United States Court of Appeals for the Federal Circuit
2006-5083, -5094
INTERNATIONAL DATA PRODUCTS CORP.,
Plaintiff-Appellant,
v.
UNITED STATES,
Defendant-Cross Appellant.
Edward J. Tolchin, Fettmann, Tolchin & Majors, P.C., of Fairfax, Virginia, argued for
plaintiff-appellant.
Allison Kidd-Miller, Trial Attorney, Commercial Litigation Branch, Civil Division,
United States Department of Justice, of Washington, DC, argued for defendant-cross
appellant. With her on the brief were Peter D. Keisler, Assistant Attorney General, and
Deborah A. Bynum, Assistant Director. Of counsel on the brief were E. Michael
Chiaparas, Director, Contract Disputes Resolution Center, Defense Contract Management
Agency, of Manassas, Virginia, and John T. Lauro, Trial Attorney, Commercial Litigation
Division, Air Force Legal Services Agency, of Arlington, Virginia.
Appealed from: United States Court of Federal Claims
Judge George W. Miller
United States Court of Appeals for the Federal Circuit
2006-5083, -5094
INTERNATIONAL DATA PRODUCTS CORP.,
Plaintiff-Appellant,
v.
UNITED STATES,
Defendant-Cross Appellant.
___________________________
DECIDED: June 27, 2007
___________________________
Before LOURIE, RADER, and PROST, Circuit Judges.
RADER, Circuit Judge.
The Air Force terminated for convenience its Desktop V contract with
International Data Products Corporation (IDP) because IDP lost its status as a small
entity favored under section 8(a) of the Small Business Act. Small Business Act, Pub.
L. No. 85-536, 72 Stat. 384 (codified as amended in scattered sections of 15 U.S.C.).
The Air Force, however, required IDP to continue to perform warranty and upgrade
services under the contract. IDP sued for the costs of performing those services. The
Court of Federal Claims determined that the termination for convenience also
terminated IDP's obligation to continue to provide warranty and upgrade services. Int'l
Data Prods. Corp. v. United States, 70 Fed. Cl. 387, 394 (2006) (citing Int'l Data Prods.
Corp. v. United States, 64 Fed. Cl. 642, 650-51 (2005)). The Court of Federal Claims,
however, also denied IDP's claim for termination costs. Id. at 390. IDP appeals the
denial of termination costs while the government cross-appeals the termination of IDP's
obligation to provide services for which it already received payment. Because 15
U.S.C. § 637(a)(21)(A) does not terminate IDP's warranty and upgrade services
obligations, this court reverses the trial court's holding that the termination for
convenience terminated IDP's warranty and upgrade obligations. This court otherwise
affirms the trial court's rulings.
I
IDP manufactures and sells computers and computer equipment. In 1995, IDP
won award of a Small Business Administration § 8(a) contract to provide computers to
the Air Force under the Desktop V contract. This contract was an indefinite-delivery,
indefinite-quantity (ID/IQ) agreement. The contract consisted of a single base year with
a minimum purchase requirement of $100,000 and four one-year options having no
minimum purchase requirement. Under the contract terms, the Air Force needed only
to buy a minimum of $100,000 in products and services from IDP and could purchase
from other contractors after meeting the minimum purchase amount.
IDP's contract originally included a purchase maximum of $1.685 Billion.
However, Dynamic Decisions, Inc. (DDI), a competitor of IDP, sued to enjoin the original
contract. In the resulting settlement, both IDP and DDI received Desktop V contracts.
Both contracts retained the $100,000 minimum purchase obligation. Both contracts
also included a maximum at $729 million (a little less than half the maximum in IDP's
original contract). The settlement agreement also amended the contracts to include an
additional term, a "total estimated quantity" of $100 million.
2006-5083, -5094 2
In 1998, Dunn Computer Corporation (Dunn), a non-section 8(a) company,
purchased IDP. Under § 637(a)(21)(A) of the Small Business Act, this acquisition
required the Air Force to terminate IDP's contract because IDP would no longer qualify
under section 8(a). 15 U.S.C. § 637(a)(21)(A) (2006). By this time, the Air Force had
purchased a total of $35 million of equipment from IDP. The Air Force requested a
waiver per § 637(a)(21)(B) from the Small Business Administration. The Administration,
however, denied the request. On October 8, 1999, the Air Force officially notified IDP of
the termination of its contract.
