Hayes Intern. Corp. v. McLucas

• Decision Date: 06 March 1975
• Docket Number: No. 73--2765,73--2765
• Parties: HAYES INTERNATIONAL CORPORATION, Plaintiff-Appellant, v. Dr. John L. McLUCAS, Secretary of the Air Force, Defendant-Appellee, The Boeing Company, Intervenor-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 247

509 F.2d 247

HAYES INTERNATIONAL CORPORATION, Plaintiff-Appellant, v. Dr. John L. McLUCAS, Secretary of the Air Force, Defendant-Appellee, The Boeing Company, Intervenor-Appellee.

No. 73--2765.

United States Court of Appeals, Fifth Circuit.

March 6, 1975.

Joseph F. Johnston, Drayton Nabers, Jr., Birmingham, Ala., Gilbert A. Cuneo, Robert L. Ackerly, Harvey G. Sherzer, Washington, D.C., for plaintiff-appellant.

Wayman G. Sherrer, U.S. Atty., Charles Stewart, Asst. U.S. Atty., Birmingham, Ala., Patrick Gray, III, Harland F. Leathers, Jeffrey Axelrad, Walter H. Fleischer, David M. Cohen, U.S. Dept. of Justice, Washington, D.C., for Sec. of the Air Force.

Thomas W. Christian, Birmingham, Ala., David E. Wagoner, Seattle, Wash., for Boeing.

Appeal from the United States District Court for the Northern District of Alabama.

Before TUTTLE, COLEMAN and AINSWORTH, Circuit Judges.

TUTTLE, Circuit Judge:

This case involves a suit by an unsuccessful bidder for a Government contract to have the contract awarded to a competitor set aside as being in violation of the regulations of the Department of Defense governing conflicts of interest in Federal procurement, § 1--113.2 and Appendix G of the Armed Services Procurement Regulations (ASPR), 32 C.F.R. § 1--113.2 and Part 141 (1971). ¹ The successful The district court originally issued a preliminary injunction enjoining the Secretary of the Air Force from taking any action pursuant to the contract awarded to Boeing; this Court on October 14, 1971, issued an order without opinion granting the Secretary of the Air The case was tried without a jury. The trial court found that Boeing did not enjoy an unfair competitive advantage over Hayes, nor was it guilty of a conflict of interest which might have biased its judgment and accordingly held that the contract was valid. The plaintiff brings this appeal. We affirm.

bidder, the Boeing Company, joined the suit as defendant-intervenor. Force's motion for a stay pending appeal. The plaintiff, Hayes International Corporation, then moved the district court to vacate the preliminary injunction and the matter proceeded to trial. Hayes stated that the reason it was requesting that its original preliminary injunction be vacated was that it was in the 'best interest of all the parties that this case proceed as quickly as possible to a judgment on the merits' inasmuch as the challenged contract was then scheduled to extend for as long as five years.

I. FACTS

The facts of this case are largely undisputed. While the expert witnesses at trial differed as to their view of the applicability of the organizational conflict of interest regulations, and to the extent of Boeing's actual advantage over other bidders seeking the contract in question, the case largely involves the legal issue of the extent to which the Armed Services Procurement Regulations apply to the facts of this case.

In March, 1971, the Secretary of the Air Force, acting through the United States Department of the Air Force, Air Force Logistics Command, Headquarters Oklahoma City Air Materiel Area, Tinker Air Force Base, issued 'Requests for Proposals' for the procurement of services to perform the 'inspection and repair as necessary' (IRAN), modifications and other related work on the worldwide Air Force Fleet of KC--135 Aerial Refueling Tankers. The Requests were issued pursuant to the authority delegated to the Secretary in 10 U.S.C. § 2304(a)(10)(1970). Pursuant to the Requests, on June 23, 1971, the Secretary awarded contract No. F34601--71--C--3366 to the Boeing Company, to take effect on July 2, 1971. Hayes International, the plaintiff in this suit, was one of the two unsuccessful bidders for this contract. ²

Contract 3366 was awarded to Boeing by the Air Force in the amount of $12,294,894.16 for the first year of performance. The contract was designated to extend over a five-year period for substantially similar maintenance and repair work, based upon options available to the Government to make periodic work assignments. The five-year contract was thus valued at approximately $60,000,000.

