Aclr, LLC v. United States ( 2020 )

In the United States Court of Federal Claims
No. 15-767C
(consolidated with 16-309C)
(E-Filed: April 6, 2020) 1
)
ACLR, LLC, )
) Summary Judgment; RCFC 56;
Plaintiff, ) Termination for Convenience;
) Constructive Termination for
v. ) Convenience; Breach of Contract.
)
THE UNITED STATES, )
)
Defendant. )
)
Thomas K. David, Reston, VA, for plaintiff. John A. Bonello, of counsel.
Adam E. Lyons, 2 Trial Attorney, with whom were Joseph H. Hunt, Assistant Attorney
General, Robert E. Kirschman, Jr., Director, Martin F. Hockey, Jr., Deputy Director,
Commercial Litigation Branch, Civil Division, United States Department of Justice,
Washington, DC, for defendant. Lucy Mac Gabhann, Office of General Counsel, United
States Department of Health and Human Services, Baltimore, MD, of counsel.
OPINION AND ORDER
CAMPBELL-SMITH, Judge.
Currently before the court are plaintiff’s motion for partial summary judgment,
ECF No. 51, and defendant’s cross-motion for summary judgment, ECF No. 52, which
1
This opinion was issued under seal on March 23, 2020. Pursuant to ¶ 3 of the ordering
language, the parties were invited to identify proprietary or confidential material subject to
deletion on the basis that the material was protected/privileged. No redactions were proposed by
the parties. Thus, the sealed and public versions of this opinion are identical, except for the
publication date and this footnote.
2
Mark E. Porada was the Trial Attorney on defendant’s response and cross-motion for
summary judgment.
have been extensively briefed. The parties’ motions are brought pursuant to Rule 56 of
the Rules of the United States Court of Federal Claims (RCFC). In ruling on the motions,
the court has also considered: (1) plaintiff’s motion for partial summary judgment
memorandum, ECF No. 51-1; (2) plaintiff’s proposed findings of uncontroverted fact,
ECF No. 51-11; (3) plaintiff’s exhibits, ECF No. 51-2 through 51-10; (4) defendant’s
response to plaintiff’s motion and cross-motion for summary judgment, ECF No. 52; (5)
defendant’s proposed findings of uncontroverted fact and response to plaintiff’s proposed
findings of uncontroverted fact, ECF No. 53; (6) defendant’s appendices, ECF No. 52-1
and 52-2; (7) plaintiff’s response/reply brief, ECF No. 58; (8) plaintiff’s response to
defendant’s proposed findings of uncontroverted fact, ECF No. 58-6; (9) plaintiff’s
supplemental exhibits, ECF No. 58-1 through 58-5; (10) defendant’s reply brief, ECF No.
61; (11) plaintiff’s sur-reply brief, ECF No. 65; (12) plaintiff’s supplemental brief, ECF
No. 69; (13) defendant’s response to plaintiff’s supplemental brief, ECF No. 70; (14)
plaintiff’s addendum to its supplemental brief, ECF No. 71; (15) plaintiff’s supplemental
reply brief, ECF No. 73; (16) defendant’s supplemental sur-reply, ECF No. 74. 3 The
parties did not request oral argument, and the court deems such argument unnecessary.
For the following reasons, plaintiff’s motion for partial summary judgment is
DENIED, and defendant’s cross-motion for summary judgment is GRANTED.
I. Background
A. Procedural History
Jurisdiction in these consolidated cases is governed by the Contract Disputes Act
of 1978, 41 U.S.C. §§ 7101-7109 (2012) (CDA). As required by the CDA, plaintiff filed
two certified claims with the contracting officer. The first—which was submitted on
March 12, 2015, in the amount of $28,506,591—included damages related to the 2007
audit and the 2010 audit. See ECF No. 52-1 at 132-36. That certified claim was denied
on June 5, 2015. See id. at 138-45. Plaintiff filed suit in this court on July 22, 2015,
contesting the denial of its certified claim for $28,506,591. See ACLR, LLC v. United
States, Case No. 15-767C, ECF No. 1 (complaint).
The second certified claim—which was submitted on September 10, 2015, in the
amount of $79,314,795—included damages related to the 2012/2013 sales tax audit. See
ECF No. 52-1 at 164-67. This certified claim was denied on January 15, 2016. See ECF
No. 51-9 at 30-34. Plaintiff filed suit in this court on March 9, 2016, contesting the
denial of its certified claim for $79,314,795. See ACLR, LLC v. United States, Case No.
3
The court recognizes the extensive briefing in this case. Subsequent briefing to the
parties’ initial cross-motions revealed and narrowed the dispositive issues in this case.
The court addresses herein only those dispositive issues.
2
16-309C, ECF No. 1 at 6 (complaint). Plaintiff increased its claimed damages in the suit
before this court to $112,002,489. See id. at 8.
Following discovery these two cases were consolidated on February 8, 2018. See
ECF No. 48 (order). Plaintiff seeks summary judgment on all of its claims related to the
2007 audit and 2010 audit (in Case No. 15-767C), and partial summary judgment on its
claims related to the 2012/2013 sales tax audit (in case No. 16-309C). See infra n.5.
Defendant seeks summary judgment in its favor on all of plaintiff’s claims, and dismissal
on jurisdictional grounds of the portion of plaintiff’s claim in Case No. 16-309C that was
not presented to the contracting officer. The motions are fully briefed and ripe for
decision by the court. See ECF No. 74.
