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January 30, 2013

2012 Court Decisions Could Impact the Future of Federal Contracting

The U.S. government is the biggest customer for some private companies, which makes contracting a huge, booming business across the country. But the scrutiny over these contracts has intensified as the federal government aims to weed out waste and as companies question the government’s ability to be fair in executing such arrangements. At an _ Public Contract Law Section panel, experts discussed five court decisions that could change the government contract landscape for the future.

In a 5-4 decision, the U.S. Supreme Court ruled in favor of the Ramah Navajo Chapter in Salazar v. Ramah Navajo Chapter. The court decided that the government is indebted to fulfill its financial agreement to the tribe, regardless of whether Congress has designated enough funds for Department of the Interior to do so. The majority opinion, written by Supreme Court Justice Sonia Sotomayor, stated “the government’s promise to pay was binding” and indicated that not paying enough funds could become a slippery slope when building these contracts in the future.

“If the government could be trusted to fulfill its promise to pay only when more pressing fiscal needs did not arise, would-be contractors would bargain warily — if at all — and only at a premium large enough to account for the risk of nonpayment,” the court stated. “In short, contracting would become more cumbersome and expensive for the government, and willing partners more scarce.”

“Essentially when the government has a lump sum appropriation, each member of the contract is obligated to be paid,” added Karen Manos, partner in Gibson Dunn’s Washington, D.C., office and co-chair of the firm’s Government and Commercial Contracts Practice Group. “I think the case has longer-term implications and hopefully leads to a change in the circuit court’s view of things.” One potential repercussion of Salazar v. Ramah Navajo Chapter that Manos referenced was sequestration, which triggers automatic spending cuts and was originally included in the Budget Control Act of 2011.

Other crucial cases involved defense contractors and their dealings with different branches of the military. In three cases, the government or the defense contractor (Boeing Co. v. United States, Hooper v. Lockheed Martin and SA Tech v. United States) objected to various terms of the contract that had been breached, which led to judgments concerning the False Claims Act, corrective action and the definition of “jurisdiction.”

Many of the cases revolved around the issue of good faith and fair dealings between the contractor and the government entity. The party suing often alleged that the other party knowingly engaged in misconduct or fraud. As experts cautioned, these types of cases, and the increasing frequency of them, could discourage transactions going forward.

Robert Sherry, a lawyer who represents technology and aerospace/defense clients for K&L Gates, identified Hooper v. Lockheed as “yet another disturbing extension of the False Claims Act” that “on first impression will have a major impact on defense contractors.” According to the Department of Justice, the False Claims Act says that any person who knowingly presents a false or fraudulent claim to the government for payment is liable for damages.

“It’s time for the federal circuit to step back and understand if they continue to hammer away at the contracting community, people will stop contracting with the government,” said Elizabeth Ferrell, partner in the Washington, D.C., office of McKenna Long & Aldridge LLP who counsels clients on government contract issues.

The experts also discussed a dispute among three timber sale contracts on public lands. In Scott Timber Co. v. United States, the Court of Appeals for the Federal Circuit found that the United States Forest Service “could not have breached the covenant of good faith and fair dealing by its pre-award conduct because the covenant did not exist until the contract was signed.”

Learn More About:  Government Regulations