Source: https://openjurist.org/326/f3d/1242/abraham-v-rockwell-international-corporation
Timestamp: 2017-09-24 03:32:06
Document Index: 531915800

Matched Legal Cases: ['§ 605', '§ 601', '§ 256', '§ 1295', '§ 607', '§ 256', '§ 256', '§ 256', '§ 970', '§ 203', '§ 7', '§ 2']

326 F3d 1242 Abraham v. Rockwell International Corporation | OpenJurist
326 F. 3d 1242 - Abraham v. Rockwell International Corporation
326 F3d 1242 Abraham v. Rockwell International Corporation
326 F.3d 1242
Spencer ABRAHAM, Secretary of Energy, Appellant,
ROCKWELL INTERNATIONAL CORPORATION, Appellee.
John A. Kolar, Trial Attorney, Commercial Litigation Branch, Civil Division, Department of Justice, of Washington, DC, argued for appellant. With him on the brief were Robert D. McCallum, Jr., Acting Associate Attorney General; David M. Cohen, Director; and Mark A. Melnick, Assistant Director. Of counsel on the brief was Marc Johnston, Attorney, Office of General Counsel, Department of Energy, of Washington, DC.
During 1990 the government made additional allegations of criminal conduct beyond those listed in the search warrant affidavit. These new allegations comprised permit and other violations of the Resource Conservation and Recovery Act of 1976 ("RCRA"), Pub.L. No. 94-580, 90 Stat. 2795 and the Clean Water Act of 1997, Pub.L. No. 95-217, 91 Stat. 1566 ("CWA"). Rockwell continued to employ counsel for itself and its employees to respond to these charges and used the database in its defense.
Beginning in early 1991, negotiations between Rockwell and the government were conducted concerning a plea agreement. The terms of the negotiated settlement were memorialized in a "Plea Agreement" dated March 26, 1992 ("the Agreement"). In the Agreement, Rockwell pled guilty to four felony violations of RCRA and one felony and five misdemeanor violations under the CWA in exchange for a release for itself and its employees. "None of the ten counts agreed to in the Plea Agreement (the Charged Conduct) w[as] based upon the allegations in the search-warrant affidavit (the Uncharged Conduct)." Id. at *26. An $18.5 million fine was levied against Rockwell, for which Rockwell agreed not to seek reimbursement from the government. Rockwell also agreed not to seek reimbursement of attorneys' fees and costs incurred by Rockwell in defending or preparing to defend against the charges to which Rockwell pled guilty (the Charged Conduct). It was agreed that Rockwell would be permitted to seek recovery of its costs related to investigation of criminal conduct that never ripened into criminal charges (the Uncharged Conduct):
After the settlement, Rockwell submitted three vouchers to the contracting officer seeking reimbursement of costs related to the investigation of Uncharged Conduct. The government refused to reimburse these costs. On June 22, 1995, Rockwell submitted a written claim for reimbursement to the contracting officer, to which no response was sent. The claim was therefore deemed to be denied pursuant to 41 U.S.C. § 605(c)(5). Id. at *52.
Following the deemed denial of its claim, Rockwell brought an action before the Board under the Contract Disputes Act of 1978, 41 U.S.C. §§ 601-13. Id. The Board held that the Major Frauds Act, 41 U.S.C. § 256, was not a bar to recovery. Id. at *53. The Board also found that the costs for which Rockwell sought reimbursement were stipulated by the parties as "`belong[ing] to the three categories of costs identified' in the plea Agreement." Id.
The Board also found that the corporation's defense costs were allowable under clause (d)(16) of the contract ("the Environmental Costs Clause"), which is a specifically negotiated provision allowing for the reimbursement of environment costs. The Environmental Costs Clause makes allowable:
All costs incurred by the Contractor with respect to any and all liabilities, claims, demands, damage costs, or penalties (such as civil sanctions including fines), arising out of, or related to environmental, safety and health activities, including costs incurred with respect to investigation, removal, remedial action, ground and surface water or other clean-up of hazardous, toxic or contaminated material(s), except for those costs that result from conduct identified in subparagraph (e)(17)(ii) of the clause entitled, "Allowable Costs, Base Fee and Award Fee."
Rockwell, 2001 WL 1543836, 2001 EBCA LEXIS 7, at *11 (emphasis added). Subparagraph (e)(17)(ii) expressly excludes costs that "result from willful misconduct or lack of good faith on the part of any of the Contractor's managerial personnel."2 Id. at *12. The Board interpreted this clause as "broad in scope and reflect[ing] the intent that Rockwell be reimbursed to the maximum extent possible for costs incurred in the performance of contract work related to environmental, health and safety activities." Id. at *63. The Board found that "[its] expansive interpretation comports with other evidence showing that this kind of coverage has long been DOE's practice and policy under M & O contracts." Id. at *64.
