No. 99-1258
In the Supreme Court of the United States
MCDONNELL DOUGLAS CORPORATION AND
GENERAL DYNAMICS CORPORATION, PETITIONERS
v.
UNITED STATES OF AMERICA
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE FEDERAL CIRCUIT
BRIEF FOR THE UNITED STATES IN OPPOSITION
SETH P. WAXMAN
Solicitor General
Counsel of Record
WILLIAM B. SCHULTZ
Acting Assistant Attorney
General
MARK B. STERN
THOMAS M. BONDY
Attorneys
Department of Justice
Washington, D.C. 20530-0001
(202) 514-2217
STEPHEN W. PRESTON
General Counsel
Department of the Navy
Washington, D.C. 20350-0001
QUESTION PRESENTED
Whether the court of appeals properly reversed and remanded for a trial
on the issue of the contractors' default, where the trial court awarded
government contractors a judgment of $1.2 billion without considering whether
they were in default of the contract.
In the Supreme Court of the United States
No. 99-1258
MCDONNELL DOUGLAS CORPORATION AND
GENERAL DYNAMICS CORPORATION, PETITIONERS
v.
UNITED STATES OF AMERICA
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE FEDERAL CIRCUIT
BRIEF FOR THE UNITED STATES IN OPPOSITION
OPINIONS BELOW
The opinion of the court of appeals (Pet. App. 1a-27a) is reported at 182
F.3d 1319. The opinion of the Court of Federal Claims (Pet. App. 28a-72a)
is reported at 35 Fed. Cl. 358.
JURISDICTION
The judgment of the court of appeals was entered on July 1, 1999. A petition
for rehearing was denied on October 29, 1999 (Pet. App. 73a-74a). The petition
for a writ of certiorari was filed on January 27, 2000. The jurisdiction
of this Court is invoked under 28 U.S.C. 1254(1).
STATEMENT
1. In January 1988, a team composed of petitioners McDonnell Douglas Corporation
and General Dynamics Corporation entered into a contract with the Navy to
design and build the A-12 Avenger, a new carrier-based attack aircraft employing
low-observable (stealth) technology. See Pet. App. 1a-2a. The contract was
a fixed-price incentive contract which provided that petitioners would design
and build eight Full Scale Engineering Development aircraft for a ceiling
price of $4,777,330,294. Id. at 2a. Delivery of the first aircraft was to
take place in June 1990, with subsequent deliveries to be made at specified
times from July 1990 to January 1991. Ibid.
From early on, petitioners encountered difficulty in designing and building
an aircraft that would meet critical contract specifications within the
negotiated schedule. Pet. App. 3a. In June 1990, petitioners failed to deliver
the first aircraft as required under the contract, and they informed the
government that the estimated cost of performing under the contract would
substantially exceed the contract ceiling price. Ibid. Petitioners stated
at that time that "the A-12 contractual schedule is not achievable
and needs to be changed," and they asserted that the aircraft performance
specifications had to be "modif[ied]." C.A. App. 15,616.1
In August 1990, after unsuccessfully attempting to reach agreement with
petitioners on an extended date for delivery of the first aircraft, the
Navy unilaterally modified the contract to extend that delivery date to
December 31, 1991. Pet. App. 3a. During the ensuing months, the Navy and
the Department of Defense engaged in a comprehensive review of the issues
arising from the cost, schedule, and performance failures associated with
the program. See C.A. App. 13,388-13,391; Pet. App. 4a. In November 1990,
petitioners submitted a formal proposal to restructure the contract. Pet.
App. 4a. Petitioners emphasized that, in their view, development and production
of the A-12 "under the terms of the existing contractual arrangement
* * * is not possible, or equitable, or authorized by law." C.A. App.
16,334A. At the same time, petitioners commenced efforts to obtain assistance
under Pub. L. No. 85-804, 50 U.S.C. 1431, which authorizes the Secretary
of Defense to modify defense contracts when to do so "would facilitate
the national defense." See C.A. App. 16,329, 18,217-18,226.
On December 17, 1991, the Navy issued a cure notice informing petitioners
that their performance under the contract was unsatisfactory. Pet. App.
5a. The Navy explained that petitioners had failed to fabricate sufficient
parts to meet the contract schedule. Ibid. In addition, the Navy stated
that petitioners' "failure to meet specification requirements, such
as aircraft weight, jeopardizes the carrier suitability of your design."
