Tuesday, January 24, 2012
On January 6th, the U.S. Supreme Court granted the petition for certiorari in Salazar v. Ramah Navajo Chapter. SCOTUSblog provides a summary of the issues here and provides links to key documents in the case here. The Petition for Certiorari, filed by Ken Salazar, Secreatry of the Interior (pictured), articulates the issue in the case as follows:
Whether the government is required to pay all of the contract support costs incurred by a tribal contractor under the Indian Self-Determination and Education As- sistance Act, 25 U.S.C. 450 et seq., where Congress has imposed an express statutory cap on the appropriations available to pay such costs and the Secretary cannot pay all such costs for all tribal contractors without exceeding the statutory cap.
SCOTUSblog's Lyle Denniston provides the following summary of the issues:
The Indian case, a petition by the federal Interior Department, involves a 1975 federal law that Congress passed to give Indian tribes a greater role in running government programs for the benefit of tribal members. The law, the Indian Self-Determination and Education Assistance Act, allows Indian tribes to contract with the Interior Department to take over operation of a federal program or service, with Interior to put up the money that the government would have spent itself on that activity. In 1988, Congress also provided that Interior must also provide funds to pay the administrative costs that the tribe incurs in operating the program, such as audit or reporting duties, and general overhead.
That separate funding provision, however, is made contingent upon Congress providing the necessary appropriations to pay for it. And, in 1999, Congress provided that there would be caps on the amount of contract support costs that Interior would cover for a tribe. Congress has imposed such caps for each of the past 15 years.
The issue in the newly granted case, Salazar v. Ramah Navajo Chapter (11-551), is whether the government must pay everything that it has promised in such a contract with a tribe, including support costs, without regard to whether that goes beyond a cap imposed by Congress — provided that the government can find the money elsewhere in the government. The Interior Department’s petition urged the Court to take the case and rule that Interior cannot be required to pay tribes beyond what the cap allows because that intrudes upon Congress’s constitutional authority to decide when and how to spend federal money.
In the programs at issue specifically in the case, the Ramah Navajo Chapter, the Oglala Sioux Tribe, and the Pueblo of Zuni had a contract with Interior to operate for tribal members a series of federal programs: for law enforcement, court operation, education assistance, land management, probate assistance, natural resource services, employment aid, child welfare assistance, operation of emergency youth centers, and juvenile detention services. The tribes sued over unpaid direct contract support costs for the fiscal years 1994 through 2001, in which congressional caps were in place.
We look forward to following this case. If anybody out there among our readers is knowledgeable about the case and would like to guest post, please get in touch, as none of us on the blog is an expert in this area.
Tuesday, January 10, 2012
After a jury trial, ATA Airlines (ATA) won a nearly $66 million verdict against Federal Express Corporation (FedEx). FedEx appealed that ruling to the 7th Circuit, and ATA filed a cross-appeal on its promissory estoppel claim in the event that FedEx should succeed on its appeal. The appeal was decided by Chief Judge Easterbrook, along with Judges Posner (picutured) and Wood. Judge Posner's opinion for the court can be found here.
The facts of the case are pretty complicated. FedEx is a team leader in the Civil Reserve Air Fleet program. That means that in the event of a national emergency, it and its junior team members, which icludes ATA, have agreed to make a certain number of aircraft for use by the Department of Defense. In return to this pledge, team members are assigned points that permit them to bid to provide non-emergency services to the government. It turns out, the little guys are more interested in these opportunities than are large carriers like FedEx, and they are willing to pay for the points, which are transferable within a team. The FedEx team earned $600 million a year providing non-emergency services to the government.
The agreements that created the team are also complicated. The contract at issue here was not really a contract at all but more of an agreement in principle about how the parties would divide up the non-emergency service contracts for the years 2007-2009. Because the parties could not know in advance what the government’s non-emergency needs would be, it could not know which of the air carriers would have the ability to meet those needs. Nonetheless, the parties agreed in principle to a 50/50 division of the work between ATA and another small carrier, Omni. But the following year, some of ATA’s work was siphoned off to Northwest Airlines, and then following Delta’s acquisition of Northwest, ATA was replaced on the team with Delta. In 2008, upon receiving notice that it would be replaced by Delta in 2009, ATA withdrew from the team and filed for bankruptcy, lacking sufficient non-government business to keep itself aloft.
