Opinions

Last week, the Federal Circuit issued its opinion in Secretary of Defense v. Raytheon Co., a government contract case that attracted an amicus brief. In this case, the government appealed a decision by 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. Specifically, the Board rejected the government’s argument that these costs should not be passed on to the government. In an opinion authored by Judge Prost and joined by Judges Moore and Taranto, the Federal Circuit reversed this ruling and remanded the case for a determination of the costs Raytheon must pay. This is our opinion summary.

Judge Prost presented the facts of the case:

The challenged costs in this case relate to Raytheon’s Government Relations and Corporate Development Departments.

Raytheon’s Government Relations Department, which in 2007 and 2008 consisted of 20 to 22 employees, is housed in Arlington, Virginia. During the relevant time period, government-relations employees engaged in various activities including information gathering, internal discussions on lobbying strategies, attending meals with contractors and Congresspeople or Congressional staff, meeting with internal Raytheon customers, attending political fundraising events, administering Raytheon’s Political Action Committee, interfacing between Raytheon and the legislative branch of the U.S. government, and responding to requests from Congressional staffers, among other similar activities.

Raytheon’s Corporate Development Department, which in 2007 and 2008 consisted of roughly seven to eight employees, is housed in Waltham, Massachusetts. During the relevant period, Corporate Development worked with Raytheon’s business units in strategic development and growth opportunities.

In 2007 and 2008, Raytheon charged the government for roughly half of the salary costs of its Government Relations and Corporate Development Departments.

The Defense Contract Audit Agency (“DCAA”) audited both Raytheon’s Government Relations Department and its Corporate Development Department, determined that Raytheon’s 2007 and 2008 incurred-cost submissions for those departments included unallowable costs, including expressly unallowable costs, and demanded reimbursement and payment of penalties. Raytheon appealed to the
Board, which held a hearing in May 2017. On February 1, 2021, it ruled in Raytheon’s favor, concluding, as relevant here, that Raytheon’s claimed government-relations and corporate-development costs were allowable and appropriately charged to the government.

With respect to government-relations costs, the Board concluded that the government had not met its burden of proving that Raytheon’s costs were unallowable lobbying costs.

The Board also concluded that the government had failed to show that the disputed corporate development costs were unallowable.

The Secretary appeals.

After providing this background, Judge Prost first addressed the Secretary’s argument that “the government met its burden of showing that Raytheon overcharged the government because Raytheon’s policy disregarding after-hours lobbying rendered the government-relations incurred-cost submissions meaningless.” Judge Prost agreed with this argument. She reasoned that “[t]he Board’s conclusion that ‘there was no cost to [Raytheon] or to the government for work outside normal business hours,’ J.A. 20, is not supported by substantial evidence.” She highlighted how the Board “observed that ‘Raytheon’s lobbyists worked early mornings, late nights, and weekends from time to time on what all of the testifying witnesses considered to be a regular part of their work duties.’” Moreover, she explained, because Raytheon’s lobbyists worked on unallowable activities after hours, “Raytheon’s policies ignoring after-hours time resulted in the government reimbursing Raytheon for unallowable costs.”

Judge Prost then turned to the government’s argument that “Raytheon’s brightline corporate-development policies are inconsistent with the FAR and resulted in Raytheon charging the government for [other] expressly unallowable costs.” The Federal Circuit again agreed with the government. On this point, the court reasoned that, “[b]y only reporting time after the submission of an indicative offer or the decision to go to market with offering materials—the bright-line rules—Raytheon’s corporate policies are plainly inconsistent” with a regulation that disallows costs associated with planning mergers and acquisitions.

In short, in this case, the Federal Circuit held that, because the Board erred in finding that Raytheon’s policies complied with the FAR and the government did not show Raytheon overcharged it, the Board’s judgment was erroneous. As a result of its analysis, the Federal Circuit reversed the Board’s judgment and remanded the case for a determination of costs Raytheon must repay and, if necessary and appropriate, any potential penalties.