Court Opinion

ID: 2804635
Source: CourtListenerOpinion
Date Created: 2015-06-01 12:05:43.656751+00
Date Added: 2024-06-11T11:59:47.664576
License: Public Domain

In the United States Court of Federal Claims
                                       No. 12-576T

                                  (E-Filed: May 31, 2015)

                                                     )
DYNETICS, INC. and SUBSIDIARIES,                     )   Cross-Motions for Partial
                                                     )   Summary Judgment; RCFC 56(a);
                     Plaintiff,                      )   I.R.C. § 41; Treasury Regulation
                                                     )   §1.41-4A; Funded Research
v.                                                   )   Exception
                                                     )
THE UNITED STATES,                                   )
                                                     )
                     Defendant.                      )
                                                     )

David M. Wooldridge, Birmingham, Ala., for plaintiff.

Jason Bergmann, Trial Counsel, with whom were Caroline D. Ciraolo, Principal Deputy
Assistant Attorney General; David I. Pincus, Chief, Court of Federal Claims Section,
Mary M. Abate, Assistant Chief, Court of Federal Claims Section , Commercial
Litigation Branch, Civil Division, United States Department of Justice, Washington,
D.C., for defendant.

                                  OPINION and ORDER

CAMPBELL-SMITH, Chief Judge

        This is a tax refund case. Dynetics, Inc. (Dynetics or plaintiff) is an engineering
company headquartered in Huntsville, Alabama. Plaintiff filed amended tax returns for
three tax periods seeking a refund based on certain research tax credits to which it claims
entitlement under § 41 of the Internal Revenue Code (I.R.C.), which governs “Credit for
increasing research activities.” I.R.C. § 41. Defendant, the Internal Revenue Service
(IRS or defendant), disallowed plaintiff’s refund claims.

        On September 7, 2012, plaintiff timely filed its complaint in this court. While
plaintiff’s complaint is based on tax refunds it claims for work performed on more than
100 contracts, the parties have asked this court to evaluate plaintiff’s claims on only 7 of
those contracts, which the parties refer to as sample contracts.

       While a taxpayer must establish a number of elements to qualify for a research tax
credit under § 41, at this point in the case, the parties seek the court’s assistance with
resolving their dispute on only one such element. Under § 41, a taxpayer may not claim a
research tax credit if that research was “funded by any grant, contract, or otherwise by
another person (or governmental entity).” I.R.C. § 41(d)(4)(H).

       Presently before the court are the parties’ fully briefed cross-motions for partial
summary judgment on the funded research question, brought under Rule 56(a) of the
Rules of the United States Court of Federal Claims (RCFC). The parties ask this court to
determine whether the research performed by Dynetics under each of the seven sample
contracts was “funded” under the governing Internal Revenue Code and Treasury
regulations.

       After consideration of the parties’ briefing and evidentiary support, the court
GRANTS defendant’s motion for partial summary judgment on the funded research
question, and DENIES plaintiff’s cross-motion for partial summary judgment on the
funded research question.

       I.     Background

       A.     Cross-Motions for Partial Summary Judgment

        Defendant filed a motion for partial summary judgment on the funded research
question. Def.’s Mot., Aug. 7, 2014, ECF No. 35-1. Plaintiff filed its cross-motion for
partial summary judgment on the funded-research question. Pl.’s Mot., Aug. 20, 2014,
ECF No. 37-1. Defendant filed its response. Def.’s Resp., Sept. 26, 2014, ECF No. 40.
Plaintiff filed a reply. Pl.’s Reply, Oct. 22, 2014, ECF No. 41.

       Defendant also filed various exhibits in support of its motion. Exs. 1.1 to 69, ECF
Nos. 30-2 to 32.9. Plaintiff likewise supported its motion with both affidavits and
exhibits. Exs. A to P, ECF No. 37-2.

         In reviewing the parties’ briefing, there were several questions on which the court
felt it would benefit from additional explanation. Accordingly, on January 28, 2015, the
court issued an order posing a number of questions to the parties, and requesting
comment. Order Supp. Br., ECF No. 42.

                                              2
       On February 19, 2015, each party filed a supplemental brief in support of its
motion for partial summary judgment. Pl.’s Supp. Br., ECF No. 45; Def.’s Supp. Br.,
ECF No. 46. On February 26, 2015, each party filed a reply. Pl.’s Reply to Def.’s Supp.
Br., ECF No. 47; Def.’s Reply to Pl.’s Supp. Br., ECF No. 48.

      The court is grateful to both parties for their supplemental briefing, which has
been helpful in resolving their cross-motions.

       B.     Sample Contracts

      Each of the sample contracts is known by an alpha-numeric code assigned by
Dynetics for internal contract management purposes. Like the parties, the court refers to
each contract by this code.

       Dynetics was awarded the AF007 contract (contract no. F08630-03-C-0034) by
the United States Air Force Research Laboratory, pursuant to which it was “to develop
and test 14 tailkits capable of carrying 21,600 pound of ammunition for deployment at a
specified target.” Ex. 12; Pl.’s Mot. 38. The AF007 contract was a cost-plus-fixed-fee
contract. Id. at DYN 953.

       The AMS01 contract (subcontract no. 017-O2K1) was issued to Dynetics by
Aviation & Missile Solutions, LLC (AMS) as a subcontract. Ex. 51, at DYN 7568.
The prime contract was issued to AMS by the U.S. Army Aviation and Missile Command
(AMCOM). Id. at DYN 7569. AMCOM is a specialized research and development
command with the Army Research Development and Engineering Command. Pl.’s Mot.
42. AMS is a joint venture between Dynetics and one other company, Camber. Id. at 43.
The work performed by Dynetics under the AMS01 contract was performed on task
orders issued as fixed-price-level-of-effort. Id. at 45-46; Def.’s Mot. 38. According to
Dynetics, work on the AMS01 contract included “develop[ing] models and simulations to
evaluate the effectiveness of missile defense systems, [as well as] developing technology
and designing hardware that would enable the integration of applicable devices onto
applicable platforms. [In addition, Dynetics] designed, analyzed, and tested warheads,
fuzes, fuse systems, and technologies to integrate fuzes and warheads in constrained
weapons systems.” Pl.’s Mot. 43.

       The AR005 contract (contract no. DAAH01-02-C0080) was issued to Dynetics by
the U.S. Army Aviation & Missile Command. Ex. 27, at DYN 58336. The AR005
contract included both fixed-price and cost-plus-fixed-fee line items. Id. at DYN 58339-
41. As relevant to this motion, defendant objects only to expenses Dynetics claims under
the cost-plus-fixed-fee line items. See Def.’s Mot. 27. According to Dynetics, its work

                                             3
on the AR005 contract included developing “calibration shelters for Humvees that were
deployed ‘in theater’” by the Army. Pl.’s Mot. 50. The purpose of this project was to
“make it easier for soldiers to calibrate their equipment in the field rather than evacuating
it for calibration.” Id.

       The BOE12 contract (contract no. 100267) was issued to Dynetics by The Boeing
Company. Ex. 40, at DYN 41546. The BOE12 contract was a time-and-materials
contract. See id. at DYN 41557-58. According to Dynetics, its work on the BOE12
contract included “assisting in the development of a system to defend the United States
against long-range (i.e., intercontinental) ballistic missile attacks.” Pl.’s Mot. 59.

        The NT001 contract (contract no. MDA908-99-D-0001) was issued to Dynetics by
the Defense Intelligence Agency (DIA) Missile & Space Intelligence Center (MSIC). Ex.
34, at DYN 8064. DIA is a combat support agency within the U.S. Department of
Defense. The NT001 contract is a cost-plus-fixed-fee contract. Id. at DYN 8067.
According to Dynetics, it was assigned tasks “associated with gaining an understanding
[of] foreign missile systems and the United States’ capability of defending against threats
posed by those foreign systems.” Pl.’s Mot. 64.

      The UAH01 contract (subcontract no. SUB2004-025) was issued to Dynetics by
the University of Alabama, Huntsville (the University) as a subcontract. Ex. 18, at DYN
1700. A cooperative agreement was issued to the University by the National Aeronautics
and Space Administration (NASA)/Marshall Space Flight Center. Id. at DYN 1701.
The UAH01 contract was a cost-plus-fixed-fee level-of-effort contract. Id. at DYN 1700.
Under the UAH01 contract, Dynetics performed various tasks in support of the National
Space Science & Technology Center. Pl.’s Mot. 70.

       The AR009 contract (contract no. DAAH01-02-C-R170) was issued to Dynetics
by the U.S. Army Aviation & Missile Command. Ex. 47, at DYN 6933. The AR009
contract was a fixed-price level-of-effort contract. Under the AR009 contract, Dynetics
was asked to “design, develop, and test aerodynamic vehicles, including missiles,
aviation systems, and targets [, and it] used aerodynamic engineering techniques to
develop or design proposed missiles or analyze properties of proposed missiles.” Pl.’s
Mot. 53 (internal citation omitted).

II.    Legal Standards

       A.     Jurisdiction

                                              4
       The United States Court of Federal Claims shall have jurisdiction to render
judgment upon any claim against the United States founded either upon the Constitution,
or any Act of Congress or any regulation of an executive department, or upon any express
or implied contract with the United States, or for liquidated or unliquidated damages in
cases not sounding in tort. 28 U.S.C. § 1491(a)(1)(2012). This court has jurisdiction,
concurrent with the district courts, over “[a]ny civil action against the United States for
the recovery of any internal-revenue tax alleged to have been erroneously or illegally
assessed or collected, or any penalty claimed to have been collected without authority or
any sum alleged to have been excessive or in any manner wrongfully collected under the
internal-revenue laws.” 28 U.S.C. § 1346(a)(1); see also Intersport Fashions West, Inc. v.
United States, 84 Fed. Cl. 454, 456-57 (2008) (finding jurisdiction over tax refund claim).
That the court has jurisdiction over plaintiff’s claim is undisputed.

       B.     Summary Judgment

       Summary judgment is appropriate “if the movant shows that there is no genuine
dispute as to any material fact and the movant is entitled to judgment as a matter of law.”
RCFC 56(a); see Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986); Celotex
Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). A genuine dispute is one that “may
reasonably be resolved in favor of either party.” Liberty Lobby, 477 U.S. at 250.
“As to materiality, the substantive law will identify which facts are material. Only
disputes over facts that might affect the outcome of the suit under the governing law will
properly preclude the entry of summary judgment.” Id. at 248.

       The moving party carries the burden of establishing its entitlement to summary
judgment. Celotex Corp., 477 U.S. at 322-23. Once that burden is met, the onus shifts to
the non-movant to identify evidence demonstrating a dispute over a material fact that
would allow a reasonable finder of fact to rule in its favor. Liberty Lobby, 477 U.S. at
256.

       In considering a motion for summary judgment, the court does not weigh each
side’s evidence but, rather, must draw all inferences in the light most favorable to the
nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587-
88 (1986). Where, as here, the parties have filed cross-motions for summary judgment,
the court evaluates each motion on its own merits and makes all reasonable inferences
against the party whose motion is under consideration. Marriot Int’l Resorts, L.P. v.
United States, 586 F.3d 962, 968-69 (Fed. Cir. 2009). To the extent there exists a
genuine issue of material fact, both motions must be denied. Id. at 969.

                                             5
       The court evaluates the parties’ motions for partial summary judgment under these
standards.

       C.     Tax Refund Claims

       It is well settled that in a tax refund case, like this one, there is a presumption of
the correctness of the findings of the Commissioner of Internal Revenue. See, e.g.,
Bubble Room, Inc. v. United States, 159 F.3d 553, 561 (Fed. Cir. 1998); Estate of
Rubinstein v. United States, 119 Fed. Cl. 658, 667 (2015) (“[T]he assessment made by
the [IRS] is presumed to be correct and this places an obligation on the taxpayer . . . to
rebut a presumption of correctness.”) (quotation marks omitted).

              In a tax refund case, the ruling of the Commissioner of Internal
       Revenue is presumed correct. To rebut this presumption of correctness, the
       taxpayer must come forward with enough evidence to support a finding
       contrary to the Commissioner’s determination. In addition, the taxpayer has
       the burden of establishing entitlement to the specific refund amount claimed.

Bubble Room, Inc., 159 F.3d at 561 (internal citations omitted). “[I]n a refund suit, a
taxpayer has the burden of proving by a preponderance of the evidence that the
assessment or determination is incorrect and the correct amount, if any, of tax.” Cook v.
United States, 46 Fed. Cl. 110, 116 (2000) (citing Helvering v. Taylor, 293 U.S. 507,
515 (1935) (“[u]nquestionably the burden of proof is on the taxpayer”)).

       The court considers plaintiff’s claim in light of these burdens of proof.

       D.     Research Tax Credit

       The Internal Revenue Code specifies when a taxpayer may take a credit for
“qualified research expenses (QREs).” I.R.C. § 41(a)-(b). Qualified research excludes
“[a]ny research to the extent funded by any grant, contract, or otherwise by another
person (or governmental entity).” I.R.C. § 41(d)(4)(H) (funded research exception).

       The regulations implementing § 41 similarly state that

       [q]ualified research does not include any research to the extent funded by
       any grant, contract, or otherwise by another (or governmental entity). To
       determine the extent to which research is so funded, § 1.41-4A(d) applies.

                                               6
Treas. Reg. § 1.41-4(c)(9)). In turn, § 1.41-4A(d) further explains that research is funded
under either of two circumstances. First, research is funded if the taxpayer receives
payment that is not “contingent on the success of the research.” Treas. Reg. § 1.41-
4A(d)(1).

