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Southwest Marine, Inc. v. United States

December 15, 2006

SOUTHWEST MARINE, INC., PETITIONER,
v.
UNITED STATES AND HON. GORDON R. ENGLAND, SECRETARY OF THE NAVY (IN HIS OFFICIAL CAPACITY), RESPONDENTS.



The opinion of the court was delivered by: Hayes, Judge

AMENDED ORDER DENYING SOUTHWEST MARINE, INC.'S MOTION FOR SUMMARY JUDGMENT

I. Introduction

By Motion for Summary Judgment, Southwest Marine, Inc. ("SWM") appeals a decision by the Armed Services Board of Contract Appeals ("ASBCA"). The ASBCA ruled that the nearly $3 million in attorney fees for which Southwest Marine, Inc. ("SWM") sought reimbursement were unallowable costs under the Federal Acquisition Regulations ("FAR"), and that the Department of the Navy therefore properly denied them. There are no factual issues to be determined; SWM challenges only the ASBCA's legal conclusions. The Court heard the parties' oral arguments on February 24, 2006, and issued an Order denying SWM's Motion on May 25, 2006. SWM subsequently filed a motion for reconsideration, which the Court granted after hearing further oral argument on October 10, 2006. In the Order granting SWM's Motion for Reconsideration, the Court vacated its May 25, 2006 Order. The Court now issues the following Amended Order affirming the ASBCA's ruling.

II. Background

A. The CWA Litigation and Denial of SWM's Request for Reimbursement

In 1996, the National Resources Defense Council ("NRDC") sued SWM in the Southern District of California for violation of the Clean Water Act ("CWA"). The E.P.A. chose not to become involved. The NRDC won the case in 1999, which resulted in imposition of a provisional $799,000 penalty against SWM for violation of the CWA. This penalty was subsequently offset in its entirety by credit for environmental investments made by SWM.*fn1 In addition, SWM was ordered to pay approximately $1.5 million for the NRDC's attorney fees, and approximately $1.3 million for its own attorney fees. SWM sought reimbursement from the Department of the Navy for a portion of the legal fees (both its own, and the NRDC's) pursuant to FAR provisions incorporated into SWM's cost accounting contracts with the Navy.

FAR § 31.205-33 permits the recovery of "[p]rofessional and consultant service costs," including "services acquired by contractors or subcontractors in order to enhance their legal . . . positions. . . . ([B]ut see 31.205-30 and 31.205-47)." 48 C.F.R. §§ 31.205-33(a) and (b). FAR § 31.205-47 is entitled "Costs related to legal and other proceedings," and provides, in pertinent part: Costs incurred in connection with any proceeding brought by a Federal, State, local, or foreign government for violation of, or a failure to comply with, law or regulation by the contractor (including its agents or employees), or costs incurred in connection with any proceeding brought by a third party in the name of the United States under the False Claims Act, 31 U.S.C. 3730, are unallowable if the result is--. . .

(2) In a civil or administrative proceeding, either a finding of contractor liability where the proceeding involves an allegation of fraud or similar misconduct or imposition of a monetary penalty where the proceeding does not involve an allegation of fraud or similar misconduct.

48 C.F.R. § 31.205-47(b). SWM had incurred its legal costs in connection with a proceeding brought by the NRDC, rather than a governmental entity or qui tam relator, but had been assessed with a monetary penalty--albeit one that was eventually offset--payable to the U.S. Treasury, for violation of the CWA. The Contracting Officer denied reimbursement of SWM's legal costs--and those of the NRDC, which SWM had been ordered to pay--as unallowable, and SWM appealed this determination to the ASBCA.

B. The ASBCA Decision

The ASBCA upheld the disallowance, finding the costs unallowable under the Federal Circuit's holding in Boeing North American, Inc. v. Roche, 298 F.3d 1274 (Fed. Cir. 2002). Boeing North American involved legal costs incurred in defending a shareholder derivative suit alleging insufficient fraud controls in the wake of a series of criminal and civil fraud actions against Boeing's predecessor-in-interest, Rockwell. See 298 F.3d at 1276-78. The Federal Circuit ruled that "Boeing's conclusion that the costs are allowable rests on a fundamentally flawed assumption--that the only professional service costs that are not allowable under FAR § 31.205-33 are those costs that are specifically disallowed under another FAR provision." Id. at 1285. Instead, the court held that the costs of unsuccessfully defending a private suit charging contractor wrongdoing are not allowable if the "similar" or "related" costs would be disallowed under the regulations. Id. at 1286-87. In so ruling, the court relied upon FAR § 31.204, which states, in pertinent part:

Section 31.205 does not cover every element of cost. Failure to include any item of cost does not imply that it is either allowable or unallowable. The determination of allowability shall be based on the principles and standards in this subpart and the treatment of similar or related selected items. . . . [T]he determination of allowability shall be based on the guidance contained in the subsection that most specifically deals with, or best captures the essential nature of, the cost at issue.

