Free Sur-Reply - District Court of Federal Claims - federal

Case 1:01-cv-00459-GWM

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS ____________________________________ ) INTERNATIONAL DATA PRODUCTS ) CORP., ) ) Plaintiff, ) ) v. ) No. 01-459C ) (Judge George W. Miller) THE UNITED STATES, ) ) Defendant. ) ____________________________________) DEFENDANT'S SUR-REPLY IN SUPPORT OF ITS RESPONSES TO PLAINTIFF'S PROPOSED CONCLUSIONS OF LAW Pursuant to the Court's February 6, 2006 order, defendant, the United States, respectfully submits this sur-reply in response to plaintiff International Data Products Corporation's ("IDP's) February 14, 2006 reply to defendant's responses to IDP's proposed conclusions of law. IDP's reply confirms that no theory of damages supports its claim for the costs that it allegedly incurred to provide warranty services to the Government after the Desktop V contract was terminated on October 8, 1999. In its reply, IDP offers the Court a smorgsabord of conflicting theories of damages. As shown below, none of these theories fit the facts of this case. Before addressing IDP's various theories of damages, it bears noting that the Court has never ruled that IDP is entitled to recover damages for performing the post-termination warranty services. The Court's March 28, 2005 order that granted IDP summary judgment merely held that "IDP was not obligated to continue to provide warranty and upgrade services under the Desktop V contract." International Data Products Corp. v. United States, 64 Fed. Cl. 642, 651 (2005) ("IDP I"). The Court's holding that IDP was not required to provide the warranty services does not mean that IDP is entitled to recover from the Government the costs of performing the warranty services. IDP already received payment in full from the Government for the warranty services as part of the unit prices that the Government paid for equipment sold

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pursuant to the Desktop V contract. Compensating IDP a second time for its costs of providing warranty services would grant IDP a windfall. "[T]he non-breaching party is not entitled, through the award of damages, to achieve a position superior to the one it would reasonably have occupied had the breach not occurred." LaSalle Talman Bank F.S.B. v. United States, 317 F.3d 1363, 1371 (Fed. Cir. 2003). 1. IDP Is Not Entitled To Recover Expectation Damages For Warranty Costs That It Expected To Cover Through The Unit Prices Of Equipment Sold

IDP leads off with its contention that it is entitled to expectation damages because it seeks the "`benefits [it] expected to receive'" had a breach not occurred. Pl. Reply 3 (quoting Glendale Fed. Bank, FSB v. United States, 239 F.3d 1374, 1380 (Fed. Cir. 2001)). IDP asserts that it "did not receive the benefit of not needing to perform" the warranty services. Pl. Reply 2. IDP also asserts that the "breach" committed by the Government was requiring IDP to perform the warranty services: "if the Government had performed its contract, the contractor would not have been required to do the work." Id. 4. Expectation damages have no application to this case. The Restatement (Second) of Contracts states that a contracting party's expectation interest is intended to protect "the expectation that the injured party had when he made the contract." Restatement (Second) of Contracts § 344(a). The only expectation interest that IDP could have reasonably held when it entered the Desktop V contract was that the Government would place at least the minimum order set by the contract, and would pay IDP for the equipment that the Government ordered. The Government fully performed its contractual duties by ordering more then 350 times the contract minimum, and by paying IDP for all of the equipment ordered by the Government. IDP I, 64 Fed. Cl. at 644. IDP asserts that it did not expect to perform any post-termination warranty services, and tries to recast "not needing to perform" the warranty services as a positive benefit that it expected to receive. Pl. Reply 1, 2. But the specific benefit that IDP seeks to recover in this suit, and the specific expectation interest that it seeks to protect, is the cost of performing 2

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warranty services after the Desktop V contract was terminated. The terms of the contract provided no basis for IDP to expect at the time that it entered the contract that it would ever receive any additional payments for performing warranty services. The only benefit that IDP could reasonably have expected from the Government was payment for the equipment ordered by the Government. The Desktop V contract provided that the unit prices for equipment included threeyear warranties on parts and labor. DPFUF1 ¶¶ 9-11. IDP could not have reasonably expected at the time that it entered the contract that it would receive any additional payment for providing warranty services anytime before those three years expired. Because IDP ceased performing all warranty services in April 2000, three years after the contract was awarded on May 5, 1997, none of the costs that it now seeks to recover as expectation damages were incurred outside the three-year warranty period provided in the Desktop V contract. DPFF2 ¶ 15. IDP does not possess any expectation interest in these costs that deserves to be protected by this Court. IDP should have reasonably expected when it entered the Desktop V contract that the Government might choose to exercise its option to extend the contract for another year at the end of the first option year in May 1999, even though it was not then required to order any more equipment, because there was no contract minimum during the option years. DPFUF ¶ 7. In those circumstances, there is no question that IDP would have been required to continue providing warranty services through April 2000 for the equipment sold during the base year of the contract (May 1997-April 1998), even if the Government placed no further orders during the second option year (May 1999-April 2000). IDP would not have "DPFUF" refers to defendant's proposed findings of uncontroverted fact, filed July 21, 2004 in support of defendant's motion for summary judgment. IDP stated in the proposed findings of uncontroverted fact that it filed August 20, 2004 ("PPFUF") that it did not contest defendant's proposed findings of uncontroverted fact. PPFUF 1 n.1.
2 1

"DPFF" refers to defendant's post-trial proposed findings of fact, filed December 12, 3

2005.

