Tuesday, February 4, 2014
According to this article from The New York Times, Detroit filed suit on Friday, seeking to invalidate complex transactions that it used to finance its debts. Detroit claims that the contracts at issue were illegal and are thus unenforceable.
The transactions brought in $1.4 billion for the city, but it now claims that they were an unlawful scheme to get around a ceiling on the amount of debt the city could take on and that it thus has no obligation to make payments on the "certificates of participation" issued in connection with the transactions. Detroit is also seeking to cancel some related "interest-rate swaps" with two banks that obligate the city to pay tens of millions of dollars annually to the banks. Just a few weeks ago, Detroit had offered to pay $165 million to get out of the contracts, but the bankruptcy judge rejected that as "too much money." Paying nothing seems like a better deal for the city, if they can find a legal basis to get out of the obligation.
Wednesday, January 29, 2014
This is the second in a series of posts that draw on Michael Dorelli and Kimberly Cohen's recent article in the Indiana Law Review on developments in contracts law in Indiana. This post will discuss State of Indiana Military Department v. Continental Electric Company, which was decided by the Indiana Court of Appeals in 2012.
In 2006, Continental Electric Company (Continental) submitted a bid as a subocontractor on the construction of an avaiation facility at the Gary/Chicago Internaional Airport (see the image at left). Continental's submitted a bid of about $1.8 million to do the electrical work on the project, noting in its bid that $335,000 should be added to its bid under "Alternative 2," which was designated "Diesel Generator." The State of Indiana Military (the State) which had issued the bid hosted a pre-bid meeting at which it sought to clarify that costs relating to Alternative 2 should be included in the base bid, but Continental did not do so, relying on its understanding of the written bid documents. The State provided a written version of its clarification of Alernative 2, but Continental claims that the written version did not reflect what was said at the pre-bid meeting.
The Larson-Danielson Construction Company (Larson) was awarded the project and chose Continental to do its electrical work. Continental began work in October 2006. It dealt only with Larson and there was no contractual relationship between it and the State. Continental billed Larson for an extra $207,000 worth of work associated with Alternative 2.
Continental complained throughout the process that it was entitled to payment for the work done under Alternative 2, but both Larson and the State believed that no extra payment was required, since both interpreted the bid documents as requiring that work associated with Alternative 2 be part of the base bid. Getting no satisfaction from Larson, Continental brought suit against the State, claiming $207,000 in damages for breach of contract or quantum meruit. The trial court found for Continental and the State appealed.
The Court of Appeals reversed. It found that Continental could not bring a breach contract claim against the State because it was not in a contractual relationship with the State. Nor had the State agreed to hear appeals arising out of controversies between Larson and its subcontrators.
The Court then moved on to Continental's unjust enrichment claim. Under Indiana law, four criteria must be met to establish such a claim:
1)Whether the owner impliedly requested the subcontractor to do the work; 2) whether the owner reasonably expected to pay the subcontractor, or the subcontractor reasonably expected to be paid by the owner; 3) whether there was an actual wrong perpetrated by the owner; and 4) whether the owner’s conduct was so active and instrumental that the owner “stepped into the shoes” of the contractor.
The Court concluded that because Larson was paid in full, the trial court erred in finding that the State had retained a benefit for which it did not pay. Basically, the Court agreed with Larson and the State the the bid documents and the clarification established that the costs associated with Alternative 2 were to be included in the base bid. The Court concluded as follows:
In sum, we conclude that Continental Electric had no right to recover against Indiana Military. Continental Electric failed to establish that a measurable benefit was conferred on Indiana Military and that its retention of a benefit without payment would be unjust. Indeed, Indiana Military did not receive a measurable benefit from Continental Electric that it had not already paid for.
All concerned, including Continental Electric, knew long before Continental Electric ever entered into a subcontract with Larson that the wiring in question was part of the base contract with Larson and that Indiana Military would expect Larson to install the wiring between the facility building and the concrete generator pad. Larson 28completed the work, and was fully paid for that work. In short, Indiana Military has not unjustly retained a benefit without payment.
The Court of Appeals set aside the trial court's ruling on quantum meruit and reversed its judgment.