       Research does not constitute qualified research to the extent it is funded by
       any grant, contract, or otherwise by another person (including any
       governmental entity). All agreements (not only research contracts) entered
       into between the taxpayer performing the research and other persons shall be
       considered in determining the extent to which the research is funded.
       Amounts payable under any agreement that are contingent on the success of
       the research and thus considered to be paid for the product or result of the
       research (see § 1.41-2(e)(2)) are not treated as funding.

Treas. Reg. § 1.41-4A(d)(1). Under § 1.41-4A(d)(1), if a taxpayer is paid for the results
of the research regardless of whether those results are successful, the research is funded,
and the taxpayer is ineligible for a tax credit. Alternatively, if payment is “contingent on
the success of the research and thus considered to be paid for the product,” the research is
not funded, and the taxpayer is eligible for the tax credit, assuming satisfaction of
remaining § 41 requirements.

      Second, research is funded if the taxpayer performing research for another person
or governmental entity “retains no substantial rights” in the research. Treas. Reg. § 1.41-
4A(d)(2).

       If a taxpayer performing research for another person retains no substantial
       rights in research under the agreement providing for the research, the
       research is treated as fully funded for purposes of section 41(d)(4)(H), and
       no expenses paid or incurred by the taxpayer in performing the research are
       qualified research expenses. For example, if the taxpayer performs research
       under an agreement that confers on another person the exclusive right to
       exploit the results of the research, the taxpayer is not performing qualified
       research because the research is treated as fully funded under this paragraph
       (d)(2). Incidental benefits to the taxpayer from performance of the research
       (for example, increased experience in a field of research) do not constitute
       substantial rights in the research.

Treas. Reg. § 1.41-4A(d)(2).

III.   Discussion – Whether Payment was Contingent on the Success of Research

                                             7
       Plaintiff makes a number of arguments in support of its position that the research it
performed under each of the seven sample contracts was not funded, that is, it would be
paid for the results of the research only if those results were successful.

       First, plaintiff argues that it had an established course of dealing with its
contracting partner in each of six sample contracts, in which, regardless of the plain terms
of each contract, it was expected to produce a successful result in order to receive
payment. Next, plaintiff argues that each of the seven sample contracts included either an
inspection clause or a warranty clause that expressly put Dynetics at financial risk of not
being paid unless the results of its research were successful. Plaintiff relies most heavily
on these two arguments.

        In addition, plaintiff argues that it faced certain risks if it failed to produce
successful research, that termination clauses in each sample contract put it at risk of
nonpayment, and that in the case of three sample contracts, the fact that the contract was
initially issued as an undefinitized contract put it at risk.

        Defendant responds in opposition to each argument, insisting that under each
sample contract, Dynetics would be paid regardless of whether its research was
successful or not. In addition, defendant argues that Dynetics failed to retain substantial
rights in the results of its research for two sample contracts. Accordingly, argues
defendant, even if Dynetics was able to show that its research was not funded for these
two contracts, Dynetics would still be ineligible for the tax credit. Plaintiff disagrees,
insisting it did retain substantial rights in the results of the research for both sample
contracts.

       The court considers plaintiff’s arguments in turn, and then defendant’s argument.

       A.     Course of Dealing

       Dynetics argues that a course of dealing existed between it and its contracting
partner in each of six of the sample contracts at issue in this motion, through which it was
obligated to deliver a particular result, not merely a number of hours of service or a level
of effort.1

1
       Dynetics makes no argument that a course of dealing existed for the UAH01
contract. See Pl.’s Mot. 70-73 (offering no course of dealing argument for the UAH01
contract); Pl.’s Reply 11-14 (making no argument that the UAH01 contract was
ambiguous).

                                             8
       Dynetics understood, based on its long-term relationships with its customers
       that it had to successfully produce a product within the estimated cost to
       receive any payment in some cases and to secure future work under the
       contract in other cases. In both circumstances, Dynetics bore the financial
       risk of failed research.

Pl.’s Mot. 22. In Dynetics’ view, under the course of dealing established with its
contracting partners, each of the six sample contracts functioned as a fixed-price
contract under which Dynetics was obligated to “produce a product,” and for
which Dynetics would be paid a fixed price, regardless of its actual costs. See id.

       Defendant argues first that plaintiff’s course of dealing argument is parol
evidence. Def.’s Resp. 15-16. The court may only consider such evidence if the
contracts are ambiguous. Def.’s Resp. 15-16. Defendant insists they are not. Def.’s
Resp. 15-16.

       Second, defendant asserts that even if the court were to consider plaintiff’s
argument, the evidence might reflect that Dynetics “had a unilateral policy that it would
continue performing research, at its own expense, in order to generate the desired
outcome, after the ceiling price of a contract or task order had been reached,” but such
evidence falls well short of showing a “joint understanding” between Dynetics and its
contracting partners. Id. at 16-17.

       Defendant is correct as to both of its arguments.

       1.     Parol Evidence

        A party’s “attempt to vary the clear meaning of [a contract] in accordance with the
parties’ course of dealing is improper under the parol evidence rule.” Alves v. United
States, 133 F.3d 1454, 1459 (Fed. Cir. 1998) (internal quotation marks omitted).

               When construing a contract, a court first examines the plain meaning
       of its express terms. The parol evidence rule is a rule of substantive law that
       prohibits the use of external evidence to add to or otherwise modify the terms
       of a written agreement “in instances where the written agreement has been
       adopted by the parties as an expression of their final understanding. The rule
       thus renders inadmissible evidence introduced to modify, supplement, or
       interpret the terms of an integrated agreement. Evidence of the parties’
       course of dealing constitutes this kind of parol evidence that is prohibited by
       the rule. If the terms of a contract are clear and unambiguous, they must be

                                             9
       given their plain meaning—extrinsic evidence is inadmissible to interpret
       them.

Barron Bancshares, Inc. v. United States, 366 F.3d 1360, 1375-76 (Fed. Cir. 2004)
(emphasis added) (internal citations and quotation marks omitted).

       The Federal Circuit has described the circumstance in which a contract might be
deemed ambiguous. “When a contract is susceptible to more than one reasonable
interpretation, it contains an ambiguity. To show an ambiguity[,] it is not enough that the
parties differ in their respective interpretations of a contract term. Rather, both
interpretations must fall within a zone of reasonableness.” Metric Constructors, Inc. v.
NASA, 169 F.3d 747, 751 (Fed. Cir. 1999) (internal citations and quotation marks
omitted).

       Plaintiff initially made no argument that any of the six sample contracts were
ambiguous. See Pl.’s Mot. 22-23. In its reply brief, plaintiff argued that, assuming
contractual ambiguity was necessary for consideration of any course of dealing, each
contract was in fact ambiguous. See Pl.’s Reply 10-14.

       Dynetics argues that during the briefing of this motion, the parties “have disagreed
about the rights and obligations of Dynetics and the United States pursuant to these
contracts . . . demonstrating that the contracts are unclear and ambiguous.” Pl.’s Reply
11. Plaintiff is mistaken. The mere fact that the parties disagree is not evidence of
contractual ambiguity. See Metric Constructors, Inc., 169 F.3d at 751.

        Plaintiff further argues that various contracts: (1) incorporate FAR provisions that
rely on a term that is never defined (AF007, AMS01, NT001); (2) contain more than one
inspection clause (AMS01 and AR009); (3) fail to include the appropriate inspection
clause (AR005); or (4) were modified frequently by the parties, suggesting a lack of
clarity (BOE12). See Pl.’s Reply 11-14.

       Regarding the “undefined terms,” Dynetics points to “best efforts” in various
contracts, “allowable cost” in at least the AF007 and NT001 contracts, and the basis for
invoice “approval” in at least the AMS01 contract. Even if the court were to assume that
ambiguity in the contracts existed, it would be a patent ambiguity, because the terms
about which plaintiff now complains are found in the FAR—the provisions of which are
incorporated expressly in the contract. Under the patent ambiguity doctrine, contract
ambiguities must be read in the government’s favor due to the contractor’s duty to
inquire. Gen. Eng’g & Mach. Works v. O’Keefe, 991 F.2d 775, 781 (Fed. Cir. 1993).
The Federal Circuit has made clear that “[a]lthough we do not wish to penalize a

                                             10
contractor because of a contract that was poorly drafted by the government, the very fact
that [a] contract is patently ambiguous places a burden on the contractor to seek
clarification. . . . [If the contractor] failed to do so[,] it must . . . lose on its claim . . . .”
Interstate Gen. Gov’t Contractors, Inc. v. Stone, 980 F.2d 1433, 1436 (Fed. Cir. 1992).
Thus, even if a patent ambiguity existed, Dynetics could not benefit from it.

        Further, Dynetics makes no argument regarding how the terms it now considers
ambiguous are relevant to the question of whether any of the six sample contracts
required Dynetics to produce a particular product, rather than to provide hours of service
or a level of effort. And if the allegedly ambiguous terms on which Dynetics asks the
court to focus do not speak to the issue of what the contracts required Dynetics to do,
plaintiff’s course of dealing argument is unavailing.

       Regarding the inspection clauses, as discussed infra Parts III.B.–F, Dynetics’
arguments do not persuade either that the inspection clauses put it at financial risk, or that
it was unclear which inspection clause applied to which contract. Moreover, even if
multiple or missing inspection clauses caused ambiguity—as Dynetics’ claims—the
ambiguity would be a patent ambiguity, and this fails to assist Dynetics. See Interstate
Gen. Gov’t Contractors, Inc., 980 F.2d at 1436.

       That a contract is modified, as the BOE12 contract was many times, is not itself
evidence of ambiguity. As plaintiff itself noted, “[t]he award of the [BOE12] contract did
not authorize any work. Boeing would then modify the contract to add a new line item
that would both allot funds and specify the work required to be done.” Pl.’s Mot. 59-60.

        Plaintiff makes no argument, nor could it, that the plain text of any of the six
sample contracts was “susceptible to more than one reasonable meaning” as to whether
Dynetics was responsible for delivering a particular result for the contracted price—as it
would be in a fixed-price contract—or whether it was responsible only for delivering a
certain number of hours of service or a certain level of effort—as it would be in the cost-
reimbursement, time-and-materials, and fixed-price level-of-effort contracts at issue here.
Plaintiff’s attempts to identify ambiguities are not convincing. Accordingly, in deciding
the parties’ cross-motions for partial summary judgment, the court does not consider the
parole evidence plaintiff seeks to introduce regarding its course of dealing with each of
its six contracting partners.

       Nonetheless, the court is mindful that the sample contracts at issue in this motion
are but a few of the contracts at issue in this matter. Solely for the purpose of providing
the parties with information that might prove useful to them in resolving their remaining

                                                 11
disputes, the court addresses plaintiff’s course of dealing argument, including all
evidence filed by Dynetics.2

       2.     Whether a Course of Dealing Existed Between Dynetics and its Contracting
              Partners

        Course of dealing relies on a “shared understanding” between the parties, which in
certain situations can be used to clarify or supplement written contractual terms. See
Sperry Flight Sys. Div. of Sperry Rand Corp. v. United States, 548 F.2d 915, 923 (Ct. Cl.
1977) (“[A] course of dealing can supply an enforceable term to a contract (or may even
supplement or qualify that contract) provided that the conduct which identifies that
course of dealing can reasonably be construed as indicative of the parties’ intentions—a
reflection of their joint or common understanding.”).

        Plaintiff’s evidence of a joint or common understanding is limited to affidavits,
see Exs. B-I, six of which are provided by Dynetics’ employees. Defendant responds that
“[f]or five of the contracts (AF007, AR005, BOE12, AR009, and AMS01), Dynetics
presents evidence only of its own understanding of its commitments and obligations and
no admissible evidence of the state of mind of the other contracting parties.”

       Review of each affidavit shows that defendant is correct, Dynetics either states its
own unilateral contract management practices, or states its position on what it believes its
contracting partner “understood.”

       To protect its reputation and demonstrate its commitment to providing
       desired results within its estimated costs, Dynetics would have taken any cost
       overruns out of its fee rather than ask the government for more money.

2
       Plaintiff filed eight affidavits in support of its course of dealing argument. See
Exs. B-I. Defendant objects to the court’s consideration of one affidavit in its entirety, as
well as to specified paragraphs in the remaining affidavits. Def.’s Objections to Evidence
Submitted by Plaintiff in Support of Its Cross-Motion for Partial Summary Judgment,
ECF No. 40-1 (Def.’s Objs.); Supplemental Declaration of Jason Bergmann in
Opposition to Plaintiff’s Cross-Motion for Summary Judgment, ECF No. 40-2. As the
court does not consider plaintiff’s course of dealing argument in its resolution of the
parties’ cross-motions, it is unnecessary to rule on defendant’s objections to plaintiff’s
evidence. The parties should draw no inference as to the admissibility of plaintiff’s
evidence from the mere fact that for the limited purpose of assisting the parties in
resolving the remainder of their disputes, the court considers plaintiff’s evidence in its
entirety.

                                             12
Hug Aff. ¶ 19, Ex. E (AF007).

       Both Dynetics and the U.S. Army understood that Dynetics would rework
       any defective or unacceptable products produced under the AR005 contract
       at its own cost, regardless of whether the product was required by a fixed-
       price or cost-plus-fixed-fee CLIN.

Williams Aff. ¶ 14, Ex. D (AR005).

       During our relationship with Boeing, we made Boeing aware of Dynetics’
       commitment to delivery [of] technically superior products within the cost
       estimates provided.

Bendickson Aff. ¶ 25, Ex. I (BOE12).

       It was Dynetics’ practice to rework any defective or unacceptable work
       product required by the contract at its own cost, regardless of the terms of the
       contract. [The U.S. Army] was aware of Dynetics’ commitment to provide
       a technically superior product within the cost estimates, even if that meant
       reworking the product at its own cost.

