Em Logging v. Department of Agriculture ( 2015 )

United States Court of Appeals
for the Federal Circuit
______________________
EM LOGGING,
Appellant
v.
DEPARTMENT OF AGRICULTURE,
Appellee
______________________
2014-1227
______________________
Appeal from the Civilian Board of Contract Appeals in
No. 2397, 2427, Administrative Judge Joseph A. Vergilio.
______________________
Decided: February 20, 2015
______________________
RICHARD ALLAN PAYNE, Doney, Crowley, Bloomquist
& Uda, Helena, MT, argued for appellant.
ELLEN MARY LYNCH, Commercial Litigation Branch,
Civil Division, United States Department of Justice,
Washington, DC, argued for appellee. Also represented by
STUART F. DELERY, ROBERT E. KIRSCHMAN, JR., BRYANT G.
SNEE.
______________________
Before NEWMAN, MOORE, and TARANTO, Circuit Judges.
2 EM LOGGING v. DEPARTMENT OF AGRICULTURE
MOORE, Circuit Judge.
EM Logging appeals from the Civilian Board of Con-
tract Appeals’ (“the Board”) judgment that the United
States Forest Service (“the Forest Service”) properly
terminated a timber sale contract based on EM Logging’s
flagrant disregard of material contract provisions. Be-
cause the record does not contain substantial evidence to
support the Board’s conclusion that EM Logging flagrant-
ly disregarded the terms of the contract, we reverse.
BACKGROUND
A. Contract and Course of Performance
On August 31, 2010, the Forest Service awarded EM
Logging a timber sale contract for the Kootenai National
Forest in Northern Montana. The contract included two
provisions relevant to this appeal regarding EM Logging’s
transportation of logs from the national forest to weighing
locations. “C5.12# – Use of Roads by Purchaser” states in
pertinent part that “[a]ll vehicles shall comply with
statutory load limits unless a permit from the Forest
Service and any necessary State permits are obtained
prior to overload vehicle use,” (“the load limit clause”).
J.A. 1217. “C6.849 – Route of Haul” states in pertinent
part that “[a]ll products removed from Sale Area shall be
transported over the designated routes of haul,” (“the haul
route clause”). J.A. 668. It further required that “Pur-
chaser shall notify Forest Service when a load of products,
after leaving Sale Area, will be delayed for more than 12
hours in reaching weighing location,” (“the notification
clause”). Id. The contract also included a termination
provision, under which the Forest Service terminated the
contract at issue. “B9.31 – Termination for Breach” states
in pertinent part that the “Contracting Officer, with the
concurrence of the Regional Forester, may terminate this
contract for breach in the event Purchaser . . . [h]as
engaged in a pattern of activity that demonstrates fla-
EM LOGGING v. DEPARTMENT OF AGRICULTURE 3
grant disregard for the terms of this contract,” (“the
termination clause”). J.A. 1211.
Before transporting logs, EM Logging sent the Forest
Service a map highlighting the roads over which it would
transport logs. The Forest Service requested, in addition
to the map, written descriptions of the proposed haul
routes. EM Logging provided written descriptions of the
haul routes and requested that it be allowed 24 hours to
transport logs to weighing locations because regulations
on maximum working time for drivers would make it
difficult to meet the notification clause’s 12-hour require-
ment. The Forest Service approved the written descrip-
tions, but denied the request to vary the notification
clause.
