Court Opinion

ID: 9495331
Source: CourtListenerOpinion
Date Created: 2023-08-05 16:00:05.199883+00
Date Added: 2024-06-11T17:56:56.793695
License: Public Domain

BOGGS, Circuit Judge,
dissenting.
I respectfully dissent from the court’s restrictive reading of the HVIC and its resultant holding that the Government can sue Boeing under the FCA to recover damages for Aircraft 89-0165.
As the court admits, the HVIC “limits contractor liability for high-value items in fairly broad terms." Majority Op. at 648 (emphasis added). The plain language of the HVIC states that, with limited exceptions that the parties agree are not applicable to the present case, “the Contractor shall not be liable for loss of or damage to property of the Government ... that (1) occurs after Government acceptance of the supplies delivered under this contract and (2) results from any defects or deficiencies in the supplies.” 48 C.F.R. § 52.246-24. Put most simply, this case is about the Government trying to do exactly what the plain and obvious wording of its contractual term says it will not do: recover from “the Contractor” for the “loss of or damage to property of the Government.”
The court’s holding — that the Government can seek under the FCA exactly what it has contracted through the HVIC not to — flows in large part from the inherent tension the court sees between the FCA and the HVIC. The court states well the history and purpose of each — the FCA was adopted to combat fraud perpetrated on the Government by its contractors, and the HVIC is included as a self-insurance provision in certain Government procurement contracts to limit the insurance that contractors must acquire (and the resultant costs those contractors pass on to the Government). Majority Op. at 641-42. The court then explains that if the HVIC is given a natural reading, it will conflict with the goals of the FCA. Majority Op. at 645.1
However, the court unnecessarily complicates the case. Contrary to the court’s reading, the FCA and HVIC can easily be *650read in harmony. The HVIC does not overwrite or preempt the FCA by relieving contractors of liability for fraud. The FCA is still applicable to the contractors; the only difference made by the HVIC is that the Government has agreed that it will not hold the contractors liable under any theory for the value of the helicopter. Accordingly, the Government can sue the contractors under the FCA and seek a finding of liability for fraud; the Government merely can not seek damages for the value of the equipment. The other penalties under the FCA are still applicable, and if the Government feels that it has been defrauded, it may debar Boeing from Government contracts. In short, the better reading of the HVIC is as an assumption of risk clause; the Government has contractually agreed to assume the risk of the loss of the helicopter, and while legal means remain open to the Government against Boeing (including that pursuant to the FCA), the Government can not seek recompense for the value of the equipment.2
There is support in both the wording and purpose of the HVIC for enforcing a natural reading of the contractual clause — • that the Government has contracted away its right to seek property damages from suppliers of high-value items.
First, the wording of the HVIC supports the proposition that it was intended in the usual case to protect contractors from Government actions utilizing a fraud theory. Pursuant to it, contractors are not liable for any damages for the loss of a high-value item caused by a product defect, unless one of the few listed exceptions applies. As the court points out, one of those exceptions is for “willful misconduct or lack of good faith” on the part of managerial personnel. Majority Op. at 643 (citing FAR § 52.246-24(b)). Though not using the word “fraud,” willful misconduct and a lack of good faith fairly describe fraud. Therefore, the HVIC expressly exempts from protection losses due to fraud on the part of managerial personnel. The negative pregnant, therefore, would be that the HVIC does protect contractors from losses due to non-managerial fraud (which the parties have stipulated to be the extent of the fraud, if any, in the present case).
Second, the purpose of the clause supports the proposition that it was intended to provide protection no matter the legal theory. In order to explain why, however, I provide a slightly broader history of the HVIC.
As the district court in this case explained, the clause represents a longstanding Department of Defense (DOD) practice of self-insuring for damage to high-value items. See Roby I, 73 F.Supp.2d at 908-09. At first it was just a practice, under which the DOD would not hold manufacturers liable for the loss of *651this type of equipment, regardless of whether the DOD found any fault, negligence, or breach of warranty to have occurred on the part of the manufacturer. Id. at 909. Then, in the 1960s, the landing gear on an airplane purchased by the United States military and resold to the Australian Navy failed, resulting in the destruction of the plane. The Australian government sued the manufacturer, seeking tort, contract, and products liability damages. Ibid. Referring to the longstanding practice of the Government self-insuring against the loss of military equipment, a California district court found that the United States Navy could have been estopped from pursuing any claim based on the loss of the aircraft, because the airplane industry was aware of and relied upon this practice. See Australia v. Lockheed Aircraft Corp. & Menasco Mfg. Co., No. 69-1623-WPG (C.D.Cal. Jan. 10, 1972). Specifically, the court found that the self-insurance practice had two central purposes: (1) to encourage manufacturers not to obtain liability insurance, the cost of which would be passed on to the Government; and (2) to encourage the manufacturers to cooperate fully in investigating the cause of equipment failures. Id. at 2-3.
As the district court in this case pointed out, around this time, the United States Commission on Government Procurement issued a report stating similarly, that defense contractors had long “[understood that the general practice of the government in military contracting was to accept the risk for loss or damage.... ” Roby I, 73 F.Supp.2d at 909. Still, the Menasco case shook the faith of Government contractors in the protection offered by the unwritten policy. In response, in 1971, the DOD issued Defense Procurement Circular 86, which, as the court notes, put in writing this limited liability. Majority Op. at 642 n. 2.
The original 1971 version of the DOD’s self-insurance policy stated that the clause did not apply “when the defects or deficiencies in such supplies ... resulted from fraud or gross negligence as amounts to fraud, on the part of any personnel of the Contractor.” DPC 86 at 4 (emphasis added). However, as the court notes, defense industry representatives warned that this would defeat the purpose of the clause, and when the clause was reissued in 1974, the phrase had been removed. Majority Op. at 643 n. 4. It was replaced with a more limited exception, which — much like the one in the current HVIC — excluded only “willful misconduct or lack of good faith on the part of any of the Contractor’s directors or officers, ... managers, superintendents, or other equivalent representatives. ...” ASPR 7-104.45 (July 1, 1974).
Importantly, the Government made this change expressly recognizing its effect. In a memorandum discussing proposed revisions to the HVIC, the Armed Services Procurement Regulations Committee, which promulgated the HVIC, explained that the removal of the original fraud provision would “eliminate contractor’s [sic] responsibility for damage to Government Property resulting from defective items and caused by the fraud or gross negligence as amounts to fraud of any personnel of the contractor.” J.A. at 652 (January 14, 1972). In 1984, the HVIC regulation relevant to this case became effective and provides substantially the same protection to military contractors providing high-value items. See 48 C.F.R. § 52.246-24.
From its history, it is clear that the DOD’s self-insurance policy was intended to preclude liability for the loss of certain Government equipment — even when such loss was the result of non-managerial fraud — so that contractors would not purchase liability insurance, which otherwise *652would be costly and would be a cost passed on to the Government. The plain language of the HVIC at issue in the present case conforms to that purpose. However, the court’s decision today does not; under it, contractors will have to insure against potential FCA liability for treble damages for the loss of high-value items resulting from actions that might be held to be fraudulent on the part of any personnel. Presumably, this cost will be passed on to the Government.
In sum, the court today holds that the HVIC does not apply in a situation wherein its plain terms and historical purpose seem to suggest it does apply — a contractor being held liable to reimburse the Government for the loss of a high-value item. Now, the Government argues that this case is not about recovering the amount lost when the helicopter was destroyed, but is instead about holding Boeing responsible for fraud. However, if the Government were really only concerned about fraud, it could seek the other penalties possible under the FCA or debar Boeing from participation in future Government contracts. Instead, the Government seeks trebled payment for the helicopter.
As explained above, if this court had held the HVIC applicable to Government actions for reimbursement under the FCA, it would not have been overriding or preempting the FCA. It would, instead, merely have been upholding the obvious coverage of a standard assumption of risk clause, under which the Government agreed not to exercise certain rights it would otherwise have in exchange for a benefit. This court would not have been holding that the FCA can not be relied upon by the Government; it would merely have been saying that the Government, in accordance with the express language and historical purpose of the HVIC, can not seek compensation for the loss of the helicopter under any theory, including under the FCA. Because the court does not so hold, I must respectfully dissent.

