Southwest Marine, Inc v. United States ( 2008 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
SOUTHWEST MARINE, INC., 
Petitioner-Appellant,
v. No. 07-55229
UNITED STATES OF AMERICA,  D.C. No.
CV-05-01189-WQH
GORDON R. ENGLAND, United
States Secretary of the Navy, in OPINION
his official capacity,
Respondents-Appellees.

Appeal from the United States District Court
for the Southern District of California
William Q. Hayes, District Judge, Presiding
Argued and Submitted
June 4, 2008—Pasadena, California
Filed August 6, 2008
Before: Alex Kozinski, Chief Judge, Ruggero J. Aldisert*
and Dorothy W. Nelson, Circuit Judges.
Opinion by Judge Aldisert
*The Honorable Ruggero J. Aldisert, Senior United States Circuit Judge
for the Third Circuit, sitting by designation.
9961
9964 SOUTHWEST MARINE, INC. v. UNITED STATES
COUNSEL
Peter B. Jones, Jones & Donovan, Newport Beach, California,
for the petitioner-appellant.
Peter B. Keiser, Jeanne E. Davidson, Bryant G. Snee, Com-
mercial Litigation Branch, Civil Division, Department of Jus-
tice, for the respondents-appellees.
OPINION
ALDISERT, Circuit Judge:
Appellant Southwest Marine, Inc., appeals from a judgment
of the United States District Court for the Southern District of
California granting summary judgment in favor of the United
States of America and the Secretary of the Navy. In this
appeal, we must determine whether fees incurred by South-
west Marine during its unsuccessful defense of a private party
Clean Water Act lawsuit are allowable costs under Subpart
31.2 of the Federal Acquisition Regulation (“FAR”), 48
C.F.R. §§ 31.201-31.205. We hold that Southwest Marine’s
costs are not allowable and affirm the judgment of the District
Court.
SOUTHWEST MARINE, INC. v. UNITED STATES 9965
I.
A.
Southwest Marine, the operator of a shipyard in San Diego,
California, was awarded and performed several contracts with
the United States Navy for repairs and alterations to Naval
vessels. During the time period relevant to this dispute, some
of Southwest Marine’s government contracts were cost-
reimbursement contracts, which provided that the Govern-
ment would reimburse Southwest Marine’s costs deemed
allowable in accordance with Subpart 31.2 of the FAR.
On April 30, 1996, several private parties, including the
Natural Resources Defense Council (“NRDC”), notified
Southwest Marine and certain state and federal agencies that
they believed Southwest Marine was violating the Clean
Water Act, 33 U.S.C. §§ 1251-1376. The government agen-
cies declined to act on the complaint, and on August 27, 1996,
the NRDC filed suit against Southwest Marine in the United
States District Court for the Southern District of California.1
The complaint alleged violations of the Clean Water Act and
sought declaratory relief, injunctive relief and civil penalties
as authorized by the Act.
After a bench trial, the district court found that Southwest
Marine had been in violation of the Clean Water Act since
August 26, 1996. In addition to injunctive relief, the district
court imposed a $799,000 civil penalty pursuant to 33 U.S.C.
§ 1319(d). Payment of the penalty was to be made to the
United States Treasury. The district court noted, however, that
the penalty could be offset by direct costs incurred by South-
west Marine in improving its stormwater diversion system.
1
A private citizen may bring an action for violation of the Clean Water
Act pursuant to 33 U.S.C. § 1365(a).
9966 SOUTHWEST MARINE, INC. v. UNITED STATES
The district court also found that, as the prevailing party, the
NRDC was entitled to an award of its attorneys’ fees.2
Southwest Marine appealed the district court’s decision,
and a panel of this Court affirmed the judgment, injunctive
relief and civil penalty. Natural Res. Def. Council v. South-
west Marine, Inc., 236 F.3d 985 (9th Cir. 2000). On May 7,
2002, a magistrate judge issued an order finding that South-
west Marine’s direct costs of improvements exceeded the
amount of the civil penalty imposed by the district court and
recommended that no penalty be paid to the United States
Treasury. The district court accepted the magistrate judge’s
findings.
