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Friday, July 27, 2012

Rocket Science: Boeing Sues Pentagon

Pentagon_logoYour tax dollars at work.  Here's the story from the Wall Street Journal:

Six years after the Pentagon fostered consolidation of its largest rocket makers, Boeing Co. now claims Air Force officials reneged on promises to reimburse the company for hundreds of millions of dollars in development expenses.

Accusing Defense Department officials of violating basic principles of "good faith, fair dealing and cooperation," Boeing is pursuing a federal lawsuit seeking reimbursement of more than $380 million the company spent on rocket development years before it formed a joint venture with Lockheed Martin Corp.

The Pentagon encouraged its two largest rocket contractors, each struggling to recoup major investments in next generation boosters, to create a joint venture, promising to reimburse certain Boeing expenditures that predated the venture. Then, the lawsuit alleges, amid eroding commercial orders and rising launch costs, the Pentagon retroactively decided those commitments weren't binding.

The scuffle highlights the challenges of trying to control escalating costs of launching U.S. defense and spy satellites amid anticipated leaner budgets. Some military satellite launches cost around $200 million, substantially more than the joint venture initially was projected to charge.

The suit, filed last month in the U.S. Court of Federal Claims in Washington, D.C., alleges that Pentagon brass and high-ranking Air Force program managers reneged on assurances that Boeing would be able to recoup investments made prior to 2006 on the Delta IV rocket, the U.S. military's most powerful launcher. Military contractors rarely suggest Pentagon officials tricked them.

The courtroom fight comes after years of quiet disputes and sometimes public clashes over the issue, including a 2008 Senate committee hearing that raised questions about Boeing's earlier financial practices.

By squaring off against its biggest military customer, Chicago-based Boeing is spotlighting arcane legal issues that entail significant financial and public-perception risks for both sides. The suit comes amid heightened Pentagon worries that current satellite and rocket budgets won't fit into slimmed-down Pentagon spending plans.

According to Boeing, Pentagon officials have contended those earlier agreements aren't legally binding. Boeing has said that if its arguments fail, it could result in a loss attributed to the venture and a payment of "up to $317 million" to the joint venture.

Spokesmen for the Air Force and the Justice Department declined comment on the litigation. A Boeing spokesman said "we negotiated in good faith," adding that the original reimbursement terms "are valid and we hope this gets resolved." But he declined to elaborate on specific points raised in the suit.

* * *

The suit alleges that Boeing initially agreed to modify its Air Force contracts and then opted to create the joint venture, which was championed by the Pentagon, based on commitments that it would be able to gradually recover expenditures it made between 1998 and 2006.

The joint venture is in the running to launch manned capsules for the National Aeronautics and Space Administration later in this decade.

The consolidation was considered essential because it allowed both financially struggling rocket systems to stay in production in order to provide the Pentagon assured access to space. The companies haven't disclosed their total losses on the two programs.

Boeing and Lockheed Martin together spent several billion dollars to develop the rockets starting in the mid-1990s, with the Pentagon contributing about $500 million in seed money to each program. But as costs soared and the outlook for commercial launches eroded by 2006, it became clear that they couldn't recoup all of those investments. A 50-50 joint venture was created to reduce overhead while keeping both rockets in production.

Boeing's earlier expenditures became a major topic of negotiation as early as 2005. In the suit, Boeing stresses that it "clearly and repeatedly conditioned its willingness" to follow the Pentagon's lead based on the government's pledges to reimburse the company's investments in hardware, personnel, program management and certain fixed costs.

In the court filing, Boeing said its "ability to recover its inventoried costs was a precondition" to continued participation in the rocket program.

But Boeing argues that after starting the reimbursement process, the Defense Department in 2008 reversed course and turned down all subsequent reimbursement requests.

The lawsuit, which also lists the joint venture as a plaintiff, suggests the change of heart was prompted by a Pentagon inspector general's review. An Air Force contracting officer ordered payments suspended in the fall of 2008, the day after the inspector general formally recommended such action.

If I am able to obtain a copy of the complaint, I will post it. I am interested to see the "arcane legal issues" that Boeing "spotlights."  In the interim, some of the article comments over at the WSJ are actually worth reading.

UPDATE: Here's the complaint:  Download BoeingPentagonComplaint.

[Meredith R. Miller]

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