Bethlehem Steel Corp. v. United States

Nichols, Judge,

delivered the opinion of the court:

This case of Wunderlich Act review of a contract dispute under Dispute Clause procedure (41 U.S.C. §§ 321-22) is now before us for the third time. On the first occasion, 191 Ct. Cl. 141, 423 F. 2d 300 (1970), we held that the Armed Services Board of Contract Appeals (ASBCA) had erred as a matter of law in not following certain Armed Services Procurement Regulations (ASPE) we considered applicable to the dispute. After Board preliminary proceedings reported at 71-1 BCA ¶8640, Bethlehem on May 10, 1971, applied to us for an order terminating stay and for other relief. This we denied in an unreported order, without opinion. The Board proceedings then resumed and resulted in the decision now under review, 73-1 BCA ¶9898. We affirm.

Our 1970 decision details the controversy as it had evolved up to that time and we need not repeat it all here. Briefly, Bethlehem had built five Navy destroyers under two fixed price contracts, Nobs-3556 and 3648, both of which contained clauses allowing for labor and material escalation, but enabling the Contracting Officer to deny any upward adjustment thereunder in whole or in part, if he found that it was not required to enable the Contractor to earn a fair and reasonable profit under the contract, Art. 6, Par. (e). After full performance, plaintiff claimed $3,347,000 escalation under Nobs-3556 and $2,404,900 under Nobs-3648. The latter claim has now been allowed by the Board in its entirety and having-been dismissed is not before us for review. The original Board decision allowed $1,064,151 under Nobs-3556 making a total profit of 5% of costs. The Board’s theory was that plaintiff had agreed to a limit of 5%. We were unable to find evidence of agreement to that limit. Further, the Board had determined the level of reasonable profit without reference to the published guidelines of the Department of Defense which told how contract clauses limiting contractors to reasonable profit levels (hereinafter, profit limitation provision) were to be interpreted and applied.

In Newport News Shipbuilding & Drydock Co. v. United States, 179 Ct. Cl. 97, 374 F. 2d 516 (1967), we had already held that in making a profit limitation decision under a Navy contract clause of the same type, the Board had erred in not following published guidelines. On retrial, the Board, as we indicated it should, followed the guidelines enacted after the contract date and before its original decision, hereinafter called the “unweighted guidelines.” It allowed Newport News full escalation, 71-1 BCA ¶8705. The case was settled on that basis. In Bethlehem, the fact appeared that the Department of Defense had superseded the original “unweighted guidelines” with so-called “weighted guidelines”, after the original Board decision hi Newport News and before that in Bethlehem.

Plaintiff in Bethlehem argued for use of the “weighted guidelines” on retrial. Defendant seemed to argue for no guidelines at all, attacking the “weighted guidelines” as unsuitable for the Bethlehem contract even if required for most others. This was because, in defendant’s view, the “weighted guidelines” would fail to allow weight for the fact the Navy had awarded this contract to Bethlehem, though it was a high bidder, to keep its Quincy, Massachusetts facility in the shipbuilding business. At that point, however, defendant indicated no preference for the “unweighted guidelines”.

This issue caused us much concern. Since, in Newport News we had held a guideline regulation to apply to a contract written at an earlier date, when no guidelines existed, it seemed consistent that any further amending or superseding provisions should be applicable likewise, right up to the original Board trial on the facts. This would make the amended or “weighted guidelines” the proper ones to use in the Bethlehem retrial. What happens, however, if the guidelines are amended or modified again, between the original trial and retrial of the issue? In Newport News, apparently by mutual consent, the new guidelines were not given effect at the retrial and the Board used the ones it should have used at the original trial. It was nevertheless obvious to us that this was not the only possible answer.

The determination of a supposedly reasonable level of profit by administrative fiat after the event, and not by operation of the market place, is not an easy operation that anyone can perform. Without guidelines the power to do it confers, as we said in Bethlehem I, a kind of roving absolutism inimical to our institutions (p. 155). In the administration of our most widely used system of profit limitation under Government contracts, the Renegotiation Act of 1951, 50 U.S.C. (App.) § 1191 and ff., and its predecessors back to 1942, the need for guidelines has been recognized from the beginning, almost, and they are provided both in statutory provisions and in regulations. 50 U.S.C. (App.) § 1213(e); 32 C.F.K. § 1460.1 and ií. The ASPE indicated a recognition of the same need, and we were understandably reluctant to believe there could be any profit limitation provisions in Department of Defense contracts, they were not intended to apply to. By the same token, new regulations, we would presume, reflected more extended experience with profit limitation, and would if applied to previously existing contracts, produce a more satisfactory result than previous regulations or no regulations at all. On the other hand, it certainly was possible the authors of regulations might be unaware at times of all the previously awarded contracts remaining unsettled, to which they might apply, and they might obtain unforeseen and undesired results. If this occurred, they should be free to correct their errors.