Tuesday, January 7, 2014
We have perviously posted examples of government contracting difficulties relating to technology contracts and websites. Saturday's New York Times featured this op-ed by Georgetown Law Professor David A. Super (pictured), which chronicles technology contracting problems that have disproportionately affected the poor.
Some recent technology contracts gone wrong that did not make the headlines:
- 66,000 Georgia food stamp recipients and about half that many Medicaid recipients had their benefits terminated for failing to respond to renewal notices that, through a contractor's error, had never been sent;
- A Massachusetts contractor deactivated food stamp cards because new ones had been sent without seeking any confirmation that the new ones had been received; and
- A contractor's errors made food stamps unavailable to people in 17 states.
Properly supervised contractors can use technology to improve the delivery of government services. But attention, oversight and willingness to act decisively to remedy fiascoes seem to depend on the wealth and clout of those who are affected. As Obamacare regains its footing, that lesson shouldn’t be forgotten.
Wednesday, December 25, 2013
It seemed unthinkable that the Obama administration could have so badly botched the rollout of the website associated with Obama's signature legislation, the Affordable Care Act (aka Obamacare). However, as The New York Times reported here on Monday, and as we have already discussed here and here, the technological fumble may be a result of broader problems in the structures of government procurement systems which may finally get the attention they deserve because of the high-profile Obamacare rollout fiasco.
To reduce the Times' report to its essence, the process of winning a government contract is very complex and daunting. There are two problemmatic consequences of this structural element of government contracting. First, it is hard for small companies or companies without expertise in the government procurement process to jump through all the hoops associated with that process. Second, when the contracts are both long term and deal with technology, the government in some cases would be better served by working with smaller, more nimble contractors that can innovate and adapt as technology develops. With technology improving at the rate at which it improves, the government cannot afford to get locked into multi-year contracts with entities that are not in a position to adapt as quickly as technology advances. As the Times puts it:
Longstanding laws intended to prevent corruption and conflict of interest often saddle agencies with vendors selected by distant committees and contracts that stretch for years, even as technology changes rapidly. The rules frequently leave the government officials in charge of a project with little choice over their suppliers, little control over the project’s execution and almost no authority to terminate a contract that is failing.
“It may make sense if you are buying pencils or cleaning services,” said David Blumenthal, who during Mr. Obama’s first term led a federal office to promote the adoption of electronic health records. But it does not work “when you have these kinds of incredibly complex, data-driven, nationally important, performance-based procurements.”
Wednesday, December 11, 2013
Congressional Study Finds that Violation of Federal Labor Laws Is No Bar to the Award of Federal Contracts
As reported here in The New York Times, a new congressional study found that the U.S. government continues to enter into contracts with firms that have been assessed heavy penalties for violating fundamental labor laws. According to the report (unfortunately the Times provides no link and I could not find one through a quick Google search), 18 companies that received federal contracts were among the recipients of the 100 largest fines issued by the Occupational Safety and Health Administration. Thirty-two federal contractors were among the leading companies in the amount of back pay owed to employees for wage violations.
The congressional committee that produced the report called for higher standards but did not go so far as to recommend that companies with major violations of labor law be considered ineligible for the award of government contracts.
Thanks to our anonymous tipster (see comments below), we have been able to find the full study. Below is the Executive Summary:
Each year, the United States pays out over $500 billion in taxpayer dollars to private companies for goods and services, much of which is used to pay the salaries of millions of workers. Taken together, companies that receive government contracts employ an estimated 22 percent of the American workforce, approximately 26 million workers.
Some of the nation’s largest federal contractors fail to pay their workers the wages they have earned or provide their employees with safe and healthy working conditions. The analysis found that almost 30 percent of the top violators of federal wage and safety laws are also current federal contractors.
- Eighteen federal contractors were recipients of one of the largest 100 penalties issued by the Occupational Safety and Health Administration (OSHA) of the Department of Labor between 2007 and 2012. Almost half of the total initial penalty dollars assessed for OSHA violations were against companies holding federal contracts in 2012.
- Forty-two American workers died during this period as a result of OSHA violations by companies holding federal contracts in 2012.
- Thirty-two federal contractors received back wage assessments among the largest 100 issued by the Wage and Hour Division of the Department of Labor between 2007 and 2012.
- Thirty-five of these companies violated both wage and safety laws.
