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US Accounting Win Over Boeing Not ‘Bullet Proof,’ Attorney Says

Sept. 28, 2022, 8:45 AM

The US government’s defeat of Boeing Co.'s government contract cost-accounting lawsuit on jurisdictional grounds was a big letdown for the federal contracting community, but the decision could be vulnerable if the company appeals, according to several government contracts attorneys.

The US Court of Federal Claims on Sept. 21 dismissed Boeing’s challenge to the government’s $1 million assessment because it said it lacks jurisdiction over challenges to the validity of regulations. The company was challenging the validity of a Federal Acquisition Regulation provision, not raising a contract breach claim as it claimed, the court concluded.

The ruling caps, for the time being, a five year old legal dispute between the aerospace defense contractor and the US arising from cost-accounting changes in a $66 million naval aircraft support services contract. Boeing sued the government after it demanded the company pay $1 million to cover increases caused by two such changes.

Boeing argued that the FAR provision the government applied conflicted with the Cost Accounting Standards statute. Boeing said it shouldn’t have to pay $1 million stemming from its changes because those changes resulted in $1.5 million in savings for the government.

The dismissal decision isn’t “bullet proof,” and it wouldn’t be surprising to see an appeal to the Federal Circuit, said Paul E. Pompeo of Arnold & Porter Kaye Scholer LLP in Washington.

Pompeo, who wasn’t involved in the litigation, said this decision, “which had been on everybody’s radar,” has flaws that could result in a remand from the appeals court—if Boeing takes that step.

Counsel for Boeing declined to comment after the decision was issued.

Prior Determinations

The decision is inconsistent with a May 2019 ruling in this case, Pompeo said. The court in 2019 determined that a regulation Boeing is challenging was essentially incorporated into its contracts, but that Boeing had failed to protest at the time of the contract award, he said.

Now, the court is saying that the regulation—which should have been challenged earlier—can’t be challenged at all, he said.

Being able to make cost offsets generated by cost accounting practice changes would have a real impact for contractors, Pompeo added.

“Under the right circumstances, offsets would shield a contractor from having to send cash to the government, sometimes totaling hundreds of million dollars,” he said.

No Decision on Merits

“Putting aside questions regarding the correctness of the court’s decision, five years later the government contracts community still has no decision on the merits of the parties’ dispute,” said Nicole Owren-Wiest of Crowell & Moring LLP in Washington.

The dispute “is whether, under the parties’ contract, the government is entitled to payment for cost impacts due to changes in the contractor’s cost accounting practices when, in the aggregate, those changes did not result in increased costs to the government—in other words, whether the government is entitled to damages when there are none,” she said.

“Common sense, and the plain language of the statute, would say no,” she said.

Peter Hutt II of Covington & Burling LLP, in Washington, said “it is truly unfortunate that the court ducked the substantive issue with a doubtful jurisdictional ruling.”

The “real disappointment is that we don’t have a decision on the real issue—whether the hopelessly unfair approach of FAR 30.606 will continue to be used by the government to disadvantage contractors,” he said.

‘Tortured Analysis’

Another flaw in the Sept. 21 ruling is how the court distinguished Boeing’s case from a Federal Circuit opinion, Texas Health Choice L.C. v. Office of Pers. Mgmt., issued in 2005, Pompeo said.

The Federal Circuit in that case said a health management agency could challenge a regulation incorporated into its contract that allegedly conflicted with the Federal Employee Health Benefits Act.

The claims court’s conclusion that there is a distinction between Boeing’s case and Texas Health “isn’t valid in this circumstance,” Pompeo said.

The court relied on a “tortured analysis” to distinguish Boeing’s suit from Federal Circuit rulings allowing challenges to regulations made in the context of a contract claim, said Kevin J. Slattum of Pillsbury Winthrop Shaw Pittman LLP in Los Angeles.

Government contracts attorneys were hoping for a different outcome because the issue has long been one of contention, he said.

The court appeared “to go out of its way to avoid deciding the legal issue and forges a procedural defense. Very disappointing. I would not be surprised if it gets appealed again,” he said.

Future Conduct

Boeing filed its suit in 2017, and appealed to the Federal Circuit after the court’s 2019 decision granting the government summary judgment.

The Federal Circuit disagreed that Boeing had waived its breach claim and revived the lawsuit in August 2020.

The claims court Sept. 21 said the Administrative Procedure Act prevents the review of the validity of regulations, and said it can’t provide relief where a regulatory interpretation would apply to future actions.

Boeing has multiple contracts with the government that could be affected by the outcome of this case, the court said. “Were the court to resolve this case on its merits in plaintiff’s favor, it would affect future conduct by defendant,” it said.

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; Andrew Harris at aharris@bloomberglaw.com