Free Response - 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 RESPONSES TO PLAINTIFF'S PROPOSED CONCLUSIONS OF LAW Pursuant to the Court's October 12, 2005 Order, defendant, the United States, respectfully submits these Responses to Plaintiff's Proposed Conclusions of Law. 1. Plaintiff asserts that it seeks the "direct costs" of providing warranty services after the Desktop V contract was terminated. Pl. Concl.1 ¶ 1. Plaintiff appears to contend that these costs are expectation damages, apparently based upon the dubious proposition that plaintiff reasonably expected that it would receive additional payment for providing the warranty services beyond the unit price originally paid by the Government when it bought the equipment serviced. Id. (citing Southern Cal. Fed. Sav. & Loan Ass'n v. United States, 422 F.3d 1319, 1334 (Fed. Cir. 2005)). Yet as shown in defendant's responses to plaintiff's proposed findings of fact, the Government has never given IDP any reason to believe that it would be paid anything extra to perform warranty services that the Government had already purchased when it paid for the unit prices of the products. Def. Resp. to PPPF ¶¶ 4-5. The damages that plaintiff seeks are not expectation damages, because plaintiff asserts that the "benefit of [its] bargain" never included performing warranty services after the contract was terminated. Pl. Concl. ¶ 1. Plaintiff does not seek to

"Pl. Concl." refers to plaintiff's Proposed Findings Of Fact And Conclusions Of Law, filed December 12, 2005.

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recover anything that it expected to receive pursuant to the Desktop V contract, such as lost revenues or profits, because the only revenues it was entitled to receive were the unit prices for goods sold, which included the cost of providing warranty services. Instead, plaintiff seeks to recover the costs that it allegedly incurred to perform the warranty services after August 31, 1999, the date that plaintiff alleges the contract should have been terminated. In some respects, plaintiff's claim appears to be more closely related to a claim for restitution, because plaintiff seeks to restore itself to the position it would have been in if all its obligations under the Desktop V contract had been terminated on August 31, 1999, and there had been no contract in effect after that date. However, "`the law is well settled . . . that in order to be compensable as restitution, the plaintiff's contribution must have been made in performance of its contractual obligations.'" Southern Cal. Fed'l Sav. & Loan, 422 F.3d at 1334 (quoting Landmark Land Co., Inc. v. United States, 256 F.3d 1365, 1372 (Fed. Cir. 2001)). Because plaintiff contends that the costs that it incurred to perform warranty services after the Desktop V contract was terminated were not "made in performance of its contractual obligations," plaintiff appears to have characterized its damages claim as being based upon a theory of expectation damages rather than restitution, so that it would be compensable. Id.; Pl. Concl. ¶ 1. Plaintiff's damages claim are not supported by either theory of damages. Nor can plaintiff show that it is entitled to recover reliance damages, because its alleged losses did not result from any alleged reliance upon the contract. 2. Plaintiff has not proven any of the three requirements of expectancy damages. It was not reasonably foreseeable to the Government that IDP would refuse to perform the three-year warranties and upgrades required in the Desktop V contract unless it received additional payment for those services. Plaintiff has also not proved 2