B. Medicare Part D
This lawsuit arises out of the Medicare Part D program, which is a voluntary
prescription drug reimbursement program that went into effect on January 1, 2006. See
ECF No. 51-1 at 7-8; ECF No. 52 at 10 (citing 42 U.S.C. § 1395w-101 et seq. (2012)).
The prescription drug coverage is offered by private providers, known as plan sponsors,
who pay the costs for the prescription drugs and are reimbursed by their beneficiaries and
the government. See ECF No. 52 at 10.
The Centers for Medicare & Medicaid Services (CMS), a component of the United
States Department of Health and Human Services (HHS), “pays plan sponsors a monthly
prospective payment throughout each year for each beneficiary enrolled in the plan.” Id.
(citation omitted). The payments are then reconciled after the end of each year with the
plans’ “actual level of enrollment, risk factors, levels of incurred allowable drug costs,
reinsurance amounts, and low-income subsidies.” Id. at 11 (citation omitted). Final
reconciled plan years can be reopened and corrected within four years for good cause.
See id.
CMS uses electronic records submitted by the plans called prescription drug
events (PDEs) to conduct the reconciliations. See id. Plan sponsors submit a PDE
recording information about the drug prescribed, its cost, payment details, and other
information “[w]henever a Medicare Part D beneficiary fills a prescription.” Id. For the
years at issue in this dispute, HHS estimated that gross payment errors (both over- and
under-payments) in its Medicare Part D payments to plan sponsors ranged from just over
one billion dollars at the lowest to over five billion at the highest. See ECF No. 51-1 at
28; ECF No. 53 at 32-33.
C. The General Services Administration (GSA) Federal Supply Schedule
Contract
On June 17, 2010, plaintiff entered into a federal supply schedule contract for
financial and business solutions issued by the General Services Administration (GSA),
3
contract number GS-23F-0074W (GSA contract). See ECF No. 70 at 12. Pursuant to the
contract, plaintiff offered “Financial Management & Audit Services” including
“Recovery Audits.” ECF No. 71-1 at 1, 5. Plaintiff stated in its contract with GSA that it
was able and ready to provide services to “accurately quantify, verify, and recover
improper payments.” Id. at 5.
The GSA contract contained a “Contract Clause Document” establishing the terms
of the contract. ECF No. 70-1 at 6. Included in the contract terms was Federal
Acquisition Regulation (FAR) clause 52.212-4(l), termination for the government’s
convenience, which permits the ordering agency to “terminate this contract or any part
hereof, for its sole convenience.” Id. at 21. Under FAR 52.212-4(l), should the agency
elect to terminate the contract for convenience, plaintiff would be owed “a percentage of
the contract price reflecting the percentage of the work performed prior to the notice of
termination, plus reasonable charges the Contractor [could] demonstrate to the
satisfaction of the ordering [agency] using its standard record keeping system, [to] have
resulted from the termination.” Id.
The GSA contract also included FAR clause 52.246-4, inspection of services—
fixed price, which permits the ordering agency to “inspect and test all services called for
by the contract, to the extent practicable at all times and places during the term of the
contract.” Id. at 81. Under FAR 52.246-4, should the agency find that the services
provided “do not conform with contract requirements, the ordering activity [might]
require the Contractor to perform the services again in conformity with contract
requirements.” Id. “If the Contractor fails to promptly perform the services again or to
take the necessary action to ensure future performance in conformity with the contract
requirements, the ordering activity may: . . . (2) terminate the contract for default.” Id.
D. The GSA Contract Recovery Audit Task Order
The passage of the Patient Protection and Affordable Care Act in 2010 required
CMS to enter into a contract to obtain “recovery audit” services for Medicare Part D. See
ECF No. 52 at 12 (citing PPACA, Pub. L. No. 111-148, § 6411(b), 124 Stat. 119, 775
(2010) (codified at 42 U.S.C. §1395ddd(h))). The purpose of such services was to
identify and assist in recovering improper payments. Id. On December 2, 2010, CMS
issued a Request for Quote (RFQ) under the GSA contract to plaintiff for recovery audit
contractor (RAC) services. See id. “Pursuant to the terms and conditions of Contract No.
GS-23F-0074W,” CMS awarded plaintiff task order HHSM-500-2011-00006G (task
order) on January 13, 2011, to identify improper payments and to recover overpayments
made under the Medicare Part D program “on a national scale.” ECF No. 51-3 at 152-54;
ECF No. 51-1 at 8. Only the terms in the task order that were different from the GSA
contract were included in the task order; otherwise, “all terms and conditions of the
contract remain in effect.” ECF No. 51-3 at 154.
4
The task order, pursuant to which the contractor was paid a firm, fixed-price
contingency fee, included a base period and four option years. See ECF No. 53 at 3.
Any payments to plaintiff were contingent upon the recovery of improper payments from
plan sponsors and were to be fixed as a percentage of such recoveries. 4 See ECF No. 51-
3 at 155.
Under the terms of the task order, ACLR was to “perform the work required in
accordance with the attached Performance Work Statement (PWS).” Id. at 154; ECF No.
53 at 3. The term of the PWS extended from January 13, 2011, to December 31, 2013.
See ECF No. 51-3 at 154; ECF No. 52 at 16. The PWS generally described the audit
process, ECF No. 51-3 at 184-93, provided for a review of duplicate payments, id. at 186,
and indicated that CMS input and approval would likely be required for the various audit
processes, see, e.g., id. at 187, 190. The PWS does not expressly require approval by
CMS for data audit activity undertaken by plaintiff; instead the PWS states that “[o]nce
the Data Audit has been complete [ACLR] will discuss [its] findings with CMS.” Id. at
189. The PWS does require CMS approval for any documentation audits. See id. The
terms of the PWS did not reference or modify the terms of the task order or the GSA
contract.
