations omitted). 38 Reply Brief for Defendant-Appellant at 42, Sikorsky Aircraft Corp. v. U.S., No C, C (Fed. Cir. March 6, 2014). 39 Id. at See supra n. 27; Sikorsky II, 105 Fed. Cl. at E.g., nal indirect cost negotiations and settlements. K 2015 Thomson Reuters 5