318 F.3d 1317 (Fed. Cir. 2002), 01-1630, Rumsfeld v. Applied Companies, Inc.

Docket Nº:01-1630.
Citation:318 F.3d 1317
Party Name:Donald H. RUMSFELD, Secretary of Defense, Appellant, v. APPLIED COMPANIES, INC., Appellee.
Case Date:December 10, 2002
Court:United States Courts of Appeals, Court of Appeals for the Federal Circuit

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318 F.3d 1317 (Fed. Cir. 2002)

Donald H. RUMSFELD, Secretary of Defense, Appellant,



No. 01-1630.

United States Court of Appeals, Federal Circuit

December 10, 2002

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David B. Stinson, Trial Attorney, Commercial Litigation Branch, Civil Division, Department of Justice, of Washington, DC, argued for appellant. With him on the brief were Robert D. McCallum, Jr., Assistant Attorney General; David M. Cohen, Director; and Deborah A. Bynum, Assistant Director. Of counsel on the brief was

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Donald Tracy, Trial Attorney, Defense Supply Center, Richmond, Defense Logistics Agency, of Richmond, VA.

Peter B. Jones, Jones & Donovan, of Newport Beach, CA, argued for appellee.

Before SCHALL, DYK, and PROST, Circuit Judges.

SCHALL, Circuit Judge.

This suit arises from a requirements contract between the Defense Logistics Agency ("DLA"), a component of the Department of Defense, and Applied Companies, Inc. ("Applied"). Under the contract, among other things, DLA was to purchase from Applied all of its requirements for two types of refrigerant storage cylinders during the period from June of 1994 through June of 1995, with an option year. In its request for proposals ("RFP"), DLA estimated its annual requirements for the two types of cylinders at 62,945 and 56,550 units, respectively. Prior to contract award, DLA determined that the estimates in the RFP were greatly overstated. However, this information was not communicated to any of the offerors, including Applied. Applied was awarded the contract, but after ordering only approximately 10% of the estimated quantity of cylinders, DLA terminated the contract for convenience on February 6,1995.

Following the denial of its termination for convenience settlement proposal and a claim for breach of contract, Applied appealed to the Armed Services Board of Contract Appeals ("Board") under the provisions of the Contract Disputes Act, 41 U.S.C. §§ 601-613 ("CDA"). Ruling on cross-motions for summary judgment, the Board concluded that DLA had breached the requirements contract by negligently failing to inform Applied that the estimates of its cylinder requirements in the RFP were inaccurate. Determination of the amount of damages was reserved for further proceedings. Applied Cos., Inc., ASBCA Nos. 50,749, 50,896, and 51,662, 01-1 B.C.A. (CCH) ¶ 31,325 (Feb. 26, 2001) {"Applied I"). DLA's subsequent motion for reconsideration was denied. Applied Cos., Inc., ASBCA Nos. 50,749, 50,896, and 51,662, 02-1 B.C.A. (CCH) ¶ 31,430 (May 21, 2001) ("Applied II"). The Secretary of Defense ("government") now appeals the Board's decision. Because the Board did not err in holding that DLA had breached its contract with Applied, we affirm.



The pertinent facts, which are not in dispute, are set forth in Applied I. They are as follows:

The requirements contract stemmed from a procurement for cylinders to store R 12 and R 114 refrigerants, which are classified as "Class I Ozone Depleting Substances," or "ODSs." Applied I, 01-1 B.C.A. at 154,730. DLA, which was charged with building and maintaining a stockpile of ODSs for the Department of Defense, assessed the existing inventories of ODSs, the amount of ODSs likely to be used and recycled, and the amount of ODSs needed to ensure availability for mission critical uses. In June of 1993, based on its assessment, DLA developed estimates of the amount of R-12 and R-114 refrigerants that it needed to acquire and, by extension, the number of cylinders that would be required to store those refrigerants. Id. On July 14, 1993, DLA issued the RFP for the requirements contract. DLA estimated in the RFP that 62,945 cylinders would be needed for the storage of R-12 refrigerants and that 56,550 cylinders would be needed for the storage of R-l14 refrigerants, for a total of approximately 120,000 cylinders during the one year term of the contract.1 Id.

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The RFP stated that the variation in actual quantity purchased would be "plus 03% minus 03%." The estimated quantities were the same for the option year. Id. On or about August 11, 1993, Applied, among others, responded to the RFP. Applied was the lowest responsive offeror.