The parties later implemented a Statement of Work (SOW), replacing the PWS,
that had two phases. The first SOW extended from January 1, 2014, through December
31, 2014 (2014 SOW), and the second SOW extended from January 1, 2015, through
December 31, 2015 (2015 SOW). See ECF No. 51-5 at 6, 45. The SOWs explicitly
required CMS approval for any audit conducted by plaintiff and set forth a process by
which plaintiff was to request that approval. See id. at 14, 17. Neither SOW expressly
addressed the cancellation of an audit after CMS had approved it.
Difficulties and delays occurred early in ACLR’s contract performance. See ECF
No. 51-1 at 10-11. The parties disagree regarding the extent of the difficulties and
delays, and whether CMS’s actions failed to meet the contract requirements. See ECF
No. 53 at 5-7. Plaintiff eventually did begin its work under the contract, and plaintiff
does not allege any breach by CMS during the initial period of performance. See ECF
No. 51-1 at 33-34, 52. Rather, in two cases, plaintiff alleges three separate breaches by
CMS as ACLR attempted to perform pursuant to the contract; the three audits are
discussed more fully herein. See id.
4
The contingency fee percentage was raised twice, pursuant to contract modifications,
with respect to certain audit activities conducted by plaintiff. See ECF No. 58-6 at 11. There
was also a general increase in the contingency fee percentage that was instituted in 2014, for
newly approved audit tasks. See ECF No. 53 at 15.
5
1. Plaintiff’s 2007 and 2010 Audit Claims (Case No. 15-767C)
a. 2007 Audit 5
Plaintiff began receiving PDE data from CMS in November 2011 and immediately
undertook an audit of 2007 PDEs (2007 audit). See ECF No. 53 at 9, 12. The parties do
not dispute that, at the time of the 2007 audit, the GSA contract, the task order, and the
PWS were in effect. See ECF No. 53 at 3. Pursuant to the task order and the PWS,
ACLR was to conduct a “duplicate payments” audit for particular calendar years. ECF
No. 51-11 at 6; ECF No. 53 at 10-11. What the parties do dispute is whether plaintiff
was required to seek CMS approval prior to conducting an audit. See ECF No. 51-1 at
15; ECF No. 52 at 15.
According to plaintiff, its audit of the 2007 PDE records identified $313,808,241
in improper duplicate payments using a technical method deemed acceptable by CMS.
See ECF No. 51-1 at 15; ECF No. 53 at 12. When plaintiff communicated its overall
result to CMS, the contracting officer directed plaintiff not to issue any notification letters
to the plan sponsors about these findings. See ECF No. 51-1 at 15; ECF No. 53 at 12.
Plaintiff asserts that it is due $23,535,618 in contingency fees for the 2007 audit. See
ECF No. 51-1 at 49.
b. 2010 Audit
CMS authorized plaintiff to conduct a duplicate payments audit for calendar year
2010 (2010 audit). See ECF No. 53 at 16-17. Plaintiff conducted the audit in 2014,
pursuant to the GSA contract, task order, and the 2014 SOW. See ECF No. 51-1 at 20;
ECF No. 52 at 17. In accordance with the procedure set forth in the 2014 SOW, plaintiff
sought approval for the audit and the methodology it would use. See ECF No. 51-1 at 20.
CMS granted its approval. See id.
According to defendant, its data validation contractor found errors in plaintiff’s
audited data. See ECF No. 52 at 31-33. Plan sponsors also voiced concerns that a
significant portion of the duplicate payments identified by plaintiff were legitimate, rather
than duplicative, but would require extensive time and effort to support. Id. Defendant,
in turn, requested that plaintiff use a revised audit protocol to review the 2010 data. See
id. at 33. Although plaintiff complied with the request, it now argues that defendant had
no right, under the contract, to modify the previously approved methodology for
plaintiff’s audit. See ECF No. 51-1 at 22-23.
5
In addition to the audits at issue here, the court notes that plaintiff completed seven audits
for which it was paid contingency fees under the GSA contract and task order. ECF No. 53 at
47; ECF No. 58-6 at 24-25. The payments for these audits do not appear to have been the
subject of any claim submitted by plaintiff to the contracting officer.
6
After reviewing the evidentiary support documentation from plan sponsors,
plaintiff submitted its 2010 audit review package to CMS. See ECF No. 51-1 at 23.
Defendant contends that plaintiff failed to use the revised methodology, and that
defendant’s data validation contractor once again found errors in plaintiff’s audited data.
See ECF No. 52 at 34-35. Defendant requested that plaintiff provide additional
information to address the raised concerns; plaintiff declined to do so. See id. at 35.
Plaintiff does not deny that it refused to comply; plaintiff explains that it refused to do so
because defendant acted in contravention of the contract terms. See ECF No. 51-1 at 23.
CMS terminated the 2010 audit, reasoning that it had unaddressed concerns about
the validity of the audit results. See ECF No. 52 at 35. Having identified $15,909,552 in
improper duplicate payments during the 2010 audit, plaintiff seeks, as its contingency fee
for that work, $2,209,146. See ECF No. 51-1 at 23.