The district court treated this agreement as an enforceable contract, but the 7th Circuit disagreed. Even if a court could somehow fill in terms relating to the various contingencies regarding the government’s needs and how those needs would be met, Judge Posner noted, the agreement had no price term relating to FedEx’s compensation for serving as team leader. That price had varied from 4.5% to 7%, and there was no set of facts or trade usage available which could provide a basis for a court-supplied price term.
In the alternative, ATA argued that it relied on FedEx’s promise to give it 50% of the non-emergency business and was thus entitled to $28 million in reliance damages incurred in purchasing aircraft need to provide non-emergency services to the government. The district court had found this claim to be preempted under the Airline Deregulation Act. The 7th Circuit disagreed, but rejected ATA’s promissory estoppel claim on the merits, since it was not reasonable for ATA to rely on a conditional promise and FedEx could not have expected such reliance based on its non-promise.
“So,” Judge Posner, concludes on page 13 of the opinion, “ATA loses.” There follows another 15 pages about expert testimony and regression analyses which, happily, are not our concern. In sum though, Judge Posner was not impressed with ATA's expert. His conclusion:
Morriss’s regression had as many bloody wounds as Julius Caesar when he was stabbed 23 times by the Roman Senators led by Brutus.
The district judge does not escape without a bloody wound or two:
We have gone on at such length about the deficiencies of the regression analysis in order to remind district judges that, painful as it may be, it is their responsibility to screen expert testimony, however technical; we have suggested aids to the discharge of that responsibility. The responsibility is especially great in a jury trial, since jurors on average have an even lower comfort level with technical evidence than judges. The examination and cross- examination of Morriss were perfunctory and must have struck most, maybe all, of the jurors as gibberish.
Beware the Feast Day of Trophimus of Arles
Tuesday, January 3, 2012
Ninth Circuit Upholds Immunity for Telecommunications Companies that Assisted in Warrantless Wiretapping
In re National Security Agency Telecommunications Records Litigation is a big case. How big? The caption alone takes up over twenty pages in the 9th Circuit's most recent opinion. The basic facts are fairly familiar. During he Bush administration, the National Security Agency (NSA) created a program called the "Terrorist Surveillance Program," which plaintiffs, supported by journalistic accounts, allege permitted warrantless wiretaps of their communications. Plaintiffs further allege that the telecommunications companies assisted the government in undertaking such warrantless surveillance of U.S. citizens who happened also to be their customers.
Congress stepped in to assist these good corporate citizens which had after all just done their part to aid their country and the NSA. In 2008, it amended the Federal Intelligence Surveillance Act (FISA) to grant effective immunity to the telecommunications companies against suits such as the ones consolidated in this case. At issue in this appeal was only Plaintiffs' challenge to the constitutionality of that grant of immunity.
The Ninth Circuit upheld the constitutionality of the amendment to FISA. Plaintiffs' claims against the government can proceed -- at least until they are dismissed on national security or state secrets grounds further down the road.
Thursday, December 22, 2011
The DC Contract Appeals Board is hiring law clerks for the Spring 2012 semester. They are interested in 2Ls, 3Ls, and LL.M.s with a strong interest in government contracts law, and litigation.
The CAB has an extremely busy docket, providing you with an excellent opportunity to gain experience working on bid protest and contract claims. Moreover, each student will work directly for a judge, serving as the judge's law clerk.
Requested Application Materials:
Applicants should provide a one-page cover letter, resume, recent legal writing sample (8 pages maximum that has been written within the last 3 years), and three professional references (including email addresses and telephone numbers).
Applications may be mailed or emailed as follows:
D.C. Contract Appeals Board
441 4th Street, NW., Suite 350N
Washington, D.C. 20001
[JT w/ HT to Jessica Tillipman and the Government Procurement Law Program at the George Washington University Law School]
Tuesday, December 20, 2011
Some clues as to how the Greeks have spent all their money are available now from the Congressional Research Service.
A few other random thoughts on the data:
- African governments clearly are not doing all they could to help the U.S. economy through purchases of U.S. weaponry
- Hooray for Canada's unexpected militarism
- And while we're at it, good on ya Australia!
- Eastern Europe (other than Poland), don't look now but there's still a big Russian bear behind you. Can we interest you in some supersonic jets?
Thanks to Steven Aftergood of the Federation of American Scientists' Secrecy News blog for providing the link!
Monday, December 5, 2011
The Department of Health and Human Services (HHS) provides training courses for its employees through HHS University (HHSU). In May 2007, HHS put out a request for quotations (RFQ) to provide grant management courses covering eight topics at HHSU. The Gonzales-McCaulley Investment Group, Inc. (GMIG). GMIG submitted a cover letter ad quote. It referenced "course book" binder that had apparently already been submitted to HHS.