Walker Aff. ¶ 22, Ex. H (AR009).

       [I]t was Dynetics’ practice to finish any incomplete work or repair any
       deficient products at its own costs (regardless of whether Dynetics was
       technically obligated to do so under the contract), rather than risk losing
       future work under the Omnibus 2000 contract or any other contract with
       AMCOM.

Miller Aff. ¶ 29, Ex. C (AMS01).

       It was Dynetics’ practice to rework defective or unacceptable deliverables at
       its own costs, regardless of whether the terms of the contract imposed this
       requirement on Dynetics.

Nicaise Aff. ¶ 14, Ex. G (All contracts).

        Regarding the sixth contract, the NT001 contract with the Missile and Space
Intelligence Center (MSIC), Dynetics filed affidavits from a current Dynetics employee

                                             13
who was previously a MSIC employee, Patrick Keller, and a retired MSIC contracting
officer, Steven Thomason. See Exs. B (Thomason) & F (Keller).

       Mr. Thomason affirms that he was the contracting officer for the NT001 contract
during the relevant time period, July 1, 2002 through June 30, 2005. Thomason Aff. ¶ 4.
Mr. Thomason provided statements regarding his management of the NT001 contract.

               In working with Dynetics on the [NT001] Contract, I made it clear
       that I expected all tasks to be completed within the amount listed in each
       delivery order and that I would not modify the delivery orders to allot
       additional funds if Dynetics was unable to complete the task within the funds
       originally allotted, barring some unforeseen circumstance that was outside of
       Dynetics’ control.

Thomason Aff. ¶ 15.

              Dynetics also knew if a deliverable for a task was incomplete or
       defective[,] it was unacceptable. Furthermore, Dynetics was aware that I
       would expect the company to go back and rework any unacceptable
       deliverables at its own cost and that I would not authorize additional funds
       to rework a defective deliverable.

Id. ¶ 17.

        Dynetics relied on these paragraphs in the Thomason affidavit to argue that “even
if the [NT001] contract were not ambiguous, the long-term course of dealing, which had
been accepted by both parties, would supplement the contract by reflecting the parties’
intent.” Pl.’s Reply 14. Dynetics is mistaken. If the NT001 contract is not ambiguous,
the court may not consider parol evidence, including the parties’ alleged course of
dealing. See. e.g., Barron Bancshares, 366 F.3d at 1375-76.

       Dynetics also failed to show that Mr. Thomason had the authority to make the
types of changes to the NT001 contract that he asserts he made—that is, managing the
contract effectively as a fixed-price contract, despite the fact that the express terms of the
written contract provided for a cost-plus-fixed-fee contract.

     The NT001 contract expressly incorporated a Limitation of Cost clause. Ex. 34, at
DYN 8099 ¶ I.75 (FAR 52.232-20 Limitation of Cost (Apr. 1984)). In relevant part,
FAR 52.232-20 provides that,

                                              14
       [t]he Contractor is not obligated to continue performance under this contract
       (including actions under the Termination clause of this contract) or otherwise
       incur costs in excess of the estimated cost specified in the Schedule, until the
       Contracting Officer (i) notifies the Contractor in writing that the estimated
       cost has been increased and (ii) provides a revised estimated total cost of
       performing this contract.

FAR 52.232-20(d)(2). Simply put, under the Limitation of Cost clause, if the allocated
funds for the NT001 contract were exhausted, Dynetics was not obligated to continue
work. Dynetics argues that, in effect, Mr. Thomason had the authority to disregard the
plain language of the contract, as provided in the Limitation of Cost clause, and compel
Dynetics to produce unfunded work. But Dynetics fails to show that Mr. Thomason had
any such authority.

       In fact, the express terms of the NT001 contract show otherwise. The contractual
terms indicate that such a change was outside of Mr. Thomason’s authority, and that
changes to the contract were to be made by written order. The NT001 contract expressly
incorporated a Changes clause enumerating the six type of changes a contracting officer,
like Mr. Thomason, was authorized to make to the contract—by written order. See Ex.
34, at DYN 8101 (incorporating FAR 52.243-2 Changes–Cost-Reimbursement (Aug.
1987) – Alternate II). Those six changes were: (1) description of services to be
performed; (2) time of performance; (3) place of performance; (4) drawings, designs, or
specifications under certain circumstances; (5) method of shipment or packing of
supplies; and (6) place of delivery. FAR 52.243-2 Alt. II.

       Nothing in the Changes clause could be read to authorize a contracting officer to
make any change to the NT001 contract other than by “written order.” Furthermore,
nothing in the Changes clause could be read to authorize a contracting officer to override
the express terms of the contract and to change it from a cost-plus-fixed-fee contract to a
fixed-price contract—by either written order or oral understanding. The changes to the
NT001 contract for which Dynetics relies on Mr. Thomason’s affirmations are beyond
his authority, as set forth in the Changes clause, and nothing in the record suggests that
Mr. Thomason had authority over the NT001 contract beyond that provided in the
Changes clause. See Thomason Aff. ¶¶ 7-8 (describing contracting officer duties and
authority). In addition, nothing in the record suggests that Mr. Thomason, a former
MSIC employee, had authority to present MSIC’s position on its management of the
NT001 contract.

       Dynetics also filed an affidavit from Mr. Keller, who in his previous role as

                                             15
MSIC Deputy Director was responsible for the overall execution of the MSIC’s mission.
Keller Aff. ¶ 4. Mr. Keller affirmed that “his primary area of expertise is the technical
aspects of the weapons systems involved in the [Defensive Systems Analysis] contracts.”
Id. ¶ 5. Mr. Keller did not state that he had any personal knowledge about or
involvement with the NT001 contract during his MSIC employment, or for that matter,
during his current employment with Dynetics. The only mention of the NT001 contract
by Mr. Keller was his statement that “Contract MDA908-99-D-0001 was one of DSA
contracts awarded to Dynetics by MSIC. It was issued to Dynetics in 1999 and was
given the project code NT001 by Dynetics.” Id. ¶ 6. While true, this statement provides
no support for Dynetics’ assertions of a course of dealing under the NT001 contract.

       As defendant correctly points out, Dynetics has failed to provide the requisite
evidence of any “joint understanding” between it and each of its contracting partners.
Def.’s Resp. 16-17.

      3.     “All Agreements”

      Finally, Dynetics argues that the Treasury regulations “require” the court to
consider the “agreements” it had with its contracting partners. See Pl.’s Reply 10.
Dynetics insists:

      [T]he course of dealing and understandings with the government reflect
      agreements between Dynetics and the government with respect to the
      research and development done under the contracts. These “agreements” are
      required to be considered by the Treasury Regulations. Treas. Reg. § 1.41-
      4A(d)(1) (“All agreements (not only research contracts) entered into between
      the taxpayer performing the research and other persons shall be considered
      in determining the extent to which the research is funded.”). Therefore, even
      if not permitted in the contract interpretation context, the course of dealing
      must be considered pursuant to the Treasury Regulations when determining
      the “funding” issue.

Id. But, Dynetics is mistaken; the Treasury regulations require no such thing. First,
Dynetics assumes what it seeks to prove, in particular, that it had an “agreement” with
any of the six contracting partners for which it has pressed this argument. Second, the
agreement contemplated in the Treasury regulation is not present here. The term
“agreement” is defined in the FAR, which governs government contracts like those at
issue here. An “agreement” is defined as a “written instrument of understanding,” that is
“not a contract.” FAR 16.702(a), 16.703(a). Clearly, the reference to “agreements” in

                                            16
the Treasury regulations does not encompass what Dynetics asserts is a course of dealing
between it and its contracting partners.

       For all these reasons, if any of the six sample contracts were ambiguous, which
they are not, see supra Part III.A.1., and the court considered plaintiff’s affidavits in their
entirety, a question on which it makes no decision, see supra note 2, plaintiff’s evidence
would still fail to show a joint understanding that would support a finding that a course of
dealing existed between Dynetics and any of its contracting partners in the AF007,
AR005, NT001, BOE12, AR009, or AMS01 contracts.

       B.     Inspection Clauses – AF007 and NT001 Contracts

       Incorporated into the AF007 contract as the inspection clause is FAR 52.246-8
Inspection of Research and Development–Cost-Reimbursement (May 2001). Ex. 12, at
DYN 957. Dynetics argues that this inspection clause is like one at issue in the contract
discussed in Fairchild Industries, Inc. v. United States, 71 F.3d 868, 873 (Fed. Cir. 1996).
Given the similar inspection clauses, Dynetics urges that its contract is like the contract in
Fairchild, which the Federal Circuit found “demonstrate[d] the shift of risk to the
contractor.” Pl.’s Mot. 41 (citing Fairchild, 71 F.3d at 873).

         Dynetics is mistaken in its reading of Fairchild. The flaw in Dynetics’ position is
that it assumes the Federal Circuit based its decision on the incorporated inspection
clause alone. The appellate court did not. Rather, it clearly based its decision on the text
of the contract, as well as on the inspection, rejection, and payment clauses incorporated
into the contract. Fairchild, 71 F.3d at 871 (“The . . . contract provided that the Air Force
was obligated to pay for the research only if Fairchild produced results that met the
contract specifications, in accordance with certain provisions of the Defense Acquisition
Regulations (DAR).”).

        The contract between Fairchild and the Air Force called for Fairchild to produce
two prototype aircraft, according to a “contract [that] contained over 1,000 pages of
technical specifications that required Fairchild to meet specific design, construction,
quality, and performance standards.” Fairchild, 71 F.3d at 870. The contract included
express language by which Fairchild accepted responsibility for producing the prototype
aircraft, known as a Next Generation Trainer (NGT). According to the contract, “[t]he
contractor hereby accepts Total System Responsibility for the NGT System,” with “total
system responsibility” defined as the

       responsibility for the installation and integration of the NGT system
       elements, i.e., its systems, subsystems, components, support equipment, and

                                              17
       software/data; including the responsibility for undertaking any and all actions
       necessary to assure that the total system will meet all requirements as defined
       in the system specification . . . as identified in . . . this contract.

Fairchild, 71 F.3d at 871 (emphasis added). Thus according to the contract language,
Fairchild explicitly accepted responsibility for doing whatever was necessary to produce
prototype aircraft in compliance with the contract specifications. See Fairchild, 71 F.3d
at 870. Unlike the contractor in Fairchild, Dynetics makes no assertion that it expressly
accepted contractual responsibility for producing any product.

       The Federal Circuit in Fairchild also relied on two DAR provisions that were
incorporated into the contract: one governing inspection and rejection, DAR 7-302.4,
and the other covering payments, DAR 7-302.2.3 “If the work was deemed unacceptable,
the Air Force could either (1) reject the work, (2) require Fairchild to correct the work at
its own expense, or (3) accept the work subject to an equitable price reduction.”
Fairchild, 71 F.3d at 870 (citing DAR 7-302.4 (1976)). Fairchild would be paid for
“work product delivered and accepted.” Fairchild, 71 F.3d at 870 (citing DAR 7-302.2
(1976)).

       The Fairchild inspection clause, which included rejection language, is
included below.

           (a) All work under this contract shall be subject to inspection and test by
       the Government, to the extent practicable, at all times (including the period
       of performance) and places, and in any event prior to acceptance. . . .

           (b) The Government may reject any work that is defective or otherwise
       not in conformity with the requirements of this contract. If the Contractor
       fails or is unable to correct or to replace such work within the delivery
       schedule or such later time as the Contracting Officer may authorize, the
       Contracting Officer may accept such work at a reduction in price which is
       equitable under the circumstances.

3
       The Defense Acquisition Regulations (DAR) were included as Title 32 of the
Code of Federal Regulations until April 1, 1984. See FMC Corp. v. United States, 853
F.2d 882, 884 n.2 (Fed. Cir. 1988). Thus, the cited DAR are available as 32 C.F.R. § 7-
302.4 and 32 C.F.R. § 7-302.2.

                                             18
DAR 7-302.4 (a)-(b) (emphasis added).

       The relevant portion of FAR 52.246-8, the inspection clause incorporated into the
AF007 contract—on which Dynetics relies, is as follows: “The Government has the right
to inspect and test all work called for by the contract, to the extent practicable at all
places and times, including the period of performance, and in any event before
acceptance.” FAR 52.246-8(c). Dynetics is correct that the inspection language in FAR
52.246-8(c) is like that found in DAR 7-302.4(a), the provision at issue in the Fairchild
case. But the rejection language found in DAR 7-302.4(b) is wholly absent from FAR
52.246-8, and Dynetics makes no assertion that such language was incorporated
independently into the AF007 contract.

      Finally, the payments clause in the Fairchild contract provided that “[t]he
Contractor shall be paid . . . [at] the prices stipulated herein for work delivered or
rendered and accepted . . . .” DAR 7-302.2.

      The payments clause incorporated in the AF007 contract is FAR 52.216-7
Allowable Cost and Payment (Dec. 2002). See Ex. 12, at DYN 964. Dynetics makes no
argument that the payments clause in the AF007 contract included similar language to the
payment clause in Fairchild that limited payment to work that the government
“accepted.” Nor is such language apparent in a review of FAR 52.216-7.

        The Federal Circuit found that Fairchild was entitled to the research credit,
because “[t]he contract explicitly placed solely on Fairchild the risk of failure of every
line item . . . . The items to be produced were not commodities: all required research,
development, and testing, to meet complex contract specifications.” Fairchild, 71 F.3d at
873. The same cannot be said of the AF007 contract. Dynetics did not bear such risk.