3. The 2012/2013 Sales Tax Audit (Case No. 16-309C)
Pursuant to the 2015 SOW, ACLR prepared, in 2015, a new audit issue review
package (NAIRP) for the audit of sales tax payments from calendar years 2012 and 2013
(2012/2013 sales tax audit). See id. at 25. CMS did not approve the proposed sales tax
audit. See id. According to plaintiff, CMS’s refusal to approve the NAIRP for the sales
tax audit was procedurally and factually improper. See id. at 25-27. From the sales tax
audit, plaintiff identified $626,326,618 in improper sales tax payments, which, plaintiff
alleges, should have earned it $75,459,194 in contingency fees. 6 Id. at 65-66.
II. Legal Standards
According to RCFC 56(a), summary judgment is appropriate “if the movant shows
that there is no genuine dispute as to any material fact and the movant is entitled to
judgment as a matter of law.” “[A]ll evidence must be viewed in the light most favorable
to the nonmoving party, and all reasonable factual inferences should be drawn in favor of
the nonmoving party.” Dairyland Power Coop. v. United States, 16 F.3d 1197, 1202
(Fed. Cir. 1994) (citations omitted).
A genuine dispute of material fact is one that could “affect the outcome” of the
litigation. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). “The moving
party . . . need not produce evidence showing the absence of a genuine issue of material
fact but rather may discharge its burden by showing the court that there is an absence of
evidence to support the nonmoving party’s case.” Dairyland Power, 16 F.3d at 1202
6
Of note, plaintiff has not sought summary judgment for the portion of its work on the
2012/2013 sales tax audit pertaining specifically to sales tax issues in the state of Louisiana. See
ECF No. 51-1 at 50 n.3, 66 n.9 (“ACLR is not seeking summary judgment on the sales tax
NAIRP with respect to the Louisiana sales tax issues.”). Defendant seeks summary judgment as
to all of plaintiff’s claims in their entirety.
7
(citing Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986)). A summary judgment
motion is properly granted against a party who fails to make a showing sufficient to
establish the existence of an essential element to that party’s case and for which that party
bears the burden of proof at trial. Celotex, 477 U.S. at 324.
The Supreme Court of the United States has instructed that “the mere existence of
some alleged factual dispute between the parties will not defeat an otherwise properly
supported motion for summary judgment; the requirement is that there be no genuine
issue of material fact.” Anderson, 477 U.S. at 247-48. A nonmovant will not defeat a
motion for summary judgment “unless there is sufficient evidence favoring the
nonmoving party for [the fact-finder] to return a verdict for that party.” Id. at 249(citation omitted). “A nonmoving party’s failure of proof concerning the existence of an
element essential to its case on which the nonmoving party will bear the burden of proof
at trial necessarily renders all other facts immaterial and entitles the moving party to
summary judgment as a matter of law.” Dairyland Power, 16 F.3d at 1202 (citing
Celotex, 477 U.S. at 323).
III. Analysis
A. Defendant Did Not Breach Its Contract with Plaintiff When It Denied or
Terminated the Audits
“To recover for breach of contract, a party must allege and establish: (1) a valid
contract between the parties, (2) an obligation or duty arising out of the contract, (3) a
breach of that duty, and (4) damages caused by the breach.” San Carlos Irr. & Drainage
Dist. v. United States, 877 F.2d 957, 959 (Fed. Cir. 1989) (citations omitted).
The parties agree that they had a valid contract—arising from the GSA contract,
the task order, and the PWS or the SOWs—that controlled the parties’ relationship. See
ECF No. 53 at 3; ECF No. 69 at 10. They disagree, however, over the extent of the
defendant’s ability under that contract to control the work done by plaintiff. Plaintiff
argues that defendant had no right to terminate or deny plaintiff’s audits under either the
PWS or the SOWs. See ECF No. 51-1 at 33-35, 53. Defendant argues that the terms of
the GSA contract permitted it to reject plaintiff’s work for nonconformance with the
contract terms, if necessary, and to terminate—for its sole convenience—any part of the
contract. See ECF No. 70 at 15-17. The plain language of the GSA contract establishes
that defendant was entitled to terminate any portion of the contract for its sole
convenience. Because defendant’s actions in denying and terminating the audits were
consistent with the terms of the contract, the court finds that, as discussed below, no
breach of the contract has occurred.
8
1. Defendant Terminated Plaintiff’s Work on the 2007 and 2010 Audits
Pursuant to Its Contractual Authority
a. The Parties’ Contract Permits Termination for Defendant’s
Convenience
The parties agree that the GSA contract, the task order, and the PWS or the SOWs,
controlled the parties’ relationship. See ECF No. 53 at 3; ECF No. 69 at 10. But plaintiff
argues that “CMS cannot point to any Part D RAC Contract provisions that justify
CMS’s” terminations of the 2007 and 2010 audits. ECF No. 58 at 10. Defendant
counters that the GSA contract’s terms allow it to inspect and reject plaintiff’s services
for nonconformance or, alternatively, to terminate any part of the contract for its sole
convenience. See ECF No. 70 at 12-14. In support of its position, defendant points to
FAR clauses 52.212-4(l) (termination for convenience) and 52.246-4 (inspection of
services) in the GSA contract. See id. Although defendant extensively briefed the issue
of its ability to terminate the audits for nonconformance with the contract, the court need
not reach this argument; the court agrees that—based on the language of the contract—
defendant had the right to terminate any portion of it for defendant’s sole convenience.
“Contract interpretation begins with the language of the written agreement.”
Bell/Heery v. United States, 739 F.3d 1324, 1331 (Fed. Cir. 2014) (quotations omitted).