C.A. App. 16,524. Because those conditions were "endangering performance
of [the] contract," the Navy informed petitioners that it might terminate
the contract for default unless those conditions were cured by January 2,
1991. Pet. App. 5a.
In meetings with the government during the next two weeks, petitioners adhered
to the position that they could not build the A-12 for the agreed-upon price,
under the agreed-upon schedule, and to the agreed-upon specifications. See
C.A. App. 16,533 (contracting officer's minutes of Dec. 18 meeting); id.
at 16,548- 16,549, 16,554-16,555 (minutes of Dec. 21 meeting); id. at 18,186
(minutes of Jan. 2 meeting); Pet. App. 5a-6a. On January 2, 1991, in their
formal reply to the government's cure notice, petitioners stated that they
would "not meet delivery schedules or certain specifications of the
original contract, or the revised FSD delivery schedule." Id. at 6a.
Petitioners asserted as well that compliance with the Navy's demand to cure
the schedule, weight, and other conditions was "unachievable."
C.A. App. 18,177. Petitioners proposed to have the government restructure
the contract under Pub. L. No. 85-804 as a cost reimbursement fixed-loss
contract, and they agreed to absorb a fixed loss of $1.5 billion. Pet. App.
6a.
On Saturday, January 5, 1991, Secretary of Defense Cheney determined that
he would not authorize relief from the contract under Pub. L. No. 85-804.
Pet. App. 6a. As he later explained, "no one could tell me how much
the program [would] cost even just through the full-scale development phase
or when [the aircraft] would be available. Data that had been presented
at one point a few months ago turned out to be invalid and inaccurate."
Hearings on Authorization and Oversight of National Defense Authorization
Act For FY 1992 and 1993 Before the House Comm. on Armed Services, 102d
Cong., 1st Sess. 60 (1991). The Secretary's decision was communicated to
the Navy's contracting officer, Rear Admiral William R. Morris, by Under
Secretary of Defense for Acquisition Donald J. Yockey. See Pet. App. 6a-7a.
The Under Secretary was aware that the Navy was scheduled to commit $553
million under the contract on January 7, 1991. Id. at 6a. Under Secretary
Yockey informed Admiral Morris that, in light of the Secretary's decision,
no further funds should be obligated. Id. at 7a.
On January 7, 1991, Admiral Morris issued a letter terminating the A-12
contract for default. Pet. App. 7a. The termination letter explained that
the action was based on the contractors' inability "to complete the
design, development, fabrication, assembly and test of the A-12 aircraft
within the contract schedule," as well as their "inability to
deliver an aircraft that meets contract requirements," including the
"weight guaranty contained within the contract specification."
C.A. App. 18,297. The same day, Admiral Morris prepared a termination memorandum
for the file, further explaining that the contractors had demonstrated "an
inability or unwillingness * * * to meet the requirements of the contract."
Id. at 18,303. The memorandum concluded that "the team's failure to
make progress and to deliver an aircraft meeting required [cost, performance,
and schedule specifications] has placed the entire program in jeopardy;
and the contractors have offered no adequate excuse for these failures."
Id. at 18,305. Shortly thereafter, the Navy issued a formal demand for the
return of unliquidated progress payments totaling $1.35 billion. Pet. App.
7a.
2. In June 1991, petitioners filed the present action in the Claims Court
(now the Court of Federal Claims (CFC)) challenging the government's default
termination on a number of grounds. Pet. App. 7a. The complaint requested
(inter alia) that the court "convert the government's termination for
default into a termination for convenience." Ibid.2 The CFC eventually
focused on Count XVII of the complaint, which claimed that the government's
termination of the contract for default was improper because the actions
of the Department of Defense had deprived the contracting officer of the
ability to make an "independent decision" regarding the termination.
C.A. App. 68,460. The court held a trial on Count XVII in September 1993.
The court made clear at the outset that the purpose of the trial was not
to consider "whether there was sufficient evidence to justify a legitimate
decision to terminate this contract for default," but solely to determine
"whether improper factors [led] to the decision such that the decision
itself was made for a[n] illegitimate reason." Id. at 74.
In December 1994, the CFC issued a brief order vacating the default termination.
See Pet. App. 29a. In April 1996, the court issued findings of fact and
conclusions of law in support of its decision to convert the government's
termination for default to a termination for convenience. Id. at 28a-72a.3
The court acknowledged that petitioners had not met the June 1990 delivery
date for the first plane, and had informed the Secretary of Defense that
they "were having schedule and cost problems that would not allow them
to perform under the terms of the contract." Id. at 33a. The court
also found that Admiral Morris, the contracting officer, had "based
the termination on the fault of the contractors because he did not believe
that the Navy bore any responsibility for the contractors' perceived inability
to achieve the contract specifications or deliver the aircraft on schedule,"
and because a termination of the contract for convenience "would result
in a windfall to the contractors." Id. at 47a.