- Overall, the 49 federal contractors responsible for large violations of federal labor laws were cited for 1,776 separate violations of these laws and paid $196 million in penalties and assessments. In fiscal year 2012, these same companies were awarded $81 billion in taxpayer dollars.
Federal law is intended to prevent taxpayer dollars from increasing the profits of companies with a record of violating federal law in two ways: by requiring contracting officers to assess a prospective contractor’s responsible compliance with federal law prior to awarding a contract, and by allowing agencies to suspend or debar contractors for certain behavior, including violations of federal law, in order to protect the integrity of taxpayer dollars.
In recent years, the federal government has increasingly used the contracting process to procure employee-based service work such as cleaning, security, and construction. However, a new analysis shows that taxpayer dollars are routinely being paid to companies that are putting the livelihoods and the lives of workers at risk. Many of the most flagrant violators of federal workplace safety and wage laws are also recipients of large federal contracts.
Almost half of the total initial penalty dollars assessed for OSHA violations were against companies holding current federal contracts.Unfortunately, this report demonstrates that the officials responsible for determining if a prospective contractor is a responsible entity prior to awarding a contract lack access to information on labor violations and lack the tools to evaluate the severity or repeated nature of these types of violations.
This is true even though the Clean Contracting Act of 2008 specifically required that a database be established to help agencies evaluate violations of federal law in making a responsibility determination. Some of the many incidents of misconduct that are not currently available to contracting officers in this database include:
- The death of a 46-year-old father of four, who was working as a washroom operator at a Cintas Corporation facility in Tulsa, Oklahoma. He was killed after being swept into an industrial dryer when he attempted to dislodge a clothes jam. The dryer continued to spin with him inside for 20 minutes at over 300 degrees. Cintas received $3.4 million in federal contracts in fiscal year 2012.
- The death of two employees of a Mississippi shipbuilding and ship repair company owned by ST Engineering Limited, who were killed when highly flammable materials being used to prepare a tugboat for painting ignited, leading to an explosion and fire. Findings of the investigation included failure to properly ventilate a confined space and lack of a rescue service available for a confined space. ST Engineering received $1.9 million in federal contracts in fiscal year 2012.
- The deaths of seven workers at an Anacortes, Washington refinery owned by Texas based Tesoro Corporation, who were killed when a heat exchanger ruptured and spewed vapor and liquid that exploded. The workers who died were standing near the area of the rupture specifically to attempt to stop leaks of the volatile, flammable gases in the facility which had not been inspected for 12 years prior to the rupture. Tesoro received $463 million in federal contracts in fiscal year 2012.
The federal government is not required to contract with the private sector. Indeed, many of the functions that private contractors carry out for the government could be done equally well or better by government employees. But, when the government does solicit work from the private sector, it should use taxpayer dollars in a way that promotes compliance with federal law and improves the quality of life for working Americans.
Ensuring that the government contracts with actors who do not engage in serious or repeated violations of federal labor law is one important step to further that goal. Recommendations that will better protect taxpayer dollars and promote compliance with laws that protect the lives and livelihoods of American workers by those who receive taxpayer money include:
- Improvements in the quality and transparency of Department of Labor information regarding violations of federal law.
- Publication of an annual list of federal contractors that were assessed penalties or other sanctions, and as well as additional information concerning contractor compliance with labor law by the Department of Labor.
- Improvement of contracting databases administered by the General Services Administration including increasing public transparency and expanding the amount of misconduct information included in those databases.
- Issuance of an Executive Order requiring contracting officers to consult with, and obtain recommendations from, a designated official at the Department of Labor about violations of federal labor law when making responsibility determinations.
- Issueance of an Executive Order to establish additional tools – beyond the existing responsibility determination and suspension and debarment process – that contracting officers, in consultation with the Department of Labor, can use to ensure that contractors comply with federal labor law.
