Court Opinion

ID: 8595183
Source: CourtListenerOpinion
Date Created: 2022-11-23 16:02:17.92168+00
Date Added: 2024-06-11T16:54:52.237612
License: Public Domain

BENNETT, Judge,
dissenting:
During the year 1954, plaintiff was awarded two contracts, Nobs-3556 and Nobs-3648, for the construction of three destroyers and two destroyers, respectively. Plaintiff was not the low bidder for the Nobs-3556 contract, but was awarded the contract nevertheless in pursuance of the Government’s policy of continuing the existence of an essential defense facility. Plaintiff was the only shipbuilder asked to submit a proposal for Nobs-3648, and, on the same policy ground, was awarded that contract as well.
Both contracts contained provisions requiring the contractor to exclude from its cost estimates any contingency allowances intended to offset anticipated increases in labor and material costs during the period of construction. In return, the Government promised to reimburse the contractor, according to an agreed formula, for any increases in labor and material costs which ultimately occurred during that period, except as limited by the following Article 6(e) of the contracts:
(e) The Contracting Officer may deny, in whole or in part, any upward adjustment in the contract price required under this Article if the Contracting Officer finds that such adjustment is not required, in whole or in part, to enable the Contractor to earn a fair and reasonable profit under this contract.
When plaintiff entered into the contracts at issue, there were no published guidelines for determining “fair and reasonable profit” in a given case. Sometime prior to August 1963 the *135Department of Defense published “unweighted” guidelines, and in August 1963 those unweighted guidelines were superseded by the “weighted” guidelines method of determining reasonable profits. 32 C.F.B.. §§ 3.808-1 el seq. (1965).
When plaintiff’s contracts were completed (the last of the five destroyers was delivered on February 26,1958), plaintiff sought from the contracting officer labor and material escalation costs of $3,347,500 on Nobs-3556 and $2,404,900 on Nobs-3648. In neither case was the amount of the escalation costs in dispute, but the contracting officer refused to permit recovery of any of those costs on the basis that such adjustment was unnecessary “to enable the Contractor to earn a a fair and reasonable profit.” Article 6(e), supra. If the decision of the contracting officer had stood, plaintiff’s profit on the two contracts would have been 3 percent and 2.3 percent of cost, respectively; the full escalation sought by plaintiff, on the other hand, would result in profit margins of 9.3 percent and 9.6 percent.
Plaintiff’s appeal to the ASBCA from the contracting-officer’s decision was partially successful, the board awarding plaintiff that portion of escalation costs which brought its profit margin on both contracts to 5 percent of cost. Though the weighted guidelines were in effect at the time of the board’s decision, the board did not use them or refer to them.
Plaintiff appealed to this court from the ASBCA decision. The result was the court’s opinion in Bethlehem Steel Corp. v. United States, 191 Ct. Cl. 141, 423 F. 2d 300 (1970), which is hereafter referred to as Bethlehem, I. In that opinion the court recalled that in an earlier case with very similar facts,1 it had applied the existing Department of Defense regulations which set out unweighted guidelines for determining a reasonable profit margin, to a contract entered into prior to the effective date of those regulations. It followed that in Bethlehem I plaintiff was also entitled to application of the existing regulations, i.e., the weighted guidelines, and the court so held (with a reservation to be discussed, infra):
* * * Plaintiff desires to take its chances under the “Weighted guidelines method” and it has a legal right to do so. [191 Ct. Cl. at 154, 423 F. 2d at 307.]
*136Indeed, even defendant in Bethlehem I accepted the general principle that the weighted guidelines should apply to contracts entered into prior to the regulation’s effective date:
* * * Defendant does not now deny that it [the regulation setting out the weighted guidelines] would govern most decisions limiting or revising otherwise justified labor and material escalation under Article 6(e), and there is nothing in it [the regulation] that suggests an intent to narrow the former scope. * * *. [191 Ct. Cl. at 150, 423 F. 2d at 305.]