Relying principally on the decision of the United States Court of Claims
(a predecessor to the Federal Circuit) in Schlesinger v. United States,
390 F.2d 702 (1968), the CFC nevertheless concluded that the default termination
was improper because it was not the product of "reasoned discretion."
Pet. App. 51a. The court found that Secretary Cheney's decision not to grant
relief under Pub. L. No. 85-804, which led to the termination of the A-12
program, was at odds with the Navy's inclination to continue the contract
despite petitioners' failings. Id. at 52a-54a. On that basis, the court
concluded that "[t]he A-12 contract was not terminated because of contractor
default," but "because the Office of the Secretary of Defense
withdrew support and funding from the A-12." Id. at 72a.
After converting the government's termination for default to a termination
for convenience, the CFC held further proceedings on the question of damages
and ultimately entered judgment for petitioners in the amount of $3,877,767,376.
Pet. App. 2a. Because petitioners had already received progress payments
of nearly $2.7 billion, the net judgment awarded by the trial court was
approximately $1.2 billion, plus interest. Id. at 8a.
3. The court of appeals reversed and remanded for a trial on the question
whether petitioners were in default of the contract. See Pet. App. 1a-27a.
The court ruled that the CFC had "erred by vacating the termination
for default without first determining whether a default existed." Id.
at 18a. The court noted that on remand the government will bear the burden
of proof with respect to the question whether termination for default was
justified, and that "if the government is not able to make this showing,
then the default termination was invalid and [petitioners] would be entitled
to a suitable recovery." Id. at 19a.
The court of appeals concluded that Schlesinger was inapposite. It explained
that "[t]he illegality in Schlesinger stemmed from the Navy's reliance
on contractor default as a pretext to terminate its relationship with the
contractor, independent of the state of actual performance under the contract."
Pet. App. 11a. In the instant case, by contrast, the court of appeals found
that "the record demonstrates that the government properly terminated
the A-12 program [and contract] for reasons related to contract performance."
Id. at 14a. The court concluded that "because the termination for default
was predicated on contract-related issues, it was within the discretion
of the government." Id. at 2a.4
ARGUMENT
The court of appeals' interlocutory ruling is correct and does not conflict
with any decision of this Court or any other court of appeals. Further review
is not warranted.
1. a. Petitioners do not contend that the decision of the court of appeals
is in conflict with any decision of this Court or of any other court of
appeals. Instead, their core contention is that the court of appeals did
not properly apply the rationale of Schlesinger v. United States, 390 F.2d
702 (Ct. Cl. 1968), which is the authority upon which the trial court placed
primary reliance. See Pet. 11; Pet. App. 51a-59a. Petitioners' claim of
an intra-circuit conflict does not satisfy the Court's usual criteria for
the exercise of certiorari jurisdiction. See Wisniewski v. United States,
353 U.S. 901, 902 (1957).
b. The interlocutory nature of the court of appeals' ruling also weighs
against review by this Court at the present time. The court of appeals "remand[ed]
the case to the trial court for a determination of whether the government's
default termination was justified, an issue upon which [the court of appeals]
express[ed] or intimate[d] no view." Pet. App. 2a. Review by this Court
would consequently be premature. See, e.g., Brotherhood of Locomotive Firemen
v. Bangor & Aroostook R.R., 389 U.S. 327, 328 (1967) ("because
the Court of Appeals remanded the case, it is not yet ripe for review by
this Court"); Virginia Military Inst. v. United States, 508 U.S. 946
(1993) (the Court "generally await[s] final judgment in the lower courts
before exercising [its] certiorari jurisdiction") (Scalia, J., respecting
the denial of certiorari).
2. a. The decision of the court of appeals is correct and consistent with
that court's precedent. In Schlesinger, the Navy terminated a contract for
50,000 caps on grounds of default when the contractor sought a limited extension
of a delivery date. See 390 F.2d at 703-706. The court of appeals agreed
that Schlesinger was technically in default at the time of the termination
because he had failed to deliver 15,000 of the caps by a date specified
in the contract. Id. at 706-707. Based on the evidence introduced at trial,
however, the court determined that the Navy had terminated the contract
because the chairman of a congressional subcommittee had sent the Navy a
letter implying that the contract should be canceled for reasons unrelated
to the failure to supply the caps on time. See id. at 705, 708 & n.6.