The termination letter stated:
This termination will not affect the rights and liabilities of the parties,
arising under the contract or otherwise, concerning defects, guarantees or
warranties relating to any articles or component parts furnished to the
Government by the Contractor under the contract or this agreement, nor
the rights and liabilities of the parties concerning software upgrades as
required by Section C of the contract.
After the termination date, the Air Force continued to demand that IDP provide warranty
and upgrade services. IDP attempted to convince the Air Force to abandon these
services or negotiate an additional contract to cover their cost. The Air Force refused
and threatened to default and debar IDP and its parent corporation if lDP did not
perform as requested.
In mid-April 2000, IDP decided the warranty costs were threatening its survival
and the survival of its parent company. IDP therefore stopped all warranty and upgrade
work. IDP seeks damages to cover the cost to repair and replace components,
shipping, labor, and fees paid to third party service firms.
2006-5083, -5094 3
II
In reviewing judgments of the Court of Federal Claims, this court reviews
conclusions of law, such as contract or statutory interpretation, without deference.
Mass. Bay Transp. Auth. v. United States, 254 F.3d 1367, 1372 (Fed. Cir. 2001); Kane
v. United States, 43 F.3d 1446, 1448 (Fed. Cir. 1994). Findings of facts receive review
under the "clearly erroneous" standard. City of El Centro v. United States, 922 F.2d
816, 819 (Fed. Cir. 1990); Hankins Constr. Co. v. United States, 838 F.2d 1194, 1195
(Fed. Cir. 1988).
A
The trial court held that when IDP entered into an agreement with Dunn
Corporation, a non-section 8(a) entity, to purchase IDP, IDP was no longer required to
continue to provide warranty and upgrade services under the Desktop V contract. Int'l
Data Prods. 64 Fed. Cl. at 649. In particular, the trial court held that "the Government
was required by the Small Business Act to terminate the Desktop V contract for
convenience or seek a waiver allowing contract performance to continue as provided by
15 U.S.C. § 637(a)(21)(B)." Id. In the circumstances of this case, 15 U.S.C. §
637(a)(21)(A) requires the government to terminate the contract for the convenience of
the government:
Subject to the provisions of subparagraph (B), a contract (including
options) awarded pursuant to this subsection shall be performed by the
concern that initially received such contract. Notwithstanding the
provisions of the preceding sentence, if the owner or owners upon whom
eligibility was based relinquish ownership or control of such concern, or
enter into any agreement to relinquish such ownership or control, such
contract or option shall be terminated for the convenience of the
Government, except that no repurchase costs or other damages may be
assessed against such concerns due solely to the provisions of this
subparagraph.
2006-5083, -5094 4
15 U.S.C. § 637(a)(21)(A) (emphases added). Section 637(a)(21)(B) authorizes the
Small Business Administration to grant a waiver under specific enumerated conditions,
none of which apply here. In its opinion, the trial court read § 637(a)(21)(A) to put an
end to all work under the contract because the provision "does not allow partial
termination of the contract." Id. at 650. The trial court explained that the requirements
of § 637(a)(21)(A) would not always further the best interests of the agency. Id.
On appeal, the Air Force argues that the warranty attaches to the goods and
does not terminate with the contract. In other words, the mandatory language of
§ 637(a)(21)(A) only requires termination of work under the contract, not warranties
associated with the goods. The Air Force further argues that the original purchase price
of the computer equipment included the cost of the warranty and upgrade services,
which thus are already fully paid.
IDP's contract includes the following warranty clause:
The Contractor shall provide users with a minimum 3 year, on-site, full
parts and labor warranty for all offered products (excluding software)
which includes CLINS 0001-0005. The Contractor shall provide users with
a minimum 5 year (4 years on-site, 5th year return to IDP) full parts and
labor warranty for all offered products (excluding software), for SLINS
0007AA through 0007CE. For SLINS 0007AA though 0007CE, [the]
contractor shall provide a three year on site, 24 hour fix or replace on
hardware warranty, and a two year upgrade warranty on software.
Computer system, printers, and peripheral shall be user expandable and
maintainable without voiding the Contractor provided warranty. The
warranty coverage shall be worldwide and provide for no charge problem
reporting 24 hours per day, 7 days per week. The warranty shall provide
for repairing or replacing products (excluding software) and prompt return
to customer service after problem notification.
This warranty explicitly warrants parts and labor for a minimum of 3-5 years and
provides a two-year warranty on software upgrades. This clause does not require the
2006-5083, -5094 5
Air Force to pay extra or separately for warranty or upgrade services. Indeed, the only
reference to charges is the proviso that the "warranty coverage shall be worldwide and
provide for no charge problem reporting 24 hours per day, 7 days per week." Thus, the
terms of the contract show that the Air Force has already paid for the contested
services.