If the contract language is unambiguous, then it must be given its plain and ordinary
meaning, such as “would be derived from the contract by a reasonably intelligent person
acquainted with the contemporaneous circumstances.” TEG-Paradigm Envtl., Inc. v.
United States, 465 F.3d 1329, 1338 (Fed. Cir. 2006) (quoting Metric Constrs., Inc. v.
Nat’l Aeronautics & Space Admin., 169 F.3d 747, 752 (Fed. Cir. 1999)).
The plain language of FAR clause 52.212-4(l) permits the government to
terminate the contract, or any part of it, for its sole convenience:
Termination for the Ordering Activity’s convenience. The ordering activity
reserves the right to terminate this contract or any part hereof, for its
convenience. In the event of such termination, the Contractor shall
immediately stop all work hereunder and shall immediately cause any and
all of its suppliers and subcontractors to cease work. Subject to the terms of
this contract, the Contractor shall be paid a percentage of the contract price
reflecting the percentage of the work performed prior to the notice of
termination, plus reasonable charges the Contractor can demonstrate to the
satisfaction of the ordering activity using its standard record keeping system,
have resulted from the termination. The Contractor shall not be required to
comply with the cost accounting standards or contract cost principles for this
purpose. This paragraph does not give the ordering activity any right to audit
9
the Contractor’s records. The Contractor shall not be paid for any work
performed or costs incurred which reasonably could have been avoided.
ECF No. 70-1 at 21 (GSA contract).
Neither party argues that “a mutually intended and agreed to alternative meaning
exists” for this clause. Forman v. United States, 329 F.3d 837, 842 (Fed. Cir. 2003).
Plaintiff instead points to the PWS and the SOW as support for its position, but fails to
identify any part of the task order, the PWS, or the SOW that modifies the termination for
convenience clause of the GSA contract. See ECF No. 73 at 6. The court, therefore,
construes the words of the clause, consistent with their ordinary meaning, to permit the
government to terminate any part of the contract for its convenience.
Termination for convenience—the right of the government to end a contract when
there has been no fault or breach by the non-governmental party—emerged after the Civil
War as a means to end war production that was no longer needed. See Torncello v.
United States, 681 F.2d 756, 764 (Ct. Cl. 1982) (detailing the history of the termination
for convenience clause). Throughout its evolution and eventual incorporation into non-
military contracts executed during periods of peace, the clause has retained its
fundamental purpose—“to reduce governmental liability for breach of contract, by
allocating to the contractor a share of the risk of unexpected change in circumstances.”
Maxima Corp. v. United States, 847 F.2d 1549, 1552 (Fed. Cir. 1988) (citing Torncello,
681 F.2d at 765-66).
Although a termination for convenience clause gives the government considerable
leeway in the cancellation of contracts, the clause is not unbounded. “When the United
States, with constitutional authority, makes contracts, it has rights and incurs
responsibilities similar to those of individuals who are parties to such instruments.” Perry
v. United States, 294 U.S. 330, 352 (1935). As such, the termination for convenience
clause may only be invoked “‘in the event of some kind of change from the
circumstances of the bargain or in the expectations of the parties.’” Maxima, 847 F.2d at
1553 (quoting Municipal Leasing Corp. v. United States, 7 Cl. Ct. 43, 47 (1984)). The
government may justify a breach as a termination for convenience to minimize damages
when the action lawfully falls under that clause, even if the contracting officer calls the
action a cancellation or “erroneously thinks that he can terminate the work on some other
ground.” Id. (quoting G.C. Casebolt Co. v. United States, 421 F.2d 710, 712 (Ct. Cl.
1970)).
Defendant does not argue that the terminations at issue were, at the time, called
terminations for convenience by the contracting officer. Defendant does, however, argue
that it had the right to, and in fact did, inspect the services offered by plaintiff and then
reject them because they failed to conform to the contract. See ECF No. 70 at 15-16.
And, defendant continues, if its actions were not justified by the contract, the
terminations should be considered constructive terminations for convenience. See id. at
10
17. Plaintiff contends that CMS breached the contract when it terminated the audits. See
ECF No. 73 at 6-7. Plaintiff reasons that there is no evidence to support CMS’s claim
that it inspected the audits and rejected them on the basis that they failed to conform to
contractual requirements. See id. at 6. The parties agree as to the material facts
concerning the terminations; they disagree as to whether defendant was authorized to
effect the terminations, and, if defendant was authorized to do so, they disagree as to
whether those terminations can now be deemed constructive terminations for
convenience. The court turns next to determine whether defendant’s alleged breaches
were constructive terminations for convenience.
b. Defendant Constructively Terminated Plaintiff’s 2007 and
2010 Audits for Convenience Pursuant to the Contract
A constructive termination for convenience is a judicially created concept to
retroactively justify a breach by the government when “the basis upon which a contract
was actually terminated is legally inadequate to justify the action taken.” Maxima, 847
F.2d at 1553. Thus, the court will deem a breach a termination for convenience in
circumstances in which the government “has stopped or [has] curtailed a contractor’s
performance for reasons that turn out to be questionable or invalid.” Torncello, 681 F.2d
at 759; see also Praecomm, Inc. v. United States, 78 Fed. Cl. 5, 12 (2007) (deeming a
“deletion of work” from the contract at issue a termination for convenience).