The Court of Claims held that under those circumstances, the termination
for default should be treated as a termination for convenience. See 390
F.2d at 707-710. The court found that the Navy had not exercised its discretion
to terminate the contract, but had "simply surrendered its power of
choice" in light of congressional pressure. Id. at 708. The court explained
that the contractor's "status of technical default served only as a
useful pretext for the taking of action felt to be necessary on other grounds
unrelated to the plaintiff's performance." Id. at 709.
The holding in Schlesinger has no application here. As the court of appeals
observed, "Schlesinger and its progeny merely stand for the proposition
that a termination for default that is unrelated to contract performance
is arbitrary and capricious, and thus an abuse of the contracting officer's
discretion. This proposition itself is but part of the well established
law governing abuse of discretion by a contracting official." Pet.
App. 13a.5 Petitioners do not and could not plausibly contend that the A-12
contract was terminated for reasons unrelated to performance. Rather, "[t]he
record shows that the government's default termination was not pretextual
or unrelated to Contractors' alleged inability to fulfill their obligations
under the contract." Ibid. Indeed, petitioners' acknowledged inability
to perform triggered the Secretary's review and was the impetus for the
actions taken by the Office of the Secretary of Defense and the contracting
officer. See id. at 3a-7a. Nor were petitioners' failures to satisfy the
contract terms merely "technical" (Schlesinger, 390 F.2d at 709):
petitioners affirmatively declared that they could not meet the contract's
basic cost, schedule, or performance specifications. See Pet. App. 3a-6a.
b. In this Court, petitioners do not contend that the government's termination
of the A-12 contract for default was a "pretext" (Schlesinger,
390 F.2d at 709); nor do they assert that their admitted inability to satisfy
the critical cost, schedule, and performance provisions of the agreement
reflected shortcomings that are "technical" (ibid.) in nature.
Petitioners urge instead that they were deprived of "a reasoned determination
on the merits as to whether a default termination was justified, including
consideration prior to termination of any reasons or excuses for problems
in performance." Pet. 6. Petitioners thus contend that if a contracting
officer fails adequately to consider a contractor's proffered excuses for
non-performance, the government's termination for default may be converted
to a termination for convenience, even if the failures of performance go
to the heart of the contract, and even if the contractor in fact has no
valid excuse for those failures. Petitioners do not identify any provision
of law that would authorize a court to grant such relief on that basis,
nor do they cite any judicial decision that has adopted their legal theory.
In any event, petitioners' claim is factually unsupported. On the day the
contract was terminated, the contracting officer issued a letter, and prepared
a memorandum to the file, setting forth the reasons for the termination.
C.A. App. 18,297, 18,303; see Pet. App. 7a. Contrary to petitioners' suggestions
(see, e.g., Pet. 14), Admiral Morris considered and rejected petitioners'
proffered excuses for their performance failures. As Admiral Morris testified,
he spent "60 to 70 percent of December [1990], through the 7th of January
[1991], working [on] A-12 issues," and took part in "dozens"
of meetings and conversations, C.A. App. 3791, which set out the contractors'
excuses in detail. His termination memorandum concluded that "the contractors
have offered no adequate excuse for [their] failures." Id. at 18,305.6
Indeed, the CFC itself recognized that
Admiral Morris based the termination on the fault of the contractors because
he did not believe that the Navy bore any responsibility for the contractors'
perceived inability to achieve the contract specifications or deliver the
aircraft on schedule. Absent some fault on the part of the Navy, he believed
that he could not terminate for convenience because he believed that action
would result in a windfall to the contractors.
Pet. App. 47a.
c. A court is not, of course, required to accept the contracting officer's
default termination. Indeed, the contracting officer's decision receives
no presumption of correctness in an action challenging a termination of
a government contract for default. See Wilner v. United States, 24 F.3d
1397, 1401-1402 (Fed. Cir. 1994) (en banc). The question in this case is
simply whether that inquiry may be pretermitted altogether, leaving petitioners
in the position they would have occupied had no default occurred. As the
court of appeals in this case correctly held, "the trial court erred
by vacating the termination for default without first determining whether
a default existed." Pet. App. 18a. That holding does not warrant this
Court's review, especially in the present interlocutory posture of this
case.
CONCLUSION
The petition for a writ of certiorari should be denied.
Respectfully submitted.
