United States Court of Appeals for the Federal Circuit
2008-5003
NORTHROP GRUMMAN INFORMATION TECHNOLOGY, INC.,
Plaintiff-Appellant,
v.
UNITED STATES,
Defendant-Appellee.
Michael E. Geltner, Geltner & Associates, P.C., of Falls Church, Virginia, argued
for plaintiff-appellant.
J. Reid Prouty, Trial Attorney, Commercial Litigation Branch, Civil Division,
United States Department of Justice, of Washington, DC, argued for defendant-
appellee. With him on the brief were Jeffrey S. Bucholtz, Acting Assistant Attorney
General, Jeanne E. Davidson, Director, and Donald E. Kinner, Assistant Director.
Appealed from: United States Court of Federal Claims
Chief Judge Edward J. Damich
United States Court of Appeals for the Federal Circuit
2008-5003
NORTHROP GRUMMAN INFORMATION TECHNOLOGY, INC.,
Plaintiff-Appellant,
v.
UNITED STATES,
Defendant-Appellee.
Appeal from the United States Court of Federal Claims in case no. 1:05-CV-00595,
Chief Judge Edward J. Damich.
__________________________
DECIDED: August 5, 2008
__________________________
Before MICHEL, Chief Judge, NEWMAN, and LINN, Circuit Judges.
Opinion for the court filed by Chief Judge MICHEL. Circuit Judge NEWMAN concurs in
the result.
MICHEL, Chief Judge.
This is a government contract case. It arises because Logicon, Inc., now known
as Northrop Grumman Information Technology, Inc. (“Northrop”), acted as a middleman
between a software developer and the United States Army. Logicon purchased certain
software from the developer and then leased it to the military, effecting the lease by way
of a delivery order under a pre-existing contract between Logicon and the United States
Air Force.
But before the Air Force issued the delivery order, and apparently before the
Army had even received or tested the software, Logicon asked the Army to sign a
“Letter of Essential Need,” which Logicon drafted, reciting that the software was
“essential to the operation of,” and “integral to,” certain Army computer systems.
Apparently based only on a sales presentation, an Army employee signed the letter,
and the Air Force issued the delivery order. The Army later determined that the
software did not function as expected and was not compatible with its systems and
needs, so the Army declined to renew the lease after the first renewal term.
Logicon, by then known as Northrop, filed suit against the United States in the
United States Court of Federal Claims, claiming that the United States breached a
warranty—allegedly contained in the Letter of Essential Need and incorporated by
reference into the contract between the parties—that the software was essential to the
Army’s computer systems and, according to Logicon’s understanding, was not acquired
merely on a test or research and development basis. The Court of Federal Claims
granted summary judgment to the United States, holding that there could be no breach
of warranty because the Letter of Essential Need (1) did not form part of the contract,
and, in any event (2) did not warrant what Northrop contends it warranted. Northrop
appealed, and we heard oral argument on June 6, 2008. Because the Court of Federal
Claims correctly determined that the alleged warranty was not incorporated by
reference into the parties’ contract, we affirm.
2008-5003 2
BACKGROUND
A. Omnicast Software, the Letter of Essential Need, and the Software Lease
Starburst Software (“Starburst”) created Omnicast, a software program designed
to minimize the bandwidth required to send data over a network to multiple recipients.
In 1999, a Starburst salesman made a marketing call to Joseph Johnson, an employee
in the Army’s Communication-Electronics Command (“CECOM”), offering to license the
Omnicast software to the Army. Johnson thought that Omnicast had the potential to
increase efficiency in communications between different CECOM computer systems,
and agreed to license the software. Johnson, however, was not a contracting officer
authorized to bind the government, and no contract document was signed by him.
Starburst, moreover, did not have an existing contract with the Army, so the parties
planned to use a pre-existing contract between the Air Force and Logicon to effect the
lease as follows: Starburst would sell the software to Logicon; Logicon would lease the
software to the Air Force; CECOM would receive the software; and CECOM would
transfer money to the Air Force to support Air Force lease payments to Logicon.
