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# (j ARMED SERVICES BOARD OF CONTRACTAPPEALS Appeal of

-- Energy Matter Conversion Corporation Under Contract No. N68936-09-C-0125 APPEARANCE FORTHE APPELLANT: ) ) ) ) )

APPEARANCES FORTHE GOVERNMENT: ASBCA No. 61583

Dr. Jaeyoung Park

President Arthur M. Taylor, Esq.

DCMA ChiefTrial Attorney Stephen M. Wilson, Esq.

Defense ContractManagementAgency Carson, CA OPINION BYADMINISTRATIVE JUDGE SWEET ON THE GOVERNMENT'S MOTION FOR SUMMARYJUDGMENT The government has moved for summaryjudgment. It argues that it is entitled tojudgment as a matter oflaw onthe claims of prose appellantEnergy Matter Conversion Corporation (EMC2) that the government improperly imposed apenalty because EMC2 included expressly unallowable legal costs in its costproposals, and EMC2 is not entitled to a waiver ofthat penalty. EMC2 argues that the legal costs are not expressly unallowable, and that it is entitled to a waiver. Forthereasons discussed below, the motion is granted. STATEMENT OF FACTS {SOF) FORPURPOSES OF THE MOTION 

### 1. Beginning in 2006, the U.S. Department ofJustice (DOJ) investigated EMC2 for potential mischarges, in violation ofthe False Claims Act, 31 U.S.C. §§ 3729-3733 related to a different contract than the one subjectto this appeal (app. supp. R4, tab 12). The DOJ sought $556,745.83 (app. supp. R4, tab 13 at 9). 2. On September 11, 2009, the Department ofthe Navy (Navy) awarded Contract No. N68936-09-C-0125 (0125 contract) to EMC2. The 0125 contract was a cost-plus-fixed-fee contract. (R4, tab 1) The 0125 contract included Federal Acquisition Regulation (FAR) clause 52.216-7, ALLOWABLE COSTAND PAYMENT (DEC 2002), which incorporated FARPart 31, Contract Cost Principles and Procedures (id. at 22). The 0125 contract also included FARclause 52.242-3, PENALTIES FOR UNALLOWABLE COSTS (MAY 2001) (id. at 21).' 

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# C 3. OnDecember 10, 2012, the Navy Acquisition Integrity Office (AIO) issued a show cause letterregarding questionable costs EMC2 charged to the Navy in fiscal year (FY) 2000 through FY 2005 related to different contracts than the one subject to this appeal (app. supp. R4, tab 1 at 1-2). 1 Among the questionable costs was the salary of Cortine McGowen. Accordingto the show cause letter, Ms. McGowentold investigators that she worked as a housekeeper at the residence ofEMC2'sprior owners, instead ofat EMC2's offices. (Id. at 4) The show cause letter expressly stated that "[t]his evidence of cost mischarging indicates a serious lack ofbusiness integrity that may warrant the debarment ofEMC[2] from Government contracting pursuantto FAR 9.4" (id. at 2). 4. By letter dated January 7, 2013, EMC2 disputed the assertion that the costs for Ms. McGowen's salary were not allowable (app. supp. R4, tab 2 at 2). 5. In 2013, EMC2 resolved the DOJ and AIO investigations (collectively, investigations) by refunding the Navy $249,850.90. The compromise did not expressly provide thatthe costs incurred in connection withthe investigations were allowable. (Compl. 

### ,i 3(c); app. supp. R4, tabs 14-15) 6. EMC2 submitted Final Indirect CostRate Proposals (FICRPs) for FY 2010 and 2011 related to the 0125 contract (2010/2011 FICRPs). The 2010/2011 FICRPs are not in the Rule 4 file. EMC2 alleges that the 2010/2011 FICRPs included as allowable costs legal costs EMC2 incurred in connection withthe investigations (legal costs). (Compl. 