The training program manager at HHS sent an e-mail to GMIG attaching "confirmation of selection to provide training in Grants Management to HHS University" and suggesting further contacts to discuss date for training sessions. Throughout June 2007, the parties exchanged communications setting up dates for the trainings. At that point, Kimberly Hill, HHSU's Manager of the Center for Administrative and Systems Training reviewed GMIG's submissions and compared them with the website of Management Concepts, the organization that had previously been providing services to HHSU, finding them virtually identical. On that basis, Ms. Hill concluded that GMIG had engaged in plagiarism, and she informed GMIG that HHSU would not be using its services. CMIG filed a pretest to the Government Accountability Office (GAO), arguing that GMIG never had an opportunity to defend itself against the charge of plagiarism. When HHS subsequently cancelled the original Request for Quotations (RFQ), the GAO dismissed the protest as "academic."
GMIG persisted, claiming that the decision to rescind the RFQ was pretextual. The GAO recommended that upon reinstating the RFQ, HHSU should give due consideration to all of the responding vendors. HHS instead decided to do all future HHSU training in-house. GMIG sued seeking $900,000 in general and consequential damages, and the suit, originally filed in California, was transferred to the Court of Federal Claims. After some procedural complexities, the Court of Federal Claims heard HHS's motion to dismiss or for summary judgment on the ground that there could be no breach of contract because there had never been a valid acceptance.
In a November 14, 2011 opinion and order, the Court of Federal Claims granted summary judgment to HHS. The court reviewed the elements of a breach of contract and concluded as follows:
“To prove the existence of a contract with the government, a plaintiff must prove four basic elements: (1) mutuality of intent to contract; (2) offer and acceptance; (3) consideration; and (4) a government representative having actual authority to bind the United States.” Hometown Fin., Inc. v. United States, 409 F.3d 1360, 1364 (Fed. Cir. 2005). Here, at a minimum, there was no offer and acceptance.
Since the federal rules do not consider a quotation to be an offer, the issuance by the government of an order in response to a quotation cannot establish a contract. But if GMIG's quotation was not the offer, perhaps the order was the offer, which was accepted through the exchange of e-mails. Unfortunately for GMIG, according to the court, the resulting e-mails merely discussed tentative dates and never amounted to an agreement. In the post-Iqbal and Twombly atmosphere, GMIG's inability to point to a "particular order and acceptance in its pleadings" is fatal to its claim.
Tuesday, November 29, 2011
On Novmeber 10, 2011, the Fourth Circuit issued its unpublished per curiam opinion in Paul Morrell, Inc. v. Kellogg, Brown & Root Services in which it affirmed a nearly $20 million fraudulent inducement judgment against Kellogg Brown & Root (KBR) and related entities. The judgment included prejudgment interest and $4 million in punitive damages.
The suit arose out of a contract dispute and settlement between KBR and Paul Morrell, which was doing business as The Event Source (TES) and was a sub-contractor on a contract in which KBR and TES provided dining services for US troops in Iraq. A government audit revealed that KBR was charging the government for more meals that were actually served and so the government decided to withhold nearly 20% of its payments to KBR. KBR passed this loss on to its subcontractors. For reasons that are unclear but were based on fraudulent misreprentations that KBR made to TES, TES agreed to payments of $24 million for its services under the contract when it was in fact entitled to $36 million.
The district court determined that KBR made material false statements in order to induce TES to accept a settlement payment that was approximately $12.4 million less than what KBR had previously acknowledged it owed TES. Applying Texas law in this diversity case, the Court of Appeals had to determine whether TES's reliance on KBR's fraudulent misrepresentations was reasonable. That issue raises a mixed question of fact and law, but in this case, the trial court's ruling turned on factual determinations that could only be not clearly erroneous.
The Fourth Circuit also rejected KBR's additional challenges to the District Court's judgment.
Tuesday, November 22, 2011
There are lots of interesting facts in The Marquardt Co. v. United States for those of us who are not experts in government contracts. The United States agreed to pay The Marquardt Company (TMC) nearly $1.5 million to settle the United States' obligations under 23 contracts with TMC. The agreement included (what to me at least seems) a very strange provision that, while the parties recognized that the Government did not at the time of the agreement have the funds available to pay the $1.5 million, it would use its "best efforts" to get the necessary funds in an expeditious manner. When the Government did not pay up, TMC sued to collect, but the Government moved to dismiss arguing that TMC "must be able to prove that it would have received more money but for the alleged breach of the Government’s best-efforts obligation” and that it could not do so.
