Government’s claims seeking reimbursement for overcharges are, for the most part, granted. The contractor had a contract to deliver food to troops in Afghanistan. The contractor massively overcharged the government for delivery of the food and committed other various frauds during performance. The government filed claims against the contractor to recoup the amounts it had overpaid. The contractor also filed claims against the government, contending that the government was bound by the rates the contractor had charged. The board found that although there were multiple claims, the appeal really hinged on the validity of the government’s claim. Also, while the government was the effective claimant, the board found that due to the way the delivery rates had been negotiated—essentially as a request for an equitable adjustment—the contractor bore the burden of proof. For the most part, the contractor was unable poke holes in the government’s claims. The government also asserted a claim that the contract was void due to fraud in the inducement. But the board denied this claim finding that the government would have likely entered the contract despite the fraud.
Supreme Foodservice GmbH had a contract with the Defense Logistics Agency to deliver food to troops in Afghanistan. Initially, the contract required Supreme to deliver food to four large military bases.
But shortly after executing the contract, DLA issued a modification, directing Supreme to begin delivering food to smaller Forward Operating Bases (FOBs). Payment for delivery to the FOBs would be separate from the fees that Supreme received for delivering food to the larger bases. The parties spent several months negotiating a price for the FOB deliveries. Supreme proposed a series of rates per pound of food delivered—i.e., $0.48 per pound delivered by truck, $2.65 for delivery by plane, and $8.65 by helicopter. DLA was under pressure to deliver food and water to the troops at the FOBs as quickly as possible. Consequently, DLA provisionally accepted Supreme’s proposed rates. The parties executed a modification stating that the Supreme’s proposed rates were acceptable for purposes of an equitable adjustment until verification of the rates was completed.
To verify Supreme’s costs, DLA asked the Defense Contract Audit Agency (DCAA) to conduct an audit of deliveries to the FOBs. While noting that Supreme lacked proper accounting controls, DCAA found that Supreme had been significantly overcharging the government for deliveries to the FOBs. The rates Supreme charged far exceeded the costs of the deliveries. Indeed, Supreme was earning 50% to 100% profit on the deliveries. DCAA questioned hundreds of millions in costs claimed by Supreme.
After receiving the DCAA audit, the contracting officer spent months reviewing and adjusting Supreme’s rates for the FOB deliveries. While it was clear that Supreme had been overcharging DLA, Supreme had actually performed well, filling almost all of the order places. What’s more, there was no other contactor that could step in to make critical deliveries to troops if Supreme refused to continue performance. The contracting officer therefore adjusted some of DCAA’s findings. The contracting officer issued a final decision (“the first decision”), finding that DLA had overpaid Supreme for $567 million in excessive rates for the FOB deliveries. The contracting officer also demanded that Supreme reimburse DLA for $175 million in distribution fees paid for the FOB deliveries.
While the DCAA audit was pending, Supreme become embroiled in criminal and False Claims Act litigation. Supreme was using a subsidiary to markup the invoice prices of items, including water, it had been providing. DLA referred the matter to the Defense Criminal Investigation Service. Supreme ultimately agreed to plead guilty to fraud and conspiracy against the United States in federal court and paying hundreds of millions in fines and restitution.
In addition, a former Supreme employee filed a qui tam action against the company under the False Claims Act, making various fraud allegations, including illegal kickbacks. The government intervened, and Supreme settled the suit, agreeing to pay the government $101 million.
Although DLA knew of Supreme’s various frauds, it continued to work with the company, presumably because Supreme actually delivered food in a mission critical situation.
Supreme completed performance in 2013. At that time, DLA’s first decision, seeking reimburse for over hundreds of millions in overpaid delivery and distribution fees, was still pending. In 2015, DLA issue another decision seeking to recover the entire $8.8 billion it had paid to Supreme under the contract. Tthe government alleged the Supreme had, in a variety of ways, committed a major fraud against the government and thus the contract was void. In 2017, DLA issue a third decision seeking a reimbursement of about $350 million in overpaid distribution fees paid to Supreme between 2011 and 2013.
Supreme submitted two claims to DLA that were essentially reverse images of the government’s overpayment claims. Basically, Supreme contended its that it was entitled to the original delivery rates the government had accepted when it first directed Supreme to make FOB deliveries. DLA denied Supreme’s claims. Supreme then appealed DLA’s three decisions and its own denied claims to the ASBCA.
Before considering the substance of Supreme’s appeals, the board addressed a number of peculiar procedural issues. As an initial matter, both Supreme and the government had submitted claims against each other but both contended the other party was the real claimant that bore the burden of proof.
The board noted that with the exception of DLA’s claim seeking to invalidate the contract for fraud, the claims were all related. Basically, DLA claimed that it had overpaid Supreme due to excessive delivery rates. Supreme contended that the adjusted rates in DLA’s first decision were too low. The board determined that it could address all the related claims by simply resolving DLA’s first decision.