The definition of the contested costs as "allowable" under the contract, however, is subject to express contractual exclusions. The Board, therefore, proceeded to review the relevant exclusions provided in clause (e)(12) ("the Fines and Penalties Clause") and clause (e)(16) ("the Contesting Actions Clause"). The Fines and Penalties Clause excludes from allowable costs:
Id. at *12. The Board interpreted this clause as not applying where "th[e] fines and penalties were incurred by the contractor because it was performing work contracted for by DOE." Id. at *65. Thus, fines and penalties would not be unallowable if the "work required or authorized under the contract violate[d] a particular law." Id. In addition to fines and penalties, the Board concluded that defending against reimbursable fines and penalties should also be reimbursable "since it would make little sense to reimburse contractors under the Fines and Penalties Clause for fines and penalties incurred because of the performance of contract work and at the same time not allow the contractor the costs of defending against the imposition of those same fines or penalties." Id. at *69. The Board also found that Rockwell did not waive its right to claim the costs by failing to provide written notice to, and obtain approval from, the contracting officer before incurring the costs. Id. at *78-79.
The Board rejected the government's contention that the "Contesting Actions Clause" barred recovery of the corporation's defense costs. That clause excludes the cost of "[l]egal, accounting, and consulting services and related costs incurred in connection with ... contesting actions of [sic, or] proposed actions of the United States." Id. at *70.3 The government urged that this clause takes priority over the allowance provisions, thus barring recovery. The Board concluded that the government's interpretation was inconsistent with the government's prior practice and in conflict with the Environmental Cost and Fines and Penalties Clauses. Id. at *75-76. Based on its findings, the Board concluded that Rockwell was entitled to reimbursement for its corporate defense costs from June 6, 1989, to December 31, 1989.
* We have jurisdiction over this appeal pursuant to 28 U.S.C. § 1295(b) and 41 U.S.C. § 607(g)(1)(B). The standard of review applied to Board decisions is prescribed by statute:
At the outset we note that this case does not require us to determine the effect of the Major Frauds Act of 1988, 41 U.S.C. § 256, and its implementing regulations on the contract in question here. That Act provides in relevant part that costs incurred in connection with a criminal proceeding by the United States that is disposed of by consent or compromise are not allowable, except that the costs "may be allowed to the extent specifically provided in such [consent or compromise] agreement." 41 U.S.C. § 256(k)(3) (2000). The Board held that, under the plea agreement, the government waived application of the Major Frauds Act in accordance with § 256(k)(3). The government has not appealed that determination. Accordingly the Major Frauds Act cannot be a ground for disallowing the costs in question.
The dispute here is whether costs incurred defending against Federal environmental allegations, which never ripened into charges, are included as allowable costs under the allowability provisions of the M & O contract and/or are excluded as unallowable under the exclusions in the M & O contract. The first contract provision cited by the Board as providing for the allowability of Rockwell's defense costs was the General Allowability Clause. That clause (quoted above) broadly provides for the allowability of the costs and expenses of work under the contract "that are necessary or incident thereto." Rockwell, 2001 EBCA LEXIS 7, at *9. There is little dispute that the sweeping language of the General Allowability Clause embraces the costs claimed here. However, that is not dispositive. The government correctly points out that the General Allowability Clause is subject to the express disallowance provisions of the contract. Subsection (c) of the contract provides that "allowable cost[s] shall not include the cost of any item described as unallowable in paragraph (e) of this clause except as indicated therein." Id. In particular, the Contesting Actions Clause (clause (e)(16)) provides that "[l]egal, accounting, and consulting services and related costs incurred in connection with ... contesting actions of [sic, or] proposed actions of the United States" are not allowable. Id. at *11-12. The Contesting Actions Clause reflects a longstanding policy of the United States disallowing such costs. See generally Bill Strong Enters. Inc. v. Shannon, 49 F.3d 1541, 1546-47 (Fed.Cir.1995), overruled on other grounds by Reflectone, Inc. v. Dalton, 60 F.3d 1572, 1579 (Fed.Cir.1995) (en banc). This policy was applied to the Department of Energy by the following regulatory provision, which excluded:
48 C.F.R. § 970.5204-13(e)(16) (1988).5
The parties appear to agree that the literal scope of the Contesting Actions Clause disallows Rockwell's costs incurred to defend against the criminal action contemplated in the search warrant. As found by the Board, "[t]he parties do not dispute that the investigation and the Grand Jury proceedings were actions of the United States." Rockwell, 2001 EBCA LEXIS 7, at *60 n. 16. Under general rules of contract law we are to interpret provisions of a contract so as to make them consistent. Lockheed Martin IR Imaging Sys. Inc. v. West, 108 F.3d 319, 322 (Fed.Cir.1997). Here, it is entirely consistent to interpret the broad language of the General Allowability Clause as being subject to the exclusion under the Contesting Actions Clause. The General Allowability Clause, therefore, does not itself support the allowability of Rockwell's defense costs.