A constructive termination for convenience, like an actual termination, may only
be employed when there has been a change in circumstances or expectations. Maxima,
847 F.2d at 1553. It may not be invoked to justify a breach in a way that leaves the non-
governmental party with no consideration for its bargain. See Torncello, 681 F.2d at 769
(holding that a requirements contract, when paired with a termination for convenience
clause that permitted the government to give no work, was illusory). It also may not be
invoked to create a breach where there has been no breach and the contract was fully
performed on both sides. See Maxima, 847 F.2d at 1554-55 (reasoning that the clause is
not intended to permit “unilateral renegotiation of a contract after it has been fully
performed”).
The parties agree that CMS did not allow plaintiff to proceed with the 2007 audit
after it had reviewed the data and presented defendant with its findings. See ECF No. 52
at 58. Defendant explains that it requested that plaintiff not proceed with the audit
because plaintiff had not identified for defendant the PDE records it audited, plaintiff’s
findings had not been validated, and defendant had not implemented a framework for
collecting the overpayments identified. See id. at 26. As with the 2007 audit, the parties
agree that defendant put an end to the 2010 audit after it had approved the audit and
methodology and plaintiff had undertaken review of the data. See id. at 30. Defendant
explains that, through a fairly extensive back-and-forth process with plaintiff, it
determined that there were issues with the validity of the data generated by the audit. See
id. at 30-35.
11
Plaintiff argues that defendant failed to produce evidence to support the claim that
defendant rejected the audits because they did not conform to contractual requirements.
See ECF No. 73 at 6-7. Plaintiff further argues that defendant cannot avail itself of a
“retroactive termination for convenience” because defendant entered into the contract
knowingly not intending to honor its obligations. Id. (citing Torncello, 681 F.2d at 756).
Plaintiff observes that defendant did not develop a recoupment mechanism until the
second year of contract performance and thus, “could not have entered into the contract
in good faith when ACLR’s sole basis for payment relied on a mechanism that did not
exist.” ECF No. 73 at 7. Plaintiff claims that the contract contained no language
permitting the termination of either the 2007 or 2010 audit, and plaintiff asserts that
defendant’s procedure for terminating the 2010 audit was flawed. See id. at 8-9.
The court may find a constructive termination for convenience when the
government’s reasons for halting contract performance “turn out to be questionable or
invalid.” Torncello, 681 F.2d at 759. Here, the court is persuaded that defendant’s
actions may appropriately be deemed a constructive termination for convenience.
Defendant’s expressed concern regarding the validity of the data generated by the audits,
and its uncertainty about the workability of the PWS as it pertained to the 2007 audit,
constitute changed circumstances that would have supported a termination for
convenience by defendant at the time and therefore, may be constructively effected now.
See ECF No. 52 at 26-27; see also Maxima, 847 F.2d at 1553; Praecomm, 78 Fed. Cl. at
12 (finding a partial termination for convenience where defendant accepted portions of
plaintiff’s work).
Plaintiff’s contention that the finding of a termination for convenience would
render the contract illusory is unavailing. The contract was not fully performed such that
a constructive termination for convenience would effectively permit a unilateral
renegotiation. See Maxima, 847 F.2d at 1554-55. Moreover, a constructive termination
for convenience does not leave plaintiff without consideration for its bargain. See
Torncello, 681 F.2d at 769. The court finds that defendant’s termination of the 2007 and
2010 audits was not a breach of the contract, but rather a constructive termination for
convenience. As such, plaintiff’s motion for summary judgment as to these claims is
denied, and defendant’s motion for summary judgment as to these claims is granted.
2. Defendant Denied Plaintiff’s Proposed 2012/2013 Sales Tax Audit
Pursuant to Its Contractual Authority
a. The Portion of Plaintiff’s 2012/2013 Sales Tax Audit Claim
That Was Not Presented to the Contracting Officer Is Not
Properly Before the Court
As an initial matter, the court must address defendant’s jurisdictional challenge to
the portion of plaintiff’s 2012/2013 sales tax audit claim that exceeds the amount of the
sales tax audit certified claim that plaintiff presented to the contracting officer. See ECF
12
No. 52 at 55-57. Plaintiff responds that its claim represents an enlarged claim and that
the court should address it, as an exercise of judicial economy. See ECF No. 58 at 6-7.
The court, however, lacks jurisdiction over any portion of plaintiff’s claim that was not
presented to the contracting officer. See, e.g., Johnson Controls World Serv., Inc. v.
United States, 43 Fed. Cl. 589, 592 (1999) (“A valid final decision by the contracting
officer is thus ‘a jurisdictional prerequisite to further legal action thereon.’”) (quoting
Sharman Co. v. United States, 2 F.3d 1564, 1568 (Fed. Cir. 1993)). Plaintiff may not
“circumvent the statutory role of the contracting officer to receive and pass judgment on
the contractor’s entire claim.” Cerberonics, Inc. v. United States, 13 Cl. Ct. 415, 418
(1987). Here, plaintiff failed to present a portion of its claim to the contracting officer.
Therefore the court does not have jurisdiction over that claim unless it represents an
appropriate enlarged claim. Id.To establish that its additional damages represent an enlarged claim over which
this court may exercise jurisdiction, plaintiff must demonstrate that the claim arose out of
the same set of operative facts as the original claim and that plaintiff neither knew, nor
reasonably should have known, of the factors justifying the increased claim when it
presented it to the contracting officer. See Kunz Const. Co. v. United States, 12 Cl. Ct.