Alan S. Kaplinsky & Mark J. Levin, Consumer Financial Services Azrbitration: What Does the Future Hold after Concepcion? 8 J. Bus. & Tech. L. 345 (2013)
Nicole F. Munro & Peter L. Cockrell, Drafting Arbitration Agreements: A Practitioner's Guide for Consumer Credit Contracts, 8 J. Bus. & Tech. L. 363 (2013)
Monday, December 2, 2013
According to this report from the Courthouse News Service, California Controller John Chiang is suing SAP Public Services (SAP), a company with which the state of California had contracted for payroll services software (MyCalPAYS) that would assist California in managing payments to its 240,000 employees. After three years of development and eight months of trials, California alleges that SAP still has not managed to get the system to work.
The system was projected to cost California taxpayers just over $100 million, but by the time it was cancelled, it had cost $260 million and never worked right, according to the state. The state claims that MyCalPAYS was tried out on a test goup, and the results were disastrous: overpayments, underpayments, failures to report deposits in retirement accounts, childcare payments and medical contributions. Although the state complained before declaring SAP to be in default, SAP contended that the system was working as designed.
As Courthouse News Service reports, California encounered similar problems when it contracted with software developer Deloitte to manage its statewide judicial case management system.
California, Kathleen Sebelius feels your pain.
Wednesday, November 13, 2013
Jonathan L. Kang, The Effect of the Court of Federal Claims' Decision in Systems Application & Technologies, Inc. v. United States on Contracting Officer Discretion to Take Corrective Action in Response to Protests before the GAO. 42 Pub. Cont. L.J. 585 (2013)
Anthony Niblett, Tracking Inconsistent Judicial Behavior. 34 Int'l Rev. L. & Econ. 9 (2013)
Wednesday, November 6, 2013
Deborah L. Forman, Embryo Disposition, Divorce & Family Law Contracting: A Model for Enforceability, 24 Colum. J. Gender & L. 378 (2013)
Danielle Kie Hart, Revealing Privilege--Why Bother? 42 Wash. U. J.L. & Pol'y 131 (2013)
Bruce M. Kramer, Oil and Gas Leases and Pooling: A Look Back and a Peek Ahead, 45 Tex. Tech. L. Rev. 877 (2013)
Mohsen Manesh, Express Contract Terms and the Implied Contractual Covenant of Delaware Law. 38 Del. J. Corp. L. 1 (2013)
Kyle B. Sill, Drafting Effective Noncompete Clauses and Other Restrictive Covenants: Considerations Ccross the United States, 14 Fla. Coastal L. Rev. 365 (2013)
Wednesday, October 30, 2013
Carol Dougherty Rasnic, Shootout at the ECJ Corral: Management 4, Labor 0; European Labor Dispute Law after Viking Line, 9 S.C. J. Int'l L. & Bus. 353 (2013)
Matthew P. Vafidis, No Sanity Clause: Thoughts on the Bill of Lading Package Limitation, 25 U.S.F. Mar. L.J. 235 (2012-13)
David P. Weber, Restricting the Freedom of Contract: A Fundamental Prohibition, 16 Yale Hum. Rts. & Dev. L.J. 51 (2013)
Monday, September 30, 2013
Yusuf Farran, Executive Director of Facilities and Transportation with the Canutillo Independent School District, claims that he observed employee theft and falsification of time cars. He also claimed that the School District overpaid a contractor, Henry's Cesspool Services (kudos to you Henry for an honest description fo your business!). Farran complained to his supervisors about the contractor's failures to properly dispose of grease-trap waste. He allegedly was told to stop making any more complaints relating to the grease trap.
In March 2009, the School District first suspended and then fired Farran for unrelated reasons. While suspsended and while his termination was pending, Farran contacted the FBI to complain about Henry's Cesspool Services. When his termination was finalized, Farran brought a claim for breach of contract and wrongful termination in violation of Texas's Whistleblower Act.
On August 3oth, the Supreme Court of Texas dismissed Farran's complaint in Canutillo Independent School District v. Farran. "To establish a Whistleblower Act claim, the plaintiff must show that his report to a law enforcement authority caused him to suffer the complained-of adverse personnel action." Unfortunately for Farran, he contacted the FBI after he had already been warned to stop complaining about the grease trap and after he had been suspended and was due to be terminated. Farran bore the burden of showing that, but for the FBI report, the School District would have reversed course and reinstated him, but he could not do so. There was no evidence that the FBI report played a role in his termination.
The Texas Supreme Court also affirmed dismissal of Farran's breach of contract claim for failure to exhaust administrative remedies. Farran thought he did not need to do so because his breach of contract claim related to his Whistleblower act claim.