It is questionable whether this clause should be construed to authorize the reimbursement of all fines and penalties attributable to work within the scope of the contracts. There is a strong public policy barring recovery of criminal fines and penalties, see Tank Truck Rentals, Inc. v. Comm'r, 356 U.S. 30, 35-36, 78 S.Ct. 507, 2 L.Ed.2d 562 (1958) (barring the deductibility of fines in the context of tax law); McBreaty v. United States Taxpayers Union, 668 F.2d 450, 451 (8th Cir.1982). This strong public policy is reflected in a statutory provision adopted in 1985 (before the execution of the first contract in question here). That statute provided:
Department of Defense Authorization Act, 1986, Pub.L. No. 99-145, 99 Stat. 583, 774 (emphases added). The statute does not provide for a broad "scope of work" exception, but rather narrowly refers to "compliance with specific terms and conditions of the contract." Id. This suggests that the provision is applicable only to fines and penalties that resulted from particular work directly required by the contract. For example, if the contract ordered that a particular area be filled, a fine incurred for doing that very act in the manner required by the contract would be recoverable. If, however, the work could have reasonably been performed so as to avoid the levied fines or penalties, there would be no reimbursement under the exception to the general non-allowability language of the Fines and Penalties Clause. A broader "scope of work" interpretation would appear to render virtually all fines and penalties allowable.
The view that this exception is of limited scope is supported also by the Department of Defense Authorization Act, which included an identical limitation on allowability under Department of Defense (DOD) contracts, id., 99 Stat. at 682, and imposed fines and penalties for violations of specific provisions of the act. For example, a $10,000 penalty is imposed for failure to comply with reporting requirements placed on former employees of DOD. Id., 99 Stat. at 695. Similarly, a $500,000 fine is imposed under the Act on contractors who knowingly employ a person convicted of a defense-contract-related felony. Id., 99 Stat. at 669. Under the Board's interpretation these fines and penalties would be reimbursable because the costs were "incurred because of the performance of contract work," Rockwell, 2001 EBCA LEXIS 7, at *69, a result that appears to be inconsistent with the congressional purpose to require that the contractor bear the costs of these fines and penalties. Finally, the Fines and Penalties Clause, unlike the Environmental Costs Clause, does not exclude costs incurred that are unallowable under clause (e)(17)(ii), which relates to willful misconduct and lack of good faith by managerial personnel. Thus, the "performance of contract work" exception as interpreted by the Board would apparently permit the reimbursement of criminal fines incurred pursuant to the performance of any contract work, even if the result of willful misconduct or lack of good faith on the part of managerial personnel. This dubious result further indicates that it is unlikely that the Fines and Penalties Clause should be given the broad scope suggested by the Board, despite the fact that the Department of Energy had previously paid civil fines and penalties under the contract and interpreted the Fines and Penalties Clause broadly. See id. at *43-46.
Id. at *11. There is little dispute that the language of the clause covers Rockwell's costs incurred to defend itself and its employees against the environmental investigation. The clause refers to "[a]ll costs... with respect to any and all ... penalties (such as civil sanctions including fines), arising out of, or related to environmental... activities." Id. (emphasis added). Further, it expressly refers to the costs incurred "with respect to investigation." Tellingly, the clause specifically excludes "costs that result from conduct identified in subparagraph (e)(17)(ii)." Id. That subparagraph refers to costs that "result from willful misconduct or lack of good faith on the part of any of the Contractor's managerial personnel." Id. at *12. The limited nature of this exclusion suggests a broad scope of coverage where, as here, there is no claim of willful misconduct or lack of good faith by managerial personnel. This language clearly covers the costs incurred with respect to EPA investigations under the circumstances of this case. The government apparently concedes that the Environmental Costs Clause embraces the costs for which Rockwell seeks reimbursement, stating that: "subparagraph 54(d)(16) appears ... to imply that Rockwell may recover for these sorts of expenses." (Appellant's Br. at 14.)