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that its alleged damages were caused by what plaintiff characterizes as the "breach of the Government": the Government's insistence that IDP continue to perform the warranty services after the contract was terminated. Pl. Concl. ¶ 2. Although plaintiff asserts that these costs "arise completely and undoubtedly" from the services IDP performed for the Desktop V contract (Pl. Concl.¶ 2), plaintiff has failed to prove that the labor and third-party costs that it seeks to recover are properly allocable to the Desktop V contract. Def. Post-Trial Br. 6-18. 3. Plaintiff has also failed to prove with "reasonable certainty" the amounts that it claims. Pl. Concl. ¶ 3 (quoting Bluebonnet Sav. Bank, F.S.B. v. United States, 266 F.3d 348, 1355 (Fed. Cir. 2001)). Defendant does not merely contend that "IDP could have maintained better records of these costs," as plaintiff asserts. Pl. Concl. ¶ 3. Plaintiff's failure to record its costs as they were incurred has made it impossible to determine accurately just how much of its alleged costs were incurred for the Desktop V contract, and renders its damages claim too unreliable to be accepted by this Court. Def. Post-Trial Br. 6-18. Even though plaintiff need only prove its damages by a preponderance of the evidence, it must still prove its damages with "`reasonable certainty.'" Southern Cal. Fed'l Sav. & Loan, 422 F.3d at 1334 (quoting Bluebonnet Sav. Bank, F.S.B, 266 F.3d at 1355). 4. Contrary to what plaintiff asserts, a government contractor may not prove its costs using the "best evidence available under the circumstances" if the circumstances include its own failure to record evidence of its claimed damages. Pl. Concl. ¶ 4. The Federal Circuit has stated that "`the amount of the recovery can only be approximated in the format of a `jury verdict' where the claimant can demonstrate a justifiable inability to substantiate the amount of his resultant injury by direct and specific proof.'" Dawco Constr., Inc. v. United States, 930 F.2d 872, 881 (Fed. Cir. 1991) (quoting Joseph Pickard's Sons Co. v. United States, 532 F.2d 739, 742, 209 3

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Ct. Cl. 643 (1976)) (italics added in Dawco). In Dawco, the Federal Circuit held that the contractor's failure to retain contemporaneous records precluded reliance upon the jury verdict method because "[t]he issuance of a change order request should signal to the prudent contractor that it must maintain records detailing any additional work." 930 F.2d at 881 (emphasis in original). Id.; accord Bath Iron Works Corp. v. United States, 34 Fed. Cl. 218, 243 (1995) (court rejected damages claim as unsubstantiated because once contractor was on notice that it was incurring additional costs, it "could have, and should have, commenced keeping contemporaneous records"). None of the cases cited by plaintiff hold that a contractor may rely upon approximations to prove its costs when it has failed to keep contemporaneous records or refer to them when preparing its claim. In all of the cases relied upon by plaintiff, there was a sound reason that the court allowed the court to rely upon approximations to prove its damages. Several of the cases involved projections or estimates of many different factors, and thus could not be calculated precisely. For example, in Seaboard Lumber Co. v. United States, 308 F.3d 1283, 1288, 1302 (Fed. Cir. 2002), the trial court estimated how much the resale price of a timber contract had been reduced by a statutory requirement that the purchaser make a down payment and midpoint payment. Likewise, in Confederated Tribes of Warm Springs Reserv. of Or. v. United States, 248 F.3d 1365, 1372 (Fed. Cir. 2001), the damages analysis relied in part upon determining how much timber Indian tribes might have sold in 1992 and 1993. In Electronic and Missile Facilities, Inc. v. United States, 189 Ct. Cl. 237, 416 F.2d 1345, 1358 (1969), the Court of Claims did state that damages need not be proven with "absolute exactness or mathematical precision," as plaintiff asserts. Pl. Concl. ¶ 4. However, the court ruled that the contractor could not recover, because 4