       Notwithstanding Dynetics’ arguments to the contrary, any similarity between the
AF007 contract and the contract in Fairchild is limited to the inspection clause. The
AF007 contract included no language that directed Dynetics to accept responsibility for
producing a product. The AF007 contract did not include rejection language; nor did it
limit payment to work the government accepted. The limited similarity between the
inspection clauses does not support a finding that the AF007 contract was like the
contract in Fairchild. Throughout its arguments based on the various inspection clauses
relevant to the sample contracts, Dynetics has attempted to liken the sample contracts to
the contract in Fairchild. For the same reasons discussed herein, none of the sample
contracts are like the contract in Fairchild.

                                              19
       Dynetics adds that it was put at financial risk by the plain text of certain other
provisions in FAR 52.246-8, insisting that

       FAR § 52.246-8 gives the government the right [to] require replacement or
       correction of “work not meeting contract requirements.” FAR § 52.246-8(f).
       Furthermore, if the contractor fails to proceed with “reasonable promptness
       to perform required replacement or correction, the Government may (i) [b]y
       contract or otherwise, perform the replacement or correction, [and] charge
       the Contractor any increased cost.” FAR § 52.246-8(g)(1).

Pl.’s Mot. 41. But, Dynetics has not fully considered the FAR provision on which it
relies.

       FAR 52.246-8(f) provides that

       [a]t any time during contract performance . . . the Government may require
       the Contractor to replace or correct work not meeting contract requirements.
       . . . Except as otherwise provided in paragraph (h) below, the cost of
       replacement or correction shall be determined as specified in the Allowable
       Cost and Payment clause, [FAR 52.216-7] but no additional fee shall be paid.

FAR 52.246-8(f).

       A review of FAR 52.216-7, the payments clause incorporated into the AF007
contract, shows that reimbursable costs include those “for items or services purchased
directly for the contract.” FAR 52.216-7(b)(1)(i). There is no mention of excluding costs
incurred to replace or correct work not meeting standards. As defendant correctly points
out, while the contractor will be paid “no additional fee” for replacement or correction,
“the denial of a ‘fee’ merely limits the contractor’s profit for the corrective work, but it
does not preclude the contractor from recovering its costs.” Def.’s Resp. 11. Dynetics
makes no assertion that in replacing or correcting its work it would not be paid. Nor does
the language of FAR 52.246-8(f) support such a position.

        Under FAR 52.246-8(g), the government may charge the contractor for “increased
cost” if the government has to perform the replacement or correction. FAR 52.246-
8(g)(1)(i). However, as Dynetics correctly states, the government may only do so “[i]f
the Contractor fails to proceed with reasonable promptness to perform required
replacement or correction.” Id. Dynetics could be at financial risk under FAR 52.246-
8(g)(1), but only if it “fails to proceed with reasonable promptness” to make the
replacement or correction. FAR 52.246-8(g)(1). And, this risk is not attributable to the

                                              20
failure of the research, which is the sole risk relevant to the tax credit. See Treas. Reg. §
1.41-4A(d)(1) (“Amounts payable under any agreement that are contingent on the success
of the research and thus considered to be paid for the product or result of the research . . .
are not treated as funding.”).

        Dynetics’ arguments that FAR 52.246-8, as incorporated into the AF007 contract,
put it at financial risk are unpersuasive.

       The NT001 contract incorporated FAR 52.246-5 Inspection of Services–Cost-
Reimbursement (Apr. 1984). Ex. 34, at DYN 8075. The inspection language in FAR
52.246-5(c) is identical to that in the inspection clause incorporated into the AF007
contract, FAR 52.246-8(c), with the exception that FAR 52.246-5(c) provides for the
inspection of “services,” rather than “work.”

       As it did with the AF007 contract, Dynetics argues that the inspection language in
the NT001 contract, which incorporates FAR 52.246-5(c), is similar to that in DAR 7-
302.4(a) and puts it at the same risk as in Fairchild. Pl.’s Mot. 68. But, as previously
discussed, any similarity in the inspection language of FAR 52.246-5(c) and DAR 7-
302.4(a), without more, is insufficient to put Dynetics at financial risk.

       C.     Inspection Clauses – AR009 and AMS01 Contracts

       The AR009 contract expressly incorporated two different clauses for inspection of
research and development; one pertained to fixed-price contracts (FAR 52.246-7) and the
other to cost-reimbursement contracts (FAR 52.246-8). Ex. 47, DYN 6946. The AR009
contract is a firm-fixed-price, level-of-effort contract (FFP-LOE) for labor costs. See id.
at DYN 6954.

         The AMS01 contract expressly incorporated four different inspection clauses,
respectively for fixed-price contracts (FAR 52.246-4), cost-reimbursement contracts
(FAR 52.246-5), time-and-material and labor-hour contracts (FAR 52.246-6) and
research and development contracts (short form) (FAR 52.246-9). See Ex. 51, at DYN
7579. Plaintiff explained that multiple inspection clauses were included in the AMS01
contract because the contract permitted “fixed rate[], fixed-price and/or cost plus fixed
fee task orders.” Pl.’s Supp. Br. 17 (quoting Ex. 51, at DYN 7570). The parties agree
that there are only five task orders at issue under the AMS01 contract, and all are FFP-
LOE. Pl.’s Mot. 45-46 (“Each task order was issued on a fixed-price level of effort

                                             21
basis.”);4 Def.’s Mot. 38 (“The five task orders provided for work on a fixed-rate level-
of-effort basis.”).

        In arguing that it was put at financial risk by the inspection clause contained in
each contract, Dynetics relied only on the fixed-price inspection clauses. See Pl.’s Mot.
58 (FAR 52.246-7 under AR009); Id. at 49 (FAR 52.246-4 under AMS01). But, plaintiff
did not explain how it could be at financial risk under any inspection clause, given the
definition of a FFP-LOE contract provided in the FAR:

       A firm-fixed-price, level-of-effort term contract is suitable for investigation
       or study in a specific research and development area. The product of the
       contract is usually a report showing the results achieved through application
       of the required level of effort. However, payment is based on the effort
       expended rather than on the results achieved.

FAR 16.207-2 Firm-Fixed-Price, Level-of-Effort Term Contracts – Application
(emphasis added). The court asked the parties to reconcile arguments based on the fixed-
price inspection clauses with the definition of a FFP-LOE contract provided in FAR
16.207-2. See Order Supp. Br. 4-5.

       Dynetics responded that “in the case of both the AR009 and AMS01 contracts, the
government defined deliverables that were expected as a pre-requisite to payment.” Pl.’s
Supp. Br. 14-15. While acknowledging that “in theory” a contractor could satisfy FFP-
LOE contract requirements by providing a specified level of effort, Pl.’s Supp. Br. 14,
Dynetics argued that the AR009 and AMS01 contracts were not “typical” FFP-LOE
contracts. Pl.’s Reply to Def.’s Supp. Br. 10. Rather, in Dynetics’ view, both contracts
“appear to be hybrids, calculating a fixed price based on effort, but requiring delivery of
specified items as a condition for payment.” Id.

       As an example of deliverables, Dynetics points to Technical Directive Order 8
(TDO 8) issued under the AR009 contract, which required Dynetics to “develop and
deliver a long list of hardware items.” Pl.’s Supp. Br. 15 (citing Ex. 48, at DYN 62475).
Review of TDO 8 shows that Dynetics is correct. TDO 8 required Dynetics’ effort on
“Flight Hardware Fabrication” in support of “several flight tests to demonstrate
4
        In its supplemental briefing, Dynetics seems to argue the task orders were fixed
price, rather than firm-fixed-price, level-of-effort. See Pl.’s Supp. Br. 17-18. The record
is clear, however, that the five task orders were firm-fixed-price, level-of-effort, with the
government purchasing a specified number of labor hours. See Ex. 52, at 64293 (Task
Order 27); Ex. 53, at DYN 64342 (Task Order 34); Ex.54 at DYN 64555 (Task Order
53); Ex. 55 at DYN 65341 (Task Order 60); Ex. 56 at DYN 65373 (Task Order 64).

                                             22
hypervelocity performance.” Ex. 48, at DYN 62475. Dynetics was required to “fabricate
to print . . . hardware items in accordance with the design drawings provided . . . .” Id.
A list of twenty different hardware items, in various quantities, followed. Id. at DYN
62475-76.

       According to Dynetics, “[s]eeking specified deliverables is directly contrary to the
applicable uses of [a] FFP-LOE [contract] under the FAR, which states that this contract
form may only be used where ‘the work cannot otherwise be clearly defined.”’ Pl.’s
Supp. Br. 15 (quoting FAR 16.207-3(a)). Plaintiff is mistaken, however, in its reliance
on this provision of the FAR.

       The AR009 contract is a research & development contract. Ex. 47, at DYN 6933
item 15 (“Kind of Contract: Research and Development Contract”). As used in FAR Part
35 (Research and Development Contracting), the term “development” means

       the systematic use of scientific and technical knowledge in the design,
       development, testing, or evaluation of a potential new product or service (or
       of an improvement in an existing product or service) to meet specific
       performance requirements or objectives. It includes the functions of design
       engineering, prototyping, and engineering testing. . . .

FAR 35.001. Part 35 of the FAR governing “contracting methods and contract type”
provides that a FFP-LOE contract “may be useful for,” inter alia, “developing system
design concepts.” FAR 35.006(d) (citing FAR 16.207, Firm-Fixed-Price, Level-of-Effort
term contracts). Thus, a FFP-LOE contract is contemplated for development, and
development includes prototyping and engineering testing, all of which require
production of hardware. Contrary to Dynetics’ assertion, a specific deliverable does not
contravene the FAR provisions governing FFP-LOE contracts.

        Dynetics adds that under the AMS01 contract, the government “likewise sought
specific deliverables.” Pl.’s Supp. Br. 17. Unlike in its argument for the AR009 contract,
Dynetics provided no specific examples from the task orders in the record. Regardless,
for the reasons explained above, any argument based on the mere requirement of a
deliverable would be insufficient to show that the AMS01 contract was other than a FFP-
LOE contract.

       Dynetics also argued that both contracts seemingly functioned as hybrid contracts
because the government permitted Dynetics to “vary its hours ‘by plus or minus 10%
provided the total price for that specific [Technical Directive Order] option exercise is
not exceeded.”’ Id. at 16 (citing Ex. 47, at DYN 6949). Dynetics reasons that “[i]f the

                                            23
government was just buying the ‘effort’ there would be no reason to vary the hours,
because hours would be all that Dynetics was providing.” Id.

        Review of the AR009 contract shows that the government specified the labor mix
for each option, including the specific positions and the number of hours for each
position. See Ex. 48, at DYN 6947. For example, an option would specify a certain
number of hours of program manager time, senior engineer time, engineer time, etc. Id.
As Dynetics correctly points out, the government allowed it to shift time from one
position to another, for example by using more engineer time but less senior engineer
time, provided it did not exceed the total dollar amount contracted for that option. Id. at
DYN 6949. The government simply allowed Dynetics some flexibility and discretion in
the labor mix of the “effort” it provided. Contrary to Dynetics’ assertion, nothing in this
labor mix flexibility shows the government was buying anything other than a level of
effort.

       Dynetics relied on a case from the U.S. Department of Agriculture Board of
Contract Appeals (Board). In its briefing, Dynetics argued that the Board considered a
contract “similar” to the AR009 and AMS01 contracts, and agreed “to treat the contract
as firm-fixed-price, despite the contractor’s claim that it understood the contract to be
fixed-price, level of effort.” Pl.’s Supp. Br. 18-19 (citing In re Mangi Envtl. Grp., Inc.,
AGBCA Nos. 2005-101-1, 2005-102-1, 2005-103-1, 06-1 BCA ¶ 33,233 (Mar. 7, 2006)).

       In that case, the contractor attempts to argue—during a dispute over costs it
incurred above the contract amount—that because it had understood the contract to be
FFP-LOE, not fixed-price, it was entitled to recover payment for its costs above the
contracted dollar amount. Mangi, Fact 22. The Board found that the contract was firm-
fixed-price; that is what the contract expressly stated, and during the bidding process, the
contractor had acknowledged as much, in writing. Accordingly, this board case provides
Dynetics with no support.

        Plaintiff has not shown that either the AR009 or AMS01 contract was anything
other than a firm-fixed-price, level-of-effort contract. As plaintiff correctly
acknowledged, in such a contract, the contractor only needs to provide a certain level of
effort in order to be paid for its work. See Pl.’s Reply to Def.’s Supp. Br. 10. Dynetics
has not shown that it was put at financial risk by the terms of any inspection clause
incorporated into either the AR009 or AMS01 contract.

       D.     Inspection Clause – AR005 Contract

                                             24
        The AR005 contract includes three different line items, fixed price, cost-plus-
fixed-fee and cost-reimbursement. The fixed-price line items provided for hardware
production, the cost-plus-fixed-fee line items covered a specified number of hours of
engineering services, and the cost-reimbursement line items supported travel and other
direct expenses. (The latter two are referred to collectively as cost-reimbursement line
items.) See, e.g., Ex. 27, at DYN 58339-42.

        Defendant objects only to expenses under the cost-reimbursement line items; it
makes no objection to expenses under the fixed-price line items. Def.’s Mot. 27.
According to defendant, Dynetics claimed QREs for wages in various amounts for each
of the three tax years at issue in this motion, and these are the expenses for which
defendant argues Dynetics may not take a tax credit under the AR005 contract. See id.

