In a suit alleging that the government breached its obligations to reimburse a contractor for pension costs and post-retirement benefits, the government’s motion for summary judgment was mostly granted and the contractor’s cross motion for summary judgment was mostly denied where (1) instead of relying on historical data to calculate an adjustment pension costs, the contractor improperly used data subsequent to an arbitrarily chosen cutoff date; and (2) to the extent the contractor could terminate or modify its obligation to pay post-retirement benefits, those benefits could not be included in a segment closing adjustment and thus were not the government’s responsibility.
For several decades, the government operated uranium enrichment facilities in Ohio and Kentucky through the United States Enrichment Corporation, a wholly owned government corporation. In 1993, Congress passed the USEC Privatization Act, which privatized the enrichment enterprise. For the next 17 years, the USEC operated as private company that contracted with the government. In 2010, however, the government stopped enrichment work at the Ohio facility. As a result, on January 1, 2011, the USEC divided the Ohio and Kentucky operations into two separate segments for costs accounting purposes.
The Ohio facility closed in September 2011, which triggered USEC’s obligation to perform a segment closing adjustment under 48 C.F.R. § 9904.413-50(c)(12) to determine the value of USEC’s pension and post-retirement benefits plans. USEC chose January 11, 2011, the date it divided the Ohio segment, as the date for measuring the value of the pension and post-retirement plans.
USEC claimed the government owed the company money for underfunded pension and retirement funds. But the government refused to pay, alleging that USEC had chosen the wrong date from which to calculate the value of the pension fund and that the company had improperly charged the government with retirement costs that should not be included in an adjustment. USEC sued the government in the Court of Federal Claims, asserting a breach of contract.
The court agreed with the government’s argument that USEC had calculated pension benefits from the wrong date. First, the court noted that it was undisputed that USEC possessed pre-2011 data, which it could use to calculate the pension benefits for the Ohio segment.
Second, the court believed that USEC had misread the relevant Cost Accounting Standard, 48 C.F.R. § 9904.413-50(c)(5). While that standard governs the closing of a “segment,” it does not mean, as USEC argued, that an adjustment must be made from the date the segment was created. Rather, the court reasoned, the standard requires the contractor to use the best available data from the earliest date for which the contractor has complete information. The contractor is not entitled to pick some arbitrary date from which to calculate pension value. Indeed, the court continued, if contractors were free to create segments at will and chose dates without taking into account the historical contractual relationship with the government, then contractors would be incentivized to open and close segment whenever they believed pension plans were underfunded, ignore the government’s historical contributions, and impose the maximum cost on the government.
Finally, to the extent the USEC argued that recreating the historic data for the pension plan would be burdensome, the court disagreed, reasoning that USEC had already agreed the pre-2011 data was available.
The court next considered whether the government owed any additional money to USEC for post-retirement benefits. Citing Raytheon Co. v. United States, 92 Fed. Cl. 549 (2010), the court found that pension benefits only need to be included in a closing segment adjustment if they are integral to the pension plan. USEC argued that the post-retirement benefits it had provided through its plan were vested and integral and thus should be included in the adjustment. Specifically, USEC argued that the USEC Privatization Act passed by Congress made the post-retirement benefits integral. The court, however, noted that the Privatization Act only required contractors to honor post-retirement benefit during the life of a collective bargaining agreement. Because the benefits were dependent on a collective bargaining agreement, they were not vested or integral.
The court did find, however, the Privatization Act required the continuation of post-retirement benefits for certain eligible retirees—i.e., those that had retired before privatization and those whose benefits had vested before privatization. The court determined that the benefits due to those individuals had to be included in the segment closing adjustment.
Aside from those eligible plan participants, the court found, no other participants were entitled to have their post-retirement benefits included in the adjustment. The USEC plan expressly allowed the company to amend, modify, or terminate the plan at any time. As a result, the plan did not guarantee benefits and thus other than for the pre-privatization employees, benefits under the plan could never vest. Because the benefits never vested, they were not subject to a segment closing adjustment.
Finally, the court considered whether post-retirement benefits were recoverable under the FAR. USEC contended that FAR 52.216-7 allows contractors to recover allowable costs and that its allowable costs included post-retirement benefits. The court rejected the argument, finding that the parties had a Forward Pricing Rate Agreement that ended the government’s obligation to pay post-retirement costs when the contract ended. Moreover, the court determined that under the Raytheon precedent, the FAR would not obligate the government to provide post-retirement costs when the post-retirement plan could be modified or terminated at will.
Ultimately, USEC’s and the governments cross motions for summary judgment were both granted in part and denied in part. The government was granted summary judgment on everything except the post-retirement benefits of pre-privatization participants. USEC was denied summary judgment on every issue except for post-retirement benefits of pre-privatization participants.
USEC is represented by Thomas A. Lemmer, Timothy J. Simone, Joseph G. Martinez, and Dennis J. Scott. The government is represented by Albert S. Iarossi, Chad A. Readler, Robert E. Kirschman, Jr., and Steven J. Gillingham of the U.S. Department of Justice.
