American Tel. & Tel. Co. v. U.S.

• Decision Date: 26 May 1999
• Docket Number: Nos. 95-5153,95-5154,s. 95-5153
• Citation: 177 F.3d 1368
• Parties: AMERICAN TELEPHONE AND TELEGRAPH COMPANY, and Lucent Technologies Inc., Plaintiffs-Appellants, UNITED STATES, Defendant/Cross-Appellant.
• Court: U.S. Court of Appeals — Federal Circuit

177 F.3d 1368

AMERICAN TELEPHONE AND TELEGRAPH COMPANY and Lucent Technologies Inc., Plaintiffs-Appellants UNITED STATES, Defendant/Cross-Appellant.

Nos. 95-5153, 95-5154.

United States Court of Appeals Federal Circuit.

May 26, 1999.

C. Stanley Dees, McKenna & Cueno, L.L.P., of Washington, DC, argued for plaintiffs-appellants. With him on the brief was J. Keith Burt. Of counsel on the brief were Thomas R. Suher, and Dean L. Grayson, Lucent Technologies, Inc., of Washington, DC.

Bryant G. Snee, Assistant Director, Commercial Litigation Branch, Civil Division, Department of Justice, of Washington, DC, argued for defendant-cross appellants. With him on the brief was David M. Cohen, Director. Of counsel on the brief were Robert D. Hogue, James H. Haag, Attorneys, Office of General Counsel, Department of the Navy, of Arlington, Virginia.

Caryl A. Potter, III, Sonnenschein Nath & Rosenthal, of Washington, DC, for amicus curiae Electronic Industries Alliance and Aerospace Industries Association of America, Inc. With him on the brief were Elizabeth A. Ferrell, of Washington, DC; Alan M. Posner, of Chicago, Illinois; and Roger K. Heidenreich, of St. Louis, Missouri.

John Lloyd Rice, Miller & Chevalier, Chartered, of Washington, DC, for amicus curiae Federal Circuit Bar Association. With him on the brief was Clarence T. Kipps, Jr. Of counsel on the brief were L. James D'Agostino, Reed Smith Shaw & McClay, of McLean, Virginia; and George Hutchinson, Executive Director, Federal Circuit Bar Association, of Washington, DC.

Before MAYER, Chief Judge, NEWMAN, PLAGER, LOURIE, CLEVENGER, RADER, SCHALL, BRYSON, and GAJARSA, Circuit Judges. ^*

Opinion for the court filed by Circuit Judge NEWMAN, in which Circuit Judges CLEVENGER, SCHALL, BRYSON, and GAJARSA join. Opinion concurring in result filed by Circuit Judge RADER, in which Chief Judge MAYER and Circuit Judge LOURIE join. Opinion dissenting-in-part and concurring-in-part filed by Circuit Judge PLAGER.

NEWMAN, Circuit Judge.

We took this appeal and cross-appeal en banc to reconsider the questions of law presented, upon certification for interlocutory appeal, concerning the applicability of § 8118 of the Defense Appropriations Act of 1987 to a contract between the Department of the Navy and the American Telephone and Telegraph Company. The Court of Federal Claims ruled that in view of the failure of the Department of Defense to comply with § 8118, the contract, which had been performed, was void ab initio. We now hold that the contract was not void, and remand to the Court of Federal Claims for further proceedings in accordance with this premise.

The Reduced Diameter Array Contract

This contract arose in Cold War response to the new ultra-quiet Soviet submarines, which were difficult to monitor using available technology and equipment. Effective antisubmarine response requires that hostile submarines be reliably detected, classified, located, and tracked. The Navy, among its programs for this purpose, employed an integrated undersea acoustic sonar system called the Surveillance Towed-Array Sensor System (SURTASS). In SURTASS a suitably equipped surface vessel tows an array of undersea detection equipment through the ocean, while the equipment collects and transmits appropriate data for processing on shipboard and for transmission to shore-based facilities. The President's Annual Report to the Congress for fiscal 1987, on the topic of Antisubmarine Warfare Forces, referred to SURTASS as "[o]ne of our most important ongoing programs in this area." Id. at 188.

On December 31, 1987, after competitive bidding, the Navy awarded AT & T a fixed price incentive fee contract for a subsystem of SURTASS, referred to as the Reduced Diameter Array. The contract was a "Total Package Procurement," requiring design of shipboard and shore-based electronics, ship-winch interface and tow cable, and an acoustic and electronic array some 8,000 feet long, to meet the new Soviet submarine capabilities. The contract required research, development, and the delivery and testing of an engineering development model, at a fixed ceiling price of $19,221,630, and included an option to the Navy to acquire a second engineering development model at a fixed ceiling price of $3,510,253, and an additional option to acquire three production-level models at a fixed ceiling price of $8,475,466.