48 C.F.R. § 31.204(c) (emphasis added).*fn2

In the instant matter, the Government argued before the ASBCA that, under Boeing North American, SWM's legal costs from the CWA litigation were "similar" to those disallowed by FAR § 31.205-47(b)(2), and therefore unallowable. SWM argued that its costs were not similar to those disallowed by FAR § 31.205-47(b)(2), but were instead allowable under FAR § 31.205-33. The ASBCA agreed with the government, concluding that SWM's costs incurred in defending the NRDC's CWA lawsuit, even though brought by a private party, were "similar" to the costs of defending a CWA action brought by the government. In reaching this conclusion, the ASBCA reasoned that both the private party and government-initiated lawsuits were for violation of federal law; both involved imposition of a monetary penalty payable to the U.S. Treasury; and, although the proceeding against SWM had not been initiated by a governmental entity, the NRDC had brought the case as a "private attorney general" under the CWA.

While recognizing that the costs of defending a private party lawsuit resulting in imposition of a monetary penalty payable to the U.S. Treasury are not expressly covered by the FAR, and that various differences exist between government and private third party plaintiffs, the ASBCA concluded: "[W]e do not believe that any such distinctions render private/government actions for CWA enforcement dissimilar so as to preclude the application of subsection 205-47(b)(2) of the FAR cost principles." In so ruling, the ASBCA--as did the Boeing North American court--made particular note of FAR § 31.204. The ASBCA rejected SWM's argument that the regulatory framers' decision not to expressly disallow a contractor's legal costs in the unsuccessful defense of a CWA action brought by a private party reflected an intent to allow such costs, noting in particular that the Federal Circuit in Boeing North American had rejected an analogous argument by the contractor. Relying upon Boeing North American and FAR § 31.204(c), the ASBCA held that SWM's legal costs were similar to the unallowed legal costs set forth in FAR § 31.205-47(b)(2), the subsection "that most specifically deals with, or best captures the essential nature of, the cost at issue." 48 C.F.R. § 31.204(c). SWM now appeals that ruling.

C. The Instant Appeal

In the instant appeal of the ASBCA's decision, SWM contends that the Federal Circuit's Boeing North American decision is "bad law," on the grounds that it is contrary to, or fails to account for, 10 U.S.C. § 2324, of which FAR § 31.205-47 is the regulatory implementation. (Pet'r's Mot. for Summ. J. 17.) Title 10 U.S.C. § 2324(k), which is the codification of the 1988 Major Fraud Act, expressly disallows costs incurred by a contractor in connection with criminal, civil, and administrative proceedings commenced by the United States or a State, where the proceeding relates to a violation of, or failure to comply with, a Federal or State statute or regulation, and results in either: conviction; a determination of contractor liability in the case of a civil or administrative proceeding involving an allegation of fraud; or imposition of a monetary penalty by reason of the violation of, or failure to comply with, a Federal or State statute or regulation. See 10 U.S.C. § 2324(k).

A purpose of the Major Fraud Act was to prevent situations in which the government pays for both sides of a lawsuit--i.e., both its prosecution, and the contractor's costs in defending it. SWM contends that the rule announced by the Federal Circuit in Boeing North American sanctions an application of FAR § 31.205-47(b) that Congress never intended: the disallowance of costs incurred in defending private party lawsuits in which the government had no involvement, and did not finance both sides' legal costs. SWM also points to the language of 10 U.S.C. § 2324(f), which requires the FAR to include detailed and specific provisions on the allowability of contractor legal costs. SWM contends that this language precludes application of the "similar or related to" principle in the manner in which it was applied by the Federal Circuit in Boeing North American, and by the ASBCA in the instant matter. In sum, SWM asserts that the ASBCA's application of the "similar or related to" principle to FAR § 31.205-47(b) in order to disallow SWM's legal costs, was contrary to, or exceeded the scope of 10 U.S.C. § 2324 and congressional intent.

In addition, SWM contends that the penalty imposed in the CWA litigation was not actually a penalty within the meaning of the applicable regulations, on the grounds that it was subsequently offset by credits. Therefore, SWM argues, even if the "similar or related to" principle can be properly applied, the ASBCA incorrectly concluded that SWM's legal costs were "similar" to the unallowable costs set forth in FAR ยง 31.205-47(b)(2), which provide for disallowance of legal costs incurred in connection with proceedings which result in imposition of monetary penalties payable to the U.S. Treasury. SWM also challenges the ASBCA's conclusion that a proceeding brought by a "private attorney ...


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