From 1998 to 2001, Southwest Marine incurred $2,761,509
in fees and expenses associated with its unsuccessful defense
of the NRDC’s lawsuit. Southwest Marine included these
expenses in its general and administrative indirect cost pool
and assigned the costs to all of its contracts, including its cost-
reimbursement government contracts.
B.
In 2001, the Defense Contract Audit Agency (“DCAA”)
initiated an audit to determine the allowability of Southwest
Marine’s costs associated with the NRDC’s lawsuit. The
DCAA audit report questioned the allowability of the costs,
and the dispute was assigned to a contracting officer. On
December 11, 2002, Southwest Marine submitted a certified
claim seeking a decision by the contracting officer that its
costs were allowable under the FAR. On May 22, 2003, the
contracting officer denied the claim. Southwest Marine filed
a timely appeal to the Armed Services Board of Contract
Appeals.
2
A court may award attorneys’ fees to a prevailing party in a Clean
Water Act lawsuit pursuant to 33 U.S.C. § 1365(d).
SOUTHWEST MARINE, INC. v. UNITED STATES 9967
In making its allowability determination, the Board relied
on Boeing North America, Inc. v. Roche, 298 F.3d 1274 (Fed.
Cir. 2002). Pursuant to Boeing, the Board determined that
Southwest Marine’s costs were unallowable because they
were similar to the costs disallowed in FAR § 31.205-47(b).
Southwest Marine appealed the Board’s decision to the Dis-
trict Court. The District Court affirmed the Board’s determi-
nation and denied Southwest Marine’s motion for summary
judgment.
Southwest Marine appeals the District Court’s denial of its
motion for summary judgment and the District Court’s deter-
mination that its claimed costs are unallowable.
II.
The Board had jurisdiction over the contracting officer’s
determination of unallowability pursuant to the Contract Dis-
putes Act, 41 U.S.C. §§ 606, 607. Because the contract at
issue in this case is a maritime contract, Southwest Marine
properly appealed the Board’s determination to the District
Court. Id. § 603. We have jurisdiction over final orders of the
District Court pursuant to 28 U.S.C. § 1291.
“Statutory and regulatory constructions are questions of
law, which we review de novo.” Lear Siegler Servs., Inc. v.
Rumsfeld, 457 F.3d 1262, 1266 (Fed. Cir. 2006); see also 41
U.S.C. § 609(b). Although we need not defer to the Board’s
or District Court’s interpretation of the FAR provisions at
issue in this case, Brownlee v. DynCorp, 349 F.3d 1343, 1349
(Fed. Cir. 2003), the Board deserves due respect because of
its expertise concerning government contracts, Lear, 457 F.3d
at 1266.
III.
A.
The allowability of costs under cost-reimbursement govern-
ment contracts is governed by FAR Subpart 31.2. Section
9968 SOUTHWEST MARINE, INC. v. UNITED STATES
31.204, which provides guidance for determining whether
specific costs are allowable, states:
(a) Costs shall be allowed to the extent they are
reasonable, allocable, and determined to be allow-
able under 31.201, 31.202, 31.203, and 31.205.
These criteria apply to all of the selected items that
follow, even if particular guidance is provided for
certain items for emphasis or clarity.
*****
(c) Section 31.205 does not cover every element
of cost. Failure to include any item of cost does not
imply that it is either allowable or unallowable. The
determination of allowability shall be based on the
principles and standards in this subpart and the treat-
ment of similar or related selected items. When more
than one subsection in 31.205 is relevant to a con-
tractor cost, the cost shall be apportioned among the
applicable subsections, and the determination of
allowability of each portion shall be based on the
guidance contained in the applicable subsection.
When a cost, to which more than one subsection in
31.205 is relevant, cannot be apportioned, the deter-
mination of allowability shall be based on the guid-
ance contained in the subsection that most
specifically deals with, or best captures the essential
nature of, the cost at issue.
48 C.F.R. §§ 31.204(a), (c).3
Southwest Marine focuses on FAR § 31.205-33 to contend
that its costs are allowable. Section 31.205-33 provides:
3
All references to FAR provisions in this opinion are to the version of
the FAR in effect at the time of the award of the contract at issue in this
case. In the current version of the FAR, § 31.204(c) has been renumbered
as § 31.204(d).