Before consummating this transaction, and allegedly to satisfy Logicon that the
transaction would be worthwhile, a Logicon representative drafted a “Letter of Essential
Need” to be signed by CECOM. The letter read in relevant part (emphasis added):
This letter is intended to clarify the essential need of the Program
Executive Office, Command, Control and Communications (PEO C3S) for
the “Starburst Software License Lease Agreement” currently being
prepared for implementation. . . . PEO C3S has decided to enter into a
lease agreement for the Starburst database products to support [Army
Battle Command System] 6.0 and beyond. These products are essential
to the operation of ABCS 6.0 as they are integral to the system. After
considering the alternatives, it was determined that a lease was the most
cost-effective means of providing long-term, Program-wide access to the
Starburst products. . . .
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Johnson signed the Letter of Essential Need on behalf of CECOM on or about
September 22, 1999. On October 20, 1999, the Air Force issued a delivery order to
Logicon, under their pre-existing contract, for the Omnicast software. The delivery order
provided for a base period of approximately one month for $100,000, two successive
one-year renewal terms for $285,000 each, and a final purchase option for an additional
$285,000. The delivery order also recited that “[t]he ‘LEASING TERMS AND
CONDITIONS’ to Special Offer # 330 Revision 03 . . . were incorporated . . . in order to
facilitate this [Delivery Order].” Those LEASING TERMS AND CONDITIONS (“Terms
and Conditions”), in turn, contained the following opening paragraph (emphasis added).
These lease terms and conditions are hereby incorporated by reference in
their entirety within the [Air Force—Logicon contract]. The [] applicable
Delivery Order and these lease terms and conditions constitute the entire
agreement between Logicon, Inc. (“Contractor”) and the U.S. Government
(“Government”) relative to the CECOM Starburst lease transaction under
the aforementioned contract. It is hereby mutually understood and agreed
that as inducement for Contractor entering into this Agreement, the
Government has provided required information relative to the essential
use of the software Asset which includes, but is not limited to, a
description of the currently identified applications to be supported and
planned life-cycle operations for the leased software.
The Terms and Conditions also contained the following clause—in the words of the
Court of Federal Claims, the “Escape Clause”—under the heading “Lease.”
[T]he government shall be relieved from all obligations under the lease, if
the Bona Fide Needs of the Government for the Asset cease to exist and
such need is not fulfilled within the succeeding twelve (12) months from
the date of non-renewal/termination, with an asset performing similar
functions which the leased Asset was intended to perform.
CECOM accepted delivery of the Omnicast software in November of 1999, and
the Army (through the Air Force) paid for the base period and the first one-year renewal
term. Upon testing the software at Fort Hood in Texas, however, the Army discovered
2008-5003 4
that Omnicast did not work effectively with CECOM’s ABCS computer systems in a
tactical environment. In March of 2000, Starburst announced that it was being acquired
by another software company and that there would be no more updates to the Omnicast
software. After discussions with Logicon, CECOM stopped using Omnicast and
decided it would not renew the software lease after the first one-year renewal term. The
Army uninstalled Omnicast, offered to return it to Logicon, and did not renew the
software lease when the first one-year renewal term expired in November of 2001.
B. Procedural History
In October of 2001, Logicon changed its name to Northrop Grumman Information
Technology, Inc. In June of 2002, Northrop Grumman Computing Systems—a different
entity and apparently not the successor to Logicon—filed a certified claim to the
Contracting Officer, alleging that CECOM’s non-renewal of the Omnicast software lease
constituted a breach of contract. The Contracting Officer denied the claim in December
of 2002, and in January of 2003 Northrop Grumman Computing Systems filed suit in the
Court of Federal Claims. In October of 2004, the parties to that suit stipulated to a
dismissal without prejudice so that Northrop Grumman Information Technology, Inc.—
the true successor to Logicon, referred to herein as “Northrop”—could pursue the
contract claim. Northrop filed a new certified claim to the Contracting Officer in March of
2005, and, when that claim was denied, filed this suit on June 3, 2005.
