McDonnell Douglas Corp. v. U.S., 02-5034.

• Citation: 323 F.3d 1006
• Decision Date: 17 March 2003
• Docket Number: No. 02-5034.,No. 02-5035.,No. 02-5046.,02-5034.,02-5035.,02-5046.
• Parties: McDONNELL DOUGLAS CORPORATION, Plaintiff-Appellant, and General Dynamics Corporation, Plaintiff-Appellant, v. UNITED STATES, Defendant-Cross Appellant.
• Court: U.S. Court of Appeals — Federal Circuit

323 F.3d 1006

McDONNELL DOUGLAS CORPORATION, Plaintiff-Appellant, and General Dynamics Corporation, Plaintiff-Appellant, v. UNITED STATES, Defendant-Cross Appellant.

No. 02-5034.

No. 02-5035.

No. 02-5046.

United States Court of Appeals, Federal Circuit.

March 17, 2003.

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Caryl A. Potter, III, Sonnenschein Nath & Rosenthal, of Washington, DC, for plaintiff-appellant McDonnell Douglas Corporation. With him on the brief was Elizabeth A. Ferrell. Of counsel on the brief was John W. Walbran, McDonnell Douglas Corporation, of St. Louis, MO.

Donald B. Verrilli, Jr., Jenner & Block, LLC, of Washington, DC, argued for plaintiff-appellant General Dynamics Corporation. With him on the brief were David A. Churchill and Thomas J. Perrelli. Of counsel on the brief were Linda L. Listrom, and Gregory S. Gallopoulos, Jenner & Block, of Chicago, IL. Of counsel was Deanne E. Maynard.

David M. Cohen, Director, Commercial Litigation Branch, Civil Division, Department of Justice, of Washington, DC, argued for defendant-cross appellant. With him on the brief were Robert D. McCallum, Jr., Assistant Attorney General; Bryant G. Snee, Assistant Director; Patricia M. McCarthy, Senior Trial Attorney, and Lawrence N. Minch, Attorney. Of counsel on the brief were George P. Williams, Wendell A Kjos, Robert C. Manley, and Mark A. Romano, Navy Office of General Counsel, Department of the Navy, of Arlington, VA.

Richard G. Taranto, Farr & Taranto, of Washington, DC, for amicus curiae appellants National Defense Industrial Association.

Ralph C. Nash, Jr., of Washington, DC, for amicus curiae Aerospace Industries Association. Of counsel on the brief were Marcia G. Madsen and David F. Dowd, Mayer, Brown, Rowe & Maw, of Washington, DC.

Before MICHEL, CLEVENGER and LINN, Circuit Judges.

CLEVENGER, Circuit Judge.

This case arises from the government's default termination in 1991 of a contract between the United States Navy and defense contractors McDonnell Douglas Corporation and General Dynamics Corporation (the "Contractors") to develop a carrier-based stealth aircraft. The Contractors challenge the judgment of the Court of Federal Claims in favor of the government, McDonnell Douglas Corp. v. United States, 50 Fed. Cl. 311 (Fed.Cl. 2001) ("McDonnell Douglas XI"), and the government cross-appeals for the return of unliquidated progress payments. Since the trial court misunderstood our mandate and misapplied the controlling standard, we vacate its judgment and remand. However, we see no error in the trial court's determination that the unilateral schedule imposed by the government was enforceable and not waived, that the Military and State Secrets privilege precluded litigation of the Contractors' "superior knowledge" claim, and that the government's claim for progress payments was not at issue in the case.

I

A

Now in its twelfth year of litigation, this case once again returns to this court. We have previously provided in detail the facts underlying this contract dispute. See McDonnell Douglas Corp. v. United States, 182 F.3d 1319 (Fed.Cir.1999) ("McDonnell Douglas X"). Thus, we will only provide a summary of the relevant background here.

In 1988, the Navy awarded McDonnell Douglas Corporation ("MDC") and General Dynamics Corporation ("GD") a fixed-price contract with a ceiling price of $4,777,330,294 to research and develop a carrier-based "stealth" attack aircraft called the "A-12 Avenger." Id. at 1322. The full-scale engineering and development ("FSD") contract required the Contractors to design and build eight stealth aircraft according to a specified delivery schedule, with the first aircraft to be delivered in June 1990 and the remaining seven aircraft to be delivered monthly through January 1991. Id. The contract also gave the Navy the option to purchase four production lots of aircraft, and the Navy exercised its option on the first production lot in May of 1990. McDonnell Douglas XI, 50 Fed. Cl. at 313.