SOUTHWEST MARINE, INC. v. UNITED STATES 9969
(a) Professional and consultant services, as used in
this subsection, are those services rendered by per-
sons who are members of a particular profession or
possess a special skill and who are not officers or
employees of the contractor. Examples include those
services acquired by contractors or subcontractors in
order to enhance their legal, economic, financial, or
technical positions. Professional and consultant ser-
vices are generally acquired to obtain information,
advice, opinions, alternatives, conclusions, recom-
mendations, training, or direct assistance, such as
studies, analyses, evaluations, liaison with Govern-
ment officials, or other forms of representation.
(b) Costs of professional and consultant services
are allowable subject to this paragraph and para-
graphs (c) through (f) of this subsection when rea-
sonable in relation to the services rendered and when
not contingent upon recovery of the costs from the
Government (but see 31.205-30 and 31.205-47).
Id. §§ 31.205-33(a), (b).
[1] The Government focuses on FAR § 31.205-47(b) to
contend that Southwest Marine’s claimed costs are unallow-
able. Section 31.205-47(b) provides:
(b) Costs incurred in connection with any pro-
ceeding brought by a Federal, State, local, or foreign
government for violation of, or a failure to comply
with, law or regulation by the contractor (including
its agents or employees), or costs incurred in connec-
tion with any proceeding brought by a third party in
the name of the United States under the False Claims
Act, 31 U.S.C. § 3730, are unallowable if the result
is —
*****
9970 SOUTHWEST MARINE, INC. v. UNITED STATES
(2) In a civil or administrative proceed-
ing, either a finding of contractor liability
where the proceeding involves an allegation
of fraud or similar misconduct or imposi-
tion of a monetary penalty where the pro-
ceeding does not involve an allegation of
fraud or similar misconduct.
Id. § 31.205-47(b).
[2] Because no provision of the FAR explicitly addresses
Southwest Marine’s costs, § 31.204(c) directs us to examine
the FAR’s treatment of similar or related costs. Id.
§ 31.204(c). We determine that the costs disallowed in FAR
§ 31.205-47(b) are similar to the costs at issue in this case.
Although the costs for which Southwest Marine seeks reim-
bursement arose from a lawsuit that was not brought by the
government, the Clean Water Act authorizes both citizen and
governmental suits and permits the government to intervene
in any suit brought by a private citizen. 33 U.S.C.
§ 1365(c)(2). When a private citizen brings an action for vio-
lation of the Clean Water Act, the citizen acts as a “private
attorney general,” suing on behalf of the public. Saboe v. Ore-
gon, 819 F. Supp. 914, 916 (D. Or. 1993). These citizen suits
supplement the governmental remedies available through the
Act. Gwaltney of Smithfield, Ltd. v. Chesapeake Bay Found.,
Inc., 484 U.S. 49, 60 (1987). Additionally, if a private citizen
successfully proves a Clean Water Act violation, the mone-
tary penalties provided for by the Act are mandatory and inure
to the United States Treasury, not to the citizen-plaintiff. 33
U.S.C. § 1319(d); Sierra Club, Inc. v. Elec. Controls Design,
Inc., 909 F.2d 1350, 1354 (9th Cir. 1990). Although we rec-
ognize differences in the NRDC’s lawsuit and the litigation
described in § 31.205-47(b), we believe that Southwest
Marine’s costs are similar to the costs disallowed in § 31.205-
47(b) and thus are unallowable.4 See 48 C.F.R. § 31.204(c)
4
This conclusion is supported by the Federal Circuit’s decision in Boe-
ing. See Boeing, 298 F.3d at 1285-1286. In Boeing, the Federal Circuit
SOUTHWEST MARINE, INC. v. UNITED STATES 9971
(“The determination of allowability shall be based on the
principles and standards in this subpart and the treatment of
similar or related selected items.”).
B.
[3] We do not find persuasive Southwest Marine’s conten-
tion that its claimed costs are allowable under § 31.205-33.
