Sikorsky Aircraft Corp. v. United States

• Decision Date: 10 December 2014
• Docket Number: Nos. 2013–5096,2013–5099.,s. 2013–5096
• Citation: 773 F.3d 1315
• Parties: SIKORSKY AIRCRAFT CORPORATION, Plaintiff–Cross Appellant, v. UNITED STATES, Defendant–Appellant.
• Court: U.S. Court of Appeals — Federal Circuit

773 F.3d 1315

SIKORSKY AIRCRAFT CORPORATION, Plaintiff–Cross Appellant

v.UNITED STATES, Defendant–Appellant.

Nos. 2013–5096

2013–5099.

United States Court of Appeals, Federal Circuit.

Dec. 10, 2014.

Jeffrey A. Hall, Bartlit Beck Herman Palenchar & Scott LLP, of Chicago, IL, argued for Plaintiff–Appellant. With him on the brief was Katherine M. Swift. Of counsel on the brief was Karen L. Manos, Gibson, Dunn & Crutcher LLP, of Washington, DC.

James W. Poirier, Attorney, Commercial Litigation Branch, Civil Division, United States Department of Justice, of Washington, DC, argued for Defendant–Appellant. With him on the brief were Stuart F. Delery, Assistant Attorney General, Bryant G. Snee, Acting Director, and Stephen J. Gillingham, Assistant Director. Of counsel on the brief were Kathlene P. Malone, Defense Contract Management Agency, of Boston, MA, and David C. Hoffman, Defense Contract Audit Agency, of Fort Belvoir, VA.

Before DYK, TARANTO, and CHEN, Circuit Judges.

Opinion

DYK, Circuit Judge.

Sikorsky Aircraft Corporation (“Sikorsky”) has had a number of government contracts that are subject to the government Cost Accounting Standards (“CAS”).¹ These standards govern the allocation of costs among the various contracts being performed by a government contractor. Allocation of costs between government contracts and non-government (or commercial) contracts is particularly important.

Between 1999 and 2005, Sikorsky allocated its materiel overhead costs as between government and non-government contracts according to a direct labor base. The question is whether this was consistent with the CAS. The government contracting officer issued a final decision against Sikorsky, finding Sikorsky's allocations between 1999 and 2005 noncompliant with CAS 418 and concluding that Sikorsky owed the government approximately $65 million in principal and $15 million in interest. Sikorsky filed a complaint with the Court of Federal Claims (the “Claims Court”) challenging this determination. The Claims Court held that the government failed to establish by a preponderance of the evidence that Sikorsky violated CAS 418. We affirm.

Background

During the period in question (1999–2005), Sikorsky held a number of contracts with the United States government to furnish helicopters and other goods and services. Sikorsky also sold aircraft and other goods and services to commercial customers.

Sikorsky's government contracts were subject to the CAS. The CAS are a set of nineteen standards promulgated by the Cost Accounting Standards Board (“CASB”). At issue in this case is the application of CAS 418, which pertains to the “[a]llocation of direct and indirect costs.” 48 C.F.R. § 9904.418–40.

Direct costs can be allocated to a particular cost objective (a contract).² CAS 418 governs how indirect costs are allocated to government cost objectives. See id. § 9904.418–20. Unlike direct costs, indirect costs are not directly related to one particular cost objective (or con-tract).³ See id. § 9904.418–30(a)(2)–(3). Therefore, an allocation base (or allocation method) is used to allocate indirect costs to cost objectives. See id. § 9904.418–40(c). The allocation base allows measurement of the quantity of costs in an indirect pool attributable to a given cost objective. See id. The allocation base used must allocate pooled indirect costs to cost objectives in “reasonable proportion” to the relationship between the indirect costs and the cost objective.Id. For example, direct cost may be used as an allocation base if the amount of direct costs consumed by a cost objective is correlated to the indirect costs consumed by that cost objective.

Sikorsky collected its materiel overhead costs in an indirect cost pool.⁴ Materiel overhead costs included the costs of purchasing and handling materiel, which Sikorsky's labor force used to manufacture and assemble aircraft and parts. The purchasing activities included issuing requests for price quotations to suppliers, negotiating pricing, drafting purchase orders, and coordinating parts delivery schedules with suppliers. The materiel handling (or, in other words, materiel logistics) costs included costs attributable to master scheduling, parts and requirements planning, receiving, internal transportation, trucking, traffic, warehousing, kitting, area control stations, and expediting. These materiel overhead costs were indirect costs related to multiple contracts.