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even though it could prove the total costs of replacing contaminated gravel, it had failed to show how much of the cost was attributable to an alleged change in the contract. 416 F.2d at 1358. In National Australia Bank v. United States, 63 Fed. Cl. 352, 358 (2004), this Court did accept a reasonable approximation of the plaintiff's alleged lost tax deductions in the absence of an asset-by-asset list of tax basis, but noted that there was no "lack of diligence on the part of plaintiff's predecessors in interest or subsequent shoddy bookkeeping on its part." In contrast, plaintiff failed to track its labor costs or Federal Express expenses as it incurred them, or to review carefully the detailed records attached to its Astronautics invoices when preparing its claim. Plaintiff is not entitled to rely upon approximations when it could have easily taken steps that would have allowed it to prove its costs accurately. 5. Although the Court of Claims has stated that a contractor need only show a "reasonable basis for computation" of its damages, the court also noted that "this leniency as to the actual mechanics of computation does not relieve the contractor of his essential burden of establishing the fundamental facts of liability, causation, and resultant injury." Wunderlich Contracting Co. v. United States, 172 Ct. Cl. 180, 199, 351 F.2d 956, 968 (1965) (concluding that "there has been a critical lack of proof of causation" of the plaintiff's claim for delay damages). Here, plaintiff is unable to prove that defendant caused the alleged damages, because plaintiff is unable to prove with reasonable certainty what amount of the costs that it seeks to recover were incurred to provide warranty services for the Desktop V contract. The other authority that plaintiff relies upon also fails to support its position. In Daly Constr., Inc. v. United States, 5 F.3d 520, 522 (Fed. Cir. 1993), the court stated that "it was incumbent upon [the plaintiff] to establish a reasonable method for computing the requested compensation," and denied any compensation. Here, plaintiff has failed to explain how it computed the percentages that it used to allocate 5

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the portion of its labor and third-party warranty costs to the Desktop V contract. In Capital Elec. Co. v. United States, 729 F.2d 743, 746 (Fed. Cir. 1984), an amicus party asserted that delay damages "need not be quantified to a mathematical certainty," but the court did not address that contention in any fashion. In Addison Miller, Inc. v. United States, 108 Ct. Cl. 513, 557, 70 F. Supp. 893, 900, cert. denied, 332 U.S. 836 (1947), the Court of Claims stated that "there must be some reasonable basis for ascertaining the amount of the damage," but denied any recovery because "[t]he testimony gives us no clew [sic] at all to the amount of the damage plaintiffs may have suffered as a result of the acts for which we have found the defendant should respond in damages."2 6. Both cases cited by plaintiff are inapposite. In Northeastern Penna. Shippers Coop. Ass'n, Inc. v. United States, 43 Fed. Cl. 763, 764-65, 770 (1999), aff'd, 243 F.3d 556 (Fed. Cir. 2000) (table), the Court analyzed "one of the more factually unique cases the court has dealt with," trying to "determine post-hoc what rate two parties would have negotiated" as a "reasonable charge" for the storage of railroad overfreight in leased trailers. In Northeastern, the plaintiff did not seek to recover costs comparable to those sought by IDP in this case, nor did the Court express any legal principles that extend beyond the peculiar facts of that case. In Neal & Co. v. United States, 945 F.2d 385 (Fed. Cir. 1991), the Federal Circuit agreed with this Court that the contractor was not required to "keep one set of cost records for work originally contemplated under the contract and another set of records for the additional work," because the additional work "`required far more precision throughout the process than that contemplated [at the time of contracting].'" Id. at 389 (quoting Neal & Co. v. United States, 19 Cl. Ct. 463, 470 (1990)). In

The final case cited by plaintiff is an unpublished decision of the Federal Circuit, which may not be cited as precedent pursuant to Fed. Cir. R. 47.6(b). Pl. Concl. ¶ 5. 6

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contrast, the warranty services that plaintiff performed after the Desktop V contract was terminated were the same services contemplated under the contract. Plaintiff did not have to keep another set of records to demonstrate what amount of its labor and third-party warranty costs were allocable to the Desktop V contract except for timesheets, which would not have been onerous to record how employees spent their time each pay period. In addition, in Neal, the contractor was required to perform the additional work because of what the Government conceded was a defective design specification. Id. Here, the warranty services whose costs plaintiff seeks to recover were not the result of any negligence or error by the Government, but were expressly provided in the Desktop V contract to ensure that IDP provided equipment that continued to perform its intended uses. 7. This Court has not ruled that damages may be estimated anytime that records are unavailable, as plaintiff suggests. Pl. Concl. ¶ 7 (citing Hi-Shear Tech. Corp. v. United States, 55 Fed. Cl. 418, 422-23 (2003), aff'd, 356 F.3d 1372 (Fed. Cir. 2004)). In Hi-Shear, the Court stated that "the complexity and absence of information in some contract cases precludes the computation of damages to exact amounts . . . . [i]n this case, since the plaintiff was not able to produce the numbers required to ascertain with exact certainty what the government requirements would have been and the government records had been legitimately destroyed and were unavailable, the court used an estimation model to reconstruct the government's contract requirements and to estimate the plaintiff's damages." Hi-Shear, 55 Fed. Cl. at 422 (emphasis added). The Federal Circuit approved the Court's use of the jury verdict method on these facts, but noted that it was only appropriate when "`there was no more reliable method for computing damages.'" Hi-Shear, 356 F.3d at 1381 (quoting Dawco Constr., 930 F.2d at 880-81). Here, plaintiff failed to maintain or review records that would have permitted more reliable methods of determining how much of its alleged 7