Section 31.205-33(a)’s definition of professional and consul-
tant service costs arguably includes some costs of legal ser-
vices. See id. § 31.205-33(a) (“Professional and consultant
services . . . are those services rendered by persons who are
members of a particular profession or possess a special skill
. . . . Examples include those services acquired by contractors
or subcontractors in order to enhance their legal, economic,
financial, or technical positions.”). Southwest Marine’s costs,
however, do not merely represent the costs of its own legal
defense services. A majority of the costs for which Southwest
Marine seeks reimbursement represents the NRDC’s legal
fees. Southwest Marine did not incur the NRDC’s fees “in
order to enhance [its] legal, economic, financial, or technical
position[ ].” Id. Rather, Southwest Marine incurred the
NRDC’s legal fees solely because the district court assessed
them against Southwest Marine. Thus, Southwest Marine’s
costs, as a whole, cannot be classified as allowable costs of
professional and consultant services within the meaning of
§ 31.205-33.
applied § 31.204(c)’s similar or related to principle when it analyzed
whether a contractor’s costs of defending, and ultimately settling, a share-
holder derivative lawsuit were allowable costs. Id. After examining
§ 31.204(c) and the court’s prior allowability determination in Caldera v.
Northrop Worldwide Aircraft Services, Inc., 192 F.3d 962, 972 (Fed. Cir.
1999) (concluding that a contractor’s costs of unsuccessfully defending a
wrongful discharge lawsuit brought by several of the contractor’s former
employees were not allowable under the FAR), the Boeing court deduced
“a simple principle — that the costs of unsuccessfully defending a private
suit charging contractor wrongdoing are not allowable if the ‘similar’ costs
would be disallowed under the regulations.” Boeing, 298 F.3d at 1286.
9972 SOUTHWEST MARINE, INC. v. UNITED STATES
Even assuming that § 31.205-33 and § 31.205-47(b) are
both relevant to the cost allowability determination in this
case, we cannot conclude that Southwest Marine’s costs are
allowable. Section 31.204(c) addresses situations in which
more than one subsection of FAR § 31.205 is relevant to an
allowability determination:
When more than one subsection in 31.205 is relevant
to a contractor cost, the cost shall be apportioned
among the applicable subsections, and the determi-
nation of allowability of each portion shall be based
on the guidance contained in the applicable subsec-
tion. When a cost, to which more than one subsec-
tion in 31.205 is relevant, cannot be apportioned, the
determination of allowability shall be based on the
guidance contained in the subsection that most spe-
cifically deals with, or best captures the essential
nature of, the cost at issue.
Id. § 31.204(c). In this case, Southwest Marine’s costs cannot
be apportioned. See Rumsfeld v. Gen. Dynamics Corp., 365
F.3d 1380, 1386-1387 (Fed. Cir. 2004) (declining to apportion
a government contractor’s litigation costs between its success-
ful and unsuccessful claims); id. at 1387 n.4 (distinguishing
between apportioning a contractor’s litigation costs for fee-
shifting purposes and for procurement purposes). Thus, the
allowability determination must be made based on the guid-
ance in the subsection that best captures the essential nature
of Southwest Marine’s claimed costs.
[4] In addition to our previous discussion, we note that
§ 31.205-33(b) explicitly references § 31.205-47. 48 C.F.R.
§ 31.205-33(b). As § 31.205-33 addresses the general cate-
gory of professional and consultant service costs, and
§ 31.205-47 addresses the more specific category of costs of
legal and other proceedings, the principles of § 31.205-33
include and direct our attention to § 31.205-47. The costs of
legal and other proceedings described in § 31.205-47(b) are
SOUTHWEST MARINE, INC. v. UNITED STATES 9973
similar to Southwest Marine’s claimed costs. Southwest
Marine’s costs do not reflect general legal advice provided to
the contractor; rather, the costs reflect the contractor’s defense
of a specific lawsuit and the consequences of its unsuccessful
defense. For these reasons, we believe § 31.205-47(b) best
captures the essential nature of Southwest Marine’s costs. As
the costs identified in § 31.205-47(b) are disallowed, South-
west Marine’s costs are also disallowed.
IV.