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been able to recover as expectation damages the costs of providing the warranty services from May 1999 through April 2000, even if the Government did not place any additional orders, and consequently did not make any additional payments to IDP, from May 1999 through April 2000. Here, IDP continued to receive orders from the Government until the contract was terminated in October 1999. If the Government had simply exercised its contractual right to stop placing orders on October 8, 1999, there is no question that IDP would have been required to continue performing warranty services. IDP should not be placed in a better situation by recovering as expectation damages the costs of providing warranty services from October 1999 through April 2000 simply because IDP's sale to Dunn Computers compelled the termination of the Desktop V contract in October 1999. LaSalle Talman Bank F.S.B. v. United States, 317 F.3d 1363, 1371 (Fed. Cir. 2003). As IDP acknowledges, it must prove that the damages that it seeks were "`reasonably foreseeable.'" Pl. Concl.3 ¶ 1 (quoting Southern Cal. Fed. Sav. & Loan Ass'n v. United States, 422 F.3d 1313, 1334 (Fed. Cir. 2005)). The Government did not reasonably expect at the time that it entered the Desktop V contract that IDP would seek any additional compensation for performing warranty services during the period of time specified in the warranties. DPFUF ¶¶ 9-11. IDP appears to assert that an expectation interest arose not only from the Desktop V contract, but also from an implied-in-fact contract formed after the Desktop V contract was terminated. IDP contends that "[b]y requiring the [warranty services] work, the Government obligates itself to pay for it, in order to put the contractor `in as good a position as he would have been in had the contract been performed.'" Pl. Reply 5 (quoting Restatement (Second) of Contracts § 344(a)). However, the Government stated in its October 8, 1999 termination

"Pl. Concl. ¶ ____" refers to plaintiff's conclusions of law, filed on December 12, 2005 as a single document with IDP's proposed findings of fact. 4

3

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notice and in subsequent conversations that IDP was required to continue performing the warranties provided in the Desktop V contract, which were included in the price of the equipment. DPFF ¶¶ 11-12, 14. Thus, the Government consistently conveyed from the time that it terminated the contract that it would not pay anything more for the warranty services. In contrast, IDP never notified the Government that it intended to seek compensation for providing the warranty services. In an October 7, 1999 email sent to the Air Force's counsel, IDP's counsel stated that "I am confirming that IDP currently intends to honor warranty work claims while we discuss the convenience termination issues." PX 25-2. IDP's counsel did not condition IDP's performance of warranty services upon later receiving additional compensation for the work beyond the payments received for the equipment sold to the Government. In these circumstances, no implied-in-fact contract arose that requires the Government to pay IDP anything more for the costs of providing the warranty services. The inapplicability of expectancy damages to this case is shown in the next sentence in the Glendale opinion after the one quoted by IDP (Pl. Reply 3), which states that "`expectancy damages' are often equated with lost profits, although they can include other damages elements as well." 239 F.3d at 1380. IDP concedes that it is not seeking lost profits, implying that it is seeking less than it is actually entitled to recover. Pl. Reply 7. However, the real reason that IDP does not seek lost profits is that it recognizes, as it must, that it had no reasonable expectation of receiving profits or any form of revenue from the Government during the period after the Desktop V contract was terminated. 2. IDP Is Not Entitled To Any Equitable Adjustment Because The Government Did Not Effect Any Constructive Changes In The Contract

IDP also asserts that the expectation interest it seeks to protect "is, in reality, an assessment for a contract `extra'" that entitles IDP to an equitable adjustment for the contract change effected by the Government. Pl. Reply 2. Although IDP asserts that the alleged change made by the Government might be a cardinal change, one of the opinions cited by IDP found no cardinal change to the contract when a $75,000 adjustment was made to a 5