        The AR005 contract incorporated only one inspection clause—FAR 52.246-2
Inspection of Supplies–Fixed-Price (Aug. 1996). See Ex. 27, at DYN 58356. Defendant
acknowledges that the absence of an inspection clause for the cost-reimbursement line
items was an “oversight,” Def.’s Reply to Pl.’s Supp. Br. 9, likely attributable to the fact
that the initial undefinitized AR005 letter contract expressed the intent of the Army to
enter a fixed-price contract, which included no line items for engineering services, see
Ex. 26, at DYN 36187-90. Regardless of the reason, it is apparent that the AR005
contract includes both fixed-price and cost-reimbursement line items, while including
only a fixed-price inspection clause. The parties disagree on the consequence of this
oversight. Defendant has correctly described each party’s position as follows:

       Defendant contends that the fixed-price clauses apply by their terms only to
       the fixed-price CLINs, and the Court should read certain mandatory but
       omitted cost-reimbursement FAR clauses into the contract under the
       Christian doctrine.5 Disagreeing, Dynetics suggests that the Court must
       apply the specific fixed-price clauses in the AR005 Contract both to the
       fixed-price and cost reimbursement CLINs.

Def.’s Reply to Pl.’s Supp. Br. 9 (footnote added).

5
         “Under the Christian doctrine, a court may insert a clause into a government
contract by operation of law if that clause is required under applicable federal
administrative regulations.” Def.’s Resp. 4-5 (quoting Gen. Eng’g & Mach. Works v.
O’Keefe, 991 F.2d 775, 779 (Fed. Cir. 1993); see also G.L. Christian & Assocs. v. United
States, 160 Ct. Cl. 1, 12 (1963) (holding that “there was a legal requirement that the
plaintiff’s contract contain the standard termination clause and the contract must be read
as if it did”)).

                                             25
       The court first considers plaintiff’s argument that FAR 52.246-2 applies to the
expenses for which it seek a tax credit, wages for engineering services. FAR 52.246-2
governs the inspection of “supplies,” which “includes but is not limited to raw materials,
components, intermediate assemblies, end products, and lots of supplies.” FAR 52.246-
2(a). Dynetics failed to offer an explanation as to how wages for engineering services
could fall within the definition of supplies provided in FAR 52.246-2.

        Rather, Dynetics’ approach was to argue that, notwithstanding that the line items
in the AR005 contract were labeled expressly “cost plus fixed fee” e.g., Ex. 27, at DYN
58340, the contract as a whole was a firm-fixed-price contract, and thus the fixed-price
inspection clause, FAR 52.246-2, must apply to every line item. See Pl.’s Supp. Br. 9
(“Because [FAR 52.246-2] is the only [inspection] clause specifically incorporated into
the contract, it is relevant to the question of whether all of the work performed under the
AR005 contract is funded. . . . ”); Pl.’s Reply to Def.’s Supp. Br. 4 (“The AR005 contract
is designated by the government as “Firm-Fixed-Price”, notwithstanding the fact that
certain CLINs are paid on a cost reimbursement basis.) (internal citation omitted).

       In support of this argument, Dynetics points to the first page of the AR005
contract, which is a form contract, Standard Form 30 (SF 30). See Pl.’s Reply to Def.’s
Supp. Br. 4 (citing Ex. 27, at DYN 58336). Item 1 on the first page of that contract is a
small box labeled “Contract ID Code,” below which are the typed words “Firm-Fixed-
Price.” Ex. 27, at 58336. In effect, Dynetics argues that the words typed into Item 1 state
what type of contract the AR005 contract is. Review of the SF 30, and its instructions,
shows that Dynetics is mistaken.

       The SF 30 and its instructions are available in the FAR. See FAR 53.301-30
(Standard Form 30, Amendment of Solicitation/Modification of Contract). The following
instruction is provided for SF 30 Item 1: “Item 1 (Contract ID Code). Insert the contract
type identification code that appears in the title block of the contract being modified.”6

        Thus, the term “firm fixed price” describes the “contract being modified,” that is
the earlier undefinitized letter contract, Ex. 26, not the definitized AR005 contract at
issue in this motion, Ex. 27. That the undefinitized letter contract was a firm-fixed-price
contract is undisputed. It is also irrelevant to this motion, as that contract included no
line items for engineering services, the only disputed expenses in this motion.

6
       A copy of the form is also available on the General Services Administration
(GSA) website. GSA, http://www.gsa.gov/portal/forms/download/116158 (search “SF
30”) (last visited May 22, 2015).

                                            26
       Dynetics has failed to show either that the AR005 contract was a fixed-price
contract, or that the wage expenses for which it seeks a tax credit were supplies which
could fall within the fixed-price inspection clause, FAR 52.246-2, as incorporated in the
AR005 contract. Accordingly, it is unnecessary to consider defendant’s alternative
argument that the court should incorporate certain FAR provisions in the AR005 contract
as a matter of law under the Christian doctrine.

       E.     Warranty Clause – BOE12 Contract

        Dynetics asserts it was put at financial risk under the Rejection, Warranty for
Services, and Warranty for Materials paragraphs of the Boeing Company General
Provisions for Labor Hour/Time & Material Contracts (GP3). See Pl.’s Mot. 63-64
(citing Pl.’s Ex. L ¶ 9 (Rejection), ¶ 11 (Warranty for Services), and ¶ 12 (Warranty for
Materials)). The GP3 is expressly incorporated into the BOE12 contract. See Ex. 40, at
DYN 41546, 41557-58.

       Dynetics argues it was at financial risk because Boeing could reject
nonconforming services, and could either require Dynetics to reperform at its own
expense, or could obtain replacement services and charge Dynetics the cost for doing so.
See Pl.’s Mot 63 (citing Pl.’s Ex. L ¶¶ 9(a), 9(b), 11). Likewise, Dynetics argues that it
was responsible for correcting or replacing nonconforming materials at its own expense.
See id. (citing Pl.’s Ex. L ¶ 12).

       The relevant clauses of the GP3 are included below.

       REJECTION

       a. If Seller [Dynetics] delivers nonconforming Services, Buyer [Boeing] may
          require Seller to promptly correct or replace the nonconforming Services.
          Redelivery to Buyer of any corrected or replaced Services shall be at Seller’s
          expense, limited to Seller’s hourly rate as set forth in this contract, excluding
          that portion of the rate attributable to profit.
       b. In addition Buyer may (i) correct the nonconforming Services or (ii) obtain
          replacement Services from another source at Seller’s expense.

Pl.’s Ex. L ¶ 9(a)-(b).

       WARRANTY FOR SERVICES. Seller warrants that all Services performed
       hereunder shall be performed by employees or agents of Seller who are
       experienced and skilled in their profession and in accordance with industry

                                            27
       standards. Seller further warrants that all Services performed under this
       contract, at the time of acceptance, shall be free from defects in workmanship
       and conform to the requirements of this contract. Buyer shall give written
       notice of any defect or nonconformance to Seller within one year from the
       date of acceptance by Buyer. [“First provision”] Buyer may, at its option,
       either (a) require correction or reperformance of any defective or
       nonconforming Services, or (b) make an equitable adjustment in the price of
       this contract. If Seller is required to correct or reperform the Services, such
       correction or reperformance shall be at Seller’s expense. Any Services
       corrected or reperformed shall be subject to this article to the same extent as
       work initially performed. [“Second provision”] If Seller fails or refuses to
       correct or reperform, Buyer may correct or replace with similar Services and
       charge Seller for any cost to Buyer, or make an equitable adjustment in the
       price of this contract.

Id. ¶ 11 (annotation added).

       WARRANTY FOR MATERIALS

       (a). . . . Buyer may, at its option, either (i) return for credit or refund or (ii)
       require prompt correction or replacement of the defective or nonconforming
       materials. Return to Seller of defective or nonconforming materials and
       redelivery to Buyer of corrected or replaced materials shall be at Seller’s
       expense.

Id. ¶ 12.

       1.     Paragraph 9(a) of the Rejection Clause and the “First Provision” of the
              Paragraph 11 Warranty for Services Clause

       Review of paragraph 9(a) shows that while Dynetics is correct that Boeing may
require it to “correct or replace the nonconforming [s]ervices,” it is incorrect that
Dynetics would be at financial risk in doing so. Dynetics relies on the term “seller’s
expense,” in paragraph 9(a). See Pl.’s Mot. 63 (“Boeing could reject nonconforming
services and require Dynetics . . . to “correct[] or replace[] Services . . . at Seller’s
expense.”) (quoting Pl.’s Ex. L ¶ 9(a)). But Dynetics omits mention of the fact that this
term is defined as “limited to Seller’s hourly rate as set forth in this contract, excluding
that portion of the rate attributable to profit.”

                                               28
        Thus when called upon by Boeing to correct or replace nonconforming services,
Dynetics is first paid its full hourly rate for producing the initial nonconforming services,
and is then paid its costs for reperforming those services, with the exception of its profit.
This is like the inspection clause in the AF007 contract, FAR 52.246-8(f). See supra Part
III.B. As discussed therein, the omission of further profit for reperforming
nonconforming services is not the type of risk contemplated under the Treasury
regulation. Dynetics was not at financial risk under the plain text of paragraph 9(a).

       In considering Dynetics’ arguments under paragraph 11, it is apparent that the first
provision in that Warranty for Services clause addresses the same point as paragraph 9(a)
of the Rejection clause, that is Boeing’s rights in the face of Dynetics’ delivery of
nonperforming services. Reviewing the relevant sentences side-by-side is helpful in
appreciating the similarity.

                                   Reperformance Requirement
                     Rejection –                           Warranty for Services –
                   Paragraph 9(a)                      Paragraph 11 “First provision”
    If Seller delivers nonconforming Services, Buyer may . . . (a) require correction or
    Buyer may require Seller to promptly          reperformance of any defective or
    correct or replace the nonconforming          nonconforming Services . . . . If Seller is
    Services. Redelivery to Buyer of any          required to correct or reperform the
    corrected or replaced Services shall be at    Services, such correction or
    Seller’s expense, limited to Seller’s hourly reperformance shall be at Seller’s expense.
    rate as set forth in this contract, excluding Any Services corrected or reperformed
    that portion of the rate attributable to      shall be subject to this article to the same
    profit.                                       extent as work initially performed.

Pl.’s Ex. L ¶¶ 9(a), 11. The only real difference between paragraphs 9(a) and 11 is
the definition of “seller’s expense.” Paragraph 11 fails to include the dependent
clause “limited to Seller’s hourly rate as set forth in this contract, excluding that
portion of the rate attributable to profit.” In reading paragraph 11, the question is
whether the term “seller’s expense” should be read to include the definition set
forth in paragraph 9(a).7

7
       The court asked the parties to comment on the definition of seller’s expense in
paragraph 9(a), and whether this definition would apply in paragraph 11, and whether
Dynetics would be at financial risk under this definition. Order for Supp. Br. 4.
Dynetics’ response was limited to stating that it understood that any reference to “Seller”
was a reference to Dynetics, followed by a repetition of its course of dealing argument.
See Pl.’s Supp. Br. 13.

                                               29
        “[T]he rule of thumb [is] that a term generally means the same thing each time it is
used,” which is known as the presumption of consistent usage. United States v.
Castleman, 134 S. Ct. 1405, 1417 (2014). However, “the presumption of consistent
usage readily yields to context, and a statutory term—even one defined in the statute—
may take on distinct [characteristics] from association with distinct statutory objects
calling for different implementation strategies. Utility Air Regulatory Grp. v. E.P.A., 134
S. Ct. 2427, 2441 (2014) (internal quotation marks omitted).

        “The words of a contract are deemed to have their ordinary meaning appropriate to
the subject matter, unless a special or unusual meaning of a particular term or usage was
intended, and was so understood by the parties.” Lockheed Martin IR Imaging Sys., Inc.
v. West, 108 F.3d 319, 322 (Fed. Cir. 1997). “Under general rules of contract law we are
to interpret provisions of a contract so as to make them consistent.” Abraham v.
Rockwell Int’l Corp., 326 F.3d 1242, 1251 (Fed. Cir. 2003). “[A]n agreement is not to be
read in a way that places its provisions in conflict, when it is reasonable to read the
provisions in harmony . . . . [T]he provisions must be read together in order to implement
the substance and purpose of the entire agreement.” Air-Sea Forwarders, Inc. v. United
States, 166 F.3d 1170, 1172 (Fed. Cir. 1999). “A reasonable interpretation must assure
that no contract provision is made inconsistent, superfluous, or redundant.” Medlin
Const. Group, Ltd. v. Harvey, 449 F.3d 1195, 1200 (Fed. Cir. 2006) (internal quotation
marks omitted).

        To read the term “seller’s expense” in paragraph 11 without the paragraph 9(a)
definition would mean that under paragraph 11, Dynetics must reperform at its own
expense, which is directly at odds with the plain text of paragraph 9(a), which states that
when reperforming, Dynetics will be paid its “hourly rate” (less its profit).

       As both paragraphs 9(a) and 11 address the same point, under the presumption of
consistent usage, the court would read the definition for seller’s expense provided in
paragraph 9(a) into paragraph 11. Reading the paragraph 9(a) definition of seller’s
expense into paragraph 11 also would permit the court to interpret the contract provisions
consistently, without placing the two provisions in conflict with one another. See
Abraham, 326 F.3d at 1251; Air-Sea Forwarders, Inc., 166 F.3d at 1172. The converse,
reading the term seller’s expense in paragraph 9(a) as it is written in paragraph 11, would
render the dependent clause in paragraph 9(a) superfluous, making such an interpretation
unreasonable. See Medlin Const. Group, Ltd., 449 F.3d at 1200.

        For these reasons, the court interprets the term “seller’s expense” in paragraph 11
to have the same meaning as in paragraph 9(a), that is Dynetics would be paid its “hourly
rate as set forth in this contract, excluding that portion of the rate attributable to profit.”

                                              30
Under this reading, as discussed earlier, Dynetics was not at financial risk when called
upon to reperform nonconforming services.