As we have recently held in Hills Transp. Co. v. United States, 204 Ct. Cl. 51, 492 F. 2d 1394 (1974) whether, in the absence of express provision, a procurement regulation can have retroactive application to a contract earlier awarded, is not to be decided by any wooden rules, but by reference to the character and intent of the contract and of the regulation involved. Here, factors favoring retroactive application are the long lapse of time under these shipbuilding contracts, between original award and final settlement, and the remedial effect of a guideline regulation, any regulation, as against the assignment of a “roving absolutism” to a Contracting Officer in granting or denying escalation.

In view of the foregoing considerations we deemed it unwise to nail defendant inescapably to the mast of the “weighted guidelines” method. While stating that as things were, plaintiff was entitled to use of that method on retrial, we held that even then, defendant could make a retroactive change in the method. Our words, as reported, were as follows:

As we have said, we see no injustice or anomaly in applying profit limitation techniques, as the Pentagon may have amended and prescribed them from time to time, up to the date of the determination. We would presume that changes were intended to clarify and simplify, as well as to reduce the impact of subjective factors hi the mind of the administering official. To some extent amendments may reflect earlier departures in actual practice, to a large extent no doubt they are the product of experience. If anything has been. slipped in which would impair vested rights unless limited to prospective application only, let it be pointed out. If we have erred in thinking the “Weighted guidelines method” is feasible to apply to the instant contracts, the Pentagon even now could amend or supplement its regulation, and the Board would be bound, provided no impairment of vested rights was attempted. Any amendment purporting to reaffirm the position now claimed, that officials determining a reasonable level of profit under clauses such as Article 6(e) are not subject to any published guidelines whatever in certain cases, at least, would advisedly be made in light of the recent statement of the Supreme Court: “* * * a broad, roving authority, a type of administrative absolutism [is] not congenial to our law-making traditions.” Gutknecht v. United States, 896 U.S. 295, 306 (1970). [191 Ct. Cl. at 154-55.]

It was express that the change should, if made, be in the regulations, and therefore by the rule-making arm of the Secretary of Defense, not his adjudicatory arm, the ASBCA. A change in the rules by the latter would be nothing but a reversion to the “do it yourself guidelines” and “seat of the pants navigation” we condemned in the Newport News decision and again in this. Members of the ASBCA are required to be “learned in the law” and can hardly be also expected to be so expert as not to need guidance as to the techniques of reasonable profit determination. If the rule-making body was to change the rules, it was implicit that body should follow its customary formalities in making rules, and receive the advice from within and without the Government that it normally would. Both the “unweighted guidelines” and the “weighted guidelines” afford internal evidence that the needed expertise exists within or is available to the Department of Defense. A third implicit requirement was that the purported “rule” should really have general application and not be just an attempt to influence a lawsuit. We referred to “The Pentagon” meaning that all bodies in or about that vast structure might perform in the roles appropriate to them under the organization of the Department.

What actually happened was put before us in Bethlehem’s 1971 motion. It is assumed for purposes of this opinion that our denial of the motion did not establish a “law of the case” barring consideration now. The ground was unstated and it could have been on several grounds.

Shortly after our decision came down the Navy legal member put before the ASPE, Committee, the rule-making committee having supervision over the ASPE, a request for a “deviation”. Quoting parts of our decision, he advanced the Navy’s position that the “weighted guidelines” were not intended to apply to contracts awarded, as Bethlehem’s was, before 1963. The Committee decided, as recorded in its minutes, that mandatory retroactive application of the weighted guidelines was not intended, and particularly with respect to escalation clauses. Deviation was not required. The Committee also agreed application of the weighted guidelines was not feasible and they were intended only for negotiation of future contracts. A deviation was approved to the extent others might think the guidelines applied. In taking this action, the Committee recognized it would leave the unweighted guidelines in ASPE 3-808 for application. They were not considered as effecting a substantive change in the contract. The Navy member had listed ten contracts with unsettled escalation claims under similar clauses, to which the “deviation” would apply. This included the two Bethlehem contracts here involved. The Navy’s reason for asserting unfeasibility appears to have been primarily that the “weighted guidelines” effectuated an objective that obtained in 1963 to attract more contractors to defense work. This need did not exist in 1954 when the Bethlehem contracts were awarded and the object was then to place contracts at the lowest possible prices.

