Northrop Corp. v. McDonnell Douglas Corp.

• Citation: 705 F.2d 1030
• Decision Date: 28 February 1983
• Docket Number: No. 81-5165,81-5172.,81-5165
• Parties: NORTHROP CORPORATION, Plaintiff/Appellant/Cross-Appellee, v. McDONNELL DOUGLAS CORPORATION, Defendant/Appellee/Cross-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

705 F.2d 1030

NORTHROP CORPORATION, Plaintiff/Appellant/Cross-Appellee, v. McDONNELL DOUGLAS CORPORATION, Defendant/Appellee/Cross-Appellant.

Nos. 81-5165, 81-5172.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted March 1, 1982.

Decided February 28, 1983.

As Amended May 9, 1983.

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George L. Hecker, Cave, McPheeters & McRoberts, Los Angeles, Cal., for McDonnell Douglas Corp.

John W. Chierichella, Eldon H. Crowell, Crowell & Moring, Washington, D.C., for Northrop Corp.

Before POOLE and BOOCHEVER, Circuit Judges, and SOLOMON,^* Senior District Judge.

BOOCHEVER, Circuit Judge:

This appeal and cross-appeal present complex issues concerning the extent to which private parties may obtain redress for alleged injuries occurring in the heavily regulated military aircraft industry. The principal issues are whether: (1) suit against the Government pursuant to 22 U.S.C. ? 2356 (disclosure of proprietary data) is the exclusive remedy; (2) the Government is a necessary party; (3) the claims present non-justiciable political or foreign policy questions; (4) certain agreements between the parties are per se illegal restraints of trade; and (5) the Government so pervades the relevant market that no trade or commerce exists for Sherman Act purposes.

The case arises out of a series of "teaming" agreements that Northrop and McDonnell Douglas ("McDonnell") entered into at the Government's request to develop military aircraft. The agreements allegedly limited Northrop to marketing those aircraft developed through the teaming effort that were suitable for land-based operation and McDonnell to marketing those suitable for aircraft-carrier operation. Despite its extensive involvement in the military aircraft industry, the Government is not a formal party to either the agreements or this action.

The trouble giving rise to Northrop's complaint and McDonnell's counterclaim began when McDonnell was awarded a large Navy contract, Northrop lost the competition for a similar Air Force contract, and McDonnell subsequently began marketing land-based aircraft to foreign countries. Northrop contends that McDonnell's marketing of land-based aircraft violated the agreements. It filed suit claiming, inter alia, fraud, breach of contract, economic coercion, refusal to deal, unfair competition, and industrial espionage. McDonnell subsequently filed a counterclaim seeking, inter alia, a declaration of rights under the agreements and damages for Northrop's allegedly illegal conduct and breaches of the agreements.

After some preliminary procedural maneuvering, the district court dismissed Northrop's first amended complaint in its entirety and, alternatively, granted McDonnell summary judgment as to five of the eight counts in the complaint. Northrop Corp. v. McDonnell Douglas Corp., 498 F.Supp. 1112 (C.D.Cal.1980). The district court also dismissed McDonnell's counterclaim and, alternatively, granted Northrop summary judgment on the ground that the counterclaim was the "mirror image" of Northrop's complaint.

We conclude that dismissal and summary judgment were inappropriate as to Northrop's complaint and McDonnell's counterclaim. Accordingly, except for the denial of a motion to modify a finding of fact, which we affirm, the decision of the district court is reversed and the matter remanded for further proceedings.

I Background

A. Facts

Between 1965 and 1972 Northrop devoted substantial resources toward developing a lightweight, moderately priced, multi-mission jet fighter. This development effort produced an aircraft design Northrop termed the P-530.

In 1972, the United States Air Force awarded Northrop a multi-million dollar contract to produce two prototype aircraft (designated the "YF-17") based generally on the P-530 design. The Air Force concurrently awarded a similar contract to General Dynamics Corporation to produce two prototypes based on an alternative design concept (designated the "YF-16"). Both contracts were awarded as part of the Air Force's Air Combat Fighter ("ACF") competition for prototype development of lightweight land-based fighters. In keeping with its usual procurement policy (see generally Armed Services Procurement Regulations "ASPR", 32 C.F.R. ?? 7-104.-9, 9-201(d), and 9-202.2(b) (1981)), the Government obtained unlimited rights through the contracts in the technology incorporated in the YF-16 and YF-17 prototypes.

McDonnell did not compete for an ACF contract. Instead, McDonnell concentrated on improving its F-15 design, which was for a more specialized and expensive land-based fighter than the YF-16 and YF-17 designs.