The KC--135 is an aircraft originally manufactured by Boeing, and is used by the Air Force as a tanker for supplying fuel in mid-air to other aircraft. ³ The IRAN/Modification contract, as contracts of this sort are referred to in the industry, provided for three classes of work to be performed. The successful bidder was first to perform periodic inspections of each aircraft. The proposal submitted by each of the bidders described the procedures the bidder would follow on each aircraft and offered a per unit price for this work. Secondly the bidder agreed to perform such modifications as prescribed by the Air Force. Modifications might be performed only on individual aircraft, as each suffered individual wear and fatigue following use, or as modifications might be prescribed for each aircraft in the KC--135 fleet. No estimate of total costs was possible because at the time the proposal was submitted it was not known how many aircraft would need modification Hayes International had been awarded a similar contract for the forty months preceding the issuance of the Boeing contract, but lost the 1971 contract for its bid was several million dollars higher than that submitted by Boeing.

or precisely what modifications would be required. The third part of the work contracted for by the Air Force under contract 3366 was unscheduled maintenance at the time the IRAN work was being performed. Following the inspection of each aircraft there might be a variety of different types of repairs which needed to be performed. Each bid set out a formula by which payment could be estimated. This entails largely a designation of a set fee per man hour of work. Using this formula, the Air Force would be able to estimate the total costs of any particular repair on any given number of aircraft.

For a number of years before contract 3366 was awarded Boeing had been under contract to the Air Force to supply sustaining engineering and related support services for the KC--135 fleet. Pursuant to these contracts Boeing had made specific recommendations as to what maintenance and modifications were required on the entire fleet of more than 700 KC--135 aircraft. Boeing continues to operate under these sustaining engineering and related support services contracts. These were awarded to Boeing on a 'sole source' basis without competition or open bidding, ⁴ as was customary in awarding sustaining engineering contracts to the original manufacturer of a given aircraft. ⁵ The trial court found Among its findings of fact, the trial court found: (1) as the contractor responsible for sustaining engineering for the KC--135 fleet, Boeing proposed a number of different modifications and improvements in the KC--135 design; (2) Boeing as part of its duties under the sustaining engineering contracts conducted a series of tests, evaluating fatigue, stress, and other factors which affect the durability and usefulness of each aircraft; and (3) Boeing was thus privy to technical data it generated as well as that provided by the Air Force. It was undisputed that Boeing was responsible for recommending to the Air Force what priority should be placed on any particular set of repairs.

that Boeing's relationship under the sustaining engineering and related support services contracts was essentially as the 'engineering arm' of the Air Force for the KC--135 fleet.

The repairs and modifications which Boeing recommended to the Air Force comprised in part the work the IRAN/Modification contractor would perform. Boeing was thus in a position to recommend changes and modifications to aircraft which would enhance the value of the IRAN/Modification contract it subsequently was awarded.

Hayes argues as a consequence of Boeing's sustaining engineering contracts it violated those D.O.D. regulations outlawing organizational conflicts of interest--both because in its dual role as both technical advisor and IRAN/Modification contractor Boeing was in a position to recommend work which it eventually performed, thereby raising the possibility of unneeded repairs being recommended to increase its own profits, and in addition because Boeing's competitive position was superior to all others bidding for the IRAN/Modification contract. This latter facet of its alleged violation of D.O.D. procurement regulations was due to Boeing's acknowledged superior opportunity to obtain and assess information--thereby enabling it to know with greater assurance what types of modifications and repairs would be performed under the IRAN/Modification contract. Because it alone knew what modifications could be expected, something which no other competitor knew with equal certainty, ⁶ Hayes alleges Boeing could submit a lower bid for work all bidders knew was to be performed, and recoup its profits on the additional work assignments it alone knew would be forthcoming.

At trial Hayes proved that Boeing recommended three specific sets of modifications which had the effect of greatly increasing the value of the IRAN/Modification contract it obtained, information which neither of its competitors possessed at the time of bidding. These three sets of repairs involved alterations to the aerial boom, ⁷ and two sets of wing modifications. One of the wing modifications is actually being performed by Boeing under its IRAN/Modification contract, as is the aerial boom modification, but the most substantial repair The district court found that while Boeing had access to vital information concerning the KC--135 fleet it also found that the Air Force evaluated all recommendations made by Boeing, and that Boeing was not in a position to make final decisions on its own recommendations for modifications and repairs. The district court further found that Boeing was only one source of ideas for improvement, although it did not specify what sources other than those...