ARMED SERVICES BOARD OF CONTRACTAPPEALS Appeal of--
K2 Solutions, Inc.
Under ContractNo. M67854-1l-C-3015
APPEARANCES FORTHE APPELLANT: ) ) ) ) )

APPEARANCES FORTHE GOVERNMENT: ASBCA No. 60907

Paul W. Bowen, Esq.

K&L Gates LLP Seattle, WA Amy M. Conant, Esq.

K&L Gates LLP Washington, DC
Ronald J. Borro, Esq.

Navy ChiefTrial Attorney Matthew S. Hawkins, Esq. Stephanie Cates-Harman, Esq.

Trial Attorneys
OPINION BYADMINISTRATIVE JUDGE SWEET ON THE GOVERNMENT'S MOTION TO DISMISS AND/OR STRIKE
This is an appeal ofa contracting officer's denial ofa claim by K2 Solutions, Inc. (K2), alleging that the government breached a contract, and the duty ofgood faith and fair dealing, by reducing a contract's scope ofwork. The government has moved to dismiss portions ofthe complaint-namely counts two, three, and six-forfailure to state a claim. 1 The motion is granted as to counts two and three, and denied as to count six.
STATEMENT OF FACTS (SOF) FORPURPOSES OF THE MOTION2

1. On 29 September 2011, the government awarded K2 Contract No. M67854-l l-C-3015, which was a contract to provide improvised explosive device detector dogs and related services (compI. 

### irir 4-5).

1The complaint does not number the counts. The government assigns such numbers in its motion to dismiss. For ease ofreference, we adopt the government's numbering convention. 2Forpurposes ofthis motion only, we accept the allegations in the complaint as true.2. The contract was for one base year, and two option years (compI.**~** 8). Option year one, ifexercised, would commence on 29 September 2012 (id.).
3. K2 alleges thatthe government failed to exercise delivery ofthe full quantity ofdogs and services during the base year (com pl.**~~** 25-34).
4. On 22 June 2012, the government sent K2 a notice ofintentto exercise option year one (compl.**~** 37, ex. J). The notice contemplated a reduction in the requirements from the original contract (id.).
5. On 31July2012, the government sent K2 ModificationNo. POOOlO (Mod. 10) (compI.**~** 39). Mod. 10 "was a unilateral Modification purportingto exercise Option Year 1 on terms different than those agreedto by the parties in the Contract" (id.). In particular, Mod. 10 "reduced requirements, changed terms within certain [contract line item numbers (CLINs)], and issued new SubCLINs for reduced amounts" (compl.**~** 40, 

### see also ex. K).
6. K2 continued toperform subsequent to the issuance ofMod. 10 (compl.**~** 45).
7. K2 alleges that, even relative to the reduced quantities ordered in Mod. 10, the government decreasedthe amount ofwork (compl.**~** 50). Inparticular, K2 alleges that the government only paid 63 percent ofthe original amount awarded in the contract for option year one, and 86 percent ofthe amount as reduced by Mod. 10 (compl.**~** 51).
8. K2 submitted a certified claim to the contracting officer (CO) on 22 April 2016 (compl.**~** 58). The CO denied that claim**(id.~** 78).3

9. This timely appeal followed.
10. Count one ofthe complaint alleges thatthe governmentbreached the contract by failing to exercise delivery ofall the ordered goods and services during the base year (compl.**~~** 80-93).
11. Count two alleges thatthe government breachedthe contractby using the exercise ofthe first option yearto reduce the scope ofwork (compl.**~~** 95, 100-01). In particular, counttwo alleges thatthe government "attempt[ed] to unilaterally exercise only parts ofthe Option Year One CLINs by exercising Option Year 1 and then immediately deletingportions ofthe work" (compl.**~** 99).
12. Count three alleges thatthe government improperly exercised option year one, in violation ofthe contract, by decreasing the amount ofworkwithoutproviding K2 the opportunity to renegotiate the option (compl.**~~** 104-05, 107-08).