EM Logging began transporting logs under the con-
tract in November 2010. J.A. 326. Between November
2010 and March 2011, the Forest Service issued six
Notifications of Breach. On November 30, the Forest
Service issued a Notification stating that EM Logging
breached the load limit clause and other terms of the
contract not at issue in this appeal. With respect to the
breach of the load limit clause, the Forest Service identi-
fied one truck load that exceeded 80,000 pounds gross
vehicle weight and one truck and trailer load that exceed-
ed 84,500 pounds gross vehicle weight. On January 14,
2011, the Forest Service issued a Notification stating that
EM Logging breached the load limit clause, identifying
three truck loads that exceeded 80,000 pounds gross
vehicle weight and four truck and trailer loads that
exceeded 84,500 pounds gross vehicle weight. On Janu-
ary 14, the Forest Service also issued a Notification
stating that EM Logging breached the haul route and
notification clauses. It stated that EM Logging “had 12
product loads . . . that have been documented as being
delayed for more than 12 hours in transit to the approved
scaling location,” that “[s]ome of these loads were trans-
ported over 13 miles one-way off of the approved haul
4 EM LOGGING v. DEPARTMENT OF AGRICULTURE
route and overnighted in Eureka,” and that “[r]equired
notification about these loads has not been timely or very
explicit.” J.A. 242. On January 21, the Forest Service
issued a Notification stating that EM Logging breached
the load limit clause because one of EM Logging’s drivers
received a ticket on January 20 for exceeding Montana
state weight limits. The Forest Service also issued Notifi-
cations on November 4, 2010, and March 2, 2011, stating
that EM Logging breached provisions of the contract
regarding washing of equipment, sanitation and servic-
ing, and late payment. The breaches in these additional
Notifications are not at issue in this appeal.
With the Notification sent January 21, 2011, the For-
est Service suspended operations and informed EM Log-
ging that the Forest Service was considering terminating
the contract for breach. The Forest Service terminated
the contract on March 11, 2011, “for repeated and ongoing
disregard for the terms of [the] contract almost from the
start of logging and hauling operations . . . .” J.A. 326.
B. Board Appeal
EM Logging appealed the termination to the Board.
The Board found that EM Logging breached the load
limit, haul route, and notification clauses and that “[t]he
purchaser’s actions with respect to violating the require-
ments for load limits, notice of delays, and haul routes,
each independently establish a basis that alone supports
the termination for breach.” J.A. 21, 30.
The Board determined that EM Logging breached the
load limit clause because it exceeded weight limits estab-
lished by Montana and the Forest Service. Although the
Board found that the contract does not specify the mean-
ing of “statutory load limits” in the load limit clause, it
found that the load limits of a Forest Service Order and
Montana state law applied. The Forest Service Order,
issued by the Forest Supervisor of the Kootenai National
Forest on February 24, 1986, prohibited trucks exceeding
EM LOGGING v. DEPARTMENT OF AGRICULTURE 5
80,000 pounds gross vehicle weight from travelling over
roads in the Kootenai National Forest. J.A. 23. The
Board concluded that EM Logging breached the load limit
clause because EM Logging hauled 31 loads over Forest
Service roads exceeding the Order’s weight limit. J.A. 25.
It concluded that EM Logging also breached the load limit
clause because it exceeded Montana state weight limits,
as evidenced by the ticket received on January 20, 2011,
and exceeded the weight limits listed on registrations for
EM Logging’s trucks and trailers. Id.
The Board determined that EM Logging breached the
haul route clause and the notification clause because it
“deviated from the designated haul routes and violated
the twelve-hour limitation.” J.A. 26. It also noted that
EM Logging overnighted trucks at locations not approved
by the Forest Service. Id.
The Board concluded that these repeated violations
“amount to blatant and flagrant violations of material
contractual provisions, given that the purchaser had
sought, but was denied, deviations, and often was re-
minded of the requirements.” J.A. 29. It therefore upheld
termination of the contract. J.A. 30.