Southwest Marine contends that the relevant FAR provi-
sions and the Board’s interpretation of those provisions vio-
late the statute from which the regulations arise. Specifically,
Southwest Marine contends that 10 U.S.C. § 2324(k) provides
an exhaustive list of unallowable costs and does not authorize
any regulation expanding that list. Because § 31.204(c) per-
mits disallowance of costs that are similar or related to other
disallowed costs, Southwest Marine contends that § 31.204(c)
is an unenforceable interpretation of the statute. Additionally,
Southwest Marine asserts that the application of FAR
§ 31.204(c) in conjunction with § 31.205-47(b) violates the
text of 10 U.S.C. § 2324(f), which requires the promulgation
of detailed cost allowability regulations.
The Government contends that the regulations constitute
permissible interpretations of 10 U.S.C. § 2324. The Govern-
ment contends that no language in § 2324(k) suggests that the
costs identified therein are the only unallowable costs. Fur-
thermore, the Government notes that FAR § 31.204 pre-dates
10 U.S.C. § 2324(k). Thus, when Congress enacted § 2324(k)
it did so against the backdrop of, and with the knowledge of,
existing regulations, including § 31.204. Finally, the Govern-
ment contends that § 31.205-33 and § 31.205-47 provide suf-
ficiently detailed cost allowability regulations in accordance
with § 2324(f).
When reviewing an agency’s interpretation of a statute that
the agency administers, this Court must make two inquiries:
9974 SOUTHWEST MARINE, INC. v. UNITED STATES
First, always, is the question whether Congress has
directly spoken to the precise question at issue. If the
intent of Congress is clear, that is the end of the mat-
ter; for the court, as well as the agency, must give
effect to the unambiguously expressed intent of Con-
gress. If, however, the court determines Congress
has not directly addressed the precise question at
issue, the court does not simply impose its own con-
struction on the statute, as would be necessary in the
absence of an administrative interpretation. Rather, if
the statute is silent or ambiguous with respect to the
specific issue, the question for the court is whether
the agency’s answer is based on a permissible con-
struction of the statute.
Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467
U.S. 837, 842-843 (1984).
A.
[5] 10 U.S.C. § 2324 is silent as to whether the costs identi-
fied therein constitute an exhaustive list of all unallowable
costs. Moreover, the statute does not speak to the allowability
of a contractor’s costs of unsuccessfully defending a private
party Clean Water Act lawsuit. The statute provides, in rele-
vant part:
(e) Specific costs not allowable. — (1) The fol-
lowing costs are not allowable under a covered con-
tract:
*****
(O) Costs incurred by a contractor in
connection with any criminal, civil, or
administrative proceeding commenced by
the United States or a State, to the extent
provided in subsection (k).
SOUTHWEST MARINE, INC. v. UNITED STATES 9975
*****
(k) Proceeding costs not allowable. — (1)
Except as otherwise provided in this subsection,
costs incurred by a contractor in connection with any
criminal, civil, or administrative proceeding com-
menced by the United States or a State are not allow-
able as reimbursable costs under a covered contract
if the proceeding (A) relates to a violation of, or fail-
ure to comply with, a Federal or State statute or reg-
ulation, and (B) results in a disposition described in
paragraph (2).
(2) A disposition referred to in paragraph (1)(B) is
any of the following:
*****
(C) In the case of any civil or administra-
tive proceeding, the imposition of a mone-
tary penalty by reason of the violation or
failure referred to in paragraph (1).
10 U.S.C. § 2324. The restrictive reading of the statute
advanced by Southwest Marine has been rejected by the Fed-
eral Circuit. See Brownlee, 349 F.3d at 1353 (“The reference
in [10 U.S.C. § 2324](k)(5)(c) to ‘contractor misconduct’
does not suggest that only contractor convictions are covered
by subsection (k)(2)(A) or that the subsection cannot be con-
strued to include employees within the term ‘contractor.’ ”).
We also decline to adopt such a narrow interpretation.