3 The certified claim asserted the same claims raised in the complaint (compI., ex. T).

213. Count four alleges that the government breached Mod. 10 by refusing to allow for the delivery ofall the services ordered under Mod. 10 (compI.**~** 115).
14. Count five alleges that the government breached the duty ofgood faith and fair dealing with respect to the base year (compl.**~~** 121-28).
15. Count six alleges that the government breachedthe duty ofgood faith and fair dealing with respect to option year one (compl.**~~** 129-38). Count six alleges two legal theories. The first theory is thatthe governmentbreachedthe contract's implied duty by using Mod. 10 to reduce the contract's scope ofwork, instead ofnegotiating a bilateral modification and price adjustment**(id.~~** 130-33). The second legal theory is that the government breachedMod. lO's implied duty by failing to exercise delivery of Mod. lO's full quantity**(id.~~** 134-36).
DECISION
I. LegalStandard
Dismissal for failure to state a claim upon whichreliefcan be granted is appropriate where the facts asserted in the complaint do not entitle the claimant to a legal remedy. Matcon Diamond, Inc., ASBCANo. 59637,**15-1BCA~36,144** at 176,407. "To survive a motion to dismiss, a complaint must contain sufficient factual matters, accepted as true, to state a claimto reliefthat is plausible on its face." Ashcroftv. Iqbal, 556 U.S. 662, 678 (2009) (citation and internal quotations omitted). We must accept all factual pleadings as true. Id.; Matcon Diamond, 15-1 BCA**~** 36, 144 at 176,407. However, we do not accept as true the legal conclusions in the complaint. Iqbal, 556 U.S. at 678. A pleading that offers labels and conclusions, or a formulaic recitation ofthe elements ofa cause ofaction will not do. Id. Nor does a complaint suffice ifit tenders naked assertions devoid offurther factual enhancement. Id. Moreover, we draw all reasonable inferences in favor ofthe appellant. Id. While the inferences need not be probable, they must be plausible. Id. Thus, the ultimate inquiry is whether the complaint alleges sufficient facts to nudge a claim across the line from conceivable to plausible. Id. at 680.
II. Counts Two and Three Fail to State a Claim
As the government contends, counts two and three alleging that the exercise of the option violated the contract by reducing the scope ofwork fail to state a claim because the attempted option exercise was ineffective, so there was no option exercise that could have violated the contract (gov'tbr. at 4-5). "[T]he notice by which the power ofan option holder is exercised must be unconditional and in exact accord with the terms ofthe option." Holly Corp., ASBCA No. 24975,**83-1BCA~16,327** at 81, 164 (quoting CORBIN ON CONTRACTS § 264 (1963)). This is so because an option

3is a contract to keep an offer open for a prescribedperiod oftime, which confers upon the option holder (optionee) the right to accept or reject the offer in accordance with its terms within the time and in the manner specified in the option. 

### Id. Therefore, principles governing acceptance ofoffers ordinarily apply to the exercise ofoptions. 

### Holly Corp.,**83-1BCA~16,327** at 81,164. "A notice of acceptance that is in any respect conditional or that reserves to the party giving it a power ofwithdrawal is not an operative notice ofacceptance." 

### Id. (citation omitted). "Thus, we have held that any attempt by the Governmentto alterthe conditions ofthe contractor's obligation

...will render ineffective the purported exercise ofan option." 

### Id. at 81,165. Here, the gravamen ofcounts two and three is that the exercise ofthe option violated the contract by reducing the scope ofwork (SOF**~~** 11-12). In support ofthat theory, the complaint alleges that Mod. 10 "reducedrequirements, changed terms within certain CLINs, and issued new SubCLINs for reduced amounts" (SOF**~** 5). Assuming that factual allegation is true, the alteration ofthe conditions ofK2's obligations renders ineffective the attempted exercise ofthe option. 

### Holly Corp., 83-1 BCA**~** 16,327 at 81,165. Because the government's attempt to exercise the option
was ineffective, there was no option exercise that could have violated the contract. Nor could K2 challenge the non-exercise ofthe option. 

### Statistica, Inc., ASBCA No. 44116, 92-3 BCA**~** 25,095 at 125,126; 

### PemcoAeroplex, Inc., ASBCA No. 47402, 95-2 BCA**~** 27,853 at 138,889.
In an apparent attempt to avoid the conclusion that the attempt to exercise the option was ineffective, K2 argues that Mod. 10 initially effectively exercised the option, and then immediately modified the contract by reducing the scope ofwork (app. br. at 4).4 However, in order to determine whetherMod. 10 initially effectively exercised the option,
we must look at Mod. 10 as a whole and decide whether it sought to modify the terms of the option. 

### Holly Corp., 83-1 BCA**~** 16,327 at 81,164. As we have stated, 

### "the notice by which the powerofan option holder is exercised must be unconditional and in exact accord with the terms ofthe option." 

### Id. (emphasis added). Therefore, a document cannot both exercise and modify an option because any modification to the terms ofan option constitutes a rejection ofthe option. 