       2.     Paragraph 9(b) of the Rejection Clause and the “Second Provision” of the
              Paragraph 11 Warranty for Services Clause

        We turn now to Dynetics’ assertions of financial risk under paragraphs 9(b) and
11. It is apparent that both paragraphs address the same points, Boeing’s rights to correct
nonconforming services or replace those services with a contractor other than Dynetics.
Comparison of the two sentences side-by-side, however, reveals a significant difference.

               Boeing’s Ability to Charge Dynetics for Replacement Services
                   Rejection –                            Warranty for Services –
               Paragraph 9 (b)                      Paragraph 11 “Second provision”
 In addition Buyer may (i) correct the        If Seller fails or refuses to correct or
 nonconforming Services or (ii) obtain        reperform, Buyer may correct or replace with
 replacement Services from another source at  similar Services and charge Seller for any cost
 Seller’s expense.                            to Buyer, or make an equitable adjustment in
                                              the price of this contract.

Pl.’s Ex. L ¶¶ 9(b), 11. In both paragraphs 9(b) and 11, Boeing has the right to charge
Dynetics the cost of any replacement services it procured from another contractor. Id. ¶
9(b) (“Buyer may . . . obtain replacement Services from another source at Seller’s
expense.”); Id. ¶ 11 (“If Seller fails or refuses to correct or reperform, Buyer may . . .
replace with similar Services and charge Seller for any cost to Buyer.”). In paragraph
9(b), Boeing may resort to this option at any time. Id. ¶ 9(b). In paragraph 11, however,
Boeing may do so only “[i]f [s]eller fails or refuses to correct or reperform.” Id. ¶ 11.

        “When a contract is susceptible to more than one reasonable interpretation, it
contains an ambiguity. To show an ambiguity[,] it is not enough that the parties differ in
their respective interpretations of a contract term. Rather, both interpretations must fall
within a zone of reasonableness.” Metric Constructors, Inc., 169 F.3d at 751 (internal
citations and quotation marks omitted).

      The plain text of paragraphs 9(b) and 11 are ambiguous as to when Boeing could
charge Dynetics for its cost in securing replacement services—at any time, or only if
Dynetics fails or refuses to correct or reperform. The GP3 as a whole provides no further
information on this point. Either interpretation is within a zone of reasonableness. See
Metric Constructors, Inc., 169 F.3d at 751.

                                             31
        Under the doctrine of contra proferentem, any ambiguity in the BOE12 contract is
to be construed against the drafter. See LAI Svcs., Inc. v. Gates, 573 F.3d 1306, 1315
(Fed. Cir. 2009). The BOE12 contract, including the GP3, was drafted by Boeing. A
review of the texts clearly indicates that paragraph 11 is in Dynetics’ interest, and against
Boeing’s interest, because it limits the circumstances in which Boeing can go outside the
contract to secure replacement services at Dynetics’ expense. For this reason, the court
resolves the ambiguity between paragraphs 9(b) and 11 by reading the GP3 to permit
Boeing to charge Dynetics for similar services it obtains as set forth in paragraph 11, “[i]f
Seller fails or refuses to correct or reperform.”

          In arguing that it was put at financial risk under paragraph 11, Dynetics overlooks
the portion of paragraph 11 that limits Boeing’s right to charge Dynetics for replacement
services only to when it first “fails or refuses to correct or reperform.” See Pl.’s Mot. 63
(“The warranty clauses of the General Provisions gave Boeing the right to request
correction or performance of defective or nonconforming services at the Seller’s expense
. . . .”) (citing Pl.’s Ex. L ¶ 11). While Dynetics is at risk under paragraph 11, this risk
results not from the failure of its research, but rather from any lack of response to a
rejection of its nonperforming services—that is, by either its failure or refusal to correct
or reperform. See Pl.’s Ex. L ¶ 11. This is not the risk contemplated by the Treasury
regulation, which is limited to the failure of the research. See infra Part III.G.

       3.     Paragraph 12

        Finally, Dynetics claims it is at risk under paragraph 12, under which it provided
Boeing with a warranty for materials. It is unclear, however, how risk under paragraph
12, if such risk exists, is relevant to this motion. According to defendant, Dynetics
claims only wages as the expenses for which it seeks a tax credit. See Def.’s Mot. 33.
Dynetics says nothing to the contrary in its own motion. See id. at 58-64. If Dynetics
seeks a tax credit only for wages, it is unclear how a warranty for materials would be
relevant to the question of whether Dynetics was at financial risk in its research, for
which it incurred only expenses for wages. Dynetics says nothing on this point.

       Having considered Dynetics’ arguments based on paragraphs 9(a), 9(b), 11 and 12
of the GP3, the court finds Dynetics’s arguments that it was put at financial risk under the
warranty and rejection clauses of the BOE12 contract to be unpersuasive.

       F.     Inspection Clause – UAH01 Contract

       The warranty clause in the UAH01 contract is set forth in the contract itself; there
are no relevant incorporated FAR provisions. See Ex. 18, at DYN 1707 ¶ 1. Dynetics

                                             32
argues that “[w]hile the UAH01 contract did not include any inspection provisions,8 the
warranty provision, as governed by Alabama law, gave UAH a right to recover the price
paid if the work delivered did not conform to the requirements of the contract.” Pl.’s
Reply 8 (quotation marks omitted) (footnote added).

       The warranty clause on which Dynetics relies is included below in its entirety.

       Standard of Performance. All services rendered by the Contractor and its
       employees, agents, or representatives in performance of this Contract shall
       conform to the highest standards of workmanship for the type of work
       involved. Each of the Contractor’s employees performing services under this
       Contract shall be well qualified for the services he or she is performing. The
       Contractor warrants to the University that all work performed shall: (a)
       conform in all respects to all requirements of this Contract; (b) be free from
       all defects in materials and workmanship; and (c) be free from all defects in
       design and be fit for its intended purposes.

Ex. 18, at DYN 1707 ¶ 1. Notably, the warranty clause includes no rejection or
reperformance provisions. In arguing it was at financial risk, Dynetics also relied on
certain Alabama state statutes:

       Failing to deliver work meeting [the warranty clause] requirements gives rise
       to a cause of action to seek return of funds already paid. Ala. Code § 7-2-
       711 (where seller fails to deliver goods as warranted, buyer may, in addition
       to other remedies, cancel contract and recover the price that has paid); Ala.
       Code. § 7-2-714; Massey-Ferguson, Inc. v. Laird, 432 So. 2d 1259 (Ala.
       1983) (damages for breach of express warranty include the difference in
       value between the goods as warranted and value as delivered plus incidental
       and consequential damages).

Pl.’s Mot. 71. In Massey-Ferguson, the Supreme Court of Alabama relied on section 7-2-
714 of the Alabama code in its calculation of damages for breach of warranty. Massey-
Ferguson, Inc., 432 So. 2d at 1264.

8
       The UAH01 contract did include an inspection provision. “Inspection. The
University, through its authorized representatives, shall have the right at all reasonable
times to inspect or otherwise evaluate the work performed or being performed by the
Contractor.” Ex. 18, at DYN 1707 ¶ 2. Nothing in the text of the inspection clause puts
Dynetics at financial risk.

                                            33
       Under Lockheed Martin, any determination of risk must be made solely on the
“research agreement” between the parties, with no consideration of any external statute
not expressly incorporated in that agreement. Lockheed Martin Corp. v. United States,
210 F.3d 1366 (Fed. Cir. 2000). In Lockheed Martin, the Federal Circuit considered the
question of whether entitlement to the tax credit—which requires the taxpayer to show
both that it was put at financial risk by conducting the research and that it retained
substantial rights in that research—could be shown by reliance on a statute outside the
contract. Id. at 1370. The appellate court held that it could not.

             We similarly reject the argument that the determination whether
      Lockheed Martin retained “substantial rights” to its research can be found by
      reference to export control laws and top secret classifications; they are also
      irrelevant because they are outside of the research agreements. The
      determination whether Lockheed Martin retained “substantial rights” must
      be made by reference to the . . . contracts alone. The regulation’s focus on
      the taxpayer’s right under the research agreements makes it clear that the
      determination whether the taxpayer had the right to use the results of its
      research without paying for that right must be determined by reference to the
      research agreements.

Id. at 1375-76. The companion Treasury regulation governing whether the taxpayer is at
financial risk likewise focuses on the taxpayer’s right under the research agreements.

      Research does not constitute qualified research to the extent it is funded by
      any grant, contract, or otherwise by another person (including any
      governmental entity). All agreements (not only research contracts) entered
      into between the taxpayer performing the research and other persons shall be
      considered in determining the extent to which the research is funded.

Treas. Reg. § 1.41-4A(d)(1) (emphasis added).

        Dynetics points to no part of the UAH contract incorporating the Alabama state
statutes on which it relies to argue that it faced financial risk. Under Lockheed Martin,
the court is precluded from considering the impact of any statute outside of the UAH01
contract in determining whether Dynetics was at financial risk under the UAH01
contract. Dynetics made no argument that it was subject to financial risk under the plain
text of the warranty provision, and a review of the UAH01 contract fails to show that it
was.

      G.     Business Risk Arguments

                                           34
       Dynetics argues that it was put at financial risk by the uncertain nature of the
work, by the fact that it had to invest in staffing and resources with no commitment from
the government to pay those costs, and by the incremental orders placed under the
contracts. Pl.’s Mot. 32-37.

       Dynetics argues that for at least four contracts—specifically, AR009, AMS01,
BOE12 and NT001—it was “uncertain” about the “nature of the work,” as the contracts
included “extremely broad statements of work that identified a wide range of work
Dynetics would be required to perform.” Id. at 32. Dynetics argues that “[b]ecause the
exact nature of the work could not always be described – or could not be described in a
manner to fully disclose all necessary information, Dynetics bore the risk that it would be
unable to complete the work within the price proposed, or at all.” Id. at 33.

       Next, Dynetics argues that under the contracts, it was “required to incur the costs
associated with developing and maintaining the staffing and resources necessary to
support the work contemplated by the contract, but the government was not obligated to
issue more than a minimal amount of work under the contract.” Id. at 34-35. Dynetics
complains that it bore the risk of its efforts and investments, while the “government had
no obligation to continue to use those resources if the research was unsuccessful.” Id.

       Dynetics further argues that six of the sample contracts (all but the AF007
contract) “contemplated an uncertain amount of work at the time the contract was
funded,” as certain contracts were Indefinite Delivery Indefinite Quantity (IDIQ), while
others “used options or modifications to order the vast majority of the work contemplated
by the contract.” Id. Dynetics asserts that it faced a financial risk because “[i]f the
research Dynetics performed under the initial tasks in these contracts was unsuccessful,
the government could have declined to issue any further work under the contract without
incurring any additional liability to Dynetics.” Id.

        Defendant collectively characterizes these risks as business risks or economic
risks, none of which, it asserts, are the type of financial risk contemplated by the Treasury
regulation. Def.’s Resp. 23-25. In support of its position, defendant points to both the
relevant Treasury regulation, and the Federal Circuit’s interpretation thereof in Fairchild.

      As provided in the Treasury regulation governing qualified research, “[a]mounts
payable under any agreement that are contingent on the success of the research and thus
considered to be paid for the product or result of the research . . . are not treated as
funding.” Treas. Reg. § 1.41-4A(d)(1).

                                             35
       As the Federal Circuit has explained,

       [t]he inquiry turns on who bears the research costs upon failure, not on
       whether the researcher is likely to succeed in performing the project. When
       payment is contingent on performance, such as the successful research and
       development of a new product or process, the researcher [Dynetics] bears the
       risk of failure.

Fairchild, 71 F.3d at 873.

        It is clear that none of plaintiff’s arguments suggest a circumstance under which it
will not be paid for the results of unsuccessful research. As this is the only financial risk
considered by the Treasury regulation in determining whether expenses are funded, that
is the only risk relevant in this motion. Plaintiff’s assertions of any other risk are
irrelevant to the court’s resolution of this motion.

       H.     Termination Clauses

       Plaintiff also argues it was at risk from the FAR termination clauses incorporated
into each sample contract. Pl.’s Mot. 37. “In all cases, the government could terminate
the contract for convenience, and the government’s liability would be capped to work
done under the contract for convenience, and the government’s liability would be capped
to work done under the contract and certain unwinding costs.” Id. (citing FAR 52.249-1
to 52.249-7). Dynetics argues it was at risk because if the government terminated the
contract for convenience, it “would still be left with the costs and expenses arising from
developing the capabilities to do the full amount of work contemplated by the contract.”
Id.

        Although it argued otherwise, Dynetics was not put at financial risk by the terms
of any FAR termination clause. As an example, FAR 52.249-6 Termination Cost-
Reimbursement (Sept. 1996) is incorporated into the AF007 contract. Ex. 12, at DYN
965. Under this termination clause, a contractor is entitled to receive all reimbursable
costs, together with reasonable costs of settlement of the terminated work. FAR 52. 249-
6(h) (1)-(3). In addition, the contractor is entitled to receive a portion of the fee payable
under the contract, which in the case of a termination for convenience, is “equal to the
percentage of completion of work contemplated under the contract.” FAR 52. 249-
6(h)(4).

      Thus, if the government terminated a contract for convenience, the contractor
would receive all reimbursable costs for the work it had performed, together with a

                                             36
comparable portion of its fee. While it is true that Dynetics would not have the
opportunity to earn its full fee, the loss of an opportunity for profit is not the type of
financial risk contemplated in the Treasury regulation. See Treas. Reg. § 1.41-4A(d)(1).