Defendant argued in Bethlehem I, however, that plaintiff should be an exception to the rule because plaintiff had been awarded the shipbuilding contracts in spite of the fact that other contractors could have built the ships at lower cost, and in order that plaintiff would not close down its facilities. In rejecting this argument, the court noted, first, that the desired exception was not to be found in the regulation and had “every earmark of having originated in the active mind of defense counsel.”2 The court also rejected defendant’s assertion that the parties had agreed to a profit level of 5 percent in consideration of plaintiff’s being awarded the contract, and that the weighted guidelines would result in a higher, unintended level of profits:
* * * The alleged agreement to a 5% level, in a contract that viewed prospectively could have resulted in anything from a loss to a windfall profit level, according to its terms, must be regarded as located in defendant’s counsel’s eyes alone. [191 Ct. Cl. at 152, 423 F. 2d at 306.]
After its determination that plaintiff had a “legal right” to application of the weighted guidelines, however, the court added the following comments:
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 in the mind of the administering official. To some extent amendments may reflect earlier departures in *137actual 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. * * *. [191 Ct. Cl. at 154, 423 F. 2d at 307.]
Seizing upon the above comments, which the majority now identifies as an option open to defendant on retrial of the case, the Navy promptly requested from the ASPE committee a “deviation” from the use of weighted guidelines with respect to plaintiff’s contracts and eight other shipbuilding contracts. The ASPE committee granted the deviation, stating that application of the weighted guidelines to contracts entered into prior to the effective date of the regulation is not feasible, since the weighted guidelines effect a substantive change in the standards existing at the time the contracts were entered into and were intended for the development of a profit objective for negotiation of future contracts. In lieu of the weighted guidelines, the ASPE committee prescribed application of the superseded unweighted guidelines to plaintiff’s contracts.
Defendant was successful in convincing the ASBCA to follow the ASPE committee’s “deviation” and thus to apply the unweighted guidelines. In doing so, the ASBCA ruled that plaintiff was entitled to full escalation on the Nobs-3648 contract, but only partial escalation (to a 6.3-percent profit margin) on the Nobs-3556 contract. Plaintiff is convinced, and defendant’s actions seem to confirm the fact, that if the ASBCA had used the weighted guidelines rather than the unweighted guidelines, plaintiff would have recovered virtually all of the escalation under the Nobs-3556 contract. Plaintiff thus requests that this court reaffirm its statement in Bethlehem I that plaintiff has a “legal right” to application of the weighted guidelines.
The issue presented for decision here is easily stated. Has defendant shown that the weighted guidelines method is not “feasible” to apply to the contract at issue ? If not, then plain*138tiff bas a legal right to its application. It is my belief that the weighted guidelines are entirely feasible to apply and that plaintiff should receive the benefit of their application. I would remand to the board for that purpose.
The term “feasible” has, of course, more than one meaning. As Judge Nichols indicates, it can mean “possible” or “reasonable” or “suitable.” There can be no dispute that it is possible to apply the weighted guidelines to plaintiff’s contracts. In fact, both plaintiff and defendant are able to anticipate what the approximate result of such an application would be. Furthermore, it would not be “unreasonable” to apply those guidelines in the sense that their use would result in an unusual or absurd result, or as Judge Nichols states, one that “shocks the sense of fairness or justice.” Rather, it appears that if they were used appropriately in the manner demonstrated in some detail by the court in Bethlehem I, the result would be an indicated profit margin for plaintiff of between 9 percent and 12 percent. The maximum profit plaintiff can receive from escalation here is 9.3 percent, in any event.4
Defendant has suggested three reasons why the use of weighted guidelines is “unsuitable,” if we are to use this as the definition of the word “feasible.” I will deal with them in turn.