Wednesday, May 22, 2013
Papers from the American Bar Foundation - The Labor Law Group Conference on The Proposed Restatement of Employment Law
The Proposed Restatement of Employment Law at Midpoint
The Restatement's Supersized Duty of Loyalty Pension
Contingent Loyalty and Restricted Exit: Commentary on the Restatement of Employment Law
Catherine Fisk & Adam Barry
An Excursion Through Strange Terrain: Chapter 6 (Defamation) And 7 (Privacy and Autonomy)
Matthew W. Finkin
What Should The Proposed Restatement of Employment Law Say About Remedies?
Remedies Doctrines in Employment Law: Ready to be Restated, or in Need of Remedial Remedies?
Papers from the Associations of the American Law Schools 2012 Annual Meeting Section of Labor Relations and Employment Law
Introduction: Guaranteeing the Rights of Public Employees
Ann C. McGinley & Kenneth G. Dau-Schmidt
Five Dead in Ohio: Ohio Citizens Overwhelmingly Support Public Employee Collective Bargaining (61 Percent to 39 Percent) in a November 2011 State Referendum Blocking the Implementation of Senate Bill 5
Jeffrey H. Keefe
"Before Wisconsin and Ohio": The Quiet Success of Card-Check Organizing in the Public Sector
Timothy D. Chandler & Rafael Gely
Friday, January 25, 2013
In 2006, the U.S. Department of Health and Human Services (HHS) recieved funds under the federal Trafficking Victims Protection Act (TVPA) and contracted with the United States Conference of Catholic Bishops (the Conference) to provide services to trafficking victims. It did so after issuing a request for proposals (RFP) and receiving submissions only from the Conference and the Salvation Army, both of which are religiously affiliated.
The Conference insisted that the contract provide that neither the Conference nor any of its sub-contracts would use the TVPA funds to counsel or provide abortions or contraceptive services and prescriptions to trafficking victims. The panel that reviewed the RFP's deducted points from the Conference's submission because of that condition, but it still rated the Conference's RFP far more favorably than that of the Salvation Army.
The Conference did not provide any direct services to trafficking victims. Rather, it subcontracted with hundreds of other organizations, which provided services to over 2200 victims over a four-year period. The Conference entered into agreements with its sub-contractors prohibiting them from using TVPA for any purposes relating to contraception or abortion, but the sub-contractors were not prohibited from using their own funds for those purposes.
In 2009, the American Civil Liberties Union of Massachusetts (ACLUM) brought suit alleging that the contract violated the First Amendment's Establishment Clause. The contract expired in 2011, and HHS replaced its program run through the Conferece with a grant program in which the Conference as not involved. The District Court nonetheless granted ACLUM's motion for summary judgment in March 2012, finding that the claim was not moot because the "voluntary cessation" exception to the mootness doctrine applied.
On January 15, 2013, the First Circuit issued its opinion in American Civil Liberites Union of Massachusetts v. United States Conference of Catholic Bishops, and it reversed. It remanded the case to the Distrcit Court for an entry of an order of dismissal because the case is rendered moot by the expiration of the contract at issue. In so doing, the First Circuit noted that the voluntary cessation doctrine has no application where the cessation is unrelated to the litigation. The exception exists to deter strategic behavior in which a party ceases the challenged behavior only to avoid further litigation and may reasonably be expected to resume the behavior once the threat of litigation has subsided. There is no likelihood that a contract will be awarded to the Conference in the foreseeable future, as HHS has locked itself into three-year agreements with other organizations under its new grant program.
As long as our first lady has ba-ba-ba-bangs [relevant "analysis" starts about a minute into the video], it seems unlikely that HHS will be contracting with the Conference and that, it seems, is enough to render ACLUM's challenge moot.
Friday, September 7, 2012
Coming Wednesday, September 12, 2012 at American University's Law School:
A panel discussion featuring:
Laura Dickinson, Oswald Symister Colclough Research Professor of Law, George Washington University. Author, Outsourcing War and Peace: Protecting Public Values in an Era of Privatized Foreign Affairs (Yale Univ. Press 2011)
Capt. Chad Fisher, U.S. Army. Chief, Branch IV, Government Appellate Division, U.S. Army Legal Services Agency; counsel for the United States in Ali.