One judge dissented, stating that the government did
not meet its burden of showing that EM Logging engaged
in a pattern of activity that demonstrated flagrant disre-
gard of the contract. J.A. 31. The dissenting judge con-
cluded that the only weight limits applicable to the load
limit clause were those under Montana law and the
government only proved a single instance—when EM
Logging’s driver was ticketed—where one of EM Logging’s
trucks exceeded the Montana limit. J.A. 34–37. The
judge concluded that the registrations for EM Logging’s
trucks did not set forth the weight limits for the load limit
clause because the parties never relied on the registra-
tions to prove the weight limits and the registrations
alone were inadequate to determine the trucks’ total
6 EM LOGGING v. DEPARTMENT OF AGRICULTURE
permissible weights. J.A. 35–36. The judge noted that
the single breach evidenced by the ticket did not demon-
strate that EM Logging was in flagrant disregard of the
contract, particularly because the driver testified that the
truck would have complied with Montana limits if the
truck had been reconfigured—an apparently common
practice. J.A. 36–37. The judge concluded that the Forest
Service did not meet its burden of proving that EM Log-
ging violated the haul route clause because the driver
adhered to the route map EM Logging submitted to the
Forest Service and the government did not prove that the
routes identified on the map were not approved. J.A. 39.
The judge concluded that the timeliness of delay notifica-
tions pursuant to the notification clause should not be a
reason to terminate the contract because even the Forest
Service realized that, after many loads of products were
not arriving within 12 hours, the parties should have
entered into an agreement to allow overnighting of trucks.
J.A. 39. Thus, the dissenting judge concluded that termi-
nation for flagrant disregard of the terms of the contract
was not established. J.A. 41.
EM Logging appeals the Board’s decision. We have
jurisdiction under 28 U.S.C. § 1295(a)(10).
DISCUSSION
We review the interpretation of a government con-
tract de novo. Lear Siegler Servs., Inc. v. Rumsfeld, 457
F.3d 1262, 1266 (Fed. Cir. 2006). We, however, cannot set
aside the Board’s factual determinations unless they are
“(A) fraudulent, arbitrary, or capricious; (B) so grossly
erroneous as to necessarily imply bad faith; or (C) not
supported by substantial evidence.” 41
U.S.C. § 7107(b)(2).
A. Basis for Termination
The termination clause relied upon by the Forest Ser-
vice allowed termination when EM Logging had “engaged
EM LOGGING v. DEPARTMENT OF AGRICULTURE 7
in a pattern of activity that demonstrates flagrant disre-
gard for the terms of this contract . . . .” J.A. 1211. To
uphold the termination, we must agree that substantial
evidence in the record supports the Board’s decision that
EM Logging flagrantly disregarded the terms of the
contract.
We must first consider the proper interpretation of
“flagrant disregard.” Merriam-Webster defines “flagrant”
as “so obviously inconsistent with what is right or proper
as to appear to be a flouting of law or morality.” Merri-
am-Webster’s Collegiate Dictionary 475 (11th ed. 2003).
This plain meaning is confirmed by the usage of “flagrant
disregard” in the contract. In full, the termination clause
states that the contract may be terminated if EM Logging:
Has engaged in a pattern of activity that demon-
strates flagrant disregard for the terms of this
contract, such as, but not limited to, repeated sus-
pensions for breach pursuant to B9.3, causing un-
designated timber meeting Utilization Standards
to be unnecessarily damaged or negligently or
willfully cut, or causing other serious environmen-
tal degradation or resource damage
J.A. 1211–12. Examples of activity that demonstrate
flagrant disregard include “repeated suspensions for
breach” or causing “serious environmental degradation or
resource damage.” Id. The plain meaning of flagrant and
the context of its usage in the contract make clear that
termination for “flagrant disregard” must be predicated
on more than technical breaches of minor contract provi-
sions or isolated breaches of material contract provisions
which caused no damage. The Forest Service, which
bears the burden of proof that it properly terminated the
contract, must not only prove that EM Logging violated
the contract, but that it did so in a way that was in fla-
grant disregard of the terms of the contract.
8 EM LOGGING v. DEPARTMENT OF AGRICULTURE
B. Violation of the Load Limit Clause
The load limit clause states that “vehicles shall com-
ply with statutory load limits . . . .” J.A. 1217. The Board
found that EM Logging violated the clause because sever-
al loads exceeded the limits set by a Forest Service Order
and Montana law.
