California v. United States, 17-206C

CourtCourt of Federal Claims
PartiesSTATE OF CALIFORNIA, acting by and through BETTY T. YEE, STATE CONTROLLER, Plaintiff, v. UNITED STATES, Defendant.
Docket NumberNo. 17-206C,17-206C
Decision Date20 December 2017

STATE OF CALIFORNIA, acting by and through

No. 17-206C

United States Court of Federal Claims

December 20, 2017

Motion for Summary Judgment; Cooperative Agreement; Breach of Contract; Contract Interpretation; Incorporation by Reference

Martin Lobel, Lobel, Novins & Lamont, LLP, Washington, D.C., for plaintiff.

Zachary J. Sullivan, Trial Attorney, Commercial Litigation Branch, Civil Division, United States Department of Justice, Washington, D.C., for defendant. Of counsel was Amy M. Siadak, Attorney-Advisor, General Law, United States Department of Interior, Office of the Solicitor - Rocky Mountain Region, Lakewood, CO. With them were Allison Kidd-Miller, Assistant Director, Commercial Litigation Branch, Civil Division, Robert E. Kirschman, Jr., Director, Commercial Litigation Branch, Civil Division, and Chad A. Readler, Acting Assistant Attorney General.



In the above-captioned case, plaintiff, Betty T. Yee, acting through and for the State of California, alleges breach of contract by defendant United States, acting through the Department of the Interior (DOI). Alleging jurisdiction in this court is proper pursuant to the Tucker Act, 28 U.S.C. § 1491 (2012), plaintiff, in its simplified, brief, amended complaint filed in this court, requests this court to find that the DOI violated the terms of a cooperative agreement entered into with the State Controller's Office (SCO) by withholding payments totaling $296,459.94 from the SCO based on a dispute as to how salary, fringe benefits, and indirect costs should be calculated under the agreement for the period of October 1, 2010 to September 30, 2014. Plaintiff requests $296,459.94 in damages, plus interest, the costs of this action, and any other just and proper relief.

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In September 2010, the DOI and the SCO entered into "Grant/Cooperative Agreement" Number M10AC20010 (the Agreement), which was subsequently renumbered to "Grant/Cooperative Agreement" Number D12AC70004 in a modification executed on November 3, 2011. Under the terms of the Agreement, the SCO provided audit and investigation services to the DOI "in accordance with Section 205 of the Federal Oil and Gas Royalty Management Act of 1982, as amended . . . ." The Agreement had an effective date of October 1, 2010, an initial term of two years and nine months, and an option to be extended for an additional three years, with the concurrence of both parties. In June 2013, the parties entered into a modification with an effective date of July 1, 2013, which extended the Agreement, without change, for three years, and provided that the term of the Agreement would end on June 30, 2016.

The Agreement provided that the SCO would "conduct audits and investigations related to oil and gas revenues owed to the United States and shared with the State, which are attributable to leased Federal onshore property and offshore 8(g) [41 U.S.C. § 1337(g)] zone property within the State . . . ." Additionally, the SCO was responsible for conducting "audits and investigations related to solid or geothermal revenues, which are attributable to Federal lands within the State's boundaries," "pursuant to Public Law 102-154." Part 2 of the Agreement provided that the DOI would "reimburse the State up to 100 percent of allowable costs for audits and/or investigations of Federal oil, gas, and solid mineral leases . . . ."

The SCO was subject to several reporting requirements under the Agreement. Pursuant to Part 5.2(B) of the Agreement, the SCO was required to submit financial reports, "as required by 43 CFR 12 [(2010)]," to ensure that expenses were recorded in the proper period. Under Part 5.2(C)(4), the SCO was required to submit a request for reimbursement within sixty days after the end of a payment period. In accordance with Part 5.2(C)(4), the SCO's request for reimbursement had to be submitted with a "summary of activities (e.g., number of audits and/or investigations performed) and other actions taken" and a "certified summary of costs incurred during the period for which the State has requested reimbursement." Part 5.2(C)(4)(b) further provided:

Summary schedules shall list direct labor hours, hourly rates, travel costs, and training costs by employee; as well as fringe benefit amounts, overhead rates and amounts, and other expenditures agreed upon by the State and the CO. Documentation is required for any change during the year of the fringe benefit or overhead rates.