### Id. Here, because Mod. 10 allegedly was not in exact accord with the terms ofthe option, it is notreasonable to inferthat Mod. 10 initially effectively exercised the option (SOF**~** 5).
Nor does 

### TigerSwan, Inc. v. UnitedStates, 110 Fed. Cl. 336 (2013)-uponwhich K2 relies (app. br. at 4-5)-help K2. 

### TigerSwan did not hold that the same document
can both exercise and modify an option. 

### Id. at 346-47. Indeed, 

### TigerSwan did not even

4 Contrary to the government's argument, the complaint articulates the theory that Mod. 10 effectively exercisedthe option, and then immediately reduced the scope ofwork (SOF**~** 11).

4deal with the exercise ofan option, let alone address the issue ofwhether such an exercise was valid. Id. Rather, in TigerSwan, there was a valid agreement-Le., there had been mutual assent to the same terms-andthen the government terminated that agreement for convenience almost two months later through a separate document. Id. at 340. Therefore, TigerSwan (which is not binding upon us in any event) is not on point. Alternatively, K2 argues that the legal effect ofthe government's attempt to use Mod. 10 to reduce the scope ofwork for option year one was that Mod. 10 constituted a rejection ofthe offer embodied in the option, and a counter-offer, which K2 accepted through performance. DeMarcoDurzoDevelopment Co. v. UnitedStates, 69 Fed. Cl. 262, 275 (2005) (citing RESTATEMENT (SECOND) OF CONTRACTS§ 59). All that proves is that K2 may have a claim for any breach ofthe new agreement embodied in Mod. 10. Id. 5 However, K2 asserts that claim in count four, which is not the subject ofthe motion to dismiss orthis opinion (SOF 

## ii 13).
III. Count Six States a Claim
Count six states a claim for a breach ofthe duty ofgood faith and fair dealing. Every contract imposes upon each party a duty ofgood faith and fair dealing in its performance and enforcement. MetcalfConstr. Co. v. UnitedStates, 742 F.3d 984, 990 (Fed. Cir. 2014). The duty includes a duty notto interfere with the otherparty's performance, and not to act so as to destroy the reasonable expectations ofthe other party regarding the fruits ofthe contract. Id.
In particular, a "bait and switch" breaches the duty ofgood faith and fair dealing. TeresaA. Mc Vicker, P.C., ASBCA Nos. 57487, 57653, 12-2 BCA

## ii 35,127 at 172,463. A bait and switch occurs when the government awards a significant contract benefitto a contractor, only to improperly eliminate that benefit soon thereafter. Id. Here, the government moves to dismiss count six insofar as it alleges that the government breached the option's implied duty before the government ineffectively exercisedthe option (gov'tbr. at 6). Neither ofthe two legal theories asserted by count six alleges that the government breached the option's implied duty before the government ineffectively exercised the option (SOF 

## ii 15). The first theory alleges that the government breached the contract's implied duty (id.). The second legal theory alleges that the governmentbreached Mod. lO's implied duty when it reduced Mod. lO's scope ofwork (id.).

5 Alternatively, K2 may have a claim under count four for costplus profit for the work it performed during option year one. Holly Corp., 83-1 BCA

## ii 16,327 at 81,165; LockheedMartin Corp., ASBCA No. 45719, 00-2 BCA

## ii 31,025.

5While Mod. 10 was an ineffective exercise ofthe option, itplausibly also constituted a new offer that K2 accepted through performance. 

### DeMarco, 60 Fed. Cl. at 275. As with all agreements, any new agreement would impose a duty ofgood faith and fair dealing after it became effective. 

### Metcalf, 742 F.3d at 990. Count six alleges that the government breached that duty after Mod. 10 became effective by reducing Mod. lO's scope ofwork (SOF**~** 15). Because count six does not allege that the government breached the option's implied duty before the government ineffectively exercised the option, the government's motion to dismiss count six is denied.
CONCLUSION
The partial motion to dismiss is granted in part, and denied in part. Counts two and three-which correspond to paragraphs 94 through 109 ofthe complaint-are dismissed for failure to state a claim.
Dated: 13 July 2017

RICHARD SHACKLEFORD Administrative Judge Acting Chairman Armed Services Board ofContract Appeals

6 JAMES R. SWEET Administrative Judge Armed Services Board ofContract Appeals

I concurI certify that the foregoing is a true copy ofthe Opinion and Decision ofthe .A.nned Services Board ofContract .A.ppeals in .A.SBC.A. No. 60907, .A.ppeal ofK2 Solutions, Inc., rendered in confonnance with the Board's Charter.

Dated:

7 JEFFREY D. GARDIN R.ecorder,.A.nned Services Board ofContract .A.ppeals