EM Logging argues that the record only contains a
single violation of Montana law. It argues that Montana
law, specifically Section 61-10-107 of the Montana Code,
limits the weight of a truck based on the truck’s number
of axles and the distance between the axles. EM Logging
argues that the Board erred in concluding that EM Log-
ging violated the load limit clause by exceeding the weight
limit set by the Forest Service Order because both parties
interpreted “statutory load limits” to include only Mon-
tana state limits. It argues that the Forest Service only
proved a single violation of Montana law because, except
for the ticket it received on January 20, 2011, the record
does not contain evidence of the number of axles or dis-
tance between axles for other loads, which are required to
determine whether a truck exceeds Montana state limits.
Thus, it argues that the government has only proven a
single violation of the load limit clause.
Moreover, EM Logging argues that the employee who
was driving the truck which received the ticket testified
that he had forgotten to reconfigure the truck to increase
the length between the axles after coming down a moun-
tain with sharp hairpin turns and that, had he reconfig-
ured the truck that day, he would have not received the
ticket because the distance between his axles would have
brought him into compliance with Montana law. In short,
EM Logging argues that it was simply a mistake not to
reconfigure the truck. This single instance, EM Logging
argues, cannot be considered flagrant disregard.
The government argues that substantial evidence
supports the Board’s decision. It argues that the Forest
EM LOGGING v. DEPARTMENT OF AGRICULTURE 9
Service Order applies to roads over which EM Logging
travelled. It argues that the Forest Service understood
that the Order was a statutory load limit because the
Forest Service advised EM Logging in the Notifications
for Breach that EM Logging needed to comply with load
limits for travelling over Forest Service roads and bridges
and the Order, rather than Montana law, applies to
Forest Service roads and bridges. It argues that although
EM Logging only received a single ticket, only receiving
one ticket does not mean that EM Logging only exceeded
Montana weight limits once. The government argues that
EM Logging’s actions, including the numerous violations
of the Forest Service Order, demonstrate a pattern of
flagrant disregard because the violations, including the
ticket, came after the Forest Service repeatedly warned
EM Logging in the Notifications.
We agree with EM Logging that the government has
only proven one violation of the load limit clause. The
clause requires EM Logging to comply with “statutory”
load limits. J.A. 1217. The Forest Service Order is not a
“statute.” It is an Order, issued by the Forest Supervisor
on February 24, 1986, under 36 C.F.R. §§ 261.50 and
261.54. As such, any violation of the Forest Service Order
is not a breach of the load limit clause. Similarly, exceed-
ing the limits listed on EM Logging’s registrations, which
the Board relied upon, does not breach the load limit
clause because they do not define statutory limits. There-
fore, the only violation of the load limit clause in the
record is the ticket issued to EM Logging on January 20,
2011, one day before the contract was suspended and
ultimately terminated. This single isolated violation does
not independently rise to the level of flagrant disregard.
To be clear, we are not sanctioning the violation of the
Forest Service Order, which the government argues was
predicated on safety concerns. The only question before
us is whether the government established “flagrant
disregard” of contract terms, and if failure to comply with
10 EM LOGGING v. DEPARTMENT OF AGRICULTURE
the Forest Service Order is not a violation of a contract
term, it cannot justify the government’s decision to termi-
nate pursuant to this particular provision.
C. Violation of the Haul Route and
Notification Clauses
The haul route and notification clauses require that
EM Logging transport logs over a designated haul route
and notify the Forest Service when deliveries will take
more than 12 hours to reach a weighing location. J.A.
668. The Board found that EM Logging deviated from the
written haul plan and violated the 12 hour requirement
when EM Logging overnighted trucks off the haul route.
J.A. 26–27.
EM Logging argues that it did not violate the haul
route and notification clauses because it travelled over
roads highlighted on the map it provided to the Forest
Service before starting work and always informed the
Forest Service as soon as practicable when a load would
be delayed. It argues that even the alleged violations of
the haul route and notification clauses do not demon-
strate flagrant disregard. It argues that even if it
breached the haul route clause when one of its drivers
took a detour on December 20, 2010, it was a minor
violation because the detour was necessitated by illness.
