The Court of Federal Claims recently issued an opinion in the long running litigation between Sikorsky Aircraft Corporation (“Sikorsky”) and the United States regarding Sikorsky’s cost accounting practices. In this new decision, the court rejected a government attempt to pursue a new legal theory to challenge Sikorsky’s compliance with the Cost Accounting Standard (“CAS”), which contradicted a legal theory the government had pursued in an earlier round of litigation. During the first round of litigation, the government had claimed that Sikorsky’s accounting practices violated a specific CAS – CAS 418. In the second round, the government demanded payment from Sikorsky on the theory that those same accounting practices were actually compliant and therefore a subsequent change triggered a violation of a different CAS regulation. This new legal theory was inconsistent with the government’s original claim. In rejecting this aggressive tactic, the court indicated its displeasure at the government’s legal arguments, and the decision may help contractors in future attempts to curtail the government’s appetite for aggressive CAS litigation tactics.
In the previous litigation, Sikorsky challenged the corporate administrative contracting officer’s (CACO) final decision that Sikorsky’s accounting practices from 1999 to 2005 were noncompliant with CAS. The government counterclaimed, alleging that Sikorsky violated CAS 418 and demanded $80 million allegedly owed by Sikorsky for the violation.
CAS 418 concerns the allocation of direct and indirect costs, including, as relevant for these cases, the allocation of materiel overhead costs. Allocation of materiel overhead costs involves the mandatory exclusion of value assigned to government furnished materiel, which Sikorsky used along with purchased materiel to manufacture and assemble aircraft and spare parts. Sikorsky sought to mitigate the distortion of this government furnished materiel in the allocation of materiel overhead costs to contracts with the government and commercial customers. Sikorsky changed its accounting practices regarding the allocation of material overhead costs in 1998 to better account for this distortion and received approval of its changes from the CACO.
In 2004, a government audit reported that Sikorsky’s revised accounting practice was potentially noncompliant with CAS 418. While Sikorsky did not agree with the audit’s conclusion, in 2006, it again changed its allocation method for materiel overhead costs. A year later, a new CACO was assigned to Sikorsky. After becoming aware of the 2004 audit, the CACO issued a final decision that Sikorsky was not compliant with CAS 418 from 1999 through 2005 and asserted a claim of $80 million against Sikorsky. In this final decision, the CACO stated that Sikorsky’s 2006 change in accounting practice was compliant with CAS 418.
After a trial on the merits, in March 2013 the court sided with Sikorsky and found that the government failed to establish that Sikorsky’s accounting practice from 1999 to 2005 violated CAS 418. In December 2014, the Federal Circuit affirmed on the merits.
While the above litigation was pending, a new CACO was assigned and issued a further final decision, this time related to Sikorsky’s newest accounting practices related to materiel overhead costs (from 2006 and thereafter). This decision, issued on December 21, 2011, asserted an alternative claim against Sikorsky: that if Sikorsky’s accounting practices from 1999 to 2005 were found compliant, then its 2006 change was a unilateral change which demanded $34 million paid to the government, triggered by CAS 201-4. By issuing this “alternative” final decision, the CACO essentially demanded payment by concluding that the practices from 1999 to 2005 were compliant.
Sikorsky again challenged this final decision, and the government again counterclaimed, seeking the $34 million from the CACO’s final decision. Sikorsky moved for judgment on the pleadings that the government’s claim was precluded by the prior suit. The parties agreed that the parties were identical and the earlier judgment was on the merits but differed with respect to whether the new claim was based on “the same set of transactional facts” as the first. The government argued that its claim was based on a different theory of recovery (CAS 201-4, rather than CAS 418). However, the court rejected the government’s argument on the basis that claim preclusion is not based on legal theories but rather the underlying facts of the claim. Importantly, the CACO admitted in his final decision that the new claim was an alternative to the earlier claim and he cited identical facts to support his decision; therefore, it was clear that the government was precluded from bringing the claim.
The court also chastised the government for arguing that the CACO’s delay in issuing the alternative claim was a reason for finding no preclusion. The court reminded the government that the CACO is a government employee and would not allow the government to hide behind its own delay. In the end, the court granted Sikorsky’s motion and awarded it costs.
It is unusual that the government would litigate two opposing positions at the same time over the same set of facts, particularly given that the same attorneys represented the government in both cases. The court’s opinion may dampen the government’s aggressive stance on CAS questions and foster a more moderated approach to issues of CAS compliance.