Government Contracts & Investigations

Contractors Should Not Leave Money on the Table: The Federal Circuit Clears the Way for Boeing to Use the Tucker Act to Sue DoD for “Illegal Exaction” in Connection with Contract Costs

By | December 14, 2020

In these unprecedented, economically-challenging times for the aviation industry, it is especially important that airlines, manufacturers and other industry stakeholders have an accessible avenue open to them for pursuing reimbursement claims against the federal government arising out of government contracts. In a decision handed down last August, Boeing Co. managed to reverse its fortunes and resuscitate a claim under the federal Tucker Act to recover costs incurred in performing a Department of Defense (“DoD”) contract. Boeing did so by styling its claim as one to recover an “illegal exaction.” In so doing, Boeing avoided its failure to have raised its claim with the agency. Boeing Co. v. United States, 968 F.3d 1371 (Fed. Cir. Aug. 10, 2020).

The Boeing case highlights the fact that contractors should not shy away from identifying and pursuing successful legal theories to preclude the government from retaining money that rightfully should be returned to the contractor’s side of the ledger.

The case arose out of numerous contracts between Boeing and DoD. In 2011, Boeing changed multiple cost accounting practices simultaneously; some of the changes increased costs to the government, whereas others decreased costs to the government. In late 2016, the Defense Contract Management Agency, invoking Federal Acquisition Regulation (“FAR”) 30.606 determined the cost impact of these changes resulted in a cost increase and demanded that Boeing pay the government that amount plus interest. Boeing paid the money to the government under these two government claims, but also filed an action in the Court of Federal Claims (“COFC”) to seek recovery of the amounts thus paid, asserting that the government, in following FAR 30.606, committed a breach of contract and effected an illegal exaction.

The COFC, 143 Fed. Cl. 298, granted the government’s motions to dismiss and for summary judgment. Boeing appealed and the Federal Circuit reversed, holding that: (1) Boeing did not waive its challenge to the lawfulness of the regulation by failing to challenge the regulation before entering into its contract with the government; (2) the government failed to establish that Boeing could have raised its challenge to the regulation during contract formation in an action under the Administrative Procedure Act (APA); (3) the government failed to establish that Boeing could have pursued a challenge to the regulation during contract formation in an action under the bid protest statute; and (4) Boeing established subject-matter jurisdiction under the Tucker Act for its illegal exaction claim.

Boeing’s core argument, applicable to both claims, was that, although FAR 30.606 undisputedly required the DoD to act as it did, that regulation was unlawful—principally because it was contrary to 41 U.S.C. § 1503(b) (and also for procedural reasons). According to Boeing, that provision of the Cost Accounting Standards (“CAS”) statute, which was incorporated into its DoD contracts, required that simultaneously adopted cost-increasing and cost-lowering changes in accounting practices be considered as a group, with the cost reductions offsetting the cost increases. Boeing argued that, by following FAR 30.606’s command to disregard the cost-lowering changes and bill Boeing for the cost-increasing changes alone, the government unlawfully charged it too much.

At the heart of the case was FAR 30.606, entitled “Resolving cost impacts.” Although FAR 52.230-6, a required contract clause for contractors subject to the CAS, does not refer to FAR 30.606, it was undisputed that, in deciding how to deal with the cost impacts of changes, “the Government was required to follow FAR 30.606 when administering the Contract.” U.S. Br. at 45 (citing 41 U.S.C. § 1121(c)(1)); id. (“FAR 30.606 is mandatory”); id. at 50 (“We do not dispute that FAR 30.606 could not be waived, nor that contracting officers are precluded from granting such a waiver.”). FAR 30.606 gives the contracting officer discretion to “adjust[ ] a single contract, several but not all contracts, all contracts, or any other suitable method.” 48 C.F.R. § 30.606(a)(2).

The problem for Boeing was that the regulation limited that discretion in a respect central to the dispute in this case. It instructed the contracting officer not to “combine the cost impacts of . . . [o]ne or more unilateral changes” “unless all of the cost impacts are increased costs to the government.” Id., § 30.606(a)(3)(ii)(A). As was undisputed, that provision barred offsetting increases in costs from some changes with reductions in costs from others.