Lt. Col Peter Kageleiry, Jr., U.S. Army. Senior Appellate Attorney, U.S. Army Defense Appellate Division; counsel for the Defendant-Appellant in Ali.
Steve Vladeck, Professor of Law and Associate Dean for Scholarship, Washington College of Law
On July 18, the highest court in the U.S. military justice system—the circuit-level Article I Court of Appeals for the Armed Forces (“CAAF”)—issued the most significant ruling on the scope of U.S. military jurisdiction in the past 25 years. In its unanimous decision in United States v. Ali, 71 M.J. 256 (2012), CAAF upheld a 2006 amendment to the federal military code that authorizes the trial by court-martial of “persons serving with or accompanying an armed force in the field,” including civilian contractors, during most overseas (and some domestic) military deployments. In so holding, CAAF distinguished a long line of Supreme Court decisions rejecting military jurisdiction over civilians both because the defendant in this case is a non-citizen and because his offense took place during a “contingency operation.” This panel of experts—including the opposing counsel before CAAF in Ali—will debate the merits of the court’s decision and seek to assess its potentially significant implications going forward with regard to contractor liability, the future of military jurisdiction in general, and the power of the military over civilians in particular.
Here's the flyer
Here's the website[JT]
Tuesday, July 31, 2012
On January 2, 2008, Staff Seargant Ryan D. Maseth stepped into a shower in his living quarters at the Radwaniyah Palace Complex (RPC) outside of Baghdad and was killed by electrocution caused by a malfunctioning water pump that was not grounded and faulty electical infrastructure. His estate sued Kellogg, Brown and Root Services, Inc. (KBR), the contractor responsible for maintaining the facilities at RPC. On July 13th, the District Court for the Western District of Pennsylvania dismissed the lawsuit, Harris v. Kellogg Brown & Root Services, Inc., finding that the political question doctrine and the combatant activities exception to the Federal Tort Claims Act (FTCA) barred the court from proceeding with the case any further.
The court had previously denied KBR's initial motion to dismiss on the same grounds, but after further discovery and two Circuit Court decisions that relied on the political question doctrine to dismiss torts claims against military contractors, the court reversed itself. While the court had initially assumed that KBR had discretion under its contracts with the military to make decisions about electrical repairs, it is now persuaded that any possible negligece by KBR cannot be divorced from military determinations.
On the political question doctrine, the court summarized its findings as follows:
[F]urther adjudication of this case will require evaluation of the military’s decision to continue to house soldiers in hardstand buildings with hazardous electrical systems even though the military was aware that the buildings lacked grounding and bonding and the military possessed specific knowledge that such electrical deficiencies had resulted in electrocutions to military personnel, causing injuries and even deaths, prior to the events of this case.
In addition, the court concluded that the combatant activities exception to the FTCA also applied and provided a separate grounds for dismissal. Although that exception does not directly address its applicability to government contractors, courts have extended its protections to such contractors. The tough issue was whether or not KBR's activities had a direct relation to combat activities. The court concluded that they did.
Friday, July 27, 2012
Your 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]
Tuesday, June 26, 2012
Pursuant to the Indian Self-Determination and Education Assistance Act (ISDA), the Secretary of the Interior enters into contracts with Indian tribes. The tribes the provide services that would otherwise be provided by the Federal Government. ISDA requires that the Secretary (pictured) pay "contract support costs" incurred by tribes in connection with the contracts, subject to the availability of appropriations. However, between 1994 and 2001, Congress appropriated funds sufficient to cover only between 77% and 92% of the aggregate contract support costs. It instead paid portions of the contracts on a pro rata basis. The tribes sued for breach of contract prusuant to the Contract Disputes Act.
The issue decided June 18th by the U.S. Supreme Court in Salazar v. Ramah Navajo Chapter was whether the U.S. government must pay those contracts in full when Congress fails to appropriate sufficient funds. The District Court had granted summary judgment to the Government, but the 10th Circuit Court of Appeals reversed, because Congress had made sufficient funds "legally available." Judge Sotomayor, writing for the 5-3 majority, uphled the 10th Circuit.
