Sufi Network Servs., Inc. v. United States

• Citation: 755 F.3d 1305
• Decision Date: 29 May 2014
• Docket Number: 2013–5040.,Nos. 2013–5039,s. 2013–5039
• Parties: SUFI NETWORK SERVICES, INC., Plaintiff–Cross–Appellant, v. UNITED STATES, Defendant–Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals for the Federal Circuit

755 F.3d 1305

SUFI NETWORK SERVICES, INC., Plaintiff–Cross–Appellant,

v.UNITED STATES, Defendant–Appellant.

Nos. 2013–5039, 2013–5040.

United States Court of Appeals, Federal Circuit.

May 29, 2014.

Frederick W. Claybrook, Jr., Crowell & Moring LLP, of Washington, DC, argued for plaintiff-cross-appellant. With him on the brief was Brian T. McLaughlin.

Kirk T. Manhardt, Assistant Director, 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, Acting Assistant Attorney General, Jeanne E. Davidson, Director, and Douglas T. Hoffman, Trial Attorney.

Before NEWMAN, LOURIE, and TARANTO, Circuit Judges.

TARANTO, Circuit Judge.

The United States appeals from a decision of the United States Court of Federal Claims that awarded $118.76 million in damages, plus interest, to SUFI Network Services, Inc., for breach of contract. SUFI Network Servs., Inc. v. United States, 108 Fed.Cl. 287, 295 (2012). SUFI cross-appeals, seeking additional damages. We affirm in part, reverse in part, vacate in part, and remand.

Background

On April 26, 1996, the Air Force Non–Appropriated Funds Purchasing Office (“Air Force”) entered into a contract with SUFI, under which SUFI would install and operate telephone systems in guest lodgings on certain Air Force bases in Europe. SUFI agreed to furnish and install the necessary equipment, including cables and switches, and to operate the systems once installed, at no cost to the government; in exchange, the Air Force agreed that “a SUFI telephone system (SUFI network) was to be the exclusive method available to a guest for placing telephone calls at the lodging.” Br. for Appellant U.S. at 4. Exclusivity was central to the bargain because SUFI's sole compensation for its up-front investments and operational costs was a portion of the revenues generated by local and long-distance telephone charges paid by guests when making calls to off-base locations. The contract originally had a ten-year term but in March 2000 was extended to fifteen years.

Soon after SUFI began offering service in January 1997, disputes arose about the Air Force's role in not protecting SUFI, under the exclusivity guarantee, against the revenue-limiting diversion of calls from SUFI's systems. It is not disputed here that the contract permitted SUFI to block access to other carriers' networks (for instance, by blocking access to calling cards) and required the Air Force to remove or disable any preexisting Defense Switched Network (DSN) telephone lines in the lodging hallways and lobbies. Nevertheless, DSN phones remained in place after January 1997, and lodging guests began engaging in “toll skipping,” often with the assistance of Air Force personnel: guests avoided SUFI's charges by using DSN phones or, when using in-room SUFI phones, by engaging a DSN operator (or other Air Force agent) to patch a call through to a long-distance destination or to the toll-free number of another long-distance carrier. Moreover, although SUFI and the Air Force agreed to permit soldiers on temporary duty to be patched through to long-distance numbers for periodic “morale” calls of limited duration and frequency, call records showed that, with Air Force assistance, guests often exceeded the limits, placing multiple consecutive calls or lengthy individual calls.

After the Air Force declined to implement adequate controls to curb DSN and patched-call abuse, SUFI blocked guest-room access to the DSN operator numbers but permitted morale calls to be placed from designated lobby phones, the latter under Air Force monitoring through sign-in logs. But Air Force personnel failed to require guests to sign the logs and, in addition, gave guests new access numbers to reach the DSN operator, thereby helping them to circumvent SUFI's charges.

Guest use of calling cards also presented problems under the contract. On June 9, 1999, the parties agreed to modify the contract with respect to charges for toll-free calls. Modification No. 5 states:

TOLL FREE CALLS: $1.00 CONNECTION FEE. (SOME INTERNATIONAL “TOLL FREE” CALLS MAY BE SUBJECT TO BILLING, FOR EXAMPLE, INTERNATIONAL TOLL FREE CALLS TO OTHER COUNTRIES, WHERE A HOST NATION PASSES ALONG A CHARGE, WILL BE SUBJECT TO CONTRACTOR'S STANDARD PER MINUTE CHARGE FOR THAT COUNTRY.)

See SUFI Network Servs., ASBCA No. 54503, 04–1 BCA ¶ 32,606 at 161,365 (Apr. 22, 2004) (SUFI I ) (quoting provision). On November 5, 2003, the Air Force cited Modification No. 5 as authority to “open toll free calls, to include calling cards at the $1.00 connection fee,” and ordered SUFI to “remove all restrictions on toll free calling.” Id. SUFI was forced to comply with the demand for about six months in 2004.