### ,i l(c)) 7. On June 30, 2016, EMC2 submittedFICRPs for FY 2012 and FY 2013 (2012/2013 FICRPs). The 2012/2013 FICRPs included as allowable costs over $10,000 oflegal costs. (R4, tab 4 at 94, 108-09, 116) 8. The Defense Contract Audit Agency (DCAA) auditedthe 2010/2011 FICRPs (2010/2011 audit), allegedly between January 10, 2017 and January 24, 2017. The final auditreport for the 2010/2011 audit is not in the Rule 4 file. (Compl. 

### ,i l(a)-(b)) However, there is evidencethatthe DCAA concluded thatEMC2 should be penalized for including expressly unallowable costs. Nevertheless, the contracting officer (CO) waived thepenalties for including expressly unallowable costs in EMC2's 2010/2011 FICRPs pursuant to FAR42.709-5(c). (App. supp. R4, tab 10) 9. OnJanuary 10, 2017, DCAA commenced an audit ofthe 2012/2013 FICRPs (2012/2013 audit) (app. supp. R4, tab 5). The 2012/2013 audit resulted in an August 17, 2017 audit report (2012/2013 audit report). The 2012/2013 audit report

1 The AIO originally sent the show cause letter onNovember 5, 2012, butthe letter did not reach EMC2 due to a change ofaddress. The AIO then sent the letterto the new address on December 10, 2012. (App. supp. R4, tab 1 at 1-2) 2

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# I"" I I questioned the allowability ofthe legal costs under FAR 31.205-47(b)(4). EMC2 did not withdraw the 2012/2013 FICRPspriorto the DCAA audit. (R4, tab 4) 10. OnJanuary 9, 2018, the CO issued a final decision (COFD), assessing a penalty in the amount of$53,614, including interest, due to the inclusion ofthe legal costs in the 2012/2013 FICRPs. The COFD also rejected EMC2's request for a waiver of the penalty for the 2012/2013 FICRPs. (R4, tab 5) 11. This appeal followed. DECISION I. The Standards for Summary Judgment Summaryjudgmentwill be granted ifa movingparty has shown that there are no genuine issues ofmaterial fact, and it is entitledtojudgmentas a matter oflaw. 

### Celotex Corp. v. Catrett, 477 U.S. 317,322 (1986). A non-movant seekingto defeat summary judgmentby suggesting conflicting facts must set forth specific facts showing that there is a genuine issue for trial. 

### Anderson v. LibertyLobby, Inc., 477 U.S. 242,248 (1986). In deciding summaryjudgmentmotions, we do notresolve controversies, weigh evidence, or make credibility determinations. 

### LibertyLobby, 477 U.S. at 255. Moreover, we draw all reasonable inferences in favor ofthe non-movant. 

### Id. II. Penalty The government is entitled tojudgment as a matter oflaw onEMC2's claim that the government improperly imposed the penalty because there is no genuine issue ofmaterial fact butthat the legal costs were expressly unallowable. "Ifthe head ofthe agency determines that a cost submitted by a contractorin its proposal for settlement is expressly unallowable under a costprinciple

..., the head ofthe agency shall assess a penalty." 10 U.S.C. § 2324(b); 

### see also FAR42.709-3. An expressly unallowable cost is "aparticular item ortype ofcost which, underthe express provisions ofan applicable law, regulation, or contract, is specifically named and stated to be unallowable." FAR 31.001. 

### It is the government's burden to showthat it was unreasonable under all ofthe circumstances for a person in the contractor's position to conclude that the cost was allowable. 

