Free Reply to Response to Motion - District Court of Federal Claims - federal

Case 1:07-cv-00815-TCW

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS CALL HENRY, INC. Plaintiff, v. THE UNITED STATES, Defendant. ) ) ) ) ) ) ) ) )

No. 07-815C (Judge Wheeler)

DEFENDANT'S REPLY IN SUPPORT OF MOTION TO DISMISS Defendant, the United States, respectfully submits this reply in support of our partial motion to dismiss dated March 7, 2008. 1 I. CALL HENRY DID NOT EXHAUST COUNTS II, III & V In our opening brief, we demonstrated that Call Henry did not submit to the contracting officer the implied contract claims in Counts II, III, and V of the complaint, which allege that the Government knew or should have known that its hours estimate was wrong. Call Henry does not claim otherwise, but incorrectly argues that these claims arise from the "same set of operative facts" as the equitable adjustment contract claim that it submitted to the contracting officer. The claim to the contracting officer was based upon allegations that the Government's estimates turned out to be too high. Compl. Ex. 1. Call Henry made no allegation that the Government knew or should have known the estimate was deficient at the time of contracting. See id. Although a party may augment its legal theories when based upon the same set of operative facts; in this case, Call Henry is attempting to augment not only its legal theories, but also the fundamental nature of its factual allegations as well. Counts II, III, and V should be dismissed for lack of jurisdiction. See RCFC 12(b)(1).

1

Defined terms in our opening brief have the same meaning in this reply.

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II.

CALL HENRY'S VARIOUS CONTRACT THEORIES FAIL TO STATE A CLAIM A. Count I: Breach Of Contract

We established in our opening brief that Count I fails to state a claim for breach of contract, except to the extent that Call Henry relies upon the payments and changes clauses in the contract, because the parties did not agree to a minimum number of hours. Call Henry concedes this point, but conjures up another breach theory: namely, that the Government somehow breached the contract by refusing to eliminate overhead positions that were "not necessary given the lower hours ordered." Compl. ¶ 22. As the theory goes, if the Government had agreed to Call Henry's request to eliminate these positions, it would have allowed Call Henry to "minimiz[e] its damages." Pl. Br. 6-7. This theory has no basis in the contract. The contract expressly required Call Henry to staff five full time positions. Def. Br. Ex. A, Stmt. Of Work, §§ 4.1.1 (one contract manager), 4.1.6.2 (three project managers), 4.1.6.3 (one maintenance superintendent). Call Henry does not (and cannot) identify any provision in the contract that would require the Government to reduce the number of these positions. Call Henry cannot impose new obligations upon the Government that do not appear in the contract; nor can Call Henry sue for breach of contractual obligations that do not exist. See Frazier v. United States, 67 Fed. Cl. 56, 60 (2005) (granting RCFC 12(b)(6) motion because contract language was unambiguous and did not entitle the plaintiff to relief sought); Holland v. United States, 74 Fed. Cl. 225, 262-63 (2006) (granting defendant partial summary judgment because contract was devoid of the promise sought to be enforced by plaintiff); Smelser v. United States, 53 Fed. Cl. 530, 542 (2002) (same, stating that plaintiff "is precluded from attempting to create obligations from alleged representations that were not incorporated into the contract"), aff'd without op., 69 Fed. Appx. 466 (Fed. Cir. 2003).

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Call Henry nevertheless relies upon H.L. Yoh Co. v. United States, 288 F.2d 493, 496 (Ct. Cl. 1961), a case in which the Government issued a change order that altered the scope of the project from a total conversion of data to a selective conversion. Pl. Br. 7-8. The Court of Claims in H.L. Yoh held that a contractor was entitled to an equitable adjustment pursuant to the changes clause because the change order resulted in a 33 percent decrease, which was a "very substantial curtailment of volume." Id. As noted in our opening brief, the questions of whether the alleged "under-ordering" by 18 to 19 percent (Compl. ¶¶ 18-19) was "substantial" or not, and whether the Government had a duty to make an equitable adjustment to Call Henry's hourly rate, are not the subject of this motion to dismiss. The payments and changes clauses in the contract govern these issues. Count I otherwise fails to state a claim for breach. B. Count II: Breach Of The Implied Covenant Of Good Faith And Fair Dealing

