Directv Grp., Inc. v. United States

Citation52 Employee Benefits Cas. 1652,670 F.3d 1370
Decision Date26 January 2012
Docket NumberNo. 2010–5031.,2010–5031.
PartiesThe DIRECTV GROUP, INC., Plaintiff–Appellee, v. UNITED STATES, Defendant–Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals for the Federal Circuit

OPINION TEXT STARTS HERE

Alexander F. Wiles, Irell & Manella LLP, of Los Angeles, California, argued for the plaintiff-appellee. With him on the brief was Adam J. Fletcher. Of counsel on the brief was Alan C. Brown, Enterprise Business Law Group LLC, of McLean, Virginia.

C. Coleman Bird, Senior Trial Counsel, Commercial Litigation Branch, Civil Division, United States Department of Justice, of Washington, DC, argued for the defendant-appellant. With him on the brief were Tony West, Assistant Attorney General, Jeanne E. Davidson, Director, and Kirk T. Manhardt, Assistant Director. Of counsel on the brief was Lawrence S. Rabyne, Defense Contract Management Agency, of Arlington Heights, Illinois.

Richard D. Bernstein, Willkie Farr & Gallagher LLP, of Washington, DC, for amicus curiae. With him on the brief were Antonio Yanez, Jr. and Frank M. Scaduto. Of counsel on the brief were Carter G. Phillips and Howard Stanislawski, Sidley Austin LLP, of Washington, DC.Before NEWMAN, GAJARSA 1, and MOORE, Circuit Judges.

Opinion for the court filed PER CURIAM. Opinion dissenting-in-part filed by Circuit Judge GAJARSA.

PER CURIAM.

At issue in this appeal are the calculation and payment of segment closing adjustments associated with the sale of certain business units by DIRECTV Group, Inc. (DIRECTV). The United States (Government) appeals the decision of the United States Court of Federal Claims in DIRECTV Group, Inc. v. United States, 89 Fed.Cl. 302 (2009), granting summary judgment in favor of DIRECTV. For the reasons stated below, we affirm.

Background

This appeal relates to the application of particular accounting regulations when a segment of a company is sold and the sale includes the transfer of defined benefit pension plans. A defined benefit pension plan is “a pension plan in which the benefits to be paid, or the basis for determining such benefits, are established in advance and the contributions are intended to provide the stated benefits.” 48 C.F.R. § 31.001 (2010). In simple terms:

Defined-benefit plans guarantee fixed payments to retired employees, leaving the company responsible for ensuring that sufficient funds will be available. Companies therefore must make assumptions regarding, inter alia, the amount of money they expect to pay in the future, and the expected performance of the investments held by their pension plans. Based on these assumptions, companies determine how much money to invest in the plan in a given period so that future liabilities will be met.

Gates v. Raytheon Co., 584 F.3d 1062, 1064 (Fed.Cir.2009).

In the case of cost-type Government contracts, the contributions made on behalf of covered employees are paid by the Government as a part of the cost of the contracts. Id. Like contributions made by the employer-contractor, the amount of the Government's contributions to the plan depends on actuarial assumptions regarding mortality rate, employee turnover, compensation levels, pension fund earnings, changes in values of pension fund assets, etc. See 4 C.F.R. § 413.30(a)(1) (1978). The differences between these ex ante assumptions and actual experience translate into actuarial gains and losses. Id. § 413.30(a)(3).

To achieve uniformity and consistency in the accounting principles followed by Government contractors, Congress authorized the Cost Accounting Standards Board “to make, promulgate, amend, and rescind cost accounting standards and interpretations thereof....” 41 U.S.C. § 422(f)(1). One of these standards, Original Cost Accounting Standard (“CAS”) 413.50, regulated the assignment of actuarial gains and losses, the valuation of the assets of a pension fund, and the allocation of pension costs to a contractor's various business segments. 2 4 C.F.R. § 413.50 (1978). To prevent volatility in the amounts of pension costs charged to the Government, that standard also required certain pension plans to amortize actuarial gains and losses over a fifteen year period. Id.

This amortized adjustment process fails, however, when the segment is closed, i.e., whenever “the segment's contracts have become separated or closed off from the pension costs” such that “there are no future periods in which to adjust ... [the] pension costs.” Allegheny Teledyne, Inc. v. United States, 316 F.3d 1366, 1374 (Fed.Cir.2003) (internal quotation omitted). In such a case, the contractor is required to “determine the difference between the actuarial liability for the segment and the market value of the assets allocated to the segment,” with the difference representing “an adjustment of previously determined pension costs.” 4 C.F.R. § 413.50(c)(12) (1978). This difference is a “segment closing adjustment” to be applied to the contract cost. In short, the Government and contractor terminate the amortization and adjust the outstanding pension obligations by allocating any then-existing surplus or deficiency between them.

