Board Has Jurisdiction over Agency’s New Legal Theory on Appeal Even Though It Wasn’t Alleged in Final Decision; Appeal of Northrop Grumman Corporation, ASBCA No. 62165

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Contractor’s motion to dismiss government’s theory for lack or jurisdiction is denied. The government issued a final decision disallowing costs, and the contractor appealed. On appeal, the government asserted a new theory in support of disallowance—i.e., the claimed costs were unreasonable. The contractor argued the board lacked jurisdiction to consider this reasonableness argument because it was a new claim that had not been included in the final decision. But the board reasoned that when the government merely adds legal arguments, the additional arguments do not constitute a new claim. Here, the new reasonableness argument was based on the same operative facts as the final decision and was not so different from the theory in the decision that it constituted a new claim.

Northrop Grumman had flexibly-priced contracts with the government. Northrop Grumman’s Incurred Cost Submission for those contracts in FY 2012 included pension costs associated with defined-benefit pension plans. The Defense Contract Management Agency (DCMA) issued a final decision disallowing some of Northrop Grumman’s pension costs. The final decision stated that the costs were unallowable under FAR 31.201-6 as “directly associated costs” of an unallowable compensation plan.

Northrop Grumman appealed the cost decision to the ASBCA, seeking, among other things, a declaration that its cost were allowable and that they were not directly associated costs under FAR 31.201-6. Northrop Grumman moved for partial summary judgment. The government filed a cross-motion. In its motion, the government reiterated its position that the pension costs were unallowable as “directly associated costs” under FAR 31.201-6. But the government also raised a new theory—namely, that the costs were unallowable as unreasonable under FAR 31.201-3.

Northrop Grumman moved to dismiss the government’s new “reasonableness” theory for lack or jurisdiction. Northrop Grumman contended the final decision had not cited FAR 31.201-3 no referred to the reasonableness of the costs. Because the reasonableness theory had not been included in the final decision, the board lacked jurisdiction to consider it on appeal.

The board reasoned that the final decision on costs was a government claim against Northrop Grumman. When the government asserts a new claim on appeal that materially differs from the initial claim against the contractor, the board lacks jurisdiction over the new claim. Nevertheless, when the government merely adds factual details or legal arguments but does not present a factually different theory, the additional argument does not constitute a new claim. Rather, for jurisdictional purposes, the board will consider the new argument part of the same claim.

Here, the government’s reasonableness argument did not seek a new payment. In fact, the government was still demanding return of the same overpayments. Regardless of whether the costs were unallowable as directly associated costs under FAR 31.201-6 or unreasonable under FAR 31.201-3, the board still had to determine whether it was improper for Northrop Grumman to seek those pension costs. The additional legal argument that the costa were unreasonable was not so materially different as to constitute a new claim. Instead, the reasonableness theory was an additional legal argument as to why Northrop Grumman’s accounting methodology was improper.

Northrop Grumman reasoned that there is no presumption of reasonableness attached to the incurrence of costs by a contractor, and if an initial review of costs results in a challenge by the government, the contractor bears the burden of proof to establish that its costs are reasonable. In this case, Northrop Grumman argued, the final decision indicated that the government never made an initial review the reasonableness or the claimed costs.Consequently, the burden to prove reasonableness never shifted to Northrop Grumman. Thus, the board lacked jurisdiction to now consider the reasonableness argument.

Citing its decision in Parsons Evergreene, LLC, ASBCA No. 58634, 18-1 BCA ¶37,137, the board reasoned that the government’s failure to mention reasonableness in the final decision was not fatal. Once a contractor appeals a final decision to the board, the parties start with a clean slate and the contractor bears the burden of proving (or if a government claim, disproving) liability. The government’s failure to expressly address the issue of reasonableness was not now a jurisdictional bar.

Northrop Grumman argued that another ASBCVA decision, AeroVironment, 16-1 BCA ¶36,337 was dispositive on this issue. In that case, the board denied a government’s motion to amend finding that the proposed amendments raised a new government claim.

But the board found that AeroVironment was inapposite. There, the government had moved to add theories that had been proposed by a government attorney during mediation. Those theories materially changed the quantum as well as the central nature of the operative facts of the claim. In this case, however, the new reasonableness theory was a complimentary challenge to the methodology Northrop Grumman used to calculate it pension costs. Both the reasonableness and the “directly associated” theories sought the same remedy: disallowance. Additionally, the new theories in AeroVironment had contradicted he contracting officer’s reasoning in the final decision. Here, on the other hand, the reasonableness challenge in no way infringed on the contracting officer’s reasoning.

The board reasoned that this case was more similar to DynCorp, Int’l LLC, ASBCA No. 61950, 20-1 BCA ¶ 37,703. There, the government disallowed several payments made to a contractor’s CEO. The audit report stated that the costs were unreasonable. But the final decision never mentioned reasonableness. Despite the absence the reasonableness theory from the final decision, the board denied the appeal, finding the severance payments had not been reasonable. The fact that reasonableness had not been mentioned in the final decision did not preclude the board from considering reasonableness.

As an alternative to its motion to dismiss, Northrop Grumman argued the board should strike the reasonableness challenge because the new theory was an unfair surprise that prejudiced Northrop Grumman. But the board found that the current posture of the case would allow Northrop Grumman discovery to gather the relevant facts to brief the reasonableness issue on the merits.

Northrop Grumman is represented by Thomas A. Lemmer and K. Tyler Thomas of Dentons US LLP. The government is represented by Arthur M. Taylor and Kara M. Klaas of the Defense Contract Management Agency.

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