. I note that the court mentions in passing the district court's reading of the HVIC, which would alleviate any perceived tension between the HVIC and the FCA by limiting the HVIC's effect to only contractual remedies; in this reading, the HVIC would be completely inapplicable to the Government’s statutory remedy under the FCA. Majority Op. at 642 (citing Roby I, 73 F.Supp.2d at 910). To the extent that the court relies on this distinction, it appears incorrect. First, while the word contractual is used to modify the remedies limited by the HVIC in its enabling regulation, that modifier does not appear in the form contract language set out in the regulations, 48 C.F.R. § 52.246-24, or in the parties’ contract (which incorporated the form language). Therefore, the clause as it appears in the parties’ contract facially covers all remedies. Second, the word contractual as used in the enabling regulation for the HVIC is open to interpretation. In addition to the definition the district court gave it, that its protection only applies to contract remedies the Government might have against Boeing, the use of the word contractual might merely be shorthand for any remedies that come out of the relationship embodied in the contract. Indeed this broader reading is more in line with the history of the HVIC. For example, in the case that prompted the Government to turn its unwritten practice of self-insurance into a formal rule, Australia v. Lockheed Aircraft Corp. & Menasco Mfg. Co., No. 69-1623-WPG (C.D.Cal. Jan. 10, 1972), the practice was discussed as a defense to contract, products liability, and negligence claims. Obviously neither negligence nor products liability claims are contract remedies in the narrow sense; they do not arise from a contract, just as a fraud claim does not. However, they can all arise out of a relationship between the parties that is based in a contract.

. Contrary to the court’s contention, the argument that the Government can contract away part of its rights under the FCA is supported by the recent Fourth Circuit decision in United States v. Bankers Insurance Co., 245 F.3d 315 (4th Cir.2001). In that case, the Government was held to an arbitration agreement contained in a contract it had signed when the Government sought instead to bring an FCA action in court against the other party to the contract. The court tries to distinguish Bankers Insurance by noting that the contract at issue in that case permitted the Government the unfettered right to sue under the FCA after it engaged in the required arbitration. Majority Op. at 645. Nevertheless, the reasoning of Bankers Insurance still applies to the case at hand: "[T]he Government has no special right to ignore its contract responsibilities. The Government should comply with its contract obligations, and it cannot avoid them merely by invoking a statutory civil claim, such as one contemplated under the FCA.” Bankers Insurance, 245 F.3d at 324.