Raytheon Co. v. United States

Decision Date16 July 2012
Docket NumberNo. 05-448C,05-448C
PartiesRAYTHEON COMPANY, Plaintiff, v. THE UNITED STATES, Defendant.
CourtU.S. Claims Court

(Filed: July 16, 2012)*


Contract Disputes Act ("CDA") claims;

Cost Accounting Standards ("CAS")

segment closing adjustments, 48 C.F.R. §

9904.413-50(c)(12); Segment closing

adjustments not barred by standard FAR

42.1204(i) form novation agreement absent

express language otherwise; CAS 413-

50(c)(5) requires "readily determinable

data" and assumptions supported by facts;

Portions of segments are not themselves

segments under CAS 413-30(a)(19);

Jurisdiction over government claims for

equitable adjustments and set-offs is lacking

without a final contracting officer's decision

under 41 U.S.C. § 605(a).

Karen L. Manos, Washington, DC, for plaintiff. John W.F. Chesley and Greta B. Williams, Washington, DC, of counsel.

C. Coleman Bird, U.S. Department of Justice, Washington, DC, with whom were Acting Assistant Attorney General Stuart F. Delery, and Jeanne E. Davidson, Director, for defendant. Jeffrey A. Regner, U.S. Department of Justice, Washington, DC, and Lawrence S. Rabyne, Defense Contract Management Agency, Arlington Heights, IL, of counsel.

Richard D. Bernstein, Washington, DC, for amicus curiae General Electric Company. Mei Lin Kwan-Gett and Howard Stanislawski, Washington, DC and Alan C. Brown, McLean, VA, of counsel.



I. Background

This case involves Contract Disputes Act ("CDA") claims totaling $69,320,563.94 by plaintiff Raytheon Company ("Raytheon") against defendant the United States ("government") related to Raytheon's sale of certain business segments and the retention of assets and liabilities associated with the "defined benefit" pension plans1 of those segments. The segment sales occurred after the 1995 revisions to the Cost Accounting Standards ("CAS") for Composition, Measurement, Adjustment, and Allocation of Pension Costs. 60 Fed. Reg. 16,534 (Mar. 30, 1995) (codified at 48 C.F.R. pts. 9903 and 99042 ). The segments at issue are (1) Aircraft Integrated Systems ("AIS"); (2) Optical Systems ("Optical"); (3) Aerospace Division ("Aerospace"); and the alleged segment (4) Printed Wire Fabrication ("PWF").3 Pursuant to CAS 413-30(a)(20) the sale of each segment resulted in a "segment closing."4 Under the requirements of CAS 413-50(c)(12), each segment closing required Raytheon to calculate an adjustment of previously-determined pension costs—known as a "segment closing adjustment"—for each segment's defined benefit pension plan or plans.5

In Allegheny Teledyne, the Federal Circuit explained the basic concepts for determining pension costs and for conducting segment closing calculations as follows:

CAS 412[] governs how a contractor determines its pension costs for each period-by the contractor's best actuarial estimate of the plan's anticipated earnings and benefit payments, taking into account the plan's past experience and reasonable expectations. . . . [CAS 413] provides for two related types of adjustments to a contractor's pension costs: (1) adjustments to account for the pension plan's actuarial gains and losses and (2) adjustments to account for a closed segment's pension surplus or deficit. Under normal circumstances, the actuarial gains or losses (differences between the estimates and actual experience) are amortized in equal annual installments over a fifteen-year period. This is not the case, however, when a "segment closing" occurs. . . . In the event a contractor closes a segment, . . . CAS 413 provides that a contractor . . . shall determine the difference between the actuarial liability for the segment and the market value of the assets allocated to the segment. . . . The difference between the market value of the assets and the actuarial liability for the segment represents an adjustment of previously-determined pension costs.