Ideally, materiel overhead costs could be allocated using a base of the direct materiel costs. Sikorsky determined that such an allocation method would result in a distortion. This is so because Sikorsky is required by the government to use substantial amounts of government furnished materiel (“GFM”), which is provided by the government to Sikorsky for use in its government contracts. GFM includes engines, hovering infrared suppression systems and auxiliary power units, crash seats, support equipment, and radios. GFM is not included in Sikorsky's direct materiel cost base. Sikorsky's only costs for this GFM are materiel overhead (handling and storage) costs, which are increased even though the government provides the GFM. For its commercial contracts, Sikorsky incurs direct materiel costs in addition to materiel overhead costs. Therefore, allocation of materiel overhead in proportion to direct materiel costs as between government and commercial contracts would assign too little to the former and too much to the latter.

Before 1999, Sikorsky allocated its materiel overhead costs using an allocation base of direct materiel costs minus certain costs incurred for commercial contracts, namely commercial aircraft engines and used helicopters. These commercial costs were subtracted in order to compensate for the exclusion of GFM from the direct materiel cost base.

However, Sikorsky concluded in 1998 that the base it used prior to 1999 did not adequately compensate for the government-favoring distortions caused by the exclusion of GFM from direct materiel costs. Sikorsky changed its allocation method effective January 1, 1999. Between 1999 and 2005, Sikorsky allocated its materiel overhead costs to government cost objectives using a direct labor base. In other words, Sikorsky allocated its materiel overhead costs in proportion to the direct labor costs consumed by each cost objective, that is, each contract.

Although Sikorsky believed its use of a direct labor base was compliant with the CAS, it changed its allocation method effective January 1, 2006, after the period in question. Under its new allocation method, Sikorsky allocated purchasing costs according to a base of direct materiel costs minus the costs of commercial aircraft engines. Sikorsky continued to allocate materiel handling costs according to a direct labor base. The government contracting officer approved this new accounting method as compliant with the CAS.

However, in March 2007, the contracting officer issued a notice of potential noncompliance with CAS 418 during the period from 1999–2005. On December 11, 2008, the contracting officer issued a final determination that Sikorsky was noncompliant with CAS 418 between 1999 and 2005, with the noncompliance becoming material in 2003. The contracting officer determined that Sikorsky owed approximately $65 million in principal and $15 million in interest to the government.

Sikorsky appealed the government's claim to the Claims Court on December 8, 2009, pursuant to 28 U.S.C. § 1491(a)(2) and 41 U.S.C. § 7104(b). The Tucker Act provides not only for jurisdiction of the Claims Court over suits to recover money from the federal government but also for jurisdiction over suits pertaining to “any claim by or against, or dispute with, a contractor arising under section 7104(b)(1) of title 41, including ... compliance with cost accounting standards.” 28 U.S.C. § 1491(a)(2) ; see Garrett v. Gen. Elec. Co., 987 F.2d 747, 750 (Fed.Cir.1993). Sikorsky thereafter filed a second suit asking the Claims Court to determine the validity of certain affirmative defenses that Sikorsky asserted to the government's claim. The two suits were consolidated. The government counterclaimed for the approximately $65 million plus interest that it claimed Sikorsky owed the government.

On appeal, the parties address only two of Sikorsky's defenses: 1) that the government's claim was barred by the statute of limitations of the Contract Disputes Act (“CDA”), codified at 41 U.S.C. § 7103(a)(4)(A) ; and 2) that Sikorsky had not violated the CAS. After trial, the Claims Court granted judgment to Sikorsky. The court characterized the statute of limitations issue as an affirmative defense, assigning the burden of proof to Sikorsky. The court rejected Sikorsky's statute of limitations defense, holding that Sikorsky had failed to meet its burden of showing that the government had actual or constructive knowledge of a potential claim more than six years before the government submitted its claim to Sikorsky. The court then addressed Sikorsky's alleged CAS 418 violation. The court held that CAS 418–50(e) was applicable to Sikorsky's cost pool. Applying CAS 418–50(e), the court held that the government failed to establish by a preponderance of the evidence that Sikorsky's direct labor base was not an appropriate allocation method.

The government appealed.⁵ We have jurisdiction pursuant to 28 U.S.C. § 1295(a)(3).

Discussion

I

Initially, we consider the statute of limitations issue. Sikorsky argues that the government's claim is barred by the six-year statute of limitations set forth in 41 U.S.C. § 7103(a)(4)(A). Section 7103(a)(4)(A) states that “[e]ach claim by a contractor against the Federal Government relating to a contract and each claim by the Federal Government against a contractor relating to a contract shall be submitted within 6 years after the accrual of the claim.” 41 U.S.C. § 7103(a)(4)(A). A claim accrues as of “the date when all events, that fix the alleged liability of either the Government or the...