SETH P. WAXMAN
Solicitor General
WILLIAM B. SCHULTZ
Acting Assistant Attorney
General
MARK B. STERN
THOMAS M. BONDY
Attorneys
STEPHEN W. PRESTON
General Counsel
Department of the Navy
MARCH 2000
1 Petitioners' statements were made in the midst of increasing evidence
of their failure to overcome a wide range of problems in the design and
fabrication of the aircraft. For example, the Navy estimated that the first
plane entering fleet operations would weigh nearly 8,000 pounds-or over
20 percent-more than the empty weight specified in petitioners' best and
final contract offer. See Pet. App. 32a; C.A. App. 27,080. In addition,
petitioners had been unable successfully to fabricate (much less assemble)
the large composite parts necessary to produce the aircraft's inner wing,
and were more than a year behind in completing the avionics software. See
C.A. App. 3402-3404, 3519-3528, 3736-3738, 13,691, 25,906, 26,549-26,550.
2 "The right to terminate a contract when there has been no fault or
breach by the non-governmental party, that is, for the 'convenience' of
the government, appeared as a legal concept after the Civil War, to facilitate
putting a speedy end to war production." Maxima Corp. v. United States,
847 F.2d 1549, 1552 (Fed. Cir. 1988). When the contract is properly terminated
for convenience, the contractor's recovery is limited to "costs incurred,
profit on work done and the costs of preparing the termination settlement
proposal. Recovery of anticipated profit is precluded." Ibid. If the
contractor would have sustained a financial loss in completing the contract,
the contractor's recovery is further reduced by the rate of loss that the
contractor was experiencing. 48 C.F.R. 49.203. Where a contract has been
terminated because of an erroneous determination that the contractor was
in default, the Federal Circuit has recognized that it has the power to
treat the termination as one for the convenience of the government. See
Maxima Corp., 847 F.2d at 1553.
3 During the period between the December 1994 order and the April 1996 opinion,
the CFC repeatedly rejected the government's contention that the termination
for default could not properly be converted to a termination for convenience
without a trial to determine whether petitioners were, in fact, in default.
The court refused to allow the government to file a two-volume proffer detailing
the evidence of the contractors' default. C.A. App. 177, 263. The court
eventually held a trial, in 1995, to consider only the evidence of default
that was concealed from the Navy. But the court stopped those proceedings
in the middle of the government's case, concluding that it had "heard
no credible evidence that the Navy was unaware of critical information at
the time of termination." Id. at 179.
4 The court of appeals noted the government's separate arguments concerning
the trial court's assessment of damages. Pet. App. 19a-20a. It concluded,
however, that in light of its disposition of the liability issue, questions
pertaining to damages were "not ripe for [its] decision" and should
be considered in the first instance by the CFC on remand. Id. at 20a. The
court also rejected the contention raised in petitioners' cross-appeal that
the A-12 contract was not subject to termination for default because it
was funded incrementally. Id. at 21a-26a. Those issues are not raised in
the petition.
5 As the court of appeals correctly noted (Pet. App. 11a-12a), the two other
cases on which petitioners principally rely are in the same mold as Schlesinger
and reflect the same principle. In Darwin Construction Co. v. United States,
811 F.2d 593 (Fed. Cir. 1987), the court held that the government's termination
for default was arbitrary and capricious because the "action was taken
solely to rid the Navy of having to deal with" the contractor. Id.
at 596. The court stated that "[t]he facts of the case before us are
almost identical to the salient facts in Schlesinger, where it was found
that the contractor's status of technical default served only 'as a useful
pretext for taking the action found necessary on other grounds unrelated
to the plaintiff's performance.'" Ibid. (quoting Schlesinger, 390 F.2d
at 709). Similarly in John A. Johnson Contracting Corp. v. United States,
132 F. Supp. 698 (Ct. Cl. 1955), the court held that the government's termination
for default should be treated as a termination for convenience, on the ground
that the contracting officer's "action in terminating the [contract]
for delay did not represent his judgment as to the merits of the case, but
was a device to satisfy what lawyers told him were, or probably were, the
legal requirements of the situation." Id. at 705.
6 Contrary to petitioners' suggestions (see Pet. 11-12, 14), Admiral Morris's
termination memorandum addressed all but one of the factors identified in
the pertinent provision of the Federal Acquisition Regulation (FAR), 48
C.F.R. 49.402-3(f). See C.A. App. 18,302-18,306. The only factor that the
memorandum did not mention-"[t]he urgency of the need for" the
A-12 (see Pet. App. 49a)-was obvious to all, and had in fact been considered.
See C.A. App. 1047, 1070, 1155, 1264, 1274, 1315. See also DCX, Inc. v.
Perry, 79 F.3d 132, 135 (Fed. Cir.) (noting that the FAR "does not
confer rights on a defaulting contractor" and that consideration of
the FAR factors is not a "prerequisite[] to a valid termination"),
cert. denied, 519 U.S. 992 (1996).