United States: The Federal Circuit Addresses Interesting Damages Issues in Its Second SUFI Network Opinion

Last Friday, the Federal Circuit issued another decision in the relatively long-running saga of the SUFI Network Services, Inc. v. U.S. litigation, which relates to a telephone network installed by SUFI Network for guests in Air Force lodging facilities in Germany. The decision is down in the weeds of several damages law issues, but it appears to break some new ground that may be helpful for other contractors pursuing damages claims against the Government.

By way of necessary background, a 2004 decision by the ASBCA established that the Air Force Nonappropriated Funds Purchasing Office materially breached a contract by allowing/facilitating service members' attempts to avoid SUFI Network's rates (e.g., by using calling cards), resulting in a partial settlement agreement under which the phone network became the Air Force's property. That partial settlement left open possibilities for litigating lost profits and other damages claims. The ASBCA then the Court of Federal Claims had issued rulings differing with respect to the damages amounts; last May, the Federal Circuit vacated "much of" the Court of Federal Claims' "lost profits" decision. The lost profits claims have been the subject of a subsequent ASBCA decision on remand. While we await further review of the recent ASBCA decision, the Federal Circuit's decision from last week addressed SUFI Network's claims for attorneys fees and expenses related to its pursuit of lost profits, as well as the extent to which a contractor litigating a non-CDA claim can recover lost profits and overhead related to pursuing damages claims. The Federal Circuit came down on the contractor's side on most of these issues.

The Federal Circuit's opinion addressed five different legal questions. The issues of "interest" on the awarded attorneys fees and the "standard rates" awarded (sections III and IV of the opinion, respectively) appear to apply relatively straight-forward legal rules and do not merit comment. The court's rulings regarding "exhaustion" of claims, ability to pursue attorneys fees, and whether the contractor could be awarded an amount to compensate it for overhead and lost profits related to attorneys fees paid to pursue its expectancy claims merit discussion.

With respect to exhaustion, the contract's disputes clause required the contractor to pursue its claim at the ASBCA after obtaining a decision from the contracting officer. After submission of the claim to the CO, no decision was issued within six months. The Federal Circuit "affirm[ed] the trial court['s decision] . . . that the contracting officer's delay rendered the contractual remedy inadequate and unavailable," excusing the plaintiff from the exhaustion requirement. Contractors are frequently required to wait long periods for COs to resolve claims; the Federal Circuit's ruling that a six-month delay in receiving a decision rendered the contractual remedy under the disputes clause "inadequate and unavailable" should give contractors confidence to initiate litigation regarding claims to which COs fail to respond in a timely manner.

The second issue meriting discussion in the recent SUFI Network decision concerns a plaintiff's entitlement to attorneys fees "incurred in negotiating its breach claims with the contracting officer." The trial court believed the fees were recoverable under the FAR as contract administration costs, but because the nonappropriated funds contract wasn't subject to the FAR, the trial court "grounded its conclusion in common law, finding that SUFI Network's attorney fees are recoverable as a foreseeable consequence of the government's breach." The Federal Circuit affirmed that ruling, asserting that such damages are appropriate "to place the wronged party in the position it would have been in had the contract been fully performed."

To support its ruling that the "American rule" ("each party in a lawsuit ordinarily shall bear its own attorney's fees") does not apply, the court cited its 1997 ruling in Massachusetts Bay Transportation Authority v. US. That case did not involve a claim "for attorney fees in an action against the United States, but for damages for breach of a contract to obtain insurance"—and the court made clear that "litigation and settlement expenditures" would only be compensable "to the extent they would have been covered by the insurance endorsements and thus would not have been incurred" by the plaintiff. The Federal Circuit does not explain how that relatively narrow ruling abrogates the general American Rule with respect to attorneys fees associated with negotiating with the government after the dispute arose but before the claim was filed. Instead, it asserts that "the government does not dispute that pre-litigation attorney fees under a claim-preparation provision like the one here can be compensable under common law principles." This ruling should be of substantial interest to contractors expending time and money trying to negotiate claims with contracting officers.

Finally, the Federal Circuit reversed the trial court's ruling that SUFI Network could not recover "overhead costs and lost profits it incurred pursuing its claim for attorney fees." The appeals court held that, although the FAR does not apply to this claim, the general proposition that common-law "damages for breach of contract should place the wronged party in as good a position as it would have been had the breaching party fully performed" allows for such a recovery. Neither of the cases cited by the court—Massachusetts Bay (discussed above) and a "spent nuclear fuels" case (Energy NW)—involved a common-law recovery of overhead costs or lost profits incurred while pursuing an attorneys fee award. Again, Government contractors should be interested in these additional potential recoveries in disputes with the Government.

Tags: ASBCA, Attorneys Fees, CFC, Federal Circuit, Lost Profits

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