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How Four Big Federal Contracts Rulings Will Echo Into 2021

Dec. 15, 2020, 11:01 AM

Much of the federal contracting legal world in 2020 remained focused on the Defense Department’s $10 billion JEDI cloud procurement—Microsoft’s selection under it, Oracle’s unsuccessful challenge to it, and Amazon’s ongoing effort to force a redo of it.

But federal contracts litigation went beyond JEDI: Some of the other most significant rulings of the year include four on accounting offsets, a contractor’s criminal history, prototype protests, and whistleblower third-party financing.

Accounting Offsets

Boeing won revival Aug. 10 of its attempt to recover $1 million the U.S. has withheld in a Navy contract dispute, after convincing a federal appeals court it didn’t waive a breach of contract claim by failing to object to an accounting rule before entering into the contract.

The federal government didn’t show that Boeing “bypassed an avenue of relief” that could have allowed it to get around the Federal Acquisition Regulation provision, nor did the government explain how Boeing could have sought a pre-award judicial review of the rule, the U.S. Court of Appeals for Federal Circuit said in Boeing Co. v. United States.

The case returned to the U.S. Court of Federal Claims, where Boeing is again arguing that it shouldn’t have to pay the $1 million stemming from accounting practice changes if they resulted in aggregate savings for the government.

Boeing’s Dec. 11 filing said the government is receiving an “unjust” windfall by collecting the “amount of costs only notionally increased by two of eight changes to Boeing’s cost accounting practices in 2011, plus interest, without regard to the costs simultaneously saved by Boeing’s other changes, which fully offset the notional cost increases.”

The problem with the regulation Boeing is challenging “is its ‘heads-we-win, tails-you-lose’ approach that disadvantages contractors and systematically provides windfalls to the government,” Peter Hutt II of Covington & Burling LLP in Washington, told Bloomberg Law.

“This one-sided approach is not only contrary to the language of the Cost Accounting Standards statute, but also is just fundamentally inequitable,” he said. “Assuming the COFC invalidates the regulation, the cost accounting world will happily return to the much fairer status quo.”

Criminal History

The U.S. Transportation Command’s award of a relocation services contract —valued up to $20 billion—was flawed because the agency didn’t properly consider the awardee’s reliance on affiliated companies with prior criminal problems, the Government Accountability Office said in HomeSafe Alliance LLC in October.

The parent company in the award, Wallenius Wilhelmsen ASA, has executives with ties to another related entity, Wallenius Wilhelmsen Ocean, which pleaded guilty and paid a $99 million fine for bid rigging and price fixing in 2016, the GAO said.

The awardee, American Roll-on Roll-off Carrier Group Inc., didn’t adequately explain how WWO would have no part in contract performance if the executives with Wallenius Wilhelmsen ASA are employed by it, the GAO said.

The GAO recommended the agency remake its award decision, and the agency said in November it plans to award a new contract in June 2021.

The case “serves as a cautionary tale to bidders inclined to burnish a proposal with references to affiliated companies’ resources without internal due diligence,” said Charlotte R. Rosen of Odin, Feldman & Pittleman PC in Reston, Va.

A proposal team “should make an informed decision regarding the risk against the benefit before including affiliates’ resources and capabilities,” she said.

Where to Prototype Protest?

A Jan. 24 Arizona district court ruling reinforced how difficult it is for contractors to protest other transaction solicitations and agreements (OTAs), which allow contractors to provide agencies with prototypes and research services without having to comply with certain regulations.

According to Bloomberg Government, federal agencies’ spending under other transaction authority has increased dramatically in recent years, especially related to efforts to combat the Covid-19 pandemic.

But contractors denied OTAs that want to protest should know that rulings by district courts, the Court of Federal Claims, and the GAO have made it tricky at best.

The District of Arizona, in MD Helicopters Inc. v. United States, said the Administrative Procedure Act barred it from issuing an order forcing the Army to award a contract under an other transaction aircraft prototype solicitation from which MD Helicopters was excluded.

The court also said it couldn’t hear the case under the Alternative Dispute Resolution Act, to the extent MD Helicopters challenged Army conduct in connection with a procurement, because those claims are typically raised at the COFC.

This ruling, however, followed a 2019 decision by the Court of Federal Claims that it lacked jurisdiction over SpaceX’s now-unsuccessful challenge to Air Force OTA awards. The court ordered a venue transfer to a California federal court, which ultimately backed the awards.

The Arizona court distinguished the cases.

The SpaceX case could be litigated in a district court, because that protest involved a multiphase procurement, and SpaceX’s challenge to the first phase had less of a connection to an eventual contract than the MD Helicopters case, the Arizona court said.

As for the GAO, MD Helicopters’ protest there was dismissed in April 2019 because the GAO only hears protests in connection with procurement contracts. OTAs aren’t procurement contracts under the Competition in Contracting Act, it said.

If MD Helicopters filed at the Court of Federal Claims, and the COFC agreed with the Arizona court and heard the case on the merits: “OTAs may not prove to be quite the refuge from normal procurement procures and protests perceived by DOD,” Rosen said.

If the COFC disagreed, that would cause a federal court dispute over jurisdiction which may be resolvable only by the Supreme Court, she said.

Contractors will be discouraged from challenging OTAs—even though the California court heard the SpaceX suit—because of the highly deferential arbitrary and capricious Administrative Procedure Act standard to the government’s actions, said John G. Horan of Faegre Drinker Biddle & Reath LLP in Washington.

Because the Federal Acquisition Regulation doesn’t apply to OTAs, “the government has more discretion in establishing the basis and criteria for award of OTAs, and challengers to the government’s actions have fewer requirements imposed on the government than protesters in traditional procurement,” he said.

District courts will also have fewer requirements to guide them in judicial review, he said.

False Claims Act Financing

A Florida federal jury properly concluded that skilled nursing home facilities violated the False Claims Act by overbilling Medicare, the U.S. Court of Appeals for the Eleventh Circuit ruled June 25 in Ruckh v. Salus Rehabilitation LLC.

The Eleventh Circuit, in a ruling that restored $255 million of an original $350 million award to a whistleblower, said the whistleblower showed that Medicare wouldn’t have paid if it knew the facilities were misrepresenting patients’ need for services.

The court also said the whistleblower’s financing agreement with a third party didn’t deprive her of standing, despite the facilities’ assertions that such agreements are precluded under the FCA as unlawful claims assignments.

The ruling ruling came a day before Ethan P. Davis, the then-principal deputy assistant attorney general, said the Justice Department wants prosecutors to gather information on whistleblowers’ involvement with third-party funders and how much control funders have.

Davis, now with King & Spalding LLP in San Francisco, said it’s too early to tell if the DOJ plans to target for dismissal whistleblower suits funded by third parties.

“The initiative is still new, and DOJ is still learning the extent to which new qui tam matters have a litigation funder behind them,” Davis said. “It may take a while for DOJ to fully understand how common these agreements are, what the terms generally look like, and what actions to take in response.”

To contact the reporter on this story: Daniel Seiden in Washington at dseiden@bloomberglaw.com

To contact the editors responsible for this story: Rob Tricchinelli at rtricchinelli@bloomberglaw.com; Steven Patrick at spatrick@bloomberglaw.com

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