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costs were attributable to the Desktop V contract. Similarly, in another case relied upon by plaintiff, it was actions of the Government, not the contractor, that made it impossible to measure the contractor's alleged damages accurately: "[t]here actually is no way of knowing when the plaintiff would have been able to complete the performance of this contract if the defendant had acted on the preproduction samples within 55 days after the samples were submitted in February 1950. Because of this, it is impossible to allocate with exactitude the responsibility for the plaintiff's loss of $175,300.48 on this contract, as between the defendant's breach of contract in failing to act on the preproduction samples within the prescribed period of time and other difficulties on the part of the plaintiff for which the defendant was not legally responsible." Specialty Assembling & Packing Co. v. United States, 174 Ct. Cl. 153, 184, 355 F.2d 554, 572 (1966). 8. Plaintiff has presented evidence of the labor costs of the employees that it alleges performed warranty services for the Desktop V contract, but plaintiff relies exclusively upon the testimony of the employees' supervisor, Mr. David Costello, to establish how much time each employee spent on the Desktop V contract as opposed to other IDP customers. Pl. Concl. ¶ 8. Mr. Costello's testimony about the percentage of time spent by each employee on the Desktop V contract is based entirely upon affidavits that were created a year after IDP ceased performing any warranty services for the Desktop V contract. DPFF ¶¶ 35-43. Neither Mr. Costello nor Mr. Murphy explained how IDP calculated the percentages for each employee. Id. Because plaintiff failed to maintain timesheets or other records that would more reliably demonstrate how much time each IDP employee spent performing warranty services for the Desktop V contract, the Court should find that plaintiff has failed to carry its burden of proof with respect to the labor costs that it seeks to recover. 9. None of the arguments advanced by plaintiff demonstrate that it has met its 8

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burden of proof. First, any alleged labor costs that plaintiff has not included in its claim are irrelevant to determining whether plaintiff has proven with reasonable certainty the labor costs that it does seek to recover. Second, even if the warranty services performed for the Desktop V contract were the most time-consuming of all IDP's contracts, it does not follow that "the percentages used on their faces would be reasonable" when the percentages range between 50 and 100 percent, and the service call records show that only between 26.77 and 33.33 percent of the service calls were performed for the Desktop V contract. DPFF ¶ 17. Third, at least four of IDP's employees who allegedly performed warranty services for the Desktop V contract until May 2000 were no longer employed by IDP when the DCAA auditors conducted their audit in early 2002, and thus could not be interviewed. DPFF ¶ 22. Further, Mr. Tatem, the lead auditor, testified that he reasonably chose not to interview the employees because DCAA "prefer[s] to see some type of records that would support the hours that the employees actually worked." Tr. 253:10-12; DPFF ¶ 73-74, 80, 83-85. 10. The documents introduced into evidence by plaintiff only demonstrate the total costs that it allegedly incurred from Astronautics, Accutek, and Federal Express during the period from September 1999 through April 2000. PX 4, PX 5, and PX 6. The documents do not provide any indication whether these costs were incurred for purposes of the Desktop V contract. As Mr. Costello admitted on cross-examination, he had access to the detailed records for Astronautics and Accutek, but he chose not to expend the time required to review them. DPFF ¶¶ 66-68. Instead, he estimated that 85 percent of Astronautics' and 10 percent of Accutek's costs were incurred for purposes of the Desktop V contract. Id. Because plaintiff did have access to these detailed records at the time that it prepared its claim, and failed to review them, it is irrelevant whether DCAA auditors later removed the documents from IDP's offices, 9