Just seven years ago, in Cherokee Nation of Oklahoma v. Leivitt, 543 U.S. 631, the Court faced a similar situation and ruled that the Government was not excused from its contractual obligations where Congress has appropriated sufficient funds to pay the tribes but the Indian Health Service, but the agency had decided to allocate the money elsewhere. Here, Congress appropriated sufficient money to Bureau of Indian Affairs (BIA) but that agency had not allocated sufficient funds to pay the contracts at issue here. The Majority also relied on Ferris v. United States, which provides that the Government is responsible to a contractor for the full amount due under a contract even if the agency exhausts is appropriation in the service of other permissible ends.
Chief Justice Roberts, joined by Justices Ginsburg, Breyer and Alito, dissented, noting that the Government's obligation to pay was made expressly contingent on the availability of appropriations and that payments under the contracts were not to exceed a set amount, which will be exceeded as a result of the Majority's ruling, nor can the Secretary be required to reduce funding for aother programs in order to make funds available under the contracts. For the dissenting Justices, ISDA creates a triply whammy that the Majority ignores. It provides that the Government's obligations are (1) subject to the availability of appropriations; (2) not to exceed a set amount; and (3) limited because the Secretary is relieved from any oblgiation to make funds available to one contractor by reducing payments to others.
The Majority responds by noting that this confuses appropriations by Congress, which were adequate to cover all the conracts at issue, and the allocation of those funds by the BIA.
Monday, June 25, 2012
As reported here by the San Jose Mercury News, a Santa Clara County jury has awarded Silicon Valley developer Carl Berg $6.08 million in a breach of contract dispute against the City of San Jose for its failure to enact a timely planning process that would allow up to 5,200 homes to be built in the Evergreen area.
Berg’s suit alleged that city officials let him and other Evergreen property owners to believe for four years that rezoning of their industrial property to residential property would be approved. As a result, the owners agreed to pay the city $8.8 million to conduct a community planning process as part of their development applications. However, in 2006, when Chuck Reed ran for mayor, Reed argued that the council should not approve the rezoning. Reed wanted to preserve the land for potential industrial uses that would generate jobs and taxes for the city. Ultimately, Reed won this argument, and in 2007 San Jose rejected the Evergreen zoning. As reported by mercurynews.com, Berg commented that “there are inherent risks in getting development agreements processed by municipal agencies.” According to Berg “the City of San Jose took the unique approach of creating a contract with us, asking for money up front, in exchange for expediting our applications.” However, according to Berg, the City never even created a process for review of Berg's application, and on that basis the jury found that the City breached its agreement with Berg and thus should refund money paid by him and the other Evergreen property owners
Mayor Reed likened the verdict to buying a car, driving it for a while, then asking to return it for a full refund. Here, the City says it is being asked to return money for many services it already rendered through the Planning Department and consultants. The City plans an appeal.
[JT and Christina Phillips]
Monday, June 4, 2012
Council 31 of the American Federation of State, County and Municipal Employees, AFL-CIO (the Union) represents 40,000 employees in the state of Illinois. It agreed to certain cost-saving measures, including deferred wage increases, in order to help Illinois address significant budget pressures. When Illinois did not emerge from its financial woes, it instituted a wage freeze, repudiating the earlier deal.
The Union brought suit, citing inter alia the Contracts Clause, and seeking an injunction forcing the state to pay the wage increases as they came due. Illinois brought a motion to dismiss, which the District Court granted. In Council 31 v. Quinn, the Seventh Circuit affirmed.
The case is procedurally complex, especially since the parties proceeded with arbitration, in which the Union prevailed in part, and that ruling is subject to an on-going appeal in the state courts. Meanwhile, the 7th Circuit addressed only constitutional claims brought pursuant to the Contracts Cluase and the Equal Protection Clause against Illinois Governor Quinn and from the State's Department of Central Management Services Director Malcolm Weems, both in their offiical capacities.
Although the Union characterized its claims as seeking only injunctive and declaratory relief, the true aim was to get the state to make expenditures from its treasury. As such, not withstanding Ex parte Young, the Eleventh Amendment barred the Union's Contracts Clause claims against the defendants.