Part 6.4 of the Agreement governed "Payment of Reimbursable Costs." Under Part 6.4(B), the DOI was responsible for reimbursing the SCO "for approved costs incurred under this Agreement in accordance with 43 CFR 12(A) Administrative and Audit Requirements and Cost Principles for Assistance Programs." At the time the parties entered into the Agreement in September 2010, 43 C.F.R. Subpart 12(A) prescribed the administrative requirements and cost principles for grants and cooperative agreements

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entered into by the DOI. See 43 C.F.R. § 12.1 (2010). The regulation at 43 C.F.R. § 12.2 (2010) indicated that a cooperative agreement with a state is subject to several Office of Management and Budget (OMB) Circulars, including OMB Circular A-87, which established principles and standards for determining costs incurred under grants, cost-reimbursement contracts, and other agreements with state, local, and Indian tribal governments. See OFFICE OF MGMT. & BUDGET, EXEC. OFFICE OF THE PRESIDENT, OMB Circular A-87, Cost Principles for State, Local, and Indian Tribal Governments (2004). Additionally, Part 8 of the Agreement, titled "Standard Award Terms and Conditions," stated that "[a]wards are based on the application submitted to, and as approved by DOI, and are subject to the terms and conditions incorporated either directly or by reference in the following: . . . 43 C.F.R. 12(A) . . . 43 C.F.R. 12(C) . . . ."

Additionally, under the terms of the Agreement, the compensation that the SCO paid to its employees working under the Agreement was reimbursable as a direct cost subject to the limitations set forth in Part 6.5(B) of the Agreement. Part 6.5(B)(1) stated:

Salaries and wages may not exceed the State's established policy and practice including the established pay scale for equivalent classifications of employees whose salaries are financed from non-Federal sources, which will be certified by the State, nor may any individual salary or wage exceed the employee's annual rate of compensation for similar functions performed immediately prior to employment hereunder. Merit or promotion increases of employees performing hereunder may not exceed those provided by the State's established policy and practice.

The Agreement at Part 6.5(C) stated, "[f]ringe benefits shall be allowed in accordance with the State's established accounting system." Pursuant to Part 6.5(D) of the Agreement, "[o]verhead rates shall be allowed in accordance with the State's established audited accounting system." Part 7.1(D), however, required that the SCO "maintain complete cost records for the Agreement period in accordance with the Generally Accepted Accounting Principles (GAAP). Such records shall be in sufficient detail to clearly demonstrate the total actual costs associated with the project . . . ."

During the course of performance at issue in the current case, October 1, 2010 to September 30, 2014, the SCO billed the DOI for salary, fringe benefits, and indirect costs, according to the SCO, in accordance with California's State Administrative Manual, also referred to as "SAM" throughout the record before the court, which, plaintiff noted, "had been in effect in California for over 30 years." The SCO utilized a formula contained in Section 8740 of California's State Administrative Manual, titled "BILLING FOR SERVICES OF EMPLOYEES PAID ON MONTHLY BASIS," for calculating the hourly billing rate for employees paid on a monthly basis.1 (capitalization in original). The state

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formula merged an employee's salary, fringe benefits, and indirect costs into a single hourly billing rate for that employee.

The DOI sent plaintiff a draft Attestation Engagement Report for the period of October 1, 2013 through September 30, 2014 prepared by the Department of Interior Office of Natural Resources Revenue, State, and Tribal Support (ONRR) to the SCO, which reviewed "fulfillment with the terms of your Cooperative Agreement . . . ." The draft Attestation Engagement Report provided a "walk-through of how [the SCO] charged [the DOI] for salary, fringe and the indirect costs (ICR/overhead) . . . ." (emphasis omitted). The draft Attestation Engagement Report and subsequent final Attestation Engagement Report appear to address indirect costs and overhead costs as a single category of costs labeled "ICR costs." According to the draft Attestation Engagement Report, the formula used by the SCO began with 2,920 hours per employee. The formula then subtracted eight hours per day for each Saturday, Sunday, and holiday occurring during California's fiscal year from the 2,920 hours. The draft Attestation Engagement Report indicated that the resulting amount was then reduced by the "non-working hours related to" personal leave, training, and other absences. That amount, 1,724 hours, was divided by twelve months to determine a theoretical amount of monthly working hours. To compensate the SCO for the cost of an employee's fringe benefits, the formula then added the state staff benefits contribution percentage2 to one-hundred percent and divided that number by the theoretical monthly working hours of 144. The resulting number was known as the "SAM Factor."

The draft Attestation Engagement Report stated that to determine the "total cost" of an employee for each month, the SCO would first multiply the employee's monthly salary by the "SAM Factor." Next, the SCO multiplied the resulting amount by the rates for fringe...

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