Our opening brief demonstrated that Count II fails to state a claim for breach of good faith. Call Henry argues that the Government acted with "malice or intent to injure" by adhering to the contract terms concerning the required number of overhead positions. Pl. Br. 9-10. This argument is meritless. The Government's refusal to modify the contract or to make an equitable adjustment is not indicia of bad faith. E.g., D.V. Gonzalez Elec. & Gen. Contrs., Inc. v. United States, 55 Fed. Cl. 447, 457-58 (2003) (dismissing good faith claim alleging contracting officer "failed to make an equitable adjustment during the performance of the contract"); AscoFalcon II Shipping Co. v. United States, 32 Fed. Cl. 595, 604 (1994) (dismissing good faith claim alleging contracting officer refused request for contract amendment)). Call Henry nevertheless argues that it was denied the benefit of the bargain because it made less profit than anticipated as a result of the reduced hours. Pl. Br. 9-10. The bargain set forth in the contract, however, only entitles Call Henry to payment for each hour worked, and there is no dispute that the Government paid Call Henry in full. Call Henry did not bargain for a -3-

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minimum number of hours and, thus, Call Henry cannot have a legitimate expectation interest in a minimum amount of profit. The payments and changes clauses address Call Henry's rights in the event of an hours shortfall and define the parameters of the parties' bargain. The implied covenant of good faith cannot vary express contract terms on point. See Craig-Buff Ltd. P'ship v. United States, 69 Fed. Cl. 382, 388 (2006) (implied covenant of "good faith cannot be construed to give rise to new obligations not otherwise contained in the contract's express terms") (citing Centex Corp. v. United States, 395 F.3d 1283, 1304 (Fed. Cir. 2005)); State of Alaska v. United States, 35 Fed. Cl. 685, 704 (1996) (implied covenant of good faith cannot "create by implication an express obligation" when there is no "express substantive obligation" in the contract), aff'd, 119 F.3d 16 (Fed. Cir. 1997) (Table). Count II fails to state a claim. C. Count III: Superior Knowledge

In response to our showing that Count III fails to state a superior knowledge claim, Call Henry ignores our arguments and authorities, and for the most part, merely parrots the deficient allegations in the complaint. Pl. Br. 10-12. Call Henry does argue, however, that it should not be charged with constructive knowledge of the possibility that the Air Force could order substantially fewer hours of work than it originally estimated, relying upon Miller Elev. Co. v. United States, 30 Fed. Cl. 662, 674-75 (1994). In Miller, the Court declined to charge a contractor with constructive knowledge of the Government's plan to conduct major building renovations when there was no evidence that the renovation plan was publicly disclosed. Pl. Br. 12-13. In contrast, the alleged "vital fact" in this case is a basic feature of every time and materials contract. As demonstrated in our opening brief, Federal procurement regulations provide that a "time and materials contract may be used only when it is not possible at the time of placing the contract to estimate accurately the extent or duration of the work or to anticipate costs with any degree of confidence." 48 C.F.R. § 16.601(c). Call Henry does not cite, much -4-

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less discuss, section 16.601(c) in its brief. Call Henry also does not explain why a commercial entity that is engaged in performing a multi-million dollar Government contract should not be charged with constructive knowledge of this basic principle of contracting law. Cf. Gen. Eng'g & Mach. Works v. O'Keefe, 991 F.2d 775, 780 (Fed. Cir. 1993) ("[G]overnment contractors are presumed to have constructive knowledge of federal procurement regulations."). Count III should be dismissed. D. Count IV: Constructive Change

Call Henry admits that it performed less, not more, than the estimated number of hours in the contract. Pl. Br. 13. Call Henry asserts, however, that it performed work that is "different from that required under the contract." Pl. Br. 13 (emphasis supplied by Call Henry, quoting Miller Elev., 30 Fed. Cl. at 678-79). Nonsense. There is no dispute that Call Henry performed the same civil engineering services called for by the contract. Call Henry merely worked fewer hours than originally estimated. Call Henry does not (and cannot) point to any clause of the contract that would have required it to perform the estimated number of hours in the contract, irrespective of the number of hours actually ordered by the Government. Call Henry did not perform work "beyond the contract requirements without a formal order." See Int'l Data Prods. Corp. v. United States, 492 F.3d 1317, 1325 (Fed. Cir. 2007). Count IV fails to state a claim. E. Count V: Implied Warranty to Provide Accurate Information