First, defendant states that it is desirable that all shipbuilding contractors whose contracts contained Article 6(e) should have the reasonableness of their profits determined by the same method — namely, unweighted guidelines. But there is no inherent reason why this should be so. We were aware in Bethlehem I that the unweighted guidelines had in all likelihood been applied in the Newport News., supra, contract, and others. We nevertheless stated that plaintiff was entitled to the benefit of the existing regulation specifying weighted guidelines. It was presumed that the weighted guidelines represented an improvement over the earlier method, particularly because they reduced the “impact of subjective factors in the mind of the administering official.”5 *139Moreover, defendant’s interest in consistency was not apparent in Bethlehem I wherein defendant argued that no guidelines should be applied to determine the reasonableness of plaintiff’s profits. It seems that defendant desires consistency of treatment only when it sees some advantage to itself arising therefrom.
The second of defendant’s arguments with respect to feasibility is that the greater profits which plaintiff would receive upon application of the weighted guidelines were not contemplated when the contract was entered into. The short answer to this contention is that the court expressly rejected it in Bethlehem I; the court stated that there was no agreement respecting profit, and that the contract could have resulted in anything from a loss to a windfall profit level, as both parties realized.
The third and final of defendant’s arguments is a reiteration of the ASPE committee’s stated reason for granting the deviation. That reason, as has been stated above, was that retroactive application “is not feasible, since it [the weighted guidelines] effected a substantive change in the standards existing at the time the contracts were entered into and were intended for the development of a profit objective for negotiation of future contracts.” Looking first to the alleged frustration of “intention,” it is noteworthy that there is no evidence in the record to support the ASPE, committee’s statement that only prospective application was intended. As the court noted in Bethlehem I, the regulation contains no such limitation and there is no reason to infer one. In addition, defendant did not argue in Bethlehem I for prospective application only, but agreed rather that the regulation would generally cover contracts such as the one in question. Even the “Notes and Filing Instructions” which accompanied the regulation and which were cited by the ASPE committee state:
The revised paragraph 3-808 is authorized for immediate use and maximum practical use is encouraged. However, to allow for an initial training period in the use of the weighted guidelines method, mandatory use is not required until after 1 January 1964. Mandatory use is prescribed for all applicable procurements initiated after 1 January 1964.
*140Defendant argues further, though, that the fact that the weighted guidelines had the potential for higher profits in order to attract the “best possible industrial capabilities” proves that only prospective application was intended. The conclusion does not follow from the premise, however. First, it should be noted that the court in Bethlehem I was aware that the regulation had the potential for greater profits. The regulation itself, section 3.808-1 (a), states that use of weighted guidelines “will result in a wider range of profits which, in many cases, will be significantly higher than previous norms.” The regulation also states that effective national defense requires attraction of the “best industrial capabilities” and that such capabilities would be dissuaded by “low profit opportunities.” Thus, the ASPE committee said nothing which the court had not already read in the regulation itself. Secondly, though the emphasis on potentially higher profits may have been directed to attracting future business, this does not prove that prior contracts were to be excluded from coverage, in the absence of a statement to that effect which could easily have been written into the regulation. The court was aware at the time of Bethlehem / that the guidelines, whether weighted or unweighted, were used primarily in negotiating the price to be paid a contractor on a future contract. Determining reasonable profits after completion of contract performance is an unusual situation. Nevertheless, in both Newport News, supra, and Bethlehem I, the court found that absent language in the regulation to the contrary, the existing guidelines were to apply. Indeed, there is no reason why the guidelines cannot be applied. The “Notes and Filing Instructions” accompanying the weighted guidelines include the statement: “This method is a rational, uniform, and equitable approach for evaluating the factors which must be considered in determining a proper profit or fee objective.” What is rational, uniform, and equitable for others is equally so for plaintiff.
The ASPE committee’s statement that the weighted guidelines represent a substantive rather than a procedural change contradicts the entire basis for decision in Bethlehem I and must be dismissed. The new regulation does not guarantee higher profits, but represents simply a less subjective method *141of determining fair and reasonable profit. That the less subjective procedure has the potential for higher profit computations only confirms the known fact that changes in procedure can have an effect on substance.