Northrop’s Complaint alleged that the United States breached the contract by,
inter alia, warranting in the Letter of Essential Need “that the Assets [i.e., the Omnicast
software] were essential when, in fact, they were acquired on a test basis and not
essential.” Northrop sought damages of $570,000, the amount the Army would have
2008-5003 5
paid had it renewed the software lease for the second one-year renewal term and then
exercised the purchase option.
The parties completed discovery in August of 2006. Northrop filed for summary
judgment on its breach-of-warranty theory on November 15, 2006, and the United
States cross-moved for summary judgment on December 20, 2006. On August 14,
2007, the Court of Federal Claims denied Northrop’s motion and granted the United
States’ motion on two alternative grounds. Northrop Grumman Info. Tech., Inc. v.
United States, 78 Fed. Cl. 45 (2007). First, the trial court held that the United States
could not be liable on Northrop’s theory because “the Contract does not, as a matter of
law, incorporate the Letter of Essential Need by reference.” Id. at 48. Second,
assuming instead that the Letter of Essential Need did form part of the parties’ contract,
the trial court held that in order to square the Letter with the contract’s Escape Clause,
“the Letter should be read such that the Government agreed that there was only the
potential for the software to work,” and thus there was no breach of warranty. Id. at 50
(emphasis added).
Northrop filed a timely notice of appeal on October 9, 2007. The Court of Federal
Claims had jurisdiction under the Contract Disputes Act, 41 U.S.C. § 609(a)(1), and we
have jurisdiction over that court’s final decision under 28 U.S.C. § 1295(a)(3).
DISCUSSION
A. Standard of Review
We review de novo the Court of Federal Claims’ grant of summary judgment and
conclusions of law, including the court’s interpretation of a contract. St. Christopher
Assocs., L.P. v. United States, 511 F.3d 1376, 1380 (Fed. Cir. 2008); N. Star Steel Co.
2008-5003 6
v. United States, 477 F.3d 1324, 1332 (Fed. Cir. 2007); Am. Capital Corp. v. Fed.
Deposit Ins. Corp., 472 F.3d 859, 865 (Fed. Cir. 2006). Incorporation by reference is a
question of law, reviewed de novo. See Zenon Envtl., Inc. v. U.S. Filter Corp., 506 F.3d
1370, 1378 (Fed. Cir. 2007) (“Whether material has been incorporated by reference into
a host document, and the extent to which it has been incorporated, is a question of
law.”); Advanced Display Sys. v. Kent State Univ., 212 F.3d 1272, 1283 (Fed. Cir. 2000)
(explaining in a patent case that “the doctrine of incorporation by reference has its roots
in the law of wills and contracts,” and that “[i]n those areas of jurisprudence, whether
material is incorporated by reference presents a question of law”).
B. Incorporation by Reference
Although in recent years we have discussed incorporation by reference in several
opinions in patent cases, see, e.g., Zenon Envtl., 506 F.3d at 1378-81; Cook Biotech,
Inc. v. Acell, Inc., 460 F.3d 1365, 1376-78 (Fed. Cir. 2006); Advanced Display Sys., 212
F.3d at 1283-84, we have not often heard a government contract appeal that turns on a
question of incorporation by reference, and our case law in this area is somewhat
sparse. What precedent exists, however, comports with our requirement in the patent
context that “[t]o incorporate material by reference, the host document must identify with
detailed particularity what specific material it incorporates and clearly indicate where
that material is found in the various documents [identified].” Cook Biotech, 460 F.3d at
1376 (quoting Advanced Display Systems, 212 F.3d at 1282). In other words, the
incorporating contract must use language that is express and clear, so as to leave no
ambiguity about the identity of the document being referenced, nor any reasonable
2008-5003 7
doubt about the fact that the referenced document is being incorporated into the
contract.