In our opening brief, we established that Count V fails to state a claim because the implied duty upon which Call Henry relies only pertains to design specifications, which are not at issue in this case. Call Henry nevertheless responds that the hours estimate, the only specification alleged to be erroneous, should be deemed a "design specification" rather than a "performance specification." Pl. Br. 8. The hours estimate, however, does not meet the wellestablished criteria for "design specifications," which must "explicitly state how the contract is to -5-

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be performed." Stuyvesant Dredging Co. v. United States, 834 F.2d 1576, 1582 (Fed. Cir. 1987). Accordingly, the implied warranty does not apply, and Count V should be dismissed. Call Henry does not squarely address our second independent ground for dismissal of Count V based upon the nature of this time and materials contract. See Pl. Br. 7-9. We demonstrated in our opening brief that Call Henry cannot maintain a defective estimates claim based upon a time and materials contract because such an agreement "may be used only when it is not possible at the time of placing the contract to estimate accurately the extent or duration of the work or to anticipate costs with any reasonable degree of confidence." 48 C.F.R. § 16.601(c) (emphasis supplied). Count V should be dismissed for this additional, independent reason. Call Henry argues, however, that in Schweiger Constr. Co., Inc. v. United States, 49 Fed. Cl. 188, 197 (2001), the Court "held that recovery is permitted for inaccurate estimates in an indefinite quantity contract in the event of more egregious governmental conduct" such as bad faith. Pl. Br. 7. The Court subsequently recognized, however, that Schweiger has been abrogated. See Abatement Contr. Corp. v. United States, 58 Fed. Cl. 594, 612-13 (2003). In Travel Centre v. Barram, 236 F.3d 1316 (Fed. Cir. 2001), the United States Court of Appeals for the Federal Circuit reversed the board's decision that the agency breached an indefinite quantity contract "by inducing Travel Centre to base its proposal on quantities that [the agency] knew or should have known were overstated" because, "regardless of the accuracy of the estimates delineated in the solicitation, ... Travel Centre could not have had a reasonable expectation" in receiving the estimated quantity of work. 236 F.3d at 1318, 1319. Call Henry does not address the controlling precedent of Travel Centre, even though we cited the case in our brief. Def. Br. 16-17. In any event, the agreement at issue in this case is a time and materials contract, rather than an indefinite quantity contract, and therefore, as we noted in our opening brief, the

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Government's hours estimate remains subject to the covenant of good faith and fair dealing. Call Henry has failed, however, to allege a breach of good faith in Count II. CONCLUSION For these reasons, and the reasons set forth in our motion to dismiss, we respectfully request that the Court dismiss the entire complaint, except to the extent that the "under-ordering" claim in Count I is based upon the payments and changes clauses in the contract. Respectfully submitted,

GREGORY G. KATSAS Acting Assistant Attorney General

JEANNE E. DAVIDSON Director

s/Patricia M. McCarthy PATRICIA M. MCCARTHY Assistant Director

OF COUNSEL CHRISTOPHER L. MCMAHON Major, USAF Trial Attorney Commercial Litigation Division Civil Law and Litigation Directorate Air Force Legal Operations Agency AFLOA/JACQ 1501 Wilson Blvd, Suite 606 Arlington VA 22209-2403 Tel: (703) 696-9091 May 7, 2008 s/Douglas G. Edelschick DOUGLAS G. EDELSCHICK Trial Attorney Commercial Litigation Branch Civil Division Department of Justice Attn: Classification Unit 8th Floor 1100 L. Street, N.W. Washington, DC 20530 Tel: (202) 353-9303 Attorneys for Defendant

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CERTIFICATE OF SERVICE I hereby certify that on May 7, 2008, a copy of foregoing "DEFENDANT'S REPLT IN SUPPORT OF MOTION TO DISMISS" 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/Douglas G. Edelschick

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