74, 79 (1987). Plaintiff admitted that the increase in its claim came about when ACLR
identified additional “granular and less conspicuous markers” of questionable payments
in the 2012/2013 sales tax audit data after it had submitted the claim to the contracting
officer. See ECF No. 58 at 6. Plaintiff is, by its own description, experienced in
conducting recovery audits, and therefore plaintiff should have known of the factors
needed to justify the increase in its claim when it presented the claim to the contracting
officer. See ECF No. 51-3 at 42. As such, the court finds that plaintiff’s enlarged claim
is not permissible. See Kunz, 12 Cl. Ct. at 79 (finding that plaintiff was an experienced
contractor and therefore should have known that its additional damages existed and had
to be submitted to the contracting officer).
Accordingly, the portion of plaintiff’s 2012/2013 sales tax audit claim (submitted
under Case No. 16-309C) that was not presented to the contracting officer is dismissed
for lack of subject matter jurisdiction. The court addresses herein only the portion of
plaintiff’s 2012/2013 sales tax audit claim that plaintiff did present to the contracting
officer in its certified claim, which the contracting officer denied—that is, plaintiff’s
certified claim of $79,314,795.
b. Defendant Properly Denied Plaintiff’s Proposed 2012/2013
Sales Tax Audit
Defendant reports that plaintiff received data from CMS regarding the 2012
calendar year in January 2014, data for the 2013 calendar year in late March 2015, and
corrected data for the 2013 calendar year in June 2015. See ECF No. 52 at 38; ECF No.
52-1 at 164-65, 338-42; ECF No. 58-6 at 50. Plaintiff reviewed the data and submitted to
defendant a NAIRP, which defendant denied on September 3, 2015, in a short email. See
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ECF No. 51-1 at 52; ECF No. 51-9 at 11 (September 3, 2015 denial email). Because
plaintiff’s analysis of the PDEs, its submission of the NAIRP, and the denial of the
NAIRP all occurred in 2015, the parties’ contractual relationship was governed by the
GSA contract, the task order, and the 2015 SOW. See ECF No. 53 at 21.
Plaintiff argues that the denial of the NAIRP constituted a breach of contract
because CMS failed to follow the SOW procedures governing the approval of a NAIRP.
See ECF No. 51-1 at 51-53. Defendant responds that CMS’s failure to “mechanically
follow all of the Appendix E timeline steps, when it already had decided to deny the sales
tax NAIRP for legitimate reasons, does not invalidate its decision.” ECF No. 52 at 70.
The court agrees with defendant. The specific steps outlined in the SOW’s “Appendix E”
chart detailing the timeline for the approval of a NAIRP provide guidance, but not
requirements, for every circumstance. See ECF No. 52 at 70; see also ECF No. 51-5 at
79-80 (setting forth the “New Issues Submission and Approval Process”). The SOW
does not require that every NAIRP follow each step in the Appendix E approval process
chart. See ECF No. 52 at 62. Instead, it calls for the contractor to “work[] with CMS[] to
refine and approve or deny the NAIRP. Once approved the RAC begins audit activities.”
Id. On review of the SOW procedures, the court finds no contract breach occasioned by
the manner in which CMS denied the proposed sales tax audit. 7
Plaintiff also argues that the denial of the NAIRP itself constituted a contract
breach. See ECF No. 51-1 at 54-57. In denying the NAIRP, CMS cites section 1.2.3 of
the SOW. ECF No. 51-9 at 11. CMS notes that, pursuant to section 1.2.3, it
“consistently ensures RAC efforts are not duplicative,” and stated that the “audit issue is
currently open and active with another CMS contractor.” Id. Plaintiff asserts that
because its efforts were not duplicative and because there was no other “open and active”
audit for sales tax at the time, defendant breached the contract. ECF No. 51-1 at 54.
Defendant responds by offering an extensive explanation of the various sales tax
application issues that it was pursuing with another contractor, and insisting that CMS’s
right to deny a proposed audit issue was absolute and not conditioned on section 1.2.3 of
the SOW. See ECF No. 52 at 69-71.
The court again agrees with defendant—the SOW does not condition CMS’s
ability to deny a NAIRP. Rather, it provides that a submitted NAIRP will either be
revised and approved, or denied. See ECF No. 51-5 at 52 (“Once submitted the RAC
works with CMS/CPI to refine and approve or deny the NAIRP.”). In its denial email,
defendant provided an explanation to plaintiff, and provided a fuller explanation in its
briefing. See ECF No. 52 at 69-71.
7
In its email denying plaintiff’s NAIRP, defendant offered ACLR the opportunity to learn
more concerning CMS’s denial, but plaintiff elected to file a certified claim regarding the
proposed 2012/2013 sales tax audit instead. See ECF No. 51-9 at 11.
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The terms of the SOW permitted defendant to deny plaintiff’s NAIRP. Because
defendant’s actions were consistent with the terms of the contract, plaintiff’s breach of
contract claim related to the 2012/2013 sales tax audit cannot stand and must be denied.
Defendant’s motion for summary judgment must be granted as to this count.
3. Defendant Did Not Breach the Implied Covenant of Good Faith and
Fair Dealing
As a matter of basic contract law, “[b]reach of the duty of good faith and fair
dealing is a theory of breach of the underlying contract, not a separate cause of action.”
CFS Int’l Capital Corp. v. United States, 118 Fed. Cl. 694, 701 (2014) (citations omitted).
“To state a claim for breach of the implied covenant of good faith and fair dealing, a
party . . . generally must allege some kind of ‘subterfuge[ ]’ or ‘evasion[ ],’ such as
‘evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering
of imperfect performance, abuse of a power to specify terms, [or] interference with or
failure to cooperate in the other party’s performance.’” Dotcom Assocs. I, LLC v. United
States, 112 Fed. Cl. 594, 596 (2013) (citing Restatement (Second) of Contracts § 205
(1981)). Importantly, to maintain both a breach of contract and a breach of good faith
and fair dealing claim, plaintiff must show that each claim is founded upon different
allegations. See CFS Int’l, 118 Fed. Cl. at 701.
