The government asserted a claim against a contractor for fraudulent over-charges. The contractor asserted a claim against the government for improperly withholding payments. The ASBCA found in favor of the government, concluding the contractor’s fraud was an affirmative defense to the contractor’s claim. On appeal to the Federal Circuit, the contractor argued the government had waived its defense because it had continued to accept performance after it had notice of the contractor’s fraud. The Federal Circuit wasn’t persuaded. Waiver is the relinquishment of a known right. The government may have suspected fraud while accepting performance, but it did not have a known right to assert fraud as an affirmative defense until the contractor pleaded guilty to fraud in court.
Supreme Foodservice GmbH v. United States, Fed. Cir. 2021-1965
Background
Supreme Foodservice GmbH had a contract with the Defense Logistics Agency (DLA) to deliver food to U.S. forces in Afghanistan. Following a DCAA audit, DLA determined that Supreme had been overcharging the government. The contracting officer issued a final decision, finding that Supreme owed the government over $560 million. DLA began withhold monthly payments from Supreme. Supreme then filed a claim seeking to recover over $500 million.
While the government and Supreme exchanged claims, a Supreme employee notified the government that Supreme was overcharging the government for produce. In 2014, the government filed a criminal suit against Supreme in federal district court alleging fraud. Supreme entered a guilty plea. DLA issued another final decision, demanding return of all the money—about $8 billion—paid under the contract.
Supreme appealed its own and the government’s claims to the ASBCA. The board largely found in DLA’s favor, ruling that Supreme had failed to produce evidence to justify the costs it had charged the government. The board also denied Supreme’s claim against the government, finding that Supreme’s fraud was a prior material breach that barred the company from recovering anything. Supreme appealed the ASBCA decision to the Federal Circuit.
Holding
Waiver of Prior Material Breach
Supreme argued the DLA had waived its affirmative defense of prior material breach. Supreme reasoned that DLA had received notice of Supreme’s fraudulent behavior in 2009, but had continued to contract with Supreme for several years, thereby relinquishing any claim for a prior material breach.
The court was not persuaded. Waiver is the intentional relinquishment of a known right. Here, DLA had some notice of Supreme’s fraudulent behavior in 2009. But it did not have a right to invoke the prior material breach defense until Supreme pleaded guilty to fraud in 2014. DLA had not waived its defense.
Interest
The ASBCA had determined that DLA had over-withheld $143 million in payments from Supreme. The board, however, found that Supreme could not recover that money due to its prior material breach. Nevertheless, Supreme claimed it was entitled to recover interest on the amount withheld. Supreme reasoned that the CDA permits a contractor to recover interest on any amount due to a contractor regardless whether the contractor prevailed on its claim.
But the court found that Supreme had misread the CDA’s provision on interest. The statute clearly provided that a contractor can only recover interest for “the contractor’s claim.” This indicates that the contractor has to be successful on its own claim to recover interest.
Supreme is represented by John Prairie and James Ryan Frazee of Wiley Rein LLP. The government is represented by P. Davis Oliver, Brian M. Boynton, and Patricia M. McCarthy of the Department of Justice.
–Case summary by Craig LaChance, Senior Editor