The ASBCA subsequently held, correctly it would appear, that under ASPE 1-109.3, the Committee had authority to approve a “deviation” of this kind, provided it was unanimous, and a major policy was not involved. Both these conditions were satisfied. See also DOD Instr. 5126.3, December 20, 1961; Government Contract Eeports § 825. It could have published a regulation or directive, without higher level approval, subject to those conditions.

The ASBCA considered it was bound by this “deviation” to apply the unweighted and not the weighted guidelines. It correctly read our decision as holding that it was not the proper body to make this kind of decision, and that one properly made elsewhere would bind it.

The Board, after trial, applying the non-weighted guidelines, awarded plaintiff full escalation under Nobs-3648, but only $687,840 additional escalation over the previous decision under Nobs-3556, being 6.3% of cost. The sum of $2,282,849 would have been required for full escalation, and the Board denied the excess of this figure over $687,840.

Plaintiff does not attack the Board’s techniques in applying the unweighted guidelines, or rather its attack does not focus upon any variation between those techniques and one or more identified parts of the non-weighted guidelines themselves. In general, the Board appears to make a conscientious and reasoned effort to apply them fairly. Plaintiff says it has a “vested” right to the “weighted guidelines” and under them would recover full escalation as a mathematical certainty. We are not so sure as to that but defer to the Pentagon’s experts who, as plaintiff notes, themselves believe such guidelines would produce substantially higher results, at least.

If defendant wanted to use the unweighted guidelines, it is regrettable it did not so inform us in 1970. To have disposed of all Art. 6(e) escalation claims by a uniform method would have had advantages apparent to any mind, and the method was already in use for Newport News. Any benefit from future advances in profit control technique could have been sacrificed in the circumstances. Nor did defendant tel] us then that the weighted guidelines were purposely inflated to attract more bidders. We also deplore the failure to inform Bethlehem of the contemplated change in the rules. There are certain amenities normally to be expected in the conduct of litigation. To obtain ex parte a change in the ground rules and present them to the adjudicating tribunal as fait ac-compli and binding on it, will not impress the ordinary mind as entirely cricket. However, our problem is whether to react only to clear cut and demonstrated illegality, or whether to allow our sense of undirected outrage to prolong this already inordinately prolonged litigation, to the advantage of no one knows wbom. In the case of the Government, we realize that the right hand often does not know what the left hand does. Actions are taken that are, in the aggregate, outrageous, yet may be quite innocent in the minds of the individual actors.

We cannot make our own determination of a reasonable profit level in view of our holding in Newport News that the issue is factual, and our obligation to leave factual issues to Board determination despite previous errors, unless the Board procedure is inadequate and unavailable. United States v. Anthony Grace & Sons, 384 U.S. 424 (1966). The slow progress of this case does not seem imputable to the Board so much as to the novelty of the issues and the complexity of the case. If the job of determining a reasonable profit level has to be done all over again, it is the Board that must do it.

The “unweighted guidelines” used here were considered and approved by us in the Newport News case supra. No contention is made that these guidelines are not fair and reasonable, of themselves. In plaintiff’s eyes, they are just not as productive of a high level of reasonable profit as the preferred set. As a matter of fact the “unweighted guidelines” bear a strong family resemblance to the Congressionally enacted set in the Renegotiation Act, cit. supra. In adjudicating Bethlehem I, we formed the impression the Department of Defense had abandoned them as unsatisfactory, but this is now shown to have been erroneous. The “weighted guidelines” were put in effect for wholly different reasons, as has appeared above.

Plaintiff’s serious legal attack on the Board decision has three main heads: (1) the alleged ex parte approach by the Navy member to the ASPE Committee, (2) that Bethlehem has a vested right in use of the “weighted guidelines” method, and (3) that it was “feasible” to use those guidelines.