Even if there were no Eleventh Amendment bar to the suit, the Court also found that the Union could not state a claim under the Contracts Clause because it alleged only an ordinary breach of contract, which is insufficient to constitute an "impairment" of contractual relations for the purposes of the Contracts Clause. The reasons why this is so have to do with the state's defenses to the Union's claims in the arbitration proceedings and the state court appeals thereof. The basic argument is that appropriate legislative appropriations were a condition precedent to its duties to pay the wage increases. If that argument succeeds, there was no contractual impairment. If it fails, there is no need for a federal court injunction because the Union will have prevailed.
The Court dismissed the Union's Equal Protection claim because the challenged state rules withstand rational basis scrutiny.
Tuesday, May 29, 2012
Here is the first guest post by guest blogger Danielle Rodabaugh
It's no secret that the economy plays a huge role when it comes to competition in the construction industry. When the economy is down, competition goes up, and small contracting firms typically have trouble competing with larger ones. When construction professionals are unprepared to pay for the surety bonds required for large projects, the opportunity for small firms to gain access to business becomes even more limited.
Before I go much further, I'd like to review the use of surety bonds in the construction industry, as the surety market remains relatively mysterious to those who work outside of it. As explained in more detail here, the financial guarantees provided by contractor bonding keep project owners from losing their investments.
Each surety bond that's issued functions as a legally binding contract among three entities. The obligee is the project owner that requires the bond as a way to ensure project completion. When it comes to contract surety, the obligee is typically a government agency that's funding a project. The principal is the contractor or contracting firm that purchases the bond as a way to guarantee future work performance on a project. The surety is the insurance company that underwrites the bond with a financial guarantee that the principal will do the job appropriately.
Government agencies require construction professionals to purchase surety bonds for a number of reasons that vary depending on the nature of a project. For example, bid bonds keep contractors from increasing their project bids after being awarded a contract. Payment bonds ensure that contractors pay for all subcontractors and materials used on a project. Performance bonds ensure that contractors complete projects according to contract. When contractors break these terms, project owners can make claims on the bonds to gain reparation.
The federally enforced Miller Act requires contractors in every state to file payment and performance bonds on any publicly funded project that costs $100,000 or more. However, state, county, city and even subdivisions might require contractors to provide additional contract bonds, such as license bonds or bid bonds, before they can be approved to work on certain projects. Or, sometimes local regulations require payment and performance bonds on publicly funded projects that cost much less than $100,000. Contractors should always verify that they're in compliance with all local bonding regulations before they begin planning their work on a project.
Although the purpose of contractor bonding is to limit the amount of financial loss project owners might have to incur on projects-gone-wrong, the associated costs can limit the projects that smaller contracting firms have access to.
Surety bonds do not function as do traditional insurance policies. When insurance companies underwrite surety bond contracts, they do so under the assumption that claims will never be made against the bonds. As such, underwriters closely scrutinize every principal before agreeing to issue a contract bond.
Furthermore, the premiums construction professionals have to pay to get bonded might come as a surprise to those who know little about contractor bonding. Contractors often get tripped up with how much surety bonds will cost and how they'll pay for them — especially when it comes to independent contractors who operate small firms. Surety bond premiums are calculated as a percentage of the bond amount. The higher the required bond amount, the higher the premium. Thus, purchasing bonds for large projects obviously costs contractors more than purchasing bonds for small projects.
The percentage rate used to calculate the premium depends on a number of factors, including the contractor's credit score, years of professional experience and record of past work performance. The stronger these variables are, the lower the surety bond rate. The weaker these variables are, the higher the surety bond rate.
As such, small firms often find it hard to compete for large projects because they struggle to either qualify for the required bonds or pay the hefty premiums. When contractors are unable to secure contractor bonding as required by law, they are not permitted to work on projects. This, consequently, typically limits large public projects to large contracting firms that can both qualify for and afford to purchase large bonds. Fortunately, when small contracting firms fail to qualify for the commercial bonding market, the Small Business Administration does offer a special bonding program to help them secure the necessary bonding.
Smaller contractors can improve their situation by reading up on the surety bond regulations that are applicable to their area. Those who understand the surety process and how various factors affect their bond premiums should find themselves better prepared to apply for the bonds they need.
[Posted by JT on behalf of Danielle Rodabaugh]