For example, we stated recently in St. Christopher Associates that “[t]his court
has been reluctant to find that statutory or regulatory provisions are incorporated into a
contract with the government unless the contract explicitly provides for their
incorporation.” 511 F.3d at 1384 (emphasis added). We cited Smithson v. United
States, 847 F.2d 791 (Fed. Cir. 1988), where the appellants argued that an entire body
of regulations promulgated by the Farmers Home Administration was incorporated by
reference into the contract-in-suit under the contract’s provision that “[t]his agreement is
subject to the present regulations of the [Farmers Home Administration] and to its future
regulations not inconsistent with the express provisions hereof.” 847 F.2d at 794. We
rejected the appellants’ argument in Smithson, explaining that “[t]his is hardly the type of
clause that should be read as incorporating fully into the contract all the FmHA
regulations,” in no small measure because “if that were the parties’ purpose, they would
have explicitly so provided.” Id. (emphasis added). By contrast, in Southern California
Edison Co. v. United States, 226 F.3d 1349 (Fed. Cir. 2000), we explained that the
contracts-in-suit did incorporate the terms and conditions of certain regulations by
specifically referring to the regulations (the text of which was attached to the contract as
an exhibit) “as fully and completely as though set forth herein [i.e., in the contract] in
length,” id. at 1353.
We have also noted that “[o]ne common way to incorporate extrinsic evidence is
through an integration clause that expressly incorporates the extrinsic evidence.” Teg-
Paradigm Envtl., Inc. v. United States, 465 F.3d 1329, 1339 (Fed. Cir. 2006) (emphasis
2008-5003 8
added). Incorporation via integration clause has arisen as an issue in Winstar cases
related to the savings and loan crisis of the 1980s, see generally United States v.
Winstar Corp., 518 U.S. 839 (1996), and there we have emphasized the need for clarity
when referencing extrinsic documents. For example, in Franklin Federal Savings Bank
v. United States, 431 F.3d 1360, 1366 n.4 (Fed. Cir. 2005), a Dividend Agreement
between the parties included the following integration clause: “This Agreement,
together with any understanding agreed to in writing by the parties, constitutes the
entire agreement between the parties and supersedes all prior agreements and
understandings of the parties in connection with the subject matter hereof.” Id. at 1366
n.3. We held that the reference to “any understanding agreed to in writing by the
parties” did not suffice to incorporate by reference an Approval Letter and a
Forbearance Letter, because those letters, being unilateral, “were not ‘written’
agreements signed by the parties, and were not characterized as such in the Dividend
Agreement.” Id. at 1366.
By contrast, in Southern California Federal Savings & Loan Assocation v. United
States, 422 F.3d 1319 (Fed. Cir. 2005), the integration clause read as follows:
This Agreement, together with any interpretation or understanding agreed
to in writing by the parties, constitutes the entire agreement between the
parties and supersedes all prior agreements and understandings of the
parties in connection with it, excepting only any resolutions or letters
concerning the Conversion, the Acquisition or this Agreement issued by
[FHLBB] or [FSLIC] in connection with the approval of the Conversion, the
Acquisition and this Agreement.
Id. at 1329 (emphasis added). We held that “[o]n its face, the [integration] clause
specifically incorporates the Forbearance Letter from the FHLBB,” and we noted that
the government did not contend otherwise. Id.; see also Franklin, 431 F.3d at 1366 n.4
2008-5003 9
(explaining that unlike the general language of the integration clause in Franklin,
clauses in prior cases including Southern California Federal “invoked different language
that explicitly incorporated the Letters” (emphasis added)).
Taken together, these cases support a principle in our Circuit that the language
used in a contract to incorporate extrinsic material by reference must explicitly, or at
least precisely, identify the written material being incorporated and must clearly
communicate that the purpose of the reference is to incorporate the referenced material
into the contract (rather than merely to acknowledge that the referenced material is
relevant to the contract, e.g., as background law or negotiating history).
Our insistence on explicit references and clear language of incorporation accords
with our sister circuits’ understanding of the common law of contracts. See, e.g.,
Standard Bent Glass Corp. v. Glassrobots Oy, 333 F.3d 440, 447 (3d Cir. 2003)
(“Incorporation by reference is proper where the underlying contract makes clear
reference to a separate document, the identity of the separate document may be
ascertained, and incorporation of the document will not result in surprise or hardship.”