Allegheny Teledyne Inc. v. United States, 316 F.3d 1366, 1371 (Fed. Cir. 2003) ("Allegheny Teledyne"), cert. denied sub nom. Gen. Motors Corp. v. United States, 540U.S. 1068 (2003) (citations and internal quotation marks omitted); Gates v. Raytheon Co., 584 F.3d 1062, 1065 (Fed. Cir. 2009) ("Gates") ("[W]hen a business segment is closed, the contractor must calculate both the market value of the assets in the pension plan allocated to the segment and the actuarial accrued liability for the segment. The difference between the plan's assets and liabilities indicates the amount by which the plan is over- or under-funded.") (citation omitted).6 Arithmetically, the difference representing the adjustment may be positive, negative, or zero. As a practical matter, the results of these calculations, based on complex actuarial assumptions and the frequent swings of market investments, is rarely, if ever, zero. If the difference is positive, the government may be entitled to a share of the surplus from the contractor. See CAS 413-50(c)(12)(vi).7 If the difference is negative, the contractor may be entitled to a share ofthe deficit from the government. See id. In either event, the end goal pursued by both the government and the contractor is to settle-up and pay their fair shares to ensure that the pension plans at issue are fully-funded to meet the promises made to the employee-participants covered by the pension plans. "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." DIRECTV Grp., Inc. v. United States, 670 F.3d 1370, 1373 (Fed. Cir. 2012).

All of the sales at issue in this case were part of a corporate restructuring program that Raytheon began in 2000.8 Several other segment sales that occurred during that period involved pension surpluses, and Raytheon paid the government for the surpluses attributable to the government's contributions.9 In this case, Raytheon is seeking to recover alleged pension deficits attributable to government work that were identified byRaytheon in its segment closing adjustments associated with the AIS, Optical, PWF, and Aerospace sales.10

In particular, Raytheon seeks $56,274,371.39 from the government in connection with sale of the AIS segment; $8,693,533.76 from the government in connection with the sale of the Optical segment; $2,933,151.69 from the government in connection with the sale of the Aerospace segment; and $1,419,507.10 from the government in connection with the sale of the alleged PWF segment. Following review by the Defense Contract Management Agency ("DCMA") and the Defense Contract Audit Agency ("DCAA"), the contracting officer denied Raytheon's claims on the grounds that Raytheon had not paid the pension deficits it sought to recover from the government for the employees that remained within Raytheon's pension plans.

The court has issued two prior opinions in this case ruling on motions for partial summary judgment and summary judgment under Rule 56 of the Rules of the United States Court of Federal Claims ("RCFC"). In its first opinion, ruling on cross-motions for partial summary judgment, the court held that Raytheon's post-retirement benefit ("PRB") costs are not "pension costs" within the meaning of CAS 412-40(a), and cannot be included in the segment closing adjustments at issue in this case. See Raytheon Co. v. United States, 92 Fed. Cl. 549 (2010) ("Raytheon I").

In its second opinion, the court addressed the government's motion for summary judgment on a series of issues, including the government's argument that Raytheon waived and transferred its claims for the Optical and AIS segment closing adjustments under the terms of the novation agreements entered into with Raytheon, the government, and the purchasers of each segment. Raytheon Co. v. United States, 96 Fed. Cl. 548 (2011) ("Raytheon II").11 The court denied the government's motion with respect to the novation agreements, finding that a genuine issue of material fact existed as to whether the conduct of the parties was sufficient to vitiate the waiver language in those novation agreements.

This third opinion follows the trial that was conducted in two phases over the course of eleven days in October and November 2011. In the first phase, the court heard testimony and received evidence regarding the issues surrounding the novation agreements. The second phase of the trial focused on the appropriateness of the various methods, assumptions, and calculations used by the parties in performing a post-1995 CAS 413 segment closing adjustment. The court heard live testimony from 21 witnessesand allowed 194 exhibits into evidence. Closing arguments were heard on February 16, 2012, following post-trial briefing.

A summary of the testimony and evidence introduced at trial and the court's findings of fact and conclusions of law for each segment are separately addressed below, starting with the AIS and Optical novation agreement issues and then proceeding with the segment closing calculations for each segment.

II. The AIS and Optical novation agreements did not act to waive and transfer Raytheon's CAS 413 segment closing claims
A. The AIS novation agreement
1. Testimony and evidence presented on the formation of the AIS novation agreement

AIS was established as a segment on January 1, 1999 from a consolidation of various businesses that Raytheon had previously acquired between 1995 and 1997: E-Systems, Inc. ("E-Systems"), Chrysler Technologies Airborne Systems ("CTAS"), and Texas Instrument ("TI") Systems. Pl.'s Ex. ("PX") 19.0002. The AIS segment was sold to L-3 Communications Integrated Systems ("L-3") on March 8, 2002. Id. By the terms of the asset purchase agreement between Raytheon and L-3, Raytheon retained the pension plan assets and actuarial accrued liabilities for AIS. See PX 41.0112 ("The Sellers shall retain all liability and responsibility for the defined benefit pension plans maintained by Sellers in which Transferred Employees...

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