The contract was successfully performed by AT & T over a period of five years. With the price adjustments to which the Navy agreed during performance, the final fixed price was approximately $34.5 million. AT & T states that technical problems and unknowns arose throughout performance, and that its total cost was at least $91 million. The Navy rejected AT & T's requests for restructuring the contract and other relief, although AT & T directed attention to § 8118 of the Defense Appropriations Act and relevant Department of Defense policy directives concerning procurement of research and development for new technologies.

AT & T duly brought suit in the Court of Federal Claims under the Contract Disputes Act. On cross motions for summary judgment the issues arising from the enactment of § 8118 were presented and argued. The Court of Federal Claims ruled that § 8118 applied to this contract, that it had not been complied with by the Department of Defense, and that the contract consequently was void ab initio. Responding to AT & T's proposal that the appropriate remedy was to reform the contract into the cost-reimbursement form favored by § 8118, the Court of Federal Claims held that since there had never been a valid contract it could not be reformed. The court held, however, that AT & T was entitled to compensation for its work on the basis of quantum meruit, on a theory of implied-in-fact contract. Before proceeding to determine quantum, the court certified for interlocutory appeal, in accordance with 28 U.S.C. § 1292(d)(2), the following questions:

(i) whether a contract executed in violation of statutory restrictions on the obligation and expenditure of appropriated funds may be declared void from the start at the instance of the performing contractor, and, if so,

(ii) whether compensation for benefits conferred upon the Government (pursuant to the voided contract) can be predicated on an implied-in-fact contract with the amount of recovery to be determined pursuant to unjust enrichment principles.

A panel of the Federal Circuit, by split decision, affirmed the ruling that the contract was void ab initio. The court also held that no relief was available to AT & T on any theory, except perhaps to replevin the goods that had been delivered to the Navy. Upon the petitions of both sides we have reheard the matter en banc. ¹

Section 8118 of the Defense Appropriations Act of 1987

Concern about the use of fixed price contracts for research and development phases pervades defense procurement. In 1971 Department of Defense Directive (DODD) 5000.1 stated that "[i]t is not possible to determine the precise production cost of a new complex defense system before it is developed," and established the policy of using cost-reimbursement price terms for procurement of research and development. The Directive stated: "Fixed price contracts are normally not appropriate for research and development phases." DODD 5000.1 & D.9.g (as amended, Sept. 1, 1987). The Federal Acquisitions Regulations governing R & D contracts also embodied this policy. See, e.g., 48 C.F.R. § 35.006(c) (1984-1998) ("Because the absence of precise specifications and difficulties in estimating costs with accuracy (resulting in a lack of confidence in cost estimates) normally precludes using fixed-price contracting for R & D, the use of cost-reimbursement contracts is usually appropriate.")

The record states that in the 1980s, despite these policy directives, the Navy returned to fixed price contracting for R & D as part of the Total Package Procurement concept. This in turn led to congressional investigations and hearings. An investigation conducted by the House Appropriations Committee concluded that for the development phases of new technologies, the Navy's use of fixed price contracting resulted in program delays, cost overruns, contractor claims, non-participation, and litigation. See Surveys & Investigations Staff, Report to the Comm. on Appropriations, U.S. House of Representatives: Navy Fixed Price Contracting in the Research, Development, Test and Evaluation (RDT & E) Account, 100th Cong., 1st Sess. (1987). The Report stated that: "Although Navy officials at the headquarters level have predicted immense success for the acquisition policy, the opinions expressed by Navy and other Service field procurement officials and technical experts indicated that [fixed price contracting] generally [has] proved unsuitable in an R & D environment." Id. at ii. The Report concluded that the nature of the work in research and exploratory development contracting "most frequently necessitates" use of the cost-reimbursement type contract. Id. at 11.

At ensuing hearings on the 1988 Defense budget, concern was expressed about the continuing use of fixed price contracts for high-cost, high-risk development projects, as well as concern for meeting congressional oversight and allocation obligations under this form of procurement. Department of Defense Appropriations for 1988: Hearings Before the Defense Subcomm. of the Comm. on Appropriations, 100th Cong., 454-55 (1987). Legislatively implementing these concerns, the House included in the Defense Appropriations Act of 1987 the provision that became § 8118:

§ 8118. None of the funds provided for the Department of Defense in this Act may be obligated or expended for fixed price-type contracts in excess of $10,000,000 for the development of a major system or subsystem unless the Under Secretary of Defense for Acquisition determines, in writing, that program risk has been reduced to the extent that realistic pricing can...