       The court further observes that in Fairchild, the Federal Circuit held that the
contractor was put at financial risk under the terms of its contract where the government
had in fact terminated Fairchild’s contract for convenience, prior to the completion of the
contract. Fairchild, 71 F.3d at 871 (“Fairchild and the Air Force agreed to termination for
convenience terms,” after Congress cancelled funding for the program.). Yet, even
though the contract in Fairchild included a termination clause and the government
actually did terminate the contract, there was no discussion in the Fairchild case about the
contractor’s financial risk resulting from the termination clause. Thus, Dynetics’
assertions are without meaningful support.

       I.     Undefinitized Contracts

      The government initially issued three sample contracts as undefinitized contracts,
which Dynetics argues put it at risk. See Pl.’s Mot. 39-40 (AF007); 51 (AR005); 60
(BOE12). Because Dynetics did not explain how such a contract put it at risk, the court
asked Dynetics to provide supplemental briefing on this point. Order Supp. Br. 2.

       Dynetics offered several arguments in response. First, Dynetics asserts that an
undefinitized contract is incomplete, and may lack relevant provisions, “such as price,
terms of payment, and inspection and acceptance rights and obligations.” Pl.’s Supp. Br.
3. Dynetics did not, however, indicate that any of the sample contracts at issue in this
motion lacked these relevant provisions.

       Second, relying on case law, Dynetics asserts that an undefinitized contract may
be unenforceable and thereby leave it at risk of nonpayment. Id. at 3-4 (citing Trauma
Servs. Group Ltd. v. United States, 33 Fed. Cl. 426 (1995)). But, the agreement in
Trauma Services, on which Dynetics based its assertions, was a memorandum of
agreement (MOA), not a contract. Trauma Servs., 33 Fed. Cl. at 430-31. That a MOA
may be unenforceable is irrelevant to whether Dynetics was at risk here under either the
AF007 or BOE12 undefinitized contract.

      The government responds that Dynetics was not at risk under any of the three
sample contracts. For the AF007 contract, the undefinitized contract included FAR
52.216-07 Allowable Cost and Payment (Dec. 2002), Ex. 12, at DYN 964, which
provided that “[t]he Government will make payments to the Contractor when requested
as work progresses.” FAR 52.216-7(a)(1). Contrary to Dynetics’ assertion that

                                            37
undefinitized contracts may be incomplete, the AF007 included two pages of FAR
clauses. Ex. 12, at DYN 964-65.

      With respect to the BOE12 contract, defendant correctly pointed out that the
undefinitized contract provided for payment to Dynetics in the event of contract
termination. Def.’s Reply to Pl.’s Supp. Br. 6-7 (citing Ex. 39, at DYN 41532).

       In the event that a definitive subcontract is not executed because of the
       inability of the parties hereto to agree upon the provisions of a definitive
       subcontract, the Buyer, [Boeing], at its sole discretion, may terminate this
       letter contract in accordance with the provision entitled “Termination for
       Convenience,” and shall pay the Subcontractor [Dynetics] in accordance
       therewith subject to the limitations contained herein, but with no allowance
       for profit.

Ex. 39, at DYN 41532 ¶ 7. Dynetics’ only risk here was the possibility that it might not
earn a profit. Again, that is not the risk contemplated by the Treasury regulation. See
Treas. Reg. § 1.41-4A(d)(1).

        While the AR005 contract was an undefinitized contract initially, none of the
expenses for which Dynetics claims a tax credit were incurred under that undefinitized
contract. Dynetics claims expenses only for wages incurred under the cost-plus-fixed-fee
contract line items for engineering services included in the later definitized contract. See
Def.’s Mot. 27; Ex. 27, at DYN 58340. Those line items were not included in the
undefinitized contract. Ex. 26, at DYN 36189-90. As Dynetics’ expenses were incurred
under the definitized contract, it is under that contract that it must show it was at risk.
See Treas. Reg. § 1.41-4A(d)(1) (“Amounts payable under any agreement that are
contingent on the success of the research and thus considered to be paid for the product or
result of the research . . . are not treated as funding.”) (emphasis added). Dynetics has
failed to do so here.

       IV.    Discussion – Whether Dynetics Retained Substantial Rights in the Results
              of the Research

         Defendant argues that because Dynetics did not retain substantial rights in the
results of the research under the UAH01 and NT001 contracts, it may not take a tax credit
for its incurred expenses under either contract. Def.’s Mot. 40-42.

       As provided in the relevant Treasury regulation,

                                            38
       [i]f a taxpayer performing research for another person retains no substantial
       rights in research under the agreement providing for the research, the
       research is treated as fully funded for purposes of section 41(d)(4)(H), and
       no expenses paid or incurred by the taxpayer in performing the research are
       qualified research expenses.

Treas. Reg. § 1.41-4A(d)(2);9 see also Lockheed Martin Corp., 210 F.3d at 1374-75 (“If
the taxpayer does not have the right to use or exploit the results of the research, its
expenditures are not entitled to the tax credit . . . regardless [of] whether the taxpayer
receives some “incidental benefit” such as increased experience.”) (emphasis added).

       A.     UAH01 Contract

        Defendant makes two arguments in support of its position that Dynetics did not
retain substantial rights in the results of its research for the University. Def.’s Mot. 41.
First, defendant points to the plain language of the contract, under which it argues that
Dynetics assigned “all rights in the results of its work” to the University. Id. (citing Ex.
18, at DYN 1709). Defendant also argues that Dynetics’ work under the UAH01 contract
was a “work for hire,” thus Dynetics retained no rights in that work. Id. Defendant first
relies on paragraph 24 of the UAH01 contract.

       24. Patents.10 (a) [1st sentence] All rights, title, and interest in and to
       inventions or other intellectual property rights conceived or reduced to
       practice in the course of performance of the work called for by this Contract
       are hereby vested in the University. [2d sentence] The contractor agrees to
       promptly disclose to the University, in a format acceptable to the University,
9
       Further, “[a] taxpayer does not retain substantial rights in the research if the
taxpayer must pay for the right to use the results of the research,” Treas. Reg. § 1.41-
4A(d)(3). The question of payment for the right to use the results of the research is not
an issue in this matter.
10
       The “Construction Rules” included in the UAH01 contract provide that “[t]he
captions and headings in this Contract are for purposes of convenience and reference
only, and the words contained therein shall have no substantive effect and shall in no way
be held to explain, modify, or amplify the meaning of the sections and provisions of this
Contract to which they pertain.” Ex. 18, at 1711 ¶ 39(a). Further, “[t]he language in all
parts of this contract shall in all cases be simply construed according to its fair meaning
and not strictly for or against any party.” Ex. 18, at 1711 ¶ 39(d). Neither party
commented on the heading “Patents” in paragraph 24. According to the contract’s
Construction Rules, the court does not consider it when evaluating Dynetics’ rights.

                                            39
       any potentially patentable idea or concept conceived or reduced to practice
       in the course of performance of the work called for by this Contract.

Ex. 18, at DYN 1709 ¶ 24(a) (annotation added).

       Dynetics replies that while it may not have retained substantial rights in all its
work for the University, it retained substantial rights in certain work, specifically all
“non-patentable technology.” Pl.’s Mot. 72 (“Therefore, to the extent the research and
development activities undertaken in connection with the UAH contract result in products
or knowledge that is not patentable, rights to those products and solutions remain with
Dynetics.”). Dynetics points to Exhibit C to the UAH01 contract, the “NASA Grantee
New Technology Summary Report,” through which NASA requires any contractor, like
the University, or subcontractor, like Dynetics, to “report new technology” to it. Ex. 18,
at DYN 1705. Exhibit C provides that new technology “may be either patentable or non-
patentable,” and that NASA does not require the disclosure of “non-patentable new
technology.” Ex. 18, at DYN 1705.

        Dynetics asserts that its work under the UAH01 contract—solving equations and
developing simulations to describe the deep space environment—is not patentable. Pl.’s
Mot. 72 (citing In re Bilski, 545 F.3d 943 (Fed. Cir. 2008) aff’d, Bilski v. Kappos, 561
U.S. 593 (2010)). Patentable inventions include “new and useful process, machine,
manufacture, or composition of matter,” 35 U.S.C. § 101, none of which, argues
Dynetics, would include the products and solutions it developed under the UAH01
contract. Pl.’s Mot. 72. Given that the results of the research under the UAH01 contract
were non-patentable, and that NASA did not require the disclosure of non-patentable new
technology, Dynetics concludes that such technical products and solutions as it ultimately
developed fell outside the second sentence in paragraph 24, and thus it retains substantial
rights in that technology. Pl.’s Mot. 72.

       Defendant responds that Dynetics overlooks the first sentence of paragraph 24,
which “more broadly ‘vests in the University’ not just patentable ‘inventions’ but also
any ‘other intellectual property rights,’ such as the copyright in the computer code written
by Dynetics.” Def.’s Resp. 28. Dynetics offered no reply to this argument. See Pl.’s
Reply 19-20.

        The Copyright Act defines a “computer program” as “a set of statements or
instructions to be used directly or indirectly in a computer in order to bring about a
certain result.” 17 U.S.C. § 101. “A computer program is a form of literary work, and
thus is copyrightable.” Greenberg v. National Geographic Soc., 533 F.3d 1244, 1262 n.6

                                            40
(11th Cir. 2008).11 The owner of a copyright enjoys a number of exclusive rights under
the Copyright Act. See, e.g., Cambridge Univ. Press v. Patton, 769 F.3d 1232, 1242 n.5
(11th Cir. 2014) (citing 17 U.S.C. § 501(a)).

        Even if Dynetics is correct that the results of the research on the UAH01 contract
were non-patentable technology, under the first sentence of paragraph 24, any other
intellectual property rights in those results, like copyright protections, would vest in the
University.

        Dynetics bears the burden of showing it had substantial rights in the results of the
research. See Bubble Room, Inc., 159 F.3d at 561. In the face of paragraph 24, Dynetics
would have to show that the results of the research on the UAH01 contract fell entirely
outside the broad category of rights vested in the University—other intellectual property
rights conceived or reduced to practice in the course of performance of the work.
According to Dynetics’ own description of its work on the UAH01 contract—solving
equations and developing simulations to describe the deep space environment, Pl.’s Mot.
72—all its work fell within the protection of paragraph 24.

        Considering the plain text of the UAH01 contract, and the work Dynetics
performed for the University, Dynetics has not carried its burden to show that it retained
substantial rights in that work. The court finds that Dynetics did not retain substantial
rights in the results of the research under the UAH01 contract.

      As defendant has prevailed on its contractual argument, it is unnecessary to reach
defendant’s alternate work for hire argument.

       B.     NT001 Contract

       With regard to the NT001 contract, defendant asks this court to consider Dynetics’
work under only one task order, Task Order 169. See Def.’s Mot. 42 n.15; Def.’s Resp.
29. According to defendant, the government issued Dynetics approximately 260 task
orders under the NT001 contract, however, defendant believes the parties can use this

11
       Copyright issues are not assigned exclusively to the Federal Circuit. See 28
U.S.C. § 1295 (2012). “When the questions on appeal involve law and precedent on
subjects not exclusively assigned to the Federal Circuit, the court applies the law which
would be applied by the regional circuit.” Atari Games Corp. v. Nintendo of Am., Inc.,
897 F.2d 1572, 1575 (Fed. Cir. 1990). As this contract was performed in the state of
Alabama, which sits within the Eleventh Circuit, the court consults Eleventh Circuit law
on copyright issues.

                                             41
court’s resolution of the substantial rights question for Task Order 169 to resolve the
same question for the remaining task orders.12 Def.’s Mot. 42 n.15. Accordingly, the
court considers only the question of whether Dynetics retained substantial rights to the
results of the research performed under Task Order 169 on the NT001 contract, and
offers no opinion on whether Dynetics retained substantial rights to the results of the
research on any other task order issued under the NT001 contract.

        Defendant describes Dynetics’ work on the NT001 contract as “highly classified
intelligence research on foreign weapons systems.” Def.’s Resp. 29. In performing its
work on the NT001 contract, “Dynetics was required to comply with military security
requirements in accordance with DD Form 254, which classified the contract as ‘Top
Secret.”’ Def.’s Mot. 41; Ex. 34, at DYN 8125 item 1.

        The parties disagree on whether the security requirements in DD Form 254 had
any effect on Dynetics’ right to use the results of the research, including the allocation of
intellectual property rights between Dynetics and the government.

       1.     Contract Provisions

       a.     DD Form 254 Security Requirements for Intelligence Information

        The DD Form 254 is the Department of Defense Contract Security Classification
Specification, and is Attachment no. 2 to the NT001 contract. Ex. 34, at DYN 8125; Ex.
34, at 8089 (Section J List of Attachments). It is a two-page form, and in the case of the
NT001 contract, includes four additional, individually-typed “continuation sheets” that
include twenty-nine enumerated paragraphs providing further information about security
guidance and security requirements. Id. at DYN 8125-30. Further, paragraph 6 on
continuation sheet page 2, itself incorporates a separate two-page attachment, Attachment
no. 1, which includes an additional eleven enumerated paragraphs regarding the security
requirements for intelligence information. See id. at DYN 8127 ¶ 6, 8131-32.

12
       In its reply, Dynetics interpreted defendant’s argument as challenging whether
Dynetics retained substantial rights in the results of the research only under Task Order
169, but not for work under any other task order. See Pl.’s Reply 19. This is an
inaccurate characterization of defendant’s argument. Defendant clearly stated that it
limited its argument to Task Order 169 only “for the purpose of this motion.” Def.’s
Mot. 42 n.15.

                                             42
        As provided in DD Form 254, Dynetics had access to intelligence information that
was SCI (Special Compartmented Information13) and non-SCI (top secret). See id. at
DYN 8125 items 10(e)(1), (2). Patrick Keller, a Dynetics employee knowledgeable
about the NT001 contract, testified about the distinctions among intelligence information
classifications. See Keller dep. 58:6-59:15, Dec. 12, 2013, Ex. 64.