At issue are segment closing adjustments resulting from DIRECTV's sale of two segments. The first segment closing occurred on December 17, 1997, when DIRECTV (formerly, Hughes Electronics Corporation) completed a spin-off of its defense business units and sold those units to Raytheon Company (“Raytheon”). In connection with the Raytheon transaction, the parties stipulated that DIRECTV transferred to Raytheon $5,774,655,148 in pension assets and $3,310,028,559 in pension liabilities, resulting in a net transfer of $2,464,626,589 in surplus pension assets associated with the transferred segment. The second segment closing occurred on October 6, 2000, when DIRECTV sold its satellite business units to The Boeing Company (“Boeing”). In connection with that transaction, the parties stipulated that DIRECTV transferred to Boeing $1,843,930,981 in pension assets and $1,037,344,156 in pension liabilities, resulting in a net transfer of $806,586,825 in surplus pension assets associated with the transferred segment. In both transactions, DIRECTV retained a relatively small portion of the surplus pension assets.

By letters dated August 2, 2001, and October 6, 2003, the Government notified DIRECTV of its initial findings that DIRECTV was in noncompliance with CAS 413.50(c)(12) based on the Raytheon and Boeing transactions, respectively. In each case, DIRECTV responded with a segment closing calculation, along with a claim for an interpretation of contract terms under the Contract Disputes Act of 1978. The Government issued a Contracting Officer's Final Decision and Demand for Payment regarding the Raytheon transaction on December 12, 2003, in which it again asserted noncompliance with CAS 413.50(c)(12) and demanded payment of $68,695,891 based on the Government's estimate of the segment closing adjustment. A similar decision regarding the Boeing transaction was issued on June 14, 2005, once again asserting noncompliance with CAS 413.50(c)(12) and demanding payment of $12,197,704.

To resolve the dispute, DIRECTV brought suit against the Government in the United States Court of Federal Claims. In its complaint, DIRECTV alleged that no segment closing adjustments were required because it transferred all of the pension plan assets and liabilities at issue to Raytheon and Boeing. Compl. ¶¶ 39, 52. DIRECTV therefore requested that the court “declare that DIRECTV's cost accounting practices are in compliance with CAS 413 or, alternatively, that any noncompliance has not resulted in increased costs paid by the United States” and that DIRECTV has no liability for any segment closing adjustment in connection with the Raytheon and Boeing transactions. Compl. at 20–21. Substantively identical requests for relief were made by DIRECTV in its Second Amended Complaint. The Government then filed counterclaims for payment of the segment closing adjustments at issue.

The trial court granted DIRECTV's summary judgment motion. Applying the same interpretation promulgated in General Electric Co. v. United States, 84 Fed.Cl. 129 (2008) (“ GE II ”), the trial court concluded that Original CAS 413 mandated that any segment closing adjustment was to be calculated based on the assets and liabilities of the entire segment, including those transferred to the buyer of the segment. DIRECTV, 89 Fed.Cl. at 306–08. The trial court rejected the Government's argument that, absent an express agreement with the Government, DIRECTV could not satisfy its CAS 413 closing adjustment through cost reductions attributable to the segment buyers. More specifically, the trial court found that neither the Allowable Cost and Payment clause, 48 C.F.R. § 52.216–7(h)(2), nor the Credits provision, 48 C.F.R. § 31.201–5, of the Federal Acquisition Regulation (“FAR”) prohibited DIRECTV from taking credit for cost reductions attributable to Boeing and Raytheon. Id. at 308–09.

The Government conceded in its summary judgment brief that if the segment closing adjustments were calculated in accordance with the logic expressed in GE II, the transfers made by DIRECTV to Raytheon and Boeing resulted in benefits to the Government—in the form of cost reductions on contracts held by the transferees—greater than the amount DIRECTV owed the Government following the segment closings. Id. at 307. The trial court also determined that the CAS authorizing legislation, 41 U.S.C. § 422(h)(3), prohibited a windfall to the Government, as would occur if DIRECTV were required to make a direct payment to the Government in addition to the cost reductions already provided by Raytheon and Boeing based on the transfer of surplus pension assets. Id. at 310. In short, the trial court concluded that the Allowable Cost and Payment clause and the Credits provision did not prohibit DIRECTV from satisfying its segment closing adjustment obligations via cost reductions attributable to Raytheon and...

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