The Court ruled that the government misunderstood the relevant burdens of proof in the circumstances. The proper burden on plaintiff here is that "it must show facts, by 'citing to particular parts of materials in the record,' RCFC 56(c)(1)(A), that tend to show that but-for the government’s breach, plaintiff could have been paid additional funds.” The Court therefore concluded as follows:
Making all reasonable inferences from the evidence proffered by TMC, the court concludes that, had the government sought funding from outside the buying commands, as was suggested by its own employees, . . . additional funds could have been made available to pay TMC. Plaintiff has therefore alleged sufficient specific facts to show that “defendant’s action materially increased the risk of the injury that occurred,” Corbin on Contracts § 55.7 n.10, and that but-for the government’s breach of its best efforts obligation, it could have secured additional funds. There is a genuine issue for trial, Celotex, 477 U.S. at 324, and accordingly, summary judgment for defendant is not appropriate at this time.
But what constitutes "best efforts"?
The Government claimed that it had to seek funds from the military agencies with which TMC had contracted, but the language of the agreement contained no such limitation on what constituted "best efforts." TMC contended that the Government was obligated to seek funds from other sources, including the Defense Finance and Accounting Service and the Pentagon. The Court determined that further development of the record was necessary as disputed issues of material fact prevented the Court from determining precisely what constituted "best efforts" in the circumstances.
In a careful and richly detailed exercise in contract interpretation, which we will not attempt to summarize here, the Court also concluded that the Government improperly withheld about $160,000 that had been taken into account when the parties agreed to the $1.5 million settlement.
Thursday, November 10, 2011
As announced in this GW Press Release and this White House (OMB) Press Release, parts of which are pasted below, Daniel Gordon (pictured) has been named Associate Dean for Government Procurement Law Studies :
From George Washington Univesrity:
GW Law is pleased to announce the appointment of Daniel I. Gordon, Administrator for Federal Procurement Policy in the Office of Management and Budget, as its new Associate Dean for Government Procurement Law Studies. He will assume the newly created position on January 1, 2012.
“Dan Gordon has long been one of the worldwide leaders in this important field, and he is that rare person who can translate his experience and knowledge into learning and action,” said Paul Schiff Berman, Dean and Robert Kramer Research Professor of Law. “Our students will greatly benefit from his ‘insider’ perspective and his practical know-how. I am confident that the creation of this position signals to Washington and the world that now more than ever, GW Law is the premier place to study government procurement law and policy.”
Mr. Gordon says he is looking forward to his new position, and shares Dean Berman’s enthusiasm for the groundbreaking role.
“While GW Law has a long history of excellence in the area of government contracts, adding the position of associate dean should provide opportunities for building on that history to take the Law School even further,” said Mr. Gordon. “Ultimately, we will want to find new ways to reach students, including potentially nontraditional frameworks, and new ways to explore connections between government contracts law and other disciplines, such as corporate, public international, and anti-trust law.”
Mr. Gordon added that his recent career experience will shape his approach to knowledge-sharing and program development at GW Law.
“Procurement policy is intertwined with procurement law, but seeing things from the policy side has enriched my understanding of the importance and the impact of procurement law,” said Mr. Gordon.
Mr. Gordon was confirmed as the Administrator for Federal Procurement Policy in November 2009. In that role, he developed and implemented acquisition policies supporting more than $500 billion of annual federal spending. Previously, he spent 17 years at the Government Accountability Office in various roles including managing associate general counsel in the Procurement Law Division, deputy general counsel and acting general counsel.
Today, Dan Gordon, the Administrator for Federal Procurement Policy, announced that later this year he will be leaving the post to serve as Associate Dean for Government Contracts Law at the George Washington University Law School.
President Obama appointed Dan Gordon as the Administrator for Federal Procurement Policy in 2009 in order to turn around the explosive contracting growth of the last decade and re-instill accountability, drive fiscal responsibility, strengthen the acquisition workforce, cut out waste and rebalance the relationship between the federal government and the contractors that support our agencies. In Dan, he selected someone with decades of experience working with the federal procurement system, in private practice and at the U.S. Government Accountability Office. When Dan began at the White House, he brought with him a commitment to openness and integrity, combined with a strong sense of what we needed to do to improve the federal acquisition system, after too many years of neglect.