Plaintiff argues that its reasonable expectation of pursuing recovery payments and
receiving a “sizeable contingency fee payment” was thwarted by defendant’s actions in
delaying, denying, and ultimately terminating the audits at issue here. See ECF No. 51-1
at 38-40, 60-61. Plaintiff asserts that defendant’s insistence that the audits could not
proceed under the PWS, and that the audit data must have been validated, interfered with
plaintiff’s performance and disregarded plaintiff’s consideration under the contract. See
id. at 42-46, 62-63. Defendant responds that, because its actions were consistent with its
contractual rights, it cannot be found to have breached the duty of good faith and fair
dealing. See ECF No. 52 at 64-65. Defendant asserts that it did, in fact, act in good faith
and with reason when it terminated each of the audits at issue, and that its decision was
not “irrational or unreasonable under the circumstances known to the agency at that
time.” Id. at 73.
Underlying plaintiff’s assertions regarding breach of the duty of good faith and
fair dealing are the same facts and circumstances that inform plaintiff’s breach of contract
assertions. Plaintiff alleges that, by acting as it did to deny and terminate the audits,
defendant interfered with plaintiff’s ability to perform. See ECF No. 51-1 at 38-46, 60-
63. This is merely a breach allegation couched in different language. Not all government
action that affects a contract violates the duty of good faith and fair dealing. See
Precision Pine & Timber, Inc. v. United States, 596 F.3d 817, 829 (Fed. Cir. 2010).
Plaintiff’s claim that defendant’s interference dispensed with its consideration under the
contract is not supported by the record and does not rise to the level of an “evasion of the
spirit of the bargain.” Dotcom Assocs., 112 Fed. Cl. at 596 (internal quotation marks
15
removed); see also Precision Pine, 596 F.3d at 831 (finding that government action that
delays performance does not destroy the contemplated benefit or the parties’ reasonable
expectations under the contract when the contract does not guarantee uninterrupted
performance but expressly contemplates modification, suspension, or cancellation). As
already discussed, defendant’s denial of the 2012/2013 sales tax audit and terminations of
the 2007 and 2010 audits fell within defendant’s contemplated contractual right to cancel.
See supra. Because plaintiff’s good faith and fair dealing claim is premised on the same
factual allegations as its breach claims, plaintiff’s motion for summary judgment must be
dismissed, and defendant is entitled to summary judgment on this count as well.
B. Plaintiff Is Entitled to Compensation for Defendant’s Termination for
Convenience Pursuant to the GSA Contract
While defendant’s actions do not constitute a breach of contract, the termination of
the 2007 and 2010 audits effected constructive terminations for convenience. As such,
under the terms of the contract, defendant is liable to plaintiff for “a percentage of the
contract price reflecting the percentage of the work performed prior to the notice of
termination, plus reasonable charges the Contractor can demonstrate to the satisfaction of
the ordering activity using its standard record keeping system, [that] resulted from the
termination.” ECF No. 70-1 at 21 (GSA contract).
Plaintiff’s current damages claim is for an amount that would “place ACLR in as
good a position as ACLR would have been in if CMS had performed in accordance with
the Part D RAC Contract or had complied with its duty of good faith and fair dealing.”
ECF No. 51-1 at 47, 64. However, “[i]n contrast with damages stemming from a breach
of contract, the sum due a contractor after a termination for convenience is significantly
circumscribed.” Praecomm, 78 Fed. Cl. at 12. Plaintiff presented no evidence or
argument as to the amount of damages owed upon a termination for convenience.
Defendant argues that even under a termination for convenience scenario, plaintiff
has no damages because “it did not put in any significant work on these audits.” ECF
No. 70 at 20. Defendant further argues that, although plaintiff made a claim to the
contracting officer for “$2,668,553 in operating costs and lost profit,” plaintiff “does not
know what of [that] amount” is related to plaintiff’s work on the audits at issue, and “has
not made a claim for it, and cannot recover.” Id.
The parties have not presented sufficient evidence and argument regarding the
percentage of work performed by plaintiff, or its reasonable charges resulting from a
termination for convenience, to enable the court to determine the amount of
compensation to which plaintiff is entitled. Plaintiff’s damages calculations clearly did
not contemplate a termination for convenience, and defendant’s bare assertion that
plaintiff is not entitled to damages is inadequate. The court will, therefore, require
additional submissions from the parties on this issue.
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IV. Conclusion
For the foregoing reasons:
(1) Plaintiff’s motion for partial summary judgment, ECF No. 51, is DENIED;
and plaintiff’s claim for damages in Case No. 16-309C above that which it
presented to the contracting officer is DISMISSED for lack of jurisdiction;
(2) Defendant’s cross-motion for summary judgment, ECF No. 52, is
GRANTED;
(3) On or before April 13, 2020, the parties shall CONFER and FILE a notice
attaching the parties’ proposed redacted version of this opinion, with any
protectable information blacked out; and
(4) On or before April 20, 2020, the parties shall CONFER and FILE a joint
status report proposing next steps for addressing the remaining issues in this
matter.
IT IS SO ORDERED.
s/Patricia E. Campbell-Smith
PATRICIA E. CAMPBELL-SMITH
Judge
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