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$212,940 contract, and "the work performed entail[ed] the same nature of work as contemplated under the original contract." Miller Elevator Co., Inc. v. United States, 30 Fed. Cl. 662, 677 (1994). Here, the adjustment sought by IDP is less then $400,000 on approximately $35 million in sales, and the post-termination warranty services at issue are the very same as the warranty services performed by IDP before termination. This does not meet the Miller Elevator definition of a cardinal change that is cited by IDP. IDP also relies upon Allied Materials & Equip. Co. v. United States, 215 Ct. Cl. 406, 569 F.2d 562 (1978). Pl. Reply 5-6. In Allied Materials, the Court of Claims stated that a cardinal change occurs when the Government requires the contractor to perform "duties materially different from those originally bargained for." 569 F.2d at 563. Requiring IDP to perform the post-termination warranty services does not meet the Court of Claims' definition of a cardinal change, because the services were the very same ones that the parties originally bargained that IDP would provide. In the alternative, IDP asserts that the Government effected a "constructive change" by requiring IDP to continue performing warranty services after the Desktop V contract was terminated. Pl. Reply 2, 4. This Court has stated that "[a] constructive change occurs where a contractor performs work beyond the contract requirements, without a formal order under the changes clause, either by an informal order of the Government or by fault of the Government." Miller Elevator, 30 Fed. Cl. at 678. The Court stated that to prove a constructive change to the requirements of the contract, "the contractor must show the performance of work in addition to or different from that required under the contract (the change component), either by express or implied direction by the Government or by Government fault (the order/fault component)." Id. at 679. IDP cannot meet the first Miller Elevator element. The warranty services that IDP performed after the contract was terminated were not different in any way from the services performed during the contract. Nor was IDP required to perform any work in addition to 6

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what it was already required to perform pursuant to the Desktop V contract. The contract required IDP to provide warranty services for all equipment ordered by the Government pursuant to the contract. After termination, the Government never required IDP to provide warranty services for any equipment other than what the Government had already ordered and paid for. As discussed above, because IDP ceased providing warranty services less than three years after the Desktop V contract was awarded, IDP never incurred any costs for providing warranty services beyond the three-year warranty period set in the contract. The only effect of the termination was to relieve IDP of the requirement to provide warranty services for any additional equipment that the Government might have ordered were it not for the termination. IDP contends that it is not true that the Government "already compensated IDP for [the warranty services] costs in the Government's payments for IDP's computer equipment." Pl. Reply 8. IDP did not contest this proposed uncontroverted fact during summary judgment briefing, so it has waived any objection it might have to the fact that the unit prices paid by the Government included three-year warranties. DPFUF ¶¶ 9-11, 14. In any event, the only means provided in the Desktop V contract for IDP to recover the costs of providing warranty services were through the sales of equipment ordered by the Government. DPFUF ¶ 9. As IDP concedes, the Government was not required to place any orders beyond the contract minimum during the base year, and was not required to extend the Desktop V contract beyond the base year of the contract. Pl. Reply 9; DPFUF ¶¶ 5-7. If IDP set its unit prices on the presumption that the contract would last for five years, that was a calculated risk for which IDP must assume responsibility as its own business decision. IDP cannot shift to the Government responsibility for the costs of providing the warranty services after October 8, 1999, simply because IDP incorrectly expected that the contract would not be terminated before the end of the fourth option year. The Government did not effect any change, constructive or otherwise, to the requirements of the Desktop V contract. 7

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In sum, IDP has failed to identify any theory of damages that supports its claim for the costs of performing warranty services after the Desktop V contract was terminated on October 8, 1999. IDP could not have reasonably expected either from the terms of the contract or from the termination notice and subsequent discussions with the contracting officer that IDP would receive any additional payments to provide warranty services. Moreover, the Government never effected a constructive change to the contract, because the Government never changed the type or increased the amount of warranty services performed by IDP. The Court should deny IDP any recovery for the costs of providing warranty services through April 2000. CONCLUSION For the foregoing reasons, defendant respectfully requests that the Court deny plaintiff any damages or other relief. Respectfully submitted, PETER D. KEISLER Assistant Attorney General DAVID M. COHEN Director OF COUNSEL: E. MICHAEL CHIAPARAS Acting Director Contract Disputes Resolution Center Defense Contract Management Agency 10500 Battleview Parkway, Suite 105 Manassas, VA 20109 JOHN T. LAURO Trial Attorney Commercial Litigation Division Air Force Legal Services Agency 1501 Wilson Boulevard Arlington, VA 22209 s/ Deborah A. Bynum DEBORAH A. BYNUM Assistant Director

s/ John H. Williamson JOHN H. WILLIAMSON Trial Attorney Commercial Litigation Branch Civil Division Department of Justice Attn: Classification Unit, 8th Floor 1100 L Street, N.W. Washington, D.C. 20530 Tele: (202) 307-0277 Fax: (202) 307-0972 E-mail: [email protected] Attorneys for Defendant 8

February 21, 2006

Case 1:01-cv-00459-GWM

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CERTIFICATE OF SERVICE I certify under penalty of perjury that on this 21sth day of February, 2006, a copy of the foregoing "DEFENDANT'S SUR-REPLY IN SUPPORT OF ITS RESPONSES TO PLAINTIFF'S PROPOSED CONCLUSIONS OF LAW" was filed electronically. I understand that notice of this filing will be sent to all parties by operation of the Court's electronic filing system. Parties may access this filing through the Court's system. /s John H. Williamson