[JT h/t Steven Schooner]
Thursday, October 13, 2011
Last week, the Federal Circuit affirmed the Court of Federal Claims dismissal of a $50 million law suit brought against various leading politicians and the U.S. government. The case is Bussie v. United States. Plaintiff alleged that he had not been compensated for psychic services he performed in assisting the government in its pursuit of "high value targets" including the "masterminds" behind 9/11. The suit named President Obama, former President George W. Bush and Fox News analyst Sarah Palin, among others as defendants. The Federal Circuit affirmed the Court of Federal Claims' finding that it had no jurisdiction under the Tucker Act to hear claims against individuals.
As plaintiff was proceeding pro se, the Federal Circuit construed his complaint generously as seeking damages from the United States. However, the court found that the Court of Federal Claims had correctly concluded that plaintiff had not alleged facts sufficient to sustain a claim for an implied-in-fact contract.
The Federal Circuit opinion is very short. Further details can be found in the Court of Federal Claims opinion here.
The complaint raises interesting possibilities. Has the government in fact been hiring psychics to try to track down terror suspects? Is that so implausible? After all, didn't Nancy Reagan consult an astrologer in order to make certain the heavens were aligned properly with President Reagan's schedule? If the government has not been hiring psychics, why not? They are likely at least as effective as waterboarding.
Tuesday, October 11, 2011
"Disappeared Contractors": David Isenberg on Steven Schooner on Contractor Deaths in Iraq & Afghanistan
David Isenberg, author of Shadow Force: Private Secuity Contractors in Iraq has a provocative new piece on HuffPo in which he argues that private military and security contractors (PMSCs) are like the "disappeared" victims of dictatorial rule. This is not of course literally true, in that the bodies of PMSCs who are killed abroad are returned so that families can mourn and bury their dead. However, Isenberg finds the analogy fitting because we do not recognize or track the extent to the which PMSCs are bearing the burden on the on-going War on Terror.
He relies on the scholarship and testimony of Geroge Washington University Law School Professor friend-of-the-blog Steven L. Schooner. Professor Schooner has written about this topic in an article co-authored with GWU law student Collin D. Swan, called "Dead Contractors: The Unexamined Effect of Surrogates on the Public's Casualty Sensitivity," about which we have previously blogged here.
The Isenberg piece provides extensive quotations from Professor Schooner's testimony before the congressionally mandated Commission on Wartime Contracting. The gist of the exerpted portions is that we now have more PMSC casualties than military casualties in Iraq and that trend is spreading to Afghanistan as well. These deaths are not reported in the way military deaths are. PMSC deaths thus impose a lower cost in terms of public tolerance for continued war than do military deaths. Professor Schooner also notes, without allocating blame, that the government does more to protect members of the military than it does for PMSCs.
Monday, October 10, 2011
On September 28, 2011, District Judge Paul Gardephe issued his opinion and order denying defendants' motion for partial summary judgment in Spaulding v. Monsanto Company. Plaintiffs alleged that Monsanto engaged in negligent waste disposal practices at its plant in Nitro, West Virginia between 1949 and 1970. The waste at issue were biproducts from the manufacture of a key component in Agent Orange.
In its motion, Monsanto attempted to rely on the govenrment contrator defense, since for part of the time that it was manufacturing the product in question, it was doing so, at least in part, for government use. The standard for determining the applicability of the defense comes form Boyle v. United Techs. Corp. 487 U.S. 500, 512 (1988), in which the court explained as follows:
Liability for design defects in military equipment cannot be imposed, pursuant to state law, when (1) the United States approved reasonably precise specifications; (2) the equipment conformed to those specifications; and (3) the supplier warned the United States about the dangers in the use of the equipment that were known to the supplier but not to the United States.
In this case, the Court concluded that Monsanto had not satisfied the requirements for the defense because the record did "not demonstrate . . . that U.S. Government representatives made an 'express determination' regarding Monsanto's alleged waste disposal practices." Nor was there any evidence that the Government had "exercised consistent oversight over Monstanto's waste disposal practices." The Court came to the same conclusion with respect to air pollution. Because the defendants had not demonstrated that the complained-of activity was conducted "pursuant to reasonably precise government specifications," the District Court denied their motion based on the government contractor defense.
Friday, September 16, 2011
Back in 2008, the Navy sought a new contractor to provide urine collection services for its federally-mandated rug testing program. RN Expertise, Inc. (RN) submitted a bid and was the prsumptive awardee of the contract. But before it finalized the award, the Navy determined that it could get the same services at a lower price through an interagency agreement (IAA) that the Department of Defense had with the Dpartment of the Interior. So, the Navy cancelled the solicitation and went with the IAA.