In 1974, the United States Navy announced the Navy Air Combat Fighter ("NACF") competition to develop a lightweight fighter suitable for aircraft carriers. To cut costs, Congress directed the Navy to make maximum use of the technology already developed and paid for in the Air Force's ACF program. The Navy was thereby forced to limit its NACF competition to proposals based on General Dynamics's YF-16 and Northrop's YF-17 technology. Because of the headstart possessed by General Dynamics and Northrop in this technology and the limited funds the Navy had available to compensate other companies for the expense of catching up, the NACF competition was effectively limited to General Dynamics and Northrop.

Although General Dynamics and Northrop were essentially the only NACF competitors, neither possessed significant experience in producing carrier-suitable aircraft. To overcome this shortcoming, the Defense Department and Navy urged them to "team"¹ with companies having greater Navy experience. McDonnell was one of three or four companies that possessed the requisite Navy experience. Although, as noted by the district court, the parties dispute who was the pursuer and who the pursued,² the outcome of the corporate courtship is clear. On October 2, 1974, Northrop and McDonnell executed a "Teaming Agreement" to develop and propose variants of the YF-17 to the Air Force and Navy.

The Teaming Agreement was the first of three major written agreements between the parties. The parties agreed that Northrop would concentrate on the Air Force's ACF competition while McDonnell concentrated on the Navy's NACF competition. The proposal submitted to the Air Force listed Northrop as prime contractor and McDonnell as associate contractor; the roles were reversed in the proposal submitted to the Navy. The Agreement was intended "to be the basis for later agreements to be definitized."

On January 14, 1975, Northrop's YF-17 lost the ACF competition to General Dynamics's YF-16. On May 2, 1975, the Navy announced that McDonnell's proposed fighter had won the NACF competition, designating the winning design the "F-18". Approximately two months later, the parties entered into a "Basic Agreement" drawn along the same lines as the prior Teaming Agreement.³ The Basic Agreement has five key provisions:

1. In the "Definition" clause, the F-18 is defined as "a carrier-based derivative of Northrop's YF-17 aircraft...."

2. In the "Objective" clause, the parties expressed their commitment to:

work together (without in any manner intending to create a joint venture or otherwise incur or imply joint or several liability) for the purpose of obtaining and performing contracts for the development and production of derivatives of Northrop's YF-17 aircraft that are responsive to the requirements of the U.S. Navy and foreign customers.

3. In the "Contract Responsibilities" clause that is at the heart of this dispute, the parties agreed:

3. (a) ... that McDonnell will be prime contractor in connection with contracts with the U.S. Navy for the development of the F-18 and for the production of those F-18 aircraft purchased by the U.S. Navy for its own use. Furthermore, in the event a foreign customer desires to procure from McDonnell ... F-18 aircraft of basically the same configuration ... McDonnell will be prime contractor....

(b) Northrop may elect to be prime contractor on any or all contracts for the development and production of aircraft derived from the Northrop YF-17 other than those referred to in paragraph (a) above.

(emphasis added). The parties dispute whether the underscored phrase "of basically the same configuration" limits McDonnell to providing only carrier-suitable derivatives of the F-18.

4. The "Data Exchange" clause mutually obligates the parties to exchange available information on the F-18 and YF-17 technology. Pursuant to this clause, the exchanged technology "may be used by the receiving party only in furtherance of the contracts referred to in paragraph 3...."⁴

5. The "Division of Effort" clause provides that, absent a contrary Navy directive, all F-18 production was to be performed according to the distribution of labor specified by the parties in the agreement (see the "Workshare" discussion, infra, at ? III).

The Government subsequently awarded McDonnell a prime contract for over $1.06 billion to make the F-18 operational. McDonnell, in turn, awarded Northrop the principal subcontract for the project. Under the prime contract, the Government paid McDonnell for interim design activities not covered by prior contracts. This payment was "flowed down" to the subcontract, reimbursing Northrop for its previously unfunded interim design work. Both the prime contract and subcontract granted the Government unlimited rights in F-18 technology and incorporated by reference an addendum (No. 438 to MIL-D-8706) that authorized the use and submission of any YF-17 technology found applicable to the F-18.

In late 1975 and early 1976, Iran commenced negotiations with Northrop to become the first customer of a YF-17 derivative land-based fighter. Northrop's land-based derivative was designated the F-18L; McDonnell's Navy design had become known by this time as the F-18A. Concerned that Northrop's...