               [SCI] means that it has to be protected with much greater care than –
       if secret information is lost, it causes bad damage. . . . Secret, bad; top secret,
       really, really bad; SCI; exceptional, extreme, grave, bad, serious
       compromise. So you have the SCI caveat that means that it is more tightly
       controlled than just regular top secret information . . . .

Id. at 58:16-59:1.

       b.     Task Order 169

       Task Order 169 called for Dynetics to provide services in support of a “classified
foreign air-defense system” known internally as “Vorlon.” Def.’s Mot. 42. “The task
order employed Dynetics to prepare engineering drawings of the missile and to describe
the key physical and operational characteristics of certain sections of the missile in a
technical report.” Def’s Supp. Br. 7. According to Mr. Keller, Task Order 169 called for
Dynetics to perform an initial characterization of a foreign air defense system, which
involved analyzing hardware—a missile nose section and a control section. Keller Dep.
95:4-15, Dec. 12, 2013, Ex. 64.

       Review of the task order itself shows that the Statement of Work described two
tasks, which required Dynetics to conduct analyses, prepare engineering drawings in both
hardcopy and softcopy (software) formats, identify key characteristics of specified
sections of a missile, perform laboratory tests, and document its findings in a report. Ex.
35, at DYN 9925. Dynetics’ work on Task Order 169 required deliverables of
engineering drawings and a technical report. Id. at DYN 9926.

       2.     Discussion

       a.     Right to Use or Exploit the Results of the Research

13
       The DD Form 254 refers alternately to Sensitive Compartmented Information, Ex.
34, at DYN 8125 item 10(e)(1), and Special Compartmented Information, Ex. 34, at
DYN 8128 ¶ 16. The terms are used interchangeably.

                                               43
        Defendant argues that the intelligence information—either SCI or top secret—
Dynetics used in performing Task Order 169 permeated the results of that research, to the
point that the security requirements in the DD Form 254 prevented Dynetics from using
those results, just as the same security requirements prevented Dynetics from using the
intelligence information itself. See Def.’s Mot. 41-42; Def.’s Resp. 29 (“Because one
cannot segregate the results of Dynetics’ work on that task order from the ‘Top Secret’ or
‘SCI’ material that Dynetics was retained to characterize, Dynetics can have no right to
‘use or exploit the results of the research.”’); Def.’s Supp. Br. 8 (“[The DD Form 254]
provisions eliminate any right that Dynetics might otherwise possess to use or exploit the
results of its work on Task Order 169, because classified “intelligence information”
permeated such work.”).

       As defendant points out in its supplemental briefing, the DD Form 254 places a
number of limits on use of intelligence information. See id. at 7-8. A sampling of
security restrictions includes the following.

      Intelligence materials generated by your organization may be reproduced
      without written permission exclusively for this contract.

Ex. 34, at DYN 8131 ¶ 4.

      No authorization is granted to release intelligence material to any activity,
      employee, or other person not directly engaged in providing services under
      the contract unless specific written authorization for such release is received
      from DIA/MSIC. This prohibition precludes release without authority to
      another contractor (including a subcontractor), Government Agency, private
      individual, or organization.

Id. at DYN 8131 ¶ 8 (emphasis added).

      Upon completion of this contract, all materials provided to the contractor will
      be returned to the Government unless written exception is provided to the
      contractor. Materials generated by the contractor may be returned or
      destroyed as directed.

Id. at DYN 8128 ¶ 10 (emphasis added).

      All materials provided to the contractor under this contract are for the
      exclusive use of this contract.

                                            44
Id. at DYN 8128 ¶ 12.

      In the face of these significant security restrictions, Dynetics makes several
arguments that it nonetheless retained the right to use the results of the research on Task
Order 169. Pl.’s Reply 19. First, Dynetics points to “skills and advancements” it
developed while working on Task Order 169.

       [A]ny capabilities developed in the analysis of the Vorlon system, such as
       advancements in preparing engineering drawings or improving the method
       of identifying radio frequency, could be reused in subsequent work
       performed by Dynetics because those skills and advancements are not
       necessarily particular to the specific classified weapons system.

Id.

       The governing Treasury regulation provides that “[i]ncidental benefits to the
taxpayer from performance of the research (for example, increased experience in a field
of research) do not constitute substantial rights in the research.”). Treas. Reg. § 1.41-
4A(d)(2). It is unclear how the accumulation of “skills and advancements” would be
other than an “incidental benefit,” and Dynetics is silent on this point.

        Next, Dynetics asserts that it can “use its research results from Task Order 169 in
performing work for other intelligence agencies following authorization from MSIC.”
Pl.’s Reply 19 (emphasis added) (citing Ex. 34, at DYN 8130 ¶ 22); see also Pl.’s Supp.
Br. 11 (“Dynetics retains the rights in the products it develops (including those products
with intelligence information) for purposes of performing work pursuant to contracts with
MSIC or any other government agency (or private company) provided that MSIC agrees
to the transfer of such information.”) (citing Ex. 34, at DYN 8132 ¶ 11) (emphasis
added).

        Dynetics does not address the obvious question of how it could have substantial
rights in the results of the research, if it needed the government’s “authorization” to use
those results. Nor do the particular DD Form 254 paragraphs cited by Dynetics in its
assertion of a right to use—paragraphs 11 and 22—provide it with support.

       The contractor will not reproduce any SCI related material without written
       permission from the [Contract Monitor]/[Special Security Officer]. When
       such permission has been granted, the contractor will control and account for
       such reproduction in the same manner as pertains to originals.

                                             45
Ex. 34, at 8130 ¶ 22. Dynetics offers no explanation how, if it did receive permission to
reproduce “SCI related material,” it could “use its research results from Task Order 169
in performing work for other intelligence agencies,” as it asserts it can, Pl.’s Reply 19,
and still comply with the requirement in paragraph 22 that it “control and account for
such reproduction in the same manner as pertains to originals.” If Dynetics performed
work for another intelligence agency, it would cease to have control over that work, and
would be unable to comply with the security requirement in paragraph 22.

      DD Form 254 attachment no. 1 paragraph 11 governs intelligence material, SCI
and non-SCI, and is included below.

               Upon expiration of the contract, all substantive collateral intelligence
       materials released to your company will be returned to the issuing agency for
       disposition. In the event the contract is extended or a new similar contract
       requiring the released data is initiated, it is the responsibility of the contract
       monitor to effect an extension or document transfer with the [Defense
       Intelligence Agency/Missile and Space Intelligence Center] [Special
       Security Officer].

Ex. 34, at DYN 8132 attach no. 1 ¶ 11 (emphasis added). Paragraph 11 refers to either an
extension of the existing contract or the initiation of a new similar contract with MSIC.
Nothing in paragraph 11 could be read to suggest that Dynetics had the right to use the
results of the research, containing intelligence material, in performing work for “any
other government agency (or private company),” as Dynetics asserts it could. See Pl.’s
Supp. Br. 11.

       In its supplemental briefing, Dynetics asserts that the security requirements in
Attachment 1 do not preclude it from using “the models, analyses, software
enhancements, or testing components developed under the NT001 contract in future
contracts,” as the intelligence material it used or generated “in many cases is severable
from the models and systems developed under the contract.” Id. Dynetics’ argument was
not specific to Task Order 169, but rather spoke generally about its work under the
NT001 contract. Id.

      Defendant responds that Dynetics produced no “models, analyses, software
enhancements, or testing components” under Task Order 169, and thus its assertion of
severability is irrelevant to this motion.14 See Def.’s Reply to Pl.’s Supp. Br. 13.

14
       Defendant acknowledges that “the degree of integration of Dynetics’ work product
with the intelligence information it concerned” will vary among the remaining task

                                              46
       Finally, Dynetics argues that in Lockheed Martin, the Federal Circuit rejected the
position that security classifications, like those found in DD Form 254, can deprive a
contractor of substantial rights in the results of the research. See Pl.’s Reply to Def.’s
Supp. Br. 5 (citing Lockheed Martin, 210 F.3d at 1375). Dynetics is mistaken in its
understanding of the Federal Circuit’s holding.

        The government argued that Lockheed Martin lacked substantial rights in its
research because, inter alia, “top secret security provisions and export control laws . . .
restricted sales of products resulting from Lockheed Martin’s research.” Lockheed
Martin, 210 F.3d at 1373. The trial court found that Lockheed Martin lacked substantial
rights in the results of the research for a number of reasons, including that it “had to seek
prior approval from the State Department before entering into licensing agreements or
discussing with other customers technical information not in the public domain,” and that
“particular statutory provisions restricted Lockheed Martin’s exports.” Lockheed Martin,
210 F.3d at 1370.

        On appeal, the Federal Circuit found that the export control laws and security
classifications upon which the trial court based its decision were outside the research
agreements, and thus irrelevant to the substantial rights determination. Lockheed Martin,
210 F.3d at 1375-76. The Federal Circuit was clear that a determination of whether the
contractor retained substantial rights “must be made by reference to the [relevant]
contracts alone.” Lockheed Martin, 210 F.3d at 1376; see also Treas. Reg. § 1.41-
4A(d)(2) (“If a taxpayer performing research for another person retains no substantial
rights in research under the agreement providing for the research, the research is treated
as fully funded . . . .”) (emphasis added).

        As discussed supra Part III.B.1.a, the DD Form 254 is clearly part of the NT001
contract. As the decision in Lockheed Martin had nothing to do with the security
classifications themselves, this decision provides Dynetics with no support.

        Dynetics has the burden to show that it has substantial rights in its research.
Although Dynetics has offered a number of arguments in furtherance of its claim that it
had the requisite substantial rights to the results of the research, the arguments are
unpersuasive. The security requirements simply leave Dynetics with no right to use
results that contained intelligence information, without government authorization. See,
e.g., Ex. 34, at DYN 8130 ¶ 22); Id. at DYN 8132 ¶ 11). Even with authorization,
Dynetics would not have had the right to freely transfer results with intelligence

orders, and that plaintiff’s severability argument could be relevant in considering
substantial right under other task orders. Def.’s Reply to Pl.’s Supp. Br. 13.

                                             47
information. See e.g., Ex. 34, at 8130 ¶ 22. Although Dynetics advanced a severability
argument, it is highly unlikely that this was feasible for Task Order 169 considering the
work required.

       b.     Intellectual Property Rights

        Dynetics also argues that the DD Form 254 is unrelated to the allocation between
it and the government of the intellectual property rights in the produced research results.
See Pl.’s Mot. 69. In its supplemental briefing, Dynetics urged that it retained intellectual
property rights in its research under FAR 52.227-11 Patent Rights—Retention by the
Contractor (June 1997), which was incorporated in the NT001 contract by reference.
Pl.’s Reply to Def.’s Supp. Br. 5 n.4 (citing Ex. 34, at DYN 8098).

        Dynetics is correct that the NT001 contract does incorporate FAR 52.227-11. That
provision in relevant part provides that “[t]he Contractor may retain the entire right, title,
and interest throughout the world to each subject invention subject to the provisions of
this clause . . . .” FAR 52.227-11(b). An “invention” is defined as “any invention or
discovery which is or may be patentable,” FAR 52.227-11(a)(1), and a “subject
invention” is defined as “any invention of the contractor conceived or first actually
reduced to practice in the performance of work under this contract . . . ,” FAR 52.227-
11(a)(6).

       Dynetics avers that the language of FAR 52.227-11 is “almost identical” to the
language in the patent rights clause incorporated in each contract in Lockheed Martin,
“which the Federal Circuit found conveyed substantial rights to the contractor.” Pl.’s
Reply to Def.’s Supp. Br. 5 n.4 (citing Lockheed Martin, 210 F.3d at 1377-78).

        Again, Dynetics is correct. The patent rights clause in Lockheed Martin stated
that “[t]he Contractor may retain the entire right, title, and interest throughout the world
or any country thereof in and to each Subject Invention disclosed [ ], subject to the rights
obtained by the Government in paragraph (c) of this clause,” Lockheed Martin, 210 F.3d
at 1378, and this language is almost identical to FAR 52.227-11, as stated above. The
Federal Circuit characterized this rights clause as giving Lockheed Martin the “the right
to make and use patented inventions or to exclude unauthorized third parties from
making, using, or selling such inventions.” Id. at 1377.

        That said, while FAR 52.227-11 does provide that Dynetics retains patent rights, it
does not vest—as Dynetics asserts—all “intellectual property rights” in Dynetics; rather
it provides rights only to “subject inventions.” Dynetics makes no argument that the
results of the research under Task Order 169—engineering drawings and a technical

                                             48
report, Ex. 35, at DYN 9926—are patentable. And unless the research results for which
it claims it has substantial rights are patentable, the rights provided by FAR 52.227-11 are
irrelevant to the consideration of substantial rights in those research results.

       For all the reasons stated, Dynetics has not carried its burden to show that it
retained substantial rights in its work on Task Order 169 under the NT001 contract. The
court finds that Dynetics did not retain substantial rights in the results of the research on
Task Order 169 under the NT001 contract.

V.     Conclusion

        For all the reasons discussed herein, the court GRANTS defendant’s motion for
partial summary judgment on the funded research question, and DENIES plaintiff’s
cross-motion for partial summary judgment on the funded research question.

      The parties are directed to file a joint status report by Tuesday, June 30, 2015,
informing the court how they would like to proceed in this matter.

       IT IS SO ORDERED.

                                                  s/ Patricia E. Campbell-Smith
                                                  PATRICIA E. CAMPBELL-SMITH
                                                  Chief Judge

                                             49