While the DLA decision was a government claim, however, it did not fit neatly into the government claim box. Both parties were alleging an adjustment of rates, but both could not simultaneously have the initial burden of coming forward with evidence. The board looked to basic tenants of contract law to determine which party had the burden of proof.
Generally, a party incurring costs is in the best position to establish proof of those costs. Applying this rule, the board reasoned that once the contracting officer had directed Supreme to start making deliveries to FOBs, the company was on notice that it would need to track its costs. Moreover, the history of the parties’ negotiations demonstrated that Supreme understood that in submitting its proposed costs for FOB deliveries, it was effectively submitting a request for an equitable adjustment. Thus, Supreme had the burden of producing evidence of its costs to DLA and DCAA.
But Supreme never fully produced documents to verify its delivery rates to DLA. Instead, it tried to minimize its criminal conduct and complained about the difficulty of maintaining records. In essence, the board found, Supreme wanted the board to let it off the hook for failing to track its costs on a multi-billion contract. The board found this was inconsistent with the law and the contract and would unjust given Supreme’s demonstrated fraud. Accordingly, while the government was the claimant, Supreme bore the burden of proof.
Having found that the government was essentially the claimant, the board next considered how to handle various affirmative defenses asserted by the government. The government asserted affirmative defenses of prior material breach and fraud in the inducement in response to Supreme’s claims. But the board noted that a claimant cannot use an affirmative defense to avoid the consequence of a claim failing on the merits. Because the government was effectively the claimant, therefore, it could not really assert any of its affirmative defenses.
Nevertheless, the board noted that DLA had already withheld about $540 million from Supreme to recoup the alleged overpayments. If the board, when considering the merits, were to find that any portion of that amount had been wrongfully withheld, then Supreme could be entitled to CDA interest. That interest would be a contractor claim that would be subject to one of the government’s affirmative defenses.
The board, however, found that any claim Supreme had for CDA interest would be barred by the government’s affirmative defense of prior material breach. It was apparent that long before the government allegedly breached by withholding payments, Supreme had breached by overcharging the government for FOB deliveries.
Supreme attempted to argue that the government had waived this defense because it continued working with the company long after learning of the overcharges and the various frauds. But the board determined that the government had not expressly waived its right to assert the defense. Rather, the evidence showed the government carefully analyzed the fraud allegations. What’s more, the board found that the board had not waived its breach defense because given the mission critical nature of the contract, DLA was not in a position to assert a breach and terminate.
As to the substance of the appeals, Supreme argued that the rates established by the contracting officer in the first decision were too low. Supreme argued that it was entitled to the rates it proposed for FOB deliveries. The board, however, reasoned that those rates were not line with any community standard of fairness of public policy given the false statements that Supreme made to DLA during negotiation of those rates and the gross disparity between those rates and Supreme’s costs.
Supreme also alleged that the adjusted rates in the contracting officer’s first decision were too low because they did not include a fair and reasonable profit. But the board found that the contracting officer had applied the DFARS weighted guidelines to establish profit rates. The board has long recognized that the weighted guidelines are an appropriate method for arriving at an acceptable profit.
As noted, in addition to the overcharges for the FOB delivery rates, DLA had sought reimbursement for hundreds of millions in distribution fees that Supreme charged for the FOB deliveries. The government conceded on appeal the contracting officer’s calculation of the amount of distribution fees owed had been less than ideal. The government requested the board to apply a jury verdict method to award damages on the distribution fees. The board, however, noted that the jury verdict approach is disfavored and may only be used when there’s evidence sufficient for the board to make a fair and reasonable approximation of damages. In this case, however, DLA had given the board very little to work with on distribution fees. Accordingly, the board denied the government’s claim with respect to distribution fees for lack of proof.
Finally, the board addressed DLA’s fraud in the inducement claim. The agency contended the contract was void ab initio due to Supreme’s various frauds and thus Supreme had to repay the entire $8.8 billion that had been paid under the contract. The board denied this claim, noting numerous problems. First, if the contract was void for fraud, then the board would not have jurisdiction to consider the appeal because there would be no extant CDA contract. Second, it did not appear that DLA would have disclaimed the agreement even if it had known of the fraud. The fact remained, there were no other viable options for food delivery in Afghanistan. Indeed, DLA continued to work with Supreme after learning of its deception. Third, awarding DLA $8.8 billion did not square with any traditional measure of damages. While Supreme committed fraud, it was undisputed that it also delivered more than three billion pounds of food that was consumed by soldiers. There was no basis to award DLA relief beyond which had already been awarded.
Supreme is represented by Philip J. Davis, Rand L. Allen, John R. Prairie, Tara L. Ward, Nina S. Samuels, and J. Ryan Frazee of Wiley Rein. The government is represented by Daniel K. Polling, Steven Cruz Herrera, J. Maxwell Carrion, and Kari L. Scheck of the Defense Logistics Agency.ASBCA - Supreme Foodservice