According to the government, "the contract contains an internal `order of precedence' in which the exclusions from costs described in paragraph 54(e) take precedence over the inclusions reflected in paragraphs 54(c) and 54(d)." (Appellant's Br. at 12.)6 The language upon which the government relies provides: "[a]llowable cost shall not include the cost of any item described as unallowable in paragraph (e) of this clause except as indicated therein." Rockwell, 2001 EBCA LEXIS 7, at *9. The government's approach would make sense if the result were to partially limit the coverage of the Environmental Costs Clause. But that is not the effect of the government's interpretation. Rather, the effect of that interpretation is effectively to rewrite the clause so that it is entirely inapplicable to all proceedings brought under the federal environmental laws, an area that the clause was explicitly drafted to cover. Id. at *47-48. Although in general a contract should be interpreted so as to avoid conflict in its provisions, see Air-Sea Forwarders, Inc. v. United States, 166 F.3d 1170, 1172 (Fed.Cir.1999); United States v. Johnson Controls, Inc., 713 F.2d 1541, 1555 (Fed.Cir.1983), there is a clear conflict between a clause that expressly provides for the reimbursement of specific costs (the Environmental Costs Clause) and another clause (the Contesting Actions Clause) that purportedly requires the opposite result. The government, in fact, concedes that "[v]iewed in isolation, subparagraph 54(d)(16) [the Environmental Costs Clause] appears to conflict with the Contesting Actions [Clause]." (Appellant's Br. at 14.) However, the government suggests that the conflict between the two clauses can be avoided by interpreting the Environmental Costs Clause as allowing recovery of fines and penalties where there was no conflict of interest between the contractor and the government. Id. at 8. There is no basis for this interpretation of the contract. The government also argues that the conflict may be avoided by interpreting the Environmental Costs Clause as not applying to criminal proceedings. Id. at 14-15. The Contesting Actions Clause, however, is also not limited to criminal proceedings. The government's distinction based on criminal proceedings, therefore, does not avoid a conflict between the two clauses. We must, therefore, determine which of the conflicting terms controls.
When construing a contract containing conflicting terms, general rules of interpretation apply. Under these rules, "[w]here specific and general terms in a contract are in conflict, those which relate to a particular matter control over the more general language." Hills Materials Co. v. Rice, 982 F.2d 514, 517 (Fed.Cir. 1992) (emphasis added); Goldwasser v. United States, 163 Ct.Cl. 450, 325 F.2d 722, 723 (1963); see also Restatement (Second) of Contracts § 203(c) (1981) ("[S]pecific terms and exact terms are given greater weight than general language."); Farnsworth on Contracts § 7.11 (2d ed. 2000) ("If, however, two provisions in a contract so clearly conflict that both cannot be given full effect, it is assumed that the more specific the provision, the more likely it is to reflect the parties' intention."). The language of the Environmental Costs Clause is particularly directed toward providing for the allowability of the very category of costs at issue here. The Contesting Actions Clause, which also refers to excluding the costs of "the preparation and issuance of stock rights, organization, or reorganization, prosecution or defense of antitrust suits ... and prosecution or defense of patent infringement litigation," Rockwell, 2001 EBCA LEXIS 7, at *11-12, is a more general exclusionary clause.
If a claim or legal action is brought against an employee as the result of the employee's conductwhen performing duties under this contract and within the employee's scope of employment the contractor shall be allowed the cost of defending the employee ...; provided, however, that the prior approval of the Contracting Officer and the consent of the employee to be defended shall be obtained before such defense is undertaken.
The provisions of the contract clause entitled, "Litigation and Claims" shallhave the same application to claims and legal actions against employees under this section as it has to those claims and legal actions which are brought directly against the Contractor. Before costs of any retained legal counsel may be allowed, the selection of such counsel must have the concurrence of the Contracting Officer.
In its reply brief, the government refers to a standard contract clause called an "Order of Precedence Clause," which it admits is not present in the contracts at issue here. (Appellant's Reply Br. at 9 n. 5.) Such clauses have been cited by this court to resolve conflicts between contract specifications and drawings, such that if "the contract contains an order of precedence clause, the specifications shall control [over the drawings]."Hensel Phelps Constr. Co. v. United States, 886 F.2d 1296, 1298 (Fed.Cir.1989); see also Government Contracts: Cycolopedic Guide to Law, Administration, Procedure § 2.180 (2000).