There, the driver fell ill while driving the truck to a
weighing station and turned around so that he could see a
doctor. He was later diagnosed with bronchial pneumo-
nia. It argues such a violation does not demonstrate
flagrant disregard. EM Logging further argues that, even
if its notifications were untimely, they do not demonstrate
flagrant disregard because they were sent as soon as
practicable given the paucity of cell phone service in rural
Montana.
The government argues that the Board’s decision is
supported by substantial evidence. It argues that the
written haul plan submitted by EM Logging, rather than
EM LOGGING v. DEPARTMENT OF AGRICULTURE 11
the map it initially submitted, defined the approved haul
route. Thus, it argues that EM Logging breached the
haul route clause on December 20, 2010, when one of its
drivers deviated from the written haul plan even though
the driver’s route was on the haul map. It argues that
EM Logging violated the notification clause because delay
notifications were untimely and points to a single notifica-
tion sent 13 days after a late delivery as unreasonable.
The government argues that these breaches demon-
strate flagrant disregard because after EM Logging
sought and was denied deviations EM Logging breached
the contract. It notes that EM Logging requested the
ability to haul on any road highlighted on the map it first
submitted to the Forest Service, but was required to
submit a written haul plan to designate routes. It argues
that EM Logging’s actions thus demonstrate flagrant
disregard of the haul route clause because EM Logging
did not adhere to the written haul plan on December 20,
2010. It notes that EM Logging requested the ability to
increase the hauling period from 12 to 24 hours, which
was denied. It argues that EM Logging’s actions demon-
strate flagrant disregard of the notification clause because
when EM Logging was unable to comply with the 12 hour
requirement, it did not timely notify the government of
delay.
We agree with EM Logging that its actions do not
provide substantial evidence for a conclusion that EM
Logging was in flagrant disregard of the contract. The
government’s only alleged route deviation was a single,
isolated event necessitated by illness. This single in-
stance does not rise to the level of flagrant disregard. The
alleged notification violations similarly do not demon-
strate flagrant disregard. The parties agree that EM
Logging did not need to notify the Forest Service before
the 12-hour period expired, but should have done so
within a reasonable period after EM Logging became
aware of a delay. The record contains evidence of a single
12 EM LOGGING v. DEPARTMENT OF AGRICULTURE
instance in which EM Logging notified the government 13
days after a delayed load was delivered. The record
contains evidence of a second instance where EM Logging
notified the government four days after a delayed load
was delivered. Both deliveries arrived within 48 hours.
EM Logging sent both of the delay notifications in No-
vember before the Forest Service issued a Notification of
Breach for the notification clause. Thus, the record
contains two delayed notifications, both sent before the
government raised its concerns with EM Logging, and no
delayed notifications after the government raised a con-
cern. Two instances of delayed notifications, before the
government even noted that such a delay in notification
was unreasonable, is not substantial evidence to support
a conclusion that EM Logging was in flagrant disregard.
The government is not arguing that EM Logging breached
the contract by not delivering within 12 hours—the issue
is not when did the trucks arrive—the issue is only when
did EM Logging notify the government that the delivery
of the load took more than 12 hours. These two minor,
technical violations of the notification clause do not sub-
stantiate termination for flagrant disregard.
D. Termination
There was one instance of route deviation necessitat-
ed by illness, one load limit violation, and two instances of
delayed notifications. None of the alleged violations
independently substantiate the Board’s finding of flagrant
disregard. Even together, the four violations are not
substantial evidence of a pattern of activity demonstrat-
ing that EM Logging’s actions were in flagrant disregard
of the contract. Substantial evidence does not support the
Board’s conclusion that EM Logging’s actions demon-
strated flagrant disregard of contract terms.
Because we conclude that substantial evidence does
not support the Board’s conclusion that EM Logging
EM LOGGING v. DEPARTMENT OF AGRICULTURE 13
flagrantly disregarded the terms of the contract, we need
not reach EM Logging’s other arguments.
REVERSED