# United States **Court of Appeals**  **for the Federal Circuit**

______________________ EM LOGGING, Appellant

v.

DEPARTMENT OF AGRICU LTURE, Appellee

______________________

2014

- 1227

______________________ Appeal from the Civilian Board of Contract Appeals in No. 2397, 2427 , Administrative Judge Joseph A. Vergilio.

______________________

Decided: February 20, 2015

______________________

R ICHARD A LLAN P AYNE , Doney, Crowley, Bloomq uist & Uda, Helena, MT, argued for appellant.

E LLEN M ARY L YNCH , Commercial Litigation Branch, Civil Division, United States Depart ment of Justice, Washington, DC , argued for appellee. Also represented by S TUART F. D ELERY , R OBERT E. K IRSCHMAN , J R ., B RYANT G. S NEE

.

______________________

Before N EWMAN , M OORE , and T ARANTO , Circuit Judges.EM LOGGING v. DEPARTMENT OF AGRICU LTURE 2

M OORE , Circuit Judge

. EM Logging appeals from the Civilian Board of Co ntract 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. Because the record does not contain substantial evidence to support the Board’s conclusion that EM Logging flagran tly disregard ed the terms of the contract, we reverse

. B ACKGROUND

A. Contract and Course of Performance
On August 3 1 , 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

p rior 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 Are a shall be transported ove r the designated routes of haul, ” (“the haul route clause”)

. J.A. 668. It further required that “ Pu rchaser shall notify Forest Service when a load of products, after leaving Sale Area, will be delayed for more than 12 hours in r eaching weighing loca tion, ” (“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 fl a-EM LOGG ING v. DEPARTMENT OF AGRICU LTURE 3

grant disregard for the terms of this con tract, ” (“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 weigh ing locations because regulations on maximum working time for drivers would make it difficult to meet the notification clause ’s 12

- hour requir ement. The Forest Service approved the written descri ptions, but denied the request to vary the notification clause

. EM Logging began transporting logs under the co ntract 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 th is appeal . With respect to the breach of the load limit clause , the Forest Service ident ified one truck load that exceeded 80,000 pounds gross vehicle weight and one truck and trailer load that excee ded 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 p ounds gross vehicle weight. O n Jan uary 14, the Forest Service also issued a Notification stating that EM Logging breached the haul route and notification clause s . 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 tran sported over 13 miles one

- way off of the approved haulEM LOGGING v. DEPARTMENT OF AGRICU LTURE 4

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. T he Forest Service also issued Notifications on November 4, 2010, and March 2, 2011

, stating that EM Logging breached provisions of the contract regarding washing of equipment , sanitation and servi cing , and late payment. The breaches in these additional N otifications are not at issue in this appeal

. With the Notification sent January 21, 2011 , the Fo rest Service suspended operations and informed EM Lo gging that the Forest Service was consider ing terminating the contract for breach. The Forest Service te rminated the contract on March 11, 2011, “for repeated and ongoing disregard for the terms of [the] contract almost from the start of l ogging and hauling operations

. . . .” J.A. 326.

B. Board Appeal
EM Logging appealed the termination to the Board. The Boa rd 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 requir ements for load limits, notice of delays, and haul routes, each independently establish a basis t hat alone supports the termination for breach.” J.A. 21, 30.

T he Board determined that EM Logging breached the load limit clause because it exceeded weight limits esta blished by Montana and the Forest Service . Although t he Board found that the contract d oes not specify the mea ning 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 Fore st on February 24, 1986, prohibited trucks exceedingEM LOGG ING v. DEPARTMENT OF AGRICU LTURE 5

80,000 pounds gross vehicle weight from travelling over roads in the Kootenai National Forest. J.A. 23. T he Board concluded that EM Logging breached the load limit clause because EM Logging hauled 31 loads over Forest Service roads exceed ing the Order’s weight limit . J.A. 25. I t 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 ex ceeded the weight limits listed on registrations for EM Logging ’ s trucks and trailers

. Id.