RN filed a bid protest, claiming that the Navy's cost analysis was flawed. In February 2011, the Court of Federal Claims granted the governments motion for judgment on the administrative record and dismissed RN's bid protest, RN Expertise, Inc. v. United States, 97 Fed. Cl. 460 (2011). In March, RN moved for reconsideration, claiming that the CoFC's decision did not account for key facts and thus resulted in a manifest injustice. On September 9th, the CoFC issued a new opinion, denying the motion and finding that RN simply sought to relitigate its case.
In its motion for reconsideration, RN argued that the CoFC erred in the way it tested the Navy's cost analysis and that the Navy failed to consider all of the costs associated with the IAA. The CoFC found both of these argument improper on a motion for reconsideration. In its first argument, RN merely raised facts and arguments that the CoFC previously addressed and rejected. In its second, RN raised arguments that could have been raised in its original briefs. Having failed to do so, it is not entitled to a second bite at the apple.
Monday, September 12, 2011
The September 5th edition of The New Yorker has a nifty article by Tad Friend about the budgetary problems cities are facing -- the article focuses on Costa Mesa, California, but notes that its problems are not unique. The story is a familiar one, but the reporting is great and the details are extreme.
The problem is a small city whose budget is tied up in personnel costs, including a 911 operator making $176,000 and a new mayor who decides to address a reported $5 million budget deficit by firing half the staff. The new mayor plans to give city workers their notice and then solicit bids to see which jobs can be more cheaply done by employing independent contractors. The mayor also seems to think that hiring such contractors will insulate the city from liability, although that wouldn't always be the case.
The flip side of the overpaid 911 operator is the dedicated maintenance worker who works for the city for four years and makes $45,600/year. He does for $26/hour what a contractor would charge $40/hour to do. Upon receiving his layoff notice, one such worker jumped off the roof of City Hall. An already bitter struggle now turned bloody. Moreover, the city has over $40 million in reserves. Some residents wondered why "Costa Mesa should be the petri dish for pension reform." An ally of the new mayor, who is a councilman and also the head of the local Pop Warner football league wasn't about to back down. Friend quotes him as follows:
Politics is very similiar to Pop Warner. People think they can bully you into making their son the quarterback, but once they realize their son's a lineman they stop bothering you.
Building to his conclusion, Friend makes the following observation about leadership:
Good leaders make unpopular decisions because they're necessary. But they also work to explain and build support for their initiatives, especially when those initiatives threaten a way of life.
This is an important insight, not only for political leaders but also for university leaders in times of shrinking budgets and rising costs.
Friday, September 9, 2011
The concept of contract law is often novel in developing economies, especially communist or formerly communist ones. Sparked by a dispute between Cosco, China's biggest state-owned shipping company, and foreign ship owners, the WSJ has an interesting discussion of business norms in China and a "Chinese corporate sector that doesn't always play by established global rules."
Apparently, Cosco has halted or delayed payments for vessels it leased in 2008, at the height of the shipping boom. Prices for these cargo ships have plunged since then. Naturally, Cosco wants to renegotiate these leases, but unilaterally reneging the contracts defies established global business norms.
The article explains:
Foreign companies that do business in China are routinely warned that contracts aren't viewed in China with the same sort of legal sanctity that they receive in most developed economies. Jingzhou Tao, a Beijing-based lawyer with Dechert LLP, says that withholding payments is a frequent tactic used in China to force price negotiations. "A contract is not an unchangeable bible for Chinese companies," Mr. Tao said.
* * *
Analysts and lawyers say big Chinese state-owned companies can be especially aggressive in dealing with foreign companies because of their government backing and the enormous clout they wield within China in industries that are often oligopolies.
"State-owned enterprises that are dominant in their own sector and in some cases more powerful than government departments are used to having things their way," said Lester Ross, a Beijing-based partner at law firm WilmerHale. Mr. Ross said that Chinese companies in the minerals and cotton industries have a history of walking away from deals when prices move against them, and that foreign companies sometimes charge a premium for services to Chinese government companies because of the contract risks.
"These companies are only partly companies. They are also political entities," said Carl Walter, a former Beijing-based banker for J.P. Morgan Chase & Co. who has co-authored two books about China's state-owned enterprises. That means political imperatives, such as concerns over the value of national assets, can sometimes drive decisions by company chief executives, who at Chinese state-owned enterprises are appointed by the Communist Party. "When you do business with these major SOEs, you better make sure you make enough money to cover," Mr. Walter said.