[6] Because Congress has not spoken directly to the allowa-
bility of the costs at issue and has made no indication that
§ 2324(k) is an exhaustive list of all unallowable costs, we
must determine whether § 31.204(c), which operates in con-
junction with the subsections of § 31.205 to determine cost
allowability, constitutes a permissible construction of 10
9976 SOUTHWEST MARINE, INC. v. UNITED STATES
U.S.C. § 2324. FAR § 31.204 or an equivalent provision, indi-
cating that not all costs are covered in the procurement regula-
tions, that the failure to include a cost implies nothing about
the allowability of the cost and that allowability determina-
tions should be based upon the treatment of similar or related
costs, has appeared in the procurement regulations since at
least 1959. See Fed. Elec. Corp., 67-2 BCA P 6416, ASBCA
No. 11324 (1967). Congress enacted § 2324(k) in 1988 as part
of the Major Fraud Act, which sought to curtail situations in
which the United States reimbursed a contractor’s legal
defense fees while also financing the prosecution of the case.
See 134 CONG. REC. S16697-01 (Oct. 18, 1988); Fluor Han-
ford, Inc. v. United States, 66 Fed. Cl. 230, 232-233 (Fed. Cl.
2005). Thus, the principles of § 31.204 predate Congress’s
delineation of certain unallowable costs in 10 U.S.C.
§ 2324(k).
[7] When Congress amended 10 U.S.C. § 2324(k) in 1988,
Congress did not mention § 31.204, nor did Congress indicate
that § 31.204 should not apply to § 2324(k). “Congress nor-
mally can be presumed to have had knowledge of the interpre-
tation given to the incorporated law, at least insofar as it
affects the new statute.” Lindahl v. Office of Pers. Mgmt., 470
U.S. 768, 802-803 (1985) (quoting Lorillard v. Pons, 434
U.S. 575, 581 (1978)). Thus, because Congress was aware of
§ 31.204 and its applicability to cost allowability determina-
tions, yet made no attempt to exclude its application to the
costs identified in § 2324(k), we conclude that FAR § 31.204
is a permissible construction of 10 U.S.C. § 2324 and was
properly applied to disallow Southwest Marine’s claimed
costs.
B.
We examine whether the FAR provides sufficiently
detailed cost allowability regulations. The relevant portion of
the statute directs:
SOUTHWEST MARINE, INC. v. UNITED STATES 9977
(f) Required regulations. — (1) The Federal
Acquisition Regulation shall contain provisions on
the allowability of contractor costs. Such provisions
shall define in detail and in specific terms those costs
which are unallowable, in whole or in part, under
covered contracts. The regulations shall, at a mini-
mum, clarify the cost principles applicable to con-
tractor costs of the following:
*****
(H) Professional and consulting services,
including legal services.
10 U.S.C. § 2324(f). We conclude that § 31.204, § 31.205-33
and § 31.205-47 are permissible interpretations of § 2324(f)
as all three relevant FAR provisions provide sufficiently
detailed guidance on the allowability of specific contractor
costs, including legal services.
[8] FAR § 31.205-33 governs the allowability of profes-
sional and consultant service costs and articulates factors to
be considered in determining the allowability of such costs.
As further clarification for a category of costs that could argu-
ably come within the purview of § 31.205-33, the FAR con-
tains § 31.205-47 to specifically address, in a more detailed
manner, costs related to certain types of legal proceedings. In
addition, § 31.204(c) expressly recognizes that the FAR does
not address all costs for which a contractor may seek reim-
bursement and provides guidelines for making allowability
determinations when faced with a cost not expressly recog-
nized in the FAR. Thus, alone and in combination, § 31.205-
33, § 31.205-47 and § 31.204 provide detailed guidelines for
the allowability of legal service costs as required by 10 U.S.C.
§ 2324(f), and constitute permissible interpretations of the
statute.
9978 SOUTHWEST MARINE, INC. v. UNITED STATES
V.
For the foregoing reasons, we conclude that the District
Court properly determined that the costs incurred by South-
west Marine in conjunction with its unsuccessful defense of
the NRDC’s Clean Water Act lawsuit are unallowable
because Southwest Marine’s costs are similar to costs disal-
lowed in FAR § 31.205-47(b). Additionally, we conclude that
FAR § 31.204, § 31.205-33 and § 31.205-47 constitute per-
missible constructions of 10 U.S.C. §§ 2324(f) and 2324(k),
and that the District Court’s application of these FAR provi-
sions, alone and in combination, did not violate 10 U.S.C.
§ 2324.
AFFIRMED.