Got a spare $472 Million? Figher Engine Contractor Hit With Major Damages for Fraud

On June 17, the U.S. District Court for the Southern District of Ohio awarded the Government over $472 Million in damages for fraud by a fighter engine contractor, United Technologies Corp.  The case is U.S. v. United Technologies Corp., S.D. Ohio, No. 3:99-cv-093, Judge Thomas M. Rose.  The contractor's fraud was held to have directly resulted in the Government overpaying on the underlying contract, which had been issued to Pratt & Whitney, United's predecessor in interest, to provide F-15 and F-16 fighter jet engines.  The fraud was detected in a Justice Department audit in the form of false statements in Pratt's best and final offer.  This decision was the latest in a series of decisions and remands in the case.  The court declined to consider market value analysis for the engine charges because it held there was a limited market and so the "market prices" proposed were tainted by the fraud of Pratt's pricing and the market entry price of the only other source provider.  The court therefore accepted Government testimony that it should adjust what the Government eventually paid by subtracting the amounts the Government paid as the result of the fraud, offset by any underestimated costs United could prove.  United could not prove any underestimated costs, and the result was about $347 M in trebled False Claims Act damages found, plus more than $7 M in penalties and more that $108 M in common law damages and interest.  Yes, I would say this case is further evidence of the FCA's teeth, and warning for those thinking about pushing the procurement envelop with their proposals. 

Teaming Agreements: Anything more than just an agreement to try and agree?

Teaming agreements are often used in the bidding or proposal process for construction or service contracts.  Two or more companies "team" together to try and take advantage of their individual strengths to better their chances at receiving an award.  They are particularly prevalent for Federal procurements.  Typically they include terms for how the team is going to bid or propose their offer, and contemplate a subsequent contract of some sort between them if the team receives the award; typically contemplating a subcontract agreement. Virginia attorneys have discussed for years whether these agreements are fully enforceable, and a recent April 2013 decision of the United States District Court for the Eastern District of Virginia, Alexandria Division (Cyberlock Consulting, Inc. v. Information Experts, Inc., Case No. 1:12cv396) calls teaming agreements even further into question.

The specific teaming agreement in question in Cyberlock designated solicitation obligations between the parties, and provided that if the team received the award they would enter into a subcontract with certain generalized terms regarding scope and percentages of work.  The teaming agreement did not include specified subcontract terms or attach the agreement into which the parties would enter; but rather left the specific subcontract for negotiation, and further included a provision that if the parties could not agree upon a subcontract, or the procuring client rejected the subcontract, the teaming agreement would terminate.  Considering these as a whole, the court held that the teaming agreement was nothing more than "an agreement to try and agree," and that the teaming agreement was therefore unenforceable.

So is this the end of teaming agreements in Virginia?  That is unlikely.  They are still a useful tool, and more typically they do not result in disputes.  But if they are going to be used, Cyblerlock is a necessary case for any teaming agreement drafter to consider.  As with many things in the law, enforceability will depend upon the specific terms of the agreement, and the more certain the terms the better.  Some considerations from Cyberlock though to try and hedge enforceability seem to include: a) including as part of the teaming agreement the subcontract into which the parties will agree; b) not making the inability to agree upon future terms a condition of termination; and c) possibly, and subject to multi-jurisdictional issues, using a choice of law provision to make the agreement subject to the laws of other than Virginia, using a jurisdiction that has considered and enforced teaming agreement terms more liberally.

As teaming agreements continue to be used and evolve, so too is the case law likely to evolve.  Where it ultimately goes in Virginia will have to be seen. - nsl

Carnell: VPPA Statutory Cap Sets Ceiling for Change Order Recovery

Carnell is a Western District of Virginia case that addressed the application of the Virginia Public Procurement's 25% cap for change orders.  Specifically, Virginia Code Sec. 2.2-4309(A) states that no fixed-price contract may be increased by more than 25% of the amount of the contract, or $50,000, whichever is greater, without the advance written approval of the Governor of his designee in the case of state agencies, or the governing body, in the case of political subdivisions.  Carnell performed change work, which exceeded the cap. 

The district court held that regardless of why the work was done, Carnell could not recover as a matter of law greater than the 25% cap because it had not received advance written approval (the 25% being based on the original contract price).  The court was unpersuaded by Carnell's argument that the cap did not apply to actions for breach of contract, holding that the cap applied to disputes as well as agreed contract action; holding that to rule otherwise "would result in the absurdity of allowing recovery on a public contract in excess of the amount that the legislature has specifically said that the contract may legally be increased."

Contractors should be very concerned about this application of the 25% cap.  It is not unusual for contractors to be forced by contract language to proceed with disputed work and negotiate adjustments later.  However, based on this ruling, if the contractor does so and the costs of doing so exceed the 25% cap then the contractor has volunteered that work and is without a remedy.  Carnell thus emphasizes the importance of estimating change impacts early and before proceeding with any work (which most contracts require anyway, but often is quite difficult to evaluate or calculate in practice), and if the cost impacts are expected to exceed the 25% cap then that issue needs to be addressed before proceeding, and certain prior to the costs reaching the cap.