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as plaintiff continues to insinuate despite Mr. Murphy's admission that he has no reason to think that DCAA removed the documents. DPFF ¶¶ 99, 101. Plaintiff has failed to carry its burden of proof with respect to the third-party warranty service providers because it neglected to use the evidence available to prove its claim. 11. None of the four "facts" asserted by plaintiff demonstrate that it has carried its burden of proof with respect to the third-party warranty service providers. First, even if IDP permitted DCAA auditor Robin Wesnofske to review detailed records in IDP's offices, IDP's own officer, Mr. Murphy, testified that he had no reason to believe that she had removed the documents from IDP's offices. DPFF ¶ 96-99. Mr. Murphy testified that IDP has been unable to locate similar records for the period before August 1999 that, according to its document retention policy, it should still have. DPFF ¶ 103. He admitted that it was possible that IDP had misplaced the documents, and testified that some of the detailed records had been located recently, after IDP completed moving its offices. DPFF ¶¶ 101-102. Second, none of the few detailed records that have survived show what portion of the Astronautics invoices are attributable to the Desktop V contract. The invoice cited by plaintiff for warranty services performed outside the United States (PX 4-13 to 4-17) only identifies various locations in Germany, and does not prove that the work performed overseas by Astronautics was "100% allocable" to the Desktop V contract, as plaintiff asserts. Pl. Concl. ¶ 11. Except for the March 15, 2000 invoice for services performed during February 2000 within the continental United States (PX 37), IDP has failed to identify any documents that confirm what proportion of the services Astronautics performed for purposes of the Desktop V contract either within or outside the continental United States. Likewise, none of the witnesses' testimony supports plaintiff's assertion that all of the Astronautics' work performed overseas was allocable to the Desktop V 10

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contract. Mr. Murphy only referred to an invoice for a single month when he testified that "you look at February [2000] where all our international work is for Desktop V." Tr. 142:1-2. Third, plaintiff has never quantified in any meaningful way how its assertion that the shipping costs for the Desktop V contract were "the most expensive shipments being made by IDP" affected its estimate that 45 percent of its Federal Express shipping costs were allocable to the Desktop V contract. Pl. Concl. ¶ 11. The document cited by plaintiff as evidence of "the number of shipments" (Pl. Concl. ¶ 11) for the Desktop V contract shows Federal Express tracking numbers for only 23 percent of the total number of closed service orders, yet plaintiff has attributed 45 percent of its Federal Express shipping costs during the period from September 1999 through April 2000 to the Desktop V contract. PX 12; DPFF ¶¶ 4748. Fourth, plaintiff's assertion that it is not seeking to recover $80,000 in bartered inventory that it allegedly paid for Astronautics' March and April 2000 invoices is irrelevant. The relevant issue is whether plaintiff can prove, for the costs that it does seek to recover, that 85 percent of Astronautics' invoices for services performed from August 1999 through February 2000 should be allocated to the Desktop V contract. Because plaintiff failed to review or maintain the records necessary to calculate accurately how much of the Astronautics' invoices are for Desktop V work, the Court should reject plaintiff's estimate as unreliable. 12. As addressed above and in defendant's proposed findings of fact and conclusions of law, as well as in defendant's responses to plaintiff's proposed findings of fact, there is ample evidence that plaintiff cannot reliably measure the costs it incurred during the period September 1999 through April 2000 that are properly allocable to the Desktop V contract. 11

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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

January 20, 2006

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CERTIFICATE OF SERVICE I certify under penalty of perjury that on this 20th day of January, 2006, a copy of the foregoing "DEFENDANT'S 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