The record supports in other ways as well the Air Force's contention that the cost
of the warranty and upgrade services were incorporated into the cost of the equipment.
The Air Force identifies several documents showing that the purchased equipment
included express extended warranties and other bundled support services. IDP, in
contrast, does not identify any evidence to support a claim that the warranty and
upgrade services require additional payment beyond the purchase price.
Further, the Air Force's termination notice to IDP closely tracks the language in
the federal procurement regulations. These regulations provide for contract termination
without terminating the contractor's responsibility to honor its warranties. The
termination notice letter specified:
This termination will not affect the rights and liabilities of the parties,
arising under the contract or otherwise, concerning defects, guarantees or
warranties relating to any articles or component parts furnished to the
Government by the Contractor under the contract or this agreement, nor
the rights and liabilities of the parties concerning software upgrades as
required by Section C of the contract.
Section 49.603-1(b)(7) of the Federal Acquisition Regulations (FAR) for "fixed-price
contracts-complete termination" enumerates several rights and liabilities that are
reserved (I.e., survive termination) including:
(v) All rights and liabilities of the parties, arising under the contract or
otherwise, and concerning defects, guarantees, or warranties relating to
any articles or component parts furnished to the Government by the
Contractor under the contract or this agreement.
2006-5083, -5094 6
48 C.F.R. § 49.603-1(b)(7)(v) (2007).
In light of this support in the regulations as well as the contract, this court
determines that the termination for convenience did not extinguish IDP's obligations to
provide warranty and upgrade services. Further, this court finds the trial court's holding
inconsistent with 48 C.F.R. § 49.603-1(b)(7)(v). Thus, this court reverses the trial court
and holds the termination for convenience of the Desktop V contract did not terminate
the warranties and upgrade services.
B
Although the Air Force is entitled to the warranty and upgrade services under the
contract, IDP presents several theories of recovery based on termination costs. Costs
recoverable after a termination for convenience are governed by FAR 49.2 and 49.3.
48 C.F.R. §§ 49.201 et seq.; 48 C.F.R. §§ 49.301 et seq. Typical costs encompass,
inter alia, the cost of preparations made, work done, and reasonable profit on these.
IDP's theories include: expectation damages, warranty services under an express
contract, warranty services under an implied in fact contract, warranty work under a
theory of constructive change or equitable adjustment or cardinal change, and quantum
meruit based on an implied in fact contract.
1. Expectation Damages
The termination clause in the contract specifies:
(b)(4) The Government shall pay:
(i) The reasonable, allowable and allocable costs, determined in
accordance with FAR Part 31, incurred by the contactor, prior to the date
of termination for completed work that has not previously been paid for; for
work in process and materials directly related to the terminated portion of
the contract ….
2006-5083, -5094 7
(ii) A reasonable profit on the terminated portion of the work.
(5) In no event shall the sum of the termination amounts payable and any
amounts for items delivered under the contract exceed the total contract
price.
(Emphasis added). IDP's original contract included a term for the contract maximum.
After the suit with DDI, however, section B2 of the contract was amended, per the
settlement agreement, to include an additional term, the "total estimate quantities:"
In accordance with the terms and conditions of the Settlement Agreement
dated 8 September 1997, the total estimated quantities are hereby
modified to reflect a value of $100M. The Contractor shall immediately
notify the Air Force, in writing, when 80% of this estimate is reached. The
Contractor shall not accept any orders which exceed the estimated
quantities valued at $100M unless authorized by the Contracting Officer to
do so.
(Emphases added).
The parties dispute the total contract price referenced in the contract's
termination clause. IDP argues that the "total estimated quantities" language reflects
the "needs" of the government and converts an ID/IQ contract into a requirements
contract. IDP further argues that it was led to believe that it would receive a minimum of
$100 million in orders. The government responds that IDP cannot recover expectation
damages because the Desktop V contract provided that the unit prices for equipment
included three-year warranties on parts and labor, and therefore, IDP could not have
reasonably expected upon contract entry to receive any additional payment for warranty
services.
Citing this court's decisions in Varilease and Travel Centre, the trial court held the
"total contract price" of a ID/IQ contract is the minimum quantity stated in the contract.