T he 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
contr actual provisions, given that the purchaser had sought, but was denied, deviations, and often was r eminded 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 disr egard of the contract. J.A. 31. The dissenting judge co ncluded 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 —wh ere 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 for th the weight limits for the load limit clause because the parties never relied on the registr ations to prove the weight limits and the registrations alone were inadequate to determine the trucks’ totalEM LOGGING v. DEPARTMENT OF AGRICU LTURE 6

permissible weights

. J.A. 35

– 36. The judge noted th at the single breach evidenced by the ticket did not demo nstrate 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. T he judge concluded that the Forest Service did not meet its burden of proving that EM Lo gging 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
route s identified on the map were not approved . J.A. 39. T he judge concluded that the timeliness of delay notific ations pursuant to the notification clause should not be a reason to termina te 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 conclude d that term ination 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).

D ISCUSSION We review the interpretation of a government co ntract 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) fraudu lent, arbitrary, or capricious; (B) so grossly
erroneous as to necess arily 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 Se rvice allowed termination when EM Logging had “engagedEM LOGG ING v. DEPARTMENT OF AGRICU LTURE 7

in a pattern of activity that demonstrates flagrant disr egard f or 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.” Merr iam

- Webster’s Colle giate 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 th at demo nstrates flagrant disregard for the terms of this contract, such as, but not limited to, repeated su spensions for breach pursuant to B9.3, causing u ndesignated timber meeting Utilization Standards to be unnecessarily damaged or negligently or willfu lly cut, or causing other serious environme ntal 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 damag e.” 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 prov isions or isolated breaches of material contr act provisions which caused no damage

. T he 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 fl agrant disregard of the terms of the contract.EM LOGGING v. DEPARTMENT OF AGRICU LTURE 8

B. Violation of the Load Limit Clause

The load limit clause states that “vehicles shall co mply with statutory load limits

. . . . ” J.A. 1217. The Board found that EM Logging violated the clause because seve ral 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 Lo gging violated the load limit clause by exceeding the weight limit set by the Forest Service Order because both parties inter preted “statutory load limits” to include only Mo ntana state limits. It argues that the Forest Service only

prov ed 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 di stance 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 t he 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 mou ntain with sharp hairpin turns and that, had he reconfi gured 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. T his 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 ForestEM LOGG ING v. DEPARTMENT OF AGRICU LTURE 9

Service Order applies to roads over which EM Logging travelled . I t 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 a nd 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 o nce. 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, excee ding the limits listed on EM Logging’s registrations , which the Board relied upon, do es not breach the load limit clause because they do not define statutory limits

. Ther efore, 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, w hich 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 withEM LOGGING v. DEPARTMENT OF AGRICU LTURE 10

the Forest Service Order is not a violation of a contract term, it cannot justify the government’s decision to term inate 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 clause s 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 demo nstrate 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 pneum onia. 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 s ent 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 t he written haul plan submitted by EM Logging , rather thanEM LOGG ING v. DEPARTMENT OF AGRICU LTURE 11

the map it initially submitted

, defined the approved haul
route

. Thus, i t 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 notific ation sent 13 days after a late delivery as un reasonable

. The government argues that these breaches demo nstrate flagrant disregard because after EM Logging sought and was denied deviations EM Logging breach ed 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 sub mit 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 . I t notes that EM Logging reques ted the ability to increase the hauling period from 12 to 24 hours, which was denied . It argues that EM Logging’s actions demo nstrate 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 i nstance does not rise to the level of flagrant disregard. The alleged notification violations similarly do not demo nstrate 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 singleEM LOGGING v. DEPARTMENT OF AGRICU LTURE 12

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

. B oth deliveries arrived within 48 hours. EM Logging sent both of the delay notifica tions in N ovember 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 co ncern. 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 flagra nt 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 L ogging 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 su bstantiate termination for flagrant disregard.

D. Termination

There was one instance of route deviation necessita ted by illness, one load limit violation, and two instances of delayed notifications. None of the alleged violations independent ly substantiate the Board’s finding of flagrant disregard. E ven together, the four violations are not substantial evidence of a pattern of activity demonstra ting that EM Loggi ng’s actions were in flagrant disregard of the contract. Substantial evidence does not support the Board’s conclusion that EM Logging’s actions demo nstrated flagrant disregard of contract terms.

Because we conclude that substantial evidence does not support the Board’s conclusion that EM LoggingEM LOGG ING v. DEPARTMENT OF AGRICU LTURE 1 3

flagrant ly disregard ed the terms of the contract, we need not reach EM Logging’s other arguments

. REVERSED