To summarize thus far, I have demonstrated that there is no valid reason why the weighted guidelines cannot feasibly be applied to plaintiff’s contract. Indeed, neither the ASPE committee nor counsel in this case has brought anything to the court’s attention which the court was unaware of at the time it stated that plaintiff had a legal right to the application of weighted guidelines, or which could have had a bearing on the court’s decision. Defendant is in reality still clinging to its assertion, rejected in Bethlehem I, that the parties did not contemplate that plaintiff would recover more than a 5-percent profit.
The majority opinion states that the court’s opinion in Bethlehem l was less a “mandate” than a “summary of the legal options open to defendant.” If this be so, and surely it is not, then Bethlehem I was no more than an advisory opinion — something which this article III court has no authority to give. In reality, Bethlehem I mandated that the weighted guidelines be used, but protected its flank by suggesting that if, for reasons unknown to the court, the application of weighted guidelines would lead to an unfair or absurd result, “the Pentagon” could amend or supplement the regulation to prevent such a result. The court did not give “the Pentagon” earte blanche to evade the mandate on any pretext, or, as Judge Nichols states to “attempt to influence a lawsuit.” Yet the Pentagon attempted to do just that.
This case bears a certain similarity to Pacific Far East Line, Inc. v. United, States, 184 Ct. Cl. 169, 394 F. 2d 990 (1968). In that case MAEAD adopted new criteria for determining the amount of profits which the Government could recapture from a subsidized ship operator. MAEAD had originally indicated that the new criteria would be retroactively applied to Pacific Far East Line’s earlier years of operation, but when it realized that this would benefit PFEL in the sum of $150,000, it withdrew retroactive application.
*142The court would not permit such a reversal by MANAD for the following reason :
* * * We are left with the bald circumstance that MANAD changed its method of accounting after it discovered that PFEL was entitled to a large sum under its original procedure. MAEAD’s only concern must have been to secure for the defendant the maximum amount of money in the form of recapture. As such, this situation takes on the appearance of market place haggling and unreasonable retroactivity which offended this court in American President Lines, Ltd. v. United States, 154 Ct. Cl. 695, 705, 291 F. 2d 931, 936 (1961). * * * [184 Ct. Cl. at 189, 394 F. 2d at 1001.]
In the same way, defendant in this case has reversed itself with regard to the use of weighted guidelines after realizing that plaintiff stands to recover greater profits from their use. Defendant’s evasion of the Bethlehem I decision in order to influence the results in this lawsuit should not be permitted. Defendant has failed to show weighted guidelines are not feasible here or would produce unfair or absurd results. The majority opinion upholding defendant’s change of rules in the middle of the game impairs plaintiff’s vested rights against “roving administrative absolutism.” The majority condemns as not “cricket” and as “deplorable” and as “outrageous” what has happened here but tolerates it. This is because the issue of a reasonable profit level is said to be factual and for administrative determination according to guidelines which are fair and reasonable and of general application although subject to change at any time for any legitimate reason. My conclusion is that even as stated the test does not fit the facts before us in such a way as to support the majority’s result in the case.
I have dealt above with the first of two main arguments plaintiff makes in this case, namely, that the weighted guidelines should have been applied because infeasibilty thereof has not been demonstrated, partcularly because this court in Bethlehem I was aware of the factors relied upon by defendant as allegedly showing infeasibility. However, plaintiff has a second cogent argument. Plaintiff says that the board acted arbitrarily and capriciously in applying unweighted guidelines. The majority opinion passes off without elabora*143tion or refutation this second argument which plaintiff develops at length. Plaintiff makes a good case against the board’s implementation of the unweighted guidelines. On either or both grounds plaintiff should prevail, and defendant should lose this case.
Dtjreee, Senior Judge, and Kunzig, Judge, join in the foregoing dissenting opinion.

 Newport News Shipbuilding & Dry Dock Co. v. United States, 179 Ct. Cl. 97, 374 F. 2d 516 (1967).

 191 Ct. Cl. at 151, 423 F. 25 at 305.

 Other shipbuilding contractors received escalation, even though such escalation brought profit levels to 15.2 percent, 15.32 percent, and 10.1 percent in three instances.

 191 Ct. Cl. at 154, 423 F. 2d at 307.