### LunaInnovations, Inc., ASBCANo. 60086, 18-1 BCA

### iJ 36,919 at 179,871; 

### Gen. Dynamics Corp., ASBCANo. 49372, 02-2 BCA ,i 31,888 at 157,570, 

### rev 'dinpart on othergrounds, Rumsfieldv. Gen. Dynamics Corp., 365 F.3d 1380 (Fed. Cir. 2004). The express provisions ofthe FAR specifically state that costs incurred in connection with any proceedings-including investigations-broughtbythe government for a violation ofthe law thatresult in disposition by compromise are 3 

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# C unallowable if"theproceedings could have led to debarment." FAR 31.205-47(a)-(b).2 Here, EMC2 incurred the legal costs in connection with the DOJ and AIO investigations for a violation ofthe law (SOF 

### ,i,i 1, 3, 6-7). Moreover, EMC2 disposed ofthe investigations by compromise when it refunded the Navy $249,850.90 in 2013 (SOF 

### ,i 5). Further, the investigations could have resulted in debarment, as the Navy informed EMC2 in the December 10, 2012 letter (SOF 

### ,i 3; FAR 9.406-2). Because there is no genuine issue ofmaterial fact suggesting that it was reasonable under all of the circumstances for a person in EMC2'sposition to conclude that the legal costs were allowable, there is no genuine issue ofmaterial fact but that the legal costs were expressly unallowable. EMC2 appears to question whether the investigations would have resulted in debarment by arguing that its January 7, 2013 letter establishes that Ms. McGowen's statements were not truthful, so EMC2 would have prevailed on the merits in the proceeding brought by the government (app. resp. at 2). However, after sending the January 7, 2013 letter, EMC2 paid the Navy $249,850.90 to dispose ofthe investigations (SOF 

### ,i 5). That fact calls into question the strength ofEMC2's argument that the January 7, 2013 letter establishes that it would have prevailed on the merits. In any event, under FAR 31.205-47(b), the government merely must show that the investigations "couldhave led to debarment"; not that it would have done so. In sum, because there is no genuine issue ofmaterial fact butthat the legal costs were expressly unallowable, the government is entitled tojudgment as a matter oflaw on EMC2's claim that the government improperly imposed a penalty. III. Penalty Waiver The government also is entitled tojudgment as a matter oflaw on EMC2's claimthat it was entitledto a penalty waiver because there is no genuine issue of material fact suggesting that EMC2 had adequate policies, training, controls, and review systems, and that it inadvertently incorporatedthe legal costs into the 2012/2013 FICRPs. A CO must waive a penalty when: The contractor demonstrates, to the cognizant contracting officer's satisfaction, that...[i]t has establishedpolicies and personnel training and an internal control and review system thatprovide assurance that unallowable costs

2 EMC2 does not-and could not-argue that the exceptions in FAR 31.205-47(c)(1) for when a compromise expressly provides that legal costs are allowable, or the contractor incurred certain costs in connection with proceedings broughtby a third party, or a state, local, or foreign government apply here (app. resp.; SOF 

### 111, 3, 5). 4'

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r···.. V subject to penalties are precluded from being included in the contractor's final indirect cost rate proposal...and [t]he unallowable costs subjectto the penalty were inadvertently incorporated into the proposal, i.e., their inclusion resulted from an unintentional error, notwithstanding the exercise ofdue care. FAR42.709-5(c). 3 Here, EMC2 argues that the government failed to inform EMC2 that the government was disallowing the legal costs in EMC2's 2010/2011 FICRPs until after EMC2 submitted its 2012/2013 FICRPs (app. resp. at 1). However, as we have recognized: The broad purpose ofthe penalty provisions

...was "to ensure that contractors, rather than the Government bear the burden ofassuring that contractor submissions for reimbursement ofcosts on government contracts do not include unallowable costs." (H.R. Conf. Rep. No. 102-966, 728, reprinted in 1992 U.S.C.C.A.N. 1769, 1819

...)[.] Congress was concerned with ending what Congressman Bill Nichols, Chairman ofthe Investigations Subcommittee, and an author ofthe penalty provision, referred to as a "cat-and-mouse game," namely, "agame in which the cost ofan item is submitted regardless of whether it's allowable, and the burden is placed on the Government auditors to identify and disallow the item." Review of Allowable Costs in OverheadSubmission[s] of defense Contractors: Joint Hearings before the Seapower and Strategic and Critical Materials Subcommittee and the

3 EMC2 does not-and could not-argue that the other exceptions in FAR42.709-5 for when the contractor withdraws the proposal before the government formally initiates an audit, orthe amount ofthe unallowable costs was $10,000 or less apply here (app. resp.; SOF

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() Investigations Subcommittee ofthe House Comm. on Armed Services, 99th Cong. 52, 60 (1985)[.] 