Arthur Bowring, managing director of the Hong Kong Shipowners Association, argues that while Cosco's moves are worrisome for the industry, they won't likely be that damaging to the company long term. He adds that in late 2008, Australian iron-ore producer Fortescue Metals Group Ltd. backed out of its obligations under some shipping contracts. After a period of arbitration, the company said in October that it had settled all disputes with shipping companies.
"People are now doing business with [Fortescue Chairman] Andrew Forrest again...and it's almost like it never happened," Mr. Bowring said.
Mr. Bowring said Cosco, which has been operating internationally for decades, is too experienced to think that it can apply Chinese rules to overseas deals. Still, he said that company relationships are viewed differently in China than in many other places. "Chinese culture will build a relationship before the contract," he said. "The relationship is always something that can be talked about. The contract is just a set of papers that you keep in your bottom drawer."
[Meredith R. Miller]
Monday, August 29, 2011
Thanks to Steven L. Schooner and the Government Contracts at GW Law Facebook page, we have word of this juicy decision by Judge Sweeney of the Court of Federal Claims in Systems Applications and Technologies, Inc. v. United States. The opinion is long, but as Professor Schooner points out, the headings alone are enticing.
This basically a Fatal Attraction case. Michael Douglas's character, played by the United States Army Aviation and Missile Life Cycle Management Command Contracting Center (the Army), gets tired of its long-time partner, Anne Archer, played by Madison Research Corporation, a wholly owned subsidiary of Kratos Defense & Security Solutions, Inc. (Kratos). It takes up with Glenn Close's character, played by Systems Applications & Technologies, Inc. (SAT). In this version of the movie, which we admit is far less cinematic than a knife fight, the Army returns to its old partner after a brief dalliance with SAT. The return takes the form of a renewed solicitation of bids followed by a bid protest from the jilted suitor.
The facts go back to June 2010, when the Government issued a solicitation of bids for "aerial target flight operations and maintenance services in support of its subscale, ballistic, rotary wing, and ballistic missile target systems." The Army had to choose among three qualified offerors, and to cut to the chase, it chose SAT. Kratos immediately filed a bid protest, which the Government Accountability Office found had merits. The Arny thus proposed corrective action, including canceling the contract with SAT and reopening the bid process. SAT sued to enjoin the corrective action. On cross-motions to dismiss/for judgment on the adminsitrative record, the court ruled for SAT.
After 10 pages on jurisdiction and justiciability (i.e. non-contractual stuff = BORING), the court gets to the meat of its decision. The headers tell it all:
A. The Army’s Decision to Take Corrective Action Constitutes a Significant Error in the Procurement Process
1. The Army’s Reliance on the GAO Attorney’s April 20, 2011 Electronic-Mail Message Renders Its Decision to Take Corrective Action Irrational
2. The Army’s Decision to Take Corrective Action Is Irrational and Unlawful
a. The Army’s Decision to Take Corrective Action Lacks a Rational Basis
b. The Army’s Decision to Take Corrective Action Violates Procurement Statutes and Regulations
B. SA-TECH Is Prejudiced by the Army’s Decision to Take Corrective Action
The Army is thus enjoined from canceling its contarct with SAT and re-opening the bid process.
Monday, August 22, 2011
This is the sort of mess that local governments deal with all the time, but this one hits home for those of us in the Valparaiso Community School District. As reported in the Northwest Indiana Times, the Valparaiso Community School Board held a special meeting on August 4th to approve a contract to erect a $250,000 scoreboard at the high school in time for the start of the football season. As public expenditures go, this one seems a no-brainer, as the Board apparently believed on August 4th that it could cover the cost of the new scoreboard with advertising revenues within five years.
Some Valparaisans were outraged, however, by the lack of public discussion and by the deficient notice prior to the special meeting held on August 4th. At a subsequent Board meeting on August 16th, public outrage was exacerbated by the revelation that the school had in fact secured only $54,000 in advertising revenues and there are divergent accounts of what information about advertising commitments was supplied to the Board at the time it approved the contract.
But here's where it gets interesting. The Board defended its hasty action on the ground that the $250,000 contract had already been entered into by unnamed "individuals who thought they had the authority" to enter into such a contract. This revelation by the Board was met with a smattering of laughter at the public meeting. Why were the outraged Valparaisans laughing? Because they know that, under agency law, thinking you have the authority to enter into a $250,000 contract is not the same thing as having such authority. And if residents find it laughable that some employee of the high school would claim to have such authority, the other party to the contract knew or should have known that such contracts require Board approval to be binding. In short, there was no need for the Board to rush to approve the contract, because the contract was never binding in the first place.
