Argument Recap / Court Week / Panel Activity

On November 1, the Federal Circuit heard oral argument in Secretary of Defense v. Raytheon Co., a government contract case that attracted an amicus brief. In this case, the government appeals a decision of the Armed Services Board of Contract Appeals relating to Raytheon’s compliance with Federal Acquisition Regulations regarding whether lobbying and acquisition and divesture costs may be passed on to the government. The panel hearing the oral argument included Chief Judge Moore and Judges Prost and Taranto. This is our argument recap.

Danial Volk argued for the government. He began by stating that Raytheon charged the government for about half the salaries of its in-house lobbyists and acquisition and divestiture team based on the absence of documentation. Volk explained that the record keeping requirement calls for adequate documentation to show that costs—charges to the government—follow the allowability rules. And Volk argued that, while Raytheon asserts its lobbyists did allowable activities, it cannot point to a single record of allowable activities. Moreover, an inference of allowable hours, Volk argued, is impermissible.

One of the judges questioned Volk on the consequences to Raytheon should the government prevail, given that the records at issue cover a span of 15 years. In response, Volk stated that Raytheon would be unable to obtain from the government lobbying or acquisition salaries for which there are no records of allowable charges. The fact, he argued, that Raytheon gave its employees incorrect instructions for record keeping is irrelevant because the records kept do not provide any allowable activities or time allotted to those activities.

John Chesley argued for Raytheon. He began by argued that Raytheon kept records that were adequate and, in particular, complied with the applicable FAR. One judge pointedly asked where the evidence for allowable activities is to be found. Chesley responded by pointing the judges to the appendices that, he said, include evidence of the primary roles of positions of employees and the summary of testimonies by employees, all of which were accepted by the Board. These employees’ testimonies related to records, he continued, but admittedly all documents provided and discussed were limited to reporting unallowable activities. In response, one judge asked for documentation regarding how much time employees spent on allowable activities. Chesley asserted that, since the question is the allocation of costs, the answer comes down to the equation “a + b = c.” Chesley states that if the salaries are “c,” and unallowable time is “a,” then Raytheon can calculate for “b,” which is allowable activities.

One judge pointed to the government’s argument that if Raytheon were wrong in its policy of hour keeping, then “b” is so unknown that Chesley’s equation is unsolvable. In response, Chesley reasserted that the records show allowable activities by inference, and, he pointed out, these records are audited yearly.

Another judge reframed the question presented in this case by noting the testimony of an employee indicated that his work duties were not limited to 8-5. Yet, this judge highlighted, Raytheon limits its calculations to subtracting unallowable activities based on a 40-hour work week, rather than identifying how many hours are worked and then subtracting the unallowable hours. This, the judge explained, could lead to Raytheon grossly overcharging the government.

In response, Chesley argued that there are two options for accounting for time under FAR, and Raytheon chose to use the time paid option rather than the total time option. Based on the option chosen, Chesley explained, Raytheon’s accounting is accurate because employees are paid on a 40-hour work week. In response, one judge maintained that Raytheon employees are paid based on the job they do, which regularly includes after-hours work. As a result, this judge continued, Raytheon’s choice to use an indirect recording system has led to the inability to assess what percentage of employees’ time and therefore salaries are spent on allowable activities.  

During Volk’s rebuttal on behalf of the government, one judge asked if, assuming the court decides the “after-hours policy” is wrong, that is the end of the case. Volk explained that this case has two independent policies at issue, and, he said, if the court finds either policy is wrong then that is the end of the case. In closing, Volk argued that acceptance of Raytheon’s argument results in the government being unable to review cost calculations, and therefore, being forced to accept costs based solely on what government contractors report.

We will continue monitoring this case and report of developments