### Gen. Dynamics, 02-2 BCA

## ,r 31,888 at 157,568. Thus, EMC2 cannot avoid the penalty by placing the burden ofidentifying and disallowing the legal costs on the government. EMC2 also asserts that it updated its accountingpolicies on January 26, 2017 (app. resp. at 2). However, EMC2 points to no evidence to support that assertion (id.). Even ifit had, that would not be a basis for a penalty waiver. In order for the penalty waiver to apply, a contractor must have policies established at the time it submitted its erroneous FICRP. FAR42.709-5. Thus, even ifEMC2, as it has alleged, updated its policies on January 26, 2017 this was after its submission ofthe 2012/2013 FICRPs on June 30, 2016 and it cannot avail itselfofthe penalty waiver (SOF 

## ,r 7). Indeed, by asserting that it did not update its policies to address the erroruntil January 26, 2017, EMC2 effectively concedes that it did not have adequate policies in place at the time it submitted the 2012/2013 FICRPs on June 30, 2016 (app. resp. at 2). Further, EMC2 asserts that it underbilled the government (app. resp. at 2). However, EMC2 points to no evidence supporting that assertion (id.). Even ifit had, underbiling is not an enumerated basis for a penalty waiver. FAR42.709-5. Next, EMC2 points to the fact that the CO waivedthe penalty for its inclusion ofthe legal costs in its 2010/2011 FICRPs (app. resp. at 2). However, a CO's decision is not binding in any subsequentproceeding. 

### Weststar Engineering, Inc., ASBCA No. 52484, 02-1 BCA

## ,r 31,759 at 156,853 n.2. Therefore, the CO's decision to waive the penalty for the 2010/2011 FICRP is notbinding on his decision regarding whether to waive the penalty for the 2012/2013 FICRPs. Finally, EMC2 argues that it should only pay 55 percent ofthe penalty to reflect an apportionment ofthe legal costs attributable to its "success[]" in the investigations (i.e., the amount by which settlement reduced EMC2's potential liability) (compl. 

## ,r 3(d); app. resp. at 2). However, FAR42.709-5 does not authorize such apportionment. Indeed, the United States Court ofAppeals for the Federal Circuithas rejected apportionment under similar circumstances-namelyin determining when legal costs are unallowable. 

### Gen. Dynamics, 365 F.3d at 1385. Therefore, the government is entitled tojudgmentas a matter oflaw on EMC2'spenalty waiver claim because there is no genuine issue ofmaterial fact suggesting that EMC2 had adequate policies, training, controls, and review systems, and that it inadvertently incorporated the legal costs into the 2012/2013 FICRPs.

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# '-' CONCLUSION Forthe reason set forth above, the government'smotion for summaryjudgment is granted. This appeal is denied. Dated: December 18, 2018

I concur

Administrative Judge Acting Chairman Armed Services Board ofContract Appeals Administrative Judge Armed Services Board ofContractAppeals

I concur

J. REID PROUTY Administrative Judge Vice Chairman Armed Services Board ofContractAppeals

I certify thatthe foregoing is a true copy ofthe Opinion and Decision ofthe Armed Services BoardofContract Appeals in ASBCANo. 61583, Appeal ofEnergy Matter Conversion Corporation, rendered in conformance withthe Board's Charter. Dated:

7 JEFFREY D. GARDIN Recorder, Armed Services Board ofContractAppeals