In addition, there is the separate, disputed issue of whether such a contract must be awarded only after a solicitation of competitive bids, which did not occur in this case.
Whether or not the contract was enforceable at the time it was signed, the Board has now adopted it, so it has become binding. That does not mean that it could not be challenged of course. Angry Valparaisans could run to court and seek to enjoin any further measures to install the new scoreboard. But doing so would cost taxpayers more money, and so citizens who would like to hold the allegdly unaccountable Board to account while also preventing improper expenditures of public funds are faced with a Hobson's choice.
Friday, August 19, 2011
According to this exclusive report from Wired.com, the Department of Defense's Inspector General is looking into $1.7 million in contracts between the Defense Advanced Research Projects Agency (DARPA), the Pentagon's top research division, and RedXDefense a corporation owned in part by DARPA's director, Regina Dugan. According to Wired, RedXDefense is indebted to Dugan to the tune of $250,000.
DARPA representatives claim that the investigation is routine and that RedXDefense won its contracts fair and square. Dugan reportedly recused herself from all deliberations that resulted in the award of contracts to RedXDefense. Still, Wired reports that the contracts were not reviewed by someone outside of DARPA so that decision-makers likely were still subject to Dugan's influence.
In other news, Pentagon officials are denying rumors of a merger between DARPA and the Dharma Initiative.
Tuesday, August 9, 2011
Survivors of and heirs to those killed in the February 2007 crash of a Chinook helicopter in Afghanistan sued the defense contractors (Boeing, Honeywell, Goodrich, and AT Engine Controls), claiming that design and manufacture flaws caused the crash. The District Court dismissed the claims against AT Engine Controls, a British corporation, based on lack of personal jurisdiction. It also granted summary judgment to the U.S. based companies, finding that the federal government contractor defense preempted plaintiffs' claims.
In this opinion filed last week, the Ninth Circuit affirmed the District Court's rulings. According to the court, the government contractor defense "protects government contractors from tort liability that arises as a result of the contractor’s 'compli[ance] with the specifications of a federal government contract.'" In Boyle v. United Technologies Corp., the U.S. Supreme Court set out a three-part test for establishing the defense: “(1) the United States approved reasonably precise specifications; (2) the equipment conformed to those specifications; and (3) the supplier warned the United States about the dangers in the use of the equipment that were known to the supplier but not to the United States.” The Ninth Circuit provides a full analysis, especially of the first prong, and concludes that the test is satisfied in this case.
Monday, August 8, 2011
On July 13, 2011, the Court of Federal Claims released its opinion in California Industrial Facilities Resources, Inc. v. United States. California Industrial Facilities Resources (CIFR) challenged the award to Alaska Structures, Inc. (AKS) of a sole source contract to build large, tent-like structures used as living quarters for troops in Afghanistan. By the time CIFR's protest was filed, AKS had almost completed the work, and the court refused to enjoin it from completing its task. Nonetheless, the court accepted jurisdiction and ruled in CIFR's favor. The court summarized its reasoning as follows:
In brief summary, the Court finds that this case is not moot because the Government’s violation of statutory competition requirements for the war effort in Afghanistan is capable of repetition, and could again evade review. The challenged actions were too short in duration to be fully litigated prior to completion, and there is a reasonable expectation that the complaining party will be subject to the same actions in the future. Fed. Election Comm’n v. Wis. Right to Life, Inc., 551 U.S. 449, 462-63 (2007); Humane Soc’y v. Clinton, 236 F.3d 1320, 1331 (Fed. Cir. 2001); Ameron, Inc. v. U.S. Army Corps of Engineers, 787 F.2d 875, 880-81 (3d Cir. 1986). The Court has jurisdiction of this matter under 28 U.S.C. § 1491(b) (2006).
On the merits, the Court finds that the Government’s award of a sole source contract to AKS violated the competition requirements in 10 U.S.C. § 2304(e) (2006) and Federal Acquisition Regulation (FAR) 6.302-2(c)(2). Even when confronted with unusual and compelling urgency, the Government still must request offers from as many potential sources as is practicable. The Government was well aware that other sources would have been interested in competing for the contract, but the Government made no effort to contact any source other than AKS. The Government had 26 days between its awareness of the shelter system requirement (April 1, 2011) and the award of the contract to AKS (April 27, 2011), and it easily could have obtained competitive prices from other sources. The Government’s failure to do so was in violation of law.