In January of 1994, after initiating a pre-award survey, DLA determined that the reserve requirements for R-12 and R-114 refrigerants were considerably lower than previously believed. Id. at 154,731. As a result, DLA established that the number of R-12 and R-l14 storage cylinders that would be needed during the upcoming year were 2,555 and 1,037, respectively. Id.

On June 20, 1994, DLA awarded the requirements contract to Applied, accepting its bid of $52.60 per cylinder. Id. In the notice of award, DLA repeated the estimates contained in the RFP. Under the contract, for the period June 20, 1994, to June 14, 1995, DLA was obligated to "order from the contractor all the [cylinders] that are required to be purchased by the Government." The contract also provided that the "quantities of [cylinders] specified in the schedule are estimates only and are not purchased by this contract." The contract incorporated various clauses from the Federal Acquisition Regulations ("FAR").

In August of 1994, DLA informed Applied—for the first time—that it had "discovered that a significant mistake was made in calculating the estimates." Id. In place of the erroneous estimates contained in both the RFP and the contract, DLA provided new estimates of the minimum and maximum quantities of R-12 and R-114 refrigerant cylinders actually purchased that it would require. Id. DLA eventually purchased a total of approximately 11,500 units of R-12 and R-l14 cylinders, approximately one-tenth of the total quantity originally estimated. Id.

DLA sought to modify the contract to reflect the new estimates. Applied responded by submitting a revised price of $126.98 per unit for the approximately 11,500 cylinders actually purchased and requesting payment for $615,945 in "under absorbed indirect costs." Id. DLA replied by proposing to pay $79 per unit for the reduced quantity of cylinders. Applied did not accept this proposal, and on February 6, 1995, DLA terminated the contract for convenience. Id. at 154,732.

Applied submitted a termination for convenience settlement proposal in the amount of $1,791,499.00, to compensate it for the shortfall in the cylinders ordered by DLA and for the overhead it allegedly absorbed in the course of preparing for and performing its obligations under the contract. Id. On February 26, 1997, by unilateral determination, the termination contracting officer denied payment for under-absorbed overhead costs and unilaterally settled Applied's termination claim for $295,253.00. Id. This sum covered Applied's costs of terminating its work in progress and $31,718.00 for profit relating to work in progress. Since Applied already had received partial payments under the contract totaling $295,253.00, the termination contracting officer determined that Applied was not entitled to any payment by way of termination settlement. Id.

Applied subsequently submitted to the contracting officer a claim for breach of contract. Applied alleged that it had relied on DLA's faulty estimates in preparing and submitting its bid and had entered into agreements with subcontractors and suppliers accordingly. Id. at 154,733.

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Based on the estimates contained in the RFP and contract, Applied asserted, it had expected to generate a profit of $8.85 per cylinder on approximately 119,495 cylinders, for a total profit of $1,057,530.80. Id. According to Applied, DLA's negligence in the preparation of the estimates constituted a breach of contract that entitled Applied "to recover damages in the amount of its anticipated profit."

On June 12, 1998, the contracting officer issued a final decision denying Applied's breach claim. Id. Though the contracting officer concluded that DLA had failed to exercise due care in the preparation of its estimates, she viewed that negligence as giving rise to a constructive change, rather than a breach, of the contract between DLA and Applied. Accordingly, she ruled that, in terms of relief, Applied was limited to an equitable adjustment under the Changes Clause of the contract, see FAR 52.243-1(b), 48 C.F.R. § 52.243-1(b), or to the recovery of the costs it had incurred plus a reasonable profit, as contemplated by the Termination for Convenience Clause, see FAR 52.249-2(f)(2), 48 C.F.R. § 52.249-2(f). The contracting officer stated that whatever costs Applied could have established under a theory of constructive change or partial termination for convenience would have been paid as part of the termination settlement.


Applied appealed the two contracting officers' decisions to the Board. Ruling on the parties' cross-motions for summary judgment, the Board addressed the question of whether DLA's negligent inclusion of inaccurate estimates in the RFP was a breach of its requirements contract with Applied. Noting the undisputed fact that "the Government knew it would actually need about one-tenth of the quantities in the solicitation," and relying on the decision of the Court of Claims in Womack v. United States, 182 Ct.Cl. 399, 389 F.2d 793 (1968), the Board ruled that DLA's actions constituted a breach of the contract that entitled Applied to compensatory damages: "The Government was . . . negligent, and appellant is entitled to . . . damages for breach of the contract." Applied I, 01-1 B.C.A. at 154,734. The Board therefore granted Applied's motion for summary judgment. Finally, while it noted that its decision only addressed the issue of Applied's entitlement, the Board observed that "[b]reach damages may include anticipatory profits." Id. (citing Carchia v....

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