(emphasis added)); PaineWebber, Inc. v. Bybyk, 81 F.3d 1193, 1201 (2d Cir. 1996)
(under common law rule as applied in New York, “the paper to be incorporated into a
written instrument by reference must be so referred to and described in the instrument
that the paper may be identified beyond all reasonable doubt” (internal citation
omitted)); Hertz Corp. v. Zurich Am. Ins. Co., 496 F. Supp. 2d 668, 675 (E.D. Va. 2007)
(“It is axiomatic in the law of contracts that, in order to incorporate a secondary
document into a primary document, the identity of the secondary document must be
readily ascertainable.”).
2008-5003 10
Moreover, “a majority of states have concluded that the contract must clearly and
specifically reference the document to be incorporated.” Ingersoll-Rand Co. v. El
Dorado Chem. Co., __ S.W.3d __, 2008 Ark. LEXIS 262, at *12-13 (Ark. Apr. 17, 2008)
(collecting cases); see also Kokjohn v. Harrington, 531 N.W.2d 99, 101 (Iowa 1995) (per
curiam) (recognizing that “[t]he common thread throughout [incorporation-by-reference
cases from other state jurisdictions] is a requirement that the reference be clear and
specific”). A leading treatise also agrees. 11 Richard A. Lord, Williston on Contracts
§ 30.25 (4th ed. 1999) (“So long as the contract makes clear reference to the document
and describes it in such terms that its identity may be ascertained beyond doubt, the
parties to a contract may incorporate contractual terms by reference to a separate,
noncontemporaneous document . . . .”).
As other courts have explained, a requirement that contract language be explicit
or otherwise clear and precise does not amount to a rule that contracting parties must
use a rote phrase or a formalistic template to effect an incorporation by reference.
Under Texas law, for example, “[t]he specific language used is not important so long as
the contract signed by the defendant plainly refers to another writing.” Teal Constr. Co.
v. Darren Casey Interests, Inc., 46 S.W.3d 417, 420 (Tex. App. 2001) (emphasis
added). Similarly, under Florida law “[a] document may be incorporated by reference in
a contract if the contract specifically describes the document and expresses the parties’
intent to be bound by its terms,” but “no particular ‘magic words’ are required to
incorporate a document by reference.” Mgmt. Computer Controls, Inc. v. Charles Perry
Constr., Inc., 743 So. 2d 627, 631 (Fla. Dist. Ct. App. 1999) (internal citations omitted).
2008-5003 11
Our Circuit likewise does not require “magic words” of reference or of
incorporation. However, we stress that parties contracting with the government may
easily avoid or at least minimize the risk of having to litigate this issue by simply
adopting widely-used and judicially-approved language of incorporation, such as “is
hereby incorporated by reference” or “is hereby incorporated as though fully set forth
herein,” and by including specific and sufficient information identifying a particular
document, such as the title, date, parties to, and section headings of any document to
be incorporated.
C. Incorporation of the Letter of Essential Need
Here, Northrop claims that the Army breached a warranty contained in the Letter
of Essential Need and incorporated by reference into the contract-in-suit. In agreement
with the Court of Federal Claims, we hold that the Letter of Essential Need is not
incorporated by reference, and that therefore Northrop’s claim must fail.
The starting point for this analysis is the delivery order issued by the Air Force for
the Omnicast software. The delivery order states that “[t]he ‘LEASING TERMS AND
CONDITIONS’ to Special Offer # 330 Revision 03 . . . were incorporated . . . in order to
facilitate this [Delivery Order].” By thus explicitly referring to the Terms and Conditions
and reciting that they “were incorporated,” the delivery order successfully incorporates
the Terms and Conditions by reference—indeed, both Northrop and the United States
agree that the Terms and Conditions form part of the contract-in-suit.