Varilease Tech. Group, Inc. v. United States, 289 F.3d 795 (Fed. Cir. 2002); Travel
2006-5083, -5094 8
Centre v. Barram, 236 F.3d 1316 (Fed. Cir. 2001). The trial court then noted the Air
Force had ordered and paid for approximately $35 million worth of products and
services under IDP's Desktop V contract. The trial court held that "because the
termination clause provides that '[i]n no event shall the sum of the termination amounts
payable and any amounts paid for items delivered under the contract exceed the total
contract price,' IDP is not entitled to termination costs." Int'l Data Prods. 64 Fed. Cl. at
647.
This court finds IDP's reading of amended section B2 to be strained at best.
Standing alone, the quoted language cannot convert an ID/IQ contract into a
requirements contract. Further, the record does not show that the Air Force misled IDP
into believing it would receive orders of $100 million. Indeed, the evidence of record
weighs against IDP. The parties did not amend the option terms. Thus, the contract
always consisted of one base year with a minimum purchase requirement and four one-
year options. At the time of termination, the parties were 2.5 years into the contract.
Thus, even though the Air Force had estimated it would eventually need $100 million
worth of equipment, IDP never could have expected to automatically receive all of those
orders.
2. Warranty Services under an Express Contract
Because the trial court held the termination for convenience completely
terminated the contract, including IDP's warranty liability, it held IDP could not collect
termination costs under a theory of express contract. Under the express contract
theory, IDP argues the contract never actually terminated because the Air Force still
demanded performance. Although this court holds IDP's warranty liability survives
2006-5083, -5094 9
termination of the contract, the contract terminated on notice to IDP. Because
terminated, the contract cannot have survived to create an express performance
obligation for the Air Force.
3. Warranty Services under an Implied-in-Fact Contract
As noted by the trial court, "a contract implied in fact is one 'founded upon a
meeting of the minds, which, although not embodied in an express contract, is inferred,
as a fact, from the conduct of the parties showing, in light of the surrounding
circumstances, their tacit understanding.'" Int'l Data Prods. 70 Fed. Cl. at 400. In the
present case, the record does not show a meeting of the minds. Indeed, IDP sent
several communications to the Air Force disputing the continued existence of contract
and its obligation to perform. IDP points to no circumstances to show that the parties
had reached a firm and enforceable bargain. Therefore, this theory also fails.
4. Warranty Work Under a Theory of Constructive Change, Equitable Adjustment, or
Cardinal Change
These theories require record evidence that the Air Force demanded work above
and beyond that in the contract. Equitable adjustments are corrective measures that
make a contractor whole when the Government modifies a contract. Ets-Hokin Corp. v.
United States, 420 F.2d 716, 720 (Ct. Cl. 1970). A constructive change occurs where a
contractor performs work beyond the contract requirements without a formal order,
either by an informal order or due to the fault of the Government. Miller Elevator Co. v.
United States, 30 Fed. Cl. 662, 678 (1994). A cardinal change is a breach that occurs
when the Government effects a change in the work so drastic that it effectively requires
the contractor to perform duties materially different from those in the original bargain.
Krygoski Constr. Co., Inc. v. United States, 94 F.3d 1537, 1543 (Fed.Cir.1996) The
2006-5083, -5094 10
Desktop V contract no longer existed at the time that IDP performed post-termination
warranty and upgrade services. Therefore, this work (not really even fairly
characterized as "additional" to the contract) would not constitute a constructive,
equitable, or cardinal change to the contract. Rather, IDP's warranty and upgrade work
fell under express warranty and upgrade clauses of the contract. Thus, this court
affirms the trial court's denial of recovery under each of these theories.
5. Quantum Meruit Based on an Implied-in-Fact Contract
A recovery in quantum meruit is based on an implied-in-law contract. That is, a
contract in which there is no actual agreement between the parties, but the law imposes
a duty in order to prevent injustice. The Court of Federal Claims, however, lacks
jurisdiction over contracts implied in law. 28 U.S.C. § 1491(a)(I) (2000). On the other
hand, "[w]here a benefit has been conferred by the contractor on the government in the
form of goods or services, which it accepted, a contractor may recover at least on a
quantum valebant or quantum meruit basis for the value of the conforming goods or
services received by the government prior to the rescission of the contract for invalidity.
The contractor is not compensated under the contract, but rather under an implied-in-
fact contract." United Pac. Ins. Co. v. United States, 464 F.3d 1325, 1329-30 (Fed. Cir.
2006). The Desktop V contract, however, is neither invalid nor unenforceable. Thus,
this exception does not apply.
Accordingly,
IT IS ORDERED THAT the trial court decision is AFFIRMED-IN-PART and
REVERSED-IN-PART.
2006-5083, -5094 11