1. As a matter of law, this court has often regarded ex parte approaches as invalidating adjudicatory actions. Camero v. United States, 179 Ct. Cl. 520, 375 F. 2d 777 (1967); Jarett v. United States, 195 Ct. Cl. 320, 451 F. 2d 623 (1971). However, it has not attempted to apply the same standards to rule making. Everyone knows that an ex parte approach may lie behind many a statute. When we indicated therefore, that a change in the rules must originate in a rule m airing body, we indicated that such a change might be effected by the procedures normal to such bodies. Plaintiff has not cited a statute or regulation applicable to the ASPE Committee, invalidating an ex parte approach by one of its members. We wonder if an approach to an organized body by one of its own members can ever be deemed ex parte in the pejorative sense of the word.

2. Plaintiff also says it had a vested right in the use of the “weighted guidelines” procedure. This echoes a provision in our former opinion, quoted above, intimating that in changing its regulation, the defendant could not impair vested rights. Where does the alleged vested right of the plaintiff originate? Not in the contract, wherein plantiff did not bargain for use of any method of determining a reasonable level of profit in case Art. 6 (e) had to be administered. Not in the regulation itself, since our reading of it makes it inherently subject to change, unless the change impairs vested rights of other origin. Not in our former decision. We are not empowered to create vested rights against the Government except in the form of money judgments. Such rights might come into being as res judicata, collateral estoppel, or “law of the case”, but we see none of these here. There has been no final judgment to give rise to the first two, and as to law of the case, it works against plaintiff if at all, insofar as our “law of the case” stated in Bethlehem I was purposely hedged, and plaintiff’s contention just comes back to depend on plaintiff’s interpretation of that decision, which we reject.

The irreparable flaw in plaintiff’s claim to a vested right in the “weighted guidelines” is that in 1954 plaintiff deliberately made contract Nobs-3556, including Art. 6(e). If Art. 6 (e) subsequently came up for implementation, the most plaintiff could demand was determination of its acceptable profit level by some fair and reasonable method, of general applicability, and not one freshly invented for its particular case. This has now been accorded to it.

3. Plaintiff also says it would be “feasible” to apply the “weighted guidelines” echoing our language that these guidelines might be changed if it were not “feasible” to use them. Plaintiff also says use of these guidelines leads inexorably to allowance of its entire escalation claim without deduction. The Board in response quotes dictionary definitions of “feasible” as “possible” or “practicable” or “capable of being done”, and other definitions as what is “suitable” or “reasonable”. It concludes, correctly, that we intended the broader meaning. The paragraph taken as a whole, indicates that a general change in the regulations made for any legitimate reason is acceptable. “Unfeasibility” of the prior regulation is merely an example. We regret having used such an ambiguous terminology. In the area of profit limitation the subjective cannot be avoided entirely. If a technique of determining a reasonable level of profit produces a result that shocks the sense of fairness or justice, use of it is not “feasible”, and should be avoided.

The Board also points out, correctly, that the major premise of Bethlehem, I decision was our objection to decision of profit limitation issues under Art. 6(e) of the involved contracts, by the use of do-it-yourself or seat-of-the-pants guidelines. A minor premise was the belief, right or wrong, that the regulations provided proper published guidelines for all cases, and the conclusion, that such published guidelines should be followed. As the Board points out, use of the “unweighted guidelines” per rule adopted under the ASPE constitution, implements, rather than violates, every significant part of our decision. Had we known they wanted to use the “unweighted guidelines” we would probably have expressed our approval. We may have thought matters would be handled differently than they were, in some respects, but we did not frame a mandate to demand all that we expected. Indeed, to describe our opinion as a mandate at all is an exaggeration. In 1910 we did not have the power to tell the Board what to do, that we now have under 28 U.S.C. § 1491, as amended by Pub. L. 92-415. The Board suspended the case to allow plaintiff to apply to this court when it declared its dissatisfaction with the guidelines to be followed. It did more than the law then required of it, to ascertain our wishes and apply them. Our so-called mandate was in reality, and was intended, more as a summary of the legal options open to defendant on the retrial of the case.

In. view of the foregoing, the Board, decision under review is not contrary to substantial evidence, is not contrary to law, and is not arbitrary or capricious. By Wunderlich Act standards, it must therefore be affirmed.

Plaintiff’s motion for summary judgment is denied. Defendant’s cross motion for summary judgment is allowed. Judgment is entered for plaintiff in the amount determined by the Board, which was for Contract Nobs-3556, $1,064,151 under the original decision and $681,840 additional under the decision now under review, or a total of $1,151,991, with adjustment for any portion of the said sum already paid.