Northrop contends that the Terms and Conditions, in turn, incorporate the Letter
of Essential Need by reference as a contract term. Northrop points to the opening
paragraph of the Terms and Conditions, which states that “[i]t is hereby mutually
2008-5003 12
understood and agreed that as inducement for Contractor entering into this Agreement,
the Government has provided required information relative to the essential use of the
software Asset which includes, but is not limited to, a description of the currently
identified applications to be supported and planned life-cycle operations for the leased
software” (emphasis added). According to Northrop, the “required information”
referenced here is the statement, contained in the Letter of Essential Need, that the
leased software was “essential to the operation of ABCS 6.0 as [it is] integral to the
system.”
However, the Terms and Conditions do not refer to the Letter of Essential Need
explicitly, as by title or date, or otherwise in any similarly clear, precise manner. As the
Court of Federal Claims explained, the phrase “required information relative to the
essential use of the software” could reasonably be interpreted to refer to the Letter of
Essential Need or to any number of other prior communications, written and oral,
between various representatives of Northrop and the Army. See Northrop Grumman,
78 Fed. Cl. at 48.
Further, even assuming for the sake of argument that this reference is sufficiently
explicit, the Terms and Conditions nevertheless do not clearly incorporate the
referenced material. Rather, the Terms and Conditions merely recount that “the
Government has provided” the required information “as inducement for Contractor
entering into this Agreement.” As in Smithson, this recital is “hardly the type of clause
that should be read as incorporating fully into the contract” some extrinsic text
containing additional contract terms. 847 F.2d at 794. “[I]f that were the parties’
purpose, they would have explicitly so provided.” Id. We can only conclude from the
2008-5003 13
absence of such explicit language regarding the “required information” that the parties
did not intend to incorporate it by reference. See, e.g. Serralles v. United States, 46
Fed. Cl. 773, 785 (Fed. Cl. 2000) (“[T]he incorporating document must not only refer to
the incorporated document, it must bring the terms of the incorporated document into
itself as if fully set out.”). 1 Because the contract-in-suit does not incorporate the Letter
of Essential Need, Northrop cannot maintain its claim for breach of warranty under the
contract.
Furthermore, the Terms and Conditions, which postdate the Letter of Essential
Need, contain an integration clause specifying that “these lease terms and conditions
constitute the entire agreement between [the parties] relative to the CECOM Starburst
lease transaction under the [Northrop-Air Force] contract” (emphasis added). This
integration clause neither incorporates the Letter of Essential Need nor permits its
incorporation or the incorporation by reference of any other extrinsic document. Thus,
the integration clause prevents Northrop from relying on the Letter. See Betaco, Inc. v.
Cessna Aircraft Co., 32 F.3d 1126, 1134 (7th Cir. 1994) (“The essence of the integration
inquiry . . . is whether the parties intended their written contract to embody the entirety
of their agreement; if so, extrinsic evidence of an additional warranty . . . cannot be
admitted. Thus, although the integration clause speaks in terms of agreements rather
than warranties, if it is given effect and the signed purchase contract is deemed to be a
1
This conclusion is further bolstered by the context of the disputed contract
language. The very first sentence of the Terms and Conditions states that “[t]hese
lease terms and conditions are hereby incorporated by reference in their entirety within”
the contract. Given that the parties were clearly familiar with such language of
incorporation, they likely would have used the same or similar language vis-à-vis the
“required information” had they intended to incorporate it into the contract.
2008-5003 14
fully integrated agreement, it effectively operates so as to preclude the plaintiff from
relying on purported warranties beyond the four corners of that agreement.”).
Having determined as a matter of law that the Letter of Essential Need does not
form part of the contract-in-suit, we may affirm on this ground and need not reach the
Court of Federal Claims’ interpretation of the language in the Letter.
CONCLUSION
For the foregoing reasons, the Court of Federal Claims was correct to grant
summary judgment to the United States in this breach-of-contract action under the
Contract Disputes Act.
AFFIRMED
NEWMAN, Circuit Judge, concurs in the result.
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