Boeing Did Not Waive Its Claims for Reimbursement

The government argued that Boeing waived its reimbursement claim by failing, before signing its contract, to challenge FAR 30.606 and its application in a manner that precluded Boeing from offsetting the amount owed to the government with the cost savings enjoyed by the government. The trial court agreed, characterizing the asserted conflict between FAR 30.606 and the CAS statute as a “patent ambiguity in [Boeing’s] contract with the government.” Boeing, 143 Fed. Cl. at 309. The COFC ruled that, “[b]ecause Boeing did not seek clarification, before award, of the conflict it saw between the CAS statute, the CAS clause and FAR 30.606, its contract claims are foreclosed as a matter of law.” Id. at 310.

On appeal, Boeing contended that the trial court incorrectly ruled that Boeing waived its challenge to the lawfulness of FAR 30.606. The Federal Circuit agreed, stating that, a “pre-award objection by Boeing to the Defense Department would have been futile, as the government concededly could not lawfully have declared FAR 30.606 inapplicable in entering into the contract.” The court emphasized that its “precedents do not require, to avoid waiver, that the contractor have pursued judicial avenues of relief before the award. To the extent that the government even urges adoption of such a requirement here, it has provided no sound basis for doing so in this case: it has not identified a judicial avenue through which a ruling on the merits of the objection was assuredly available.” 968 F.3d at 1377.

Boeing Entitled to Pursue Illegal Exaction Claim

The Federal Circuit also held that Boeing could pursue its cost reimbursement claim by characterizing the overpayment to the government as an “illegal exaction.” Boeing contended that the trial court, in ruling that it lacked jurisdiction over the “illegal exaction” claim, mistakenly required that the asserted basis of illegality be a “money-mandating” statute. The Federal Circuit stated, “We agree with Boeing.” The court explained that, “[c]ase law involving the Tucker Act, 28 U.S.C. § 1491(a), has long distinguished three types of claims against the federal government: contractual claims, illegal-exaction claims, and money-mandating-statute claims.” The non-contractual claims under Section 1491 can be divided into two somewhat overlapping classes—those in which the plaintiff has paid money over to the government, directly or in effect, and seeks return of all or part of that sum; and those demands in which money has not been paid but the plaintiff asserts that he is nevertheless entitled to a payment from the treasury. The court added that, “One way an illegal exaction occurs . . . is when the ‘plaintiff has paid money over to the Government . . . and seeks return of all or part of that sum’ that was ‘improperly paid, exacted, or taken from the claimant in contravention of the Constitution, a statute, or a regulation.” (Citing Virgin Islands Port Authority v. United States, 922 F.3d 1328, 1333 (Fed. Cir. 2019) (quoting Eastport S.S., 372 F.2d at 1007)). Allegations of subject matter jurisdiction, to suffice, must satisfy a relatively low standard—must exceed a threshold that “has been equated with such concepts as ‘essentially fictitious,’ ‘wholly insubstantial,’ ‘obviously frivolous,’ and ‘obviously without merit.’ ” Shapiro v. McManus, ––– U.S. ––––, 136 S. Ct. 450, 456, 193 L.Ed.2d 279 (2015) (internal quotations omitted). Thus, to establish Tucker Act jurisdiction for an illegal exaction claim, a party that has paid money over to the government and seeks its return must make a non-frivolous allegation that the government, in obtaining the money, has violated the Constitution, a statute, or a regulation.

The court then stated that, under this standard, Boeing established jurisdiction for its illegal exaction claim. Boeing alleged that the government “demanded that Boeing pay it … $940,007” to cover the “increased costs caused by two of the [contract] changes,” that the government “also demanded $124,766 in compound interest,” and that Boeing had already “paid $71,276 to the Government.” And Boeing alleged that the government’s “demand for payment of $1,064,773 [$940,007 plus $124,766] is . . . in direct violation of 41 U.S.C. § 1503(b), which requires that the Government ‘may not recover costs greater than the aggregate increased cost to the Federal Government.’” J.A. 60. “In short, Boeing alleged that the government has demanded and taken Boeing’s money in violation of a statute. Whatever its ultimate merits, this allegation suffices for jurisdiction to adjudicate the illegal exaction claim.”

The Boeing case presents a good example of where creative legal arguments can be crucial in seeking a fair resolution of a situation in which the government has received more money from a contractor than it is entitled to receive. The fact that legal arguments were not raised before a contract was executed, because, for example, the contentions would be futile, can be key in allowing entities with reimbursement claims to be able to pursue them under the “illegal exaction” theory of recovery.

Roy Goldberg is a partner in Stinson LLP’s Washington, D.C. office. He represents airlines and other aviation entities in pursuit of refund claims against the federal government, and in challenges to government taxes, fees and charges, including claims filed in the U.S. Court of Federal Claims.

Contact Roy Goldberg for more information.