From the outset, the Contractors encountered difficulties in performing the contract, especially in meeting the contract schedule and in keeping the aircraft weight within specifications. McDonnell Douglas X, 182 F.3d at 1322. In June of 1990, the Contractors informed the Navy that they could not deliver the first aircraft on time and that the cost of completing the contract would substantially exceed the ceiling price. Id. As a solution, the Contractors proposed to restructure the fixed-price agreement into a cost-reimbursement contract. Id. Despite their negotiations, the parties could not reach an agreement on the proposed contract restructuring or on a new delivery date. Id. So, in August of 1990, the Navy issued a unilateral schedule modification, continuing the first flight and delivery date to December 31, 1991. Id.

Subsequently, more problems arose concerning the FSD contract, leading the Department of Defense ("DoD") and the Navy to question the viability of the project. Id. at 1322-23. On December 17, 1990, Rear Admiral William Morris, the contracting officer, sent a cure notice to the Contractors, informing them of his intention to terminate the contract for default based on the Contractors' failure to timely fabricate the required parts and to meet specification requirements. See id. at 1323. In their response dated January 2, 1991, the Contractors conceded that they could not meet the new delivery schedule, but denied that they were in default and asserted that the new delivery schedule was invalid or unenforceable. Id. As suggested cure, they again submitted a proposal to restructure the FSD agreement to a cost-reimbursement contract. Id. In exchange for that restructuring, the Contractors would absorb $1.5 billion in fixed loss and would waive their claims for equitable adjustment. Id.

After numerous meetings with DoD and Navy principals, Admiral Morris terminated the contract for default on January 7, 1991. Id. at 1323-24. A few weeks later, the Navy sent a letter to the Contractors demanding the return of approximately $1.35 billion in unliquidated progress payments under the terminated contract. Id. at 1324.

In June of 1991, the Contractors sought relief in the Court of Federal Claims under the Contract Disputes Act, 41 U.S.C. § 609(a) (2000). After protracted litigation, the trial court held that the Contractors' performance did not constitute the basis for the Navy's decision to terminate, and the court therefore converted the default termination into a termination for convenience. McDonnell Douglas X, 182 F.3d at 1324. On appeal, we reversed that judgment, holding that the termination was related to the Contractors' performance. Id. at 1326-29. We remanded the case to the trial court to determine whether the default termination was justified. Id. at 1329.

After a six-week trial on remand, the Court of Federal Claims ruled in favor of the Navy. McDonnell Douglas XI, 50 Fed. Cl. at 319. The trial court sustained the default based solely on the Contractors' failure to meet the December 1991 first flight date. Id. at 315-19. It declined to base its determination of justified default on the Contractors' alleged financial inability to perform the contract, anticipatory repudiation, and failure to comply with weight and other specification requirements. Id. at 319-24. Turning to the Contractors' defenses, the trial court rejected their arguments that the unilateral schedule was unreasonable and therefore unenforceable, or, if enforceable then the Navy waived the unilateral schedule and first flight date of December 1991; that the contract was commercially impossible to perform; and that the Navy had to disclose its alleged superior knowledge despite the assertion of the state secrets privilege. Id. at 324-26. Having addressed those issues, the Court of Federal Claims entered judgment in favor of the government. Id. at 326.

After entry of judgment, the government moved for a favorable entry of monetary judgment ordering that the Contractors return $1.35 billion in progress payments. Because the trial court determined that the government did not submit a counterclaim and that the unliquidated damages were not an issue in the litigation, the Court of Federal Claims ruled "it was not necessary for this court to address what we consider to be a[n] understanding among the parties that was outside the focus of this case."

The Contractors appealed the trial court's judgment and challenged the trial court's construction of our mandate, determination that the unilateral schedule was enforceable and unwaived, and dismissal of their "superior knowledge" claims. The government cross-appealed for the return of the $1.35 billion in unliquidated progress payments. We have jurisdiction over this case pursuant to 28 U.S.C. § 1295(a)(3).

B

We review issues of law de novo, without deference to the trial court. Bass Enters. Prod. Co. v. United States, 133 F.3d 893, 895 (Fed.Cir.1998). This plenary review also applies to interpretations of our own mandate. Engel Indus., Inc. v. Lockformer Co., 166 F.3d 1379, 1382 (Fed. Cir.1999). However, we will not disturb the trial court's factual findings, such as its evaluation of evidence of default, unless they are clearly erroneous. See Lisbon Contractors, Inc. v. United States, 828 F.2d 759, 766 (Fed.Cir.1987). A factual finding is clearly erroneous when the reviewing court is left with a "definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948).

II

A

On remand, the Court of Federal Claims sustained the default termination based solely on the Contractors' conceded inability to make the December 1991 first flight date. McDonnell Douglas XI, 50 Fed. Cl. at 315-19. As it explained, if it found that the first flight date was reasonable, "the Circuit's finding that the Government's decision to terminate for default was...