In response, SUFI challenged the Air Force's interpretation of Modification No. 5 and asked the contracting officer to decide “whether Modification 5 (or any other part of the Contract) requires SUFI to remove restrictions on toll-free calls accessing other long-distance carriers.” Id. SUFI also asked the officer to decide whether the Air Force's directive that SUFI remove such restrictions would constitute a “material breach[ ] of contract that permit[s] SUFI to cancel the Contract and stop work.” Id. The contracting officer issued a final decision denying SUFI's claims on January 15, 2004. On SUFI's appeal pursuant to the contract's “disputes” clause, however, the Armed Services Board of Contract Appeals (Board) concluded otherwise. The Board held that SUFI could not be required to remove restrictions on toll-free calls, that the government breached the contract in its order regarding toll-free calls, that the breach was material, and that SUFI could therefore stop performance of the contract. SUFI Network Servs., ASBCA No. 54503, 04–2 BCA ¶ 32,714 at 161,868–69 (Aug. 17, 2004) (SUFI II ); SUFI Network Servs., ASBCA No. 54503, 04–2 BCA ¶ 32,788 at 162,193–95 (Nov. 1, 2004) (SUFI III ).

On August 25, 2004, SUFI notified the contracting officer that it intended to stop work on the contract, but would negotiate with the Air Force over transitional measures to minimize inconvenience to guests. Ultimately, SUFI, while maintaining its claims for breach of contract, sold the telephone system to the Air Force for $2.275 million. The Air Force took over operation of the telephone system on June 1, 2005.

One month later, SUFI submitted twenty-eight monetary claims, totaling $130.3 million, to the contracting officer. The officer denied all of the claims, except that he allowed SUFI $132,922 on its calling-card claim. SUFI appealed to the Board, which granted only partial relief to SUFI, on twenty-one of the claims, in a series of decisions between 2006 and 2010. The Board's final award was approximately $7.4 million in damages, plus interest.

SUFI challenged the Board's decisions in the Court of Federal Claims by filing a contract action under the Tucker Act, 28 U.S.C. § 1491. The parties do not dispute that the Tucker Act covers SUFI's claims. Nor do they dispute that judicial review of SUFI's claims under the Tucker Act is governed by the Wunderlich Act, 41 U.S.C. §§ 321–322 (2006) (now repealed). See Vista Scientific Corp. v. United States, 808 F.2d 50, 50 (Fed.Cir.1986).

SUFI did not challenge the Board's ruling on some claims, which accounted for approximately $2.8 million in damages, plus interest. That amount became final. SUFI challenged the Board's ruling regarding a number of claims, moving for judgment on the administrative record: Count I (calling cards); Count III (hallway and lobby DSN phones); Count V (other operator numbers and patching); Count VI (early DSN abuse); Count VII (Delta Squadron); Count VIII (Prime Knight lodgings); Count IX (Kapaun line charge); Count XI (German troops housing); Count XV (general lack of cooperation); Count XVI (post-termination lost profits); Count XVIII (SIMS/LTS interfaces); and Count XXIII (change of Air Force switches).

On November 8, 2012, the Court of Federal Claims granted SUFI's motion. The court awarded SUFI damages of $118,764,081.34, plus interest, for the claims that were appealed—mostly representing lost profits both before termination of the contract and after termination. SUFI Network Servs., 108 Fed.Cl. at 321. That award was more than $114 million greater than the Board award on the same claims. Id.

The United States appeals the increased award. It accepts that it is liable for breach of contract, appealing only with regard to the amount of damages. SUFI cross-appeals, seeking additional damages. We have jurisdiction under 28 U.S.C. § 1295(a)(3).

Discussion

We review the Board decision in this case under the Wunderlich Act, previously codified at 41 U.S.C. §§ 321–322. Although the Act has been repealed, the repeal does not affect this case—involving judicial review of an administrative decision in a government-contract case that the parties agree is within the Tucker Act and outside the Contract Disputes Act—because SUFI initiated these proceedings at the Board before the repeal. Pub.L. No. 111–350, 124 Stat. 3677, 3855, 3859 (Jan. 4, 2011).

Under the Wunderlich Act, the Board's “decision shall be final and conclusive unless the same is fra[u]dulent or capricious or arbitrary or so grossly erroneous as necessarily to imply bad faith, or is not supported by substantial evidence,” 41 U.S.C. § 321 (2006), and “[n]o Government contract shall contain a provision making final on a question of law the decision of any administrative official, representative, or board,” id. § 322. Although cases subject to the Act involve contract disputes, the judicial proceeding is one of judicial review of agency action. As relevant here, in applying the express statutory standard, we, like the Court of Federal Claims, decide legal issues de novo, review the Board's factual findings for lack of substantial evidence, and ensure that the Board's reasoning was...