In late September the Federal Circuit issued its opinion in ACLR, LLR v. US, a government contract case that we have been tracking because it attracted an amicus brief. In this case, the Federal Circuit reviewed a grant of summary judgment by the Court of Federal Claims on ACLR’s claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and recovery of certain termination-for-convenience damages. The Court of Federal Claims granted summary judgment in favor of the government based on ACLR’s purported failure to keep records sufficient to establish costs it was seeking to recover as damages. The Federal Circuit affirmed the judgment in an opinion authored by Judge Stark that was joined by Judge Prost and Judge Hughes. This is our opinion summary.
Judge Stark began by outlining the procedural and factual background of the case:
ACLR is a management consulting company that offers recovery auditing services. On June 17, 2010, ACLR entered into a federal supply schedule contract with the General Services Administration (‘GSA’), which made ACLR eligible to offer recovery auditing services to government agencies. . . . [T]he GSA contract included Federal Acquisition Regulation (‘FAR’) 52.212-4(l), which expressly permits an ordering agency, i.e., an agency contracting ACLR’s services, such as the [Center for Medicare and Medicaid Services (CMS)], to ‘terminate’ [a] contract or any part [t]hereof, for its sole convenience. . . .’ This ‘termination for convenience’ provision further sets out the damages a terminated contractor, such as ACLR, could attempt to recover. It provides that if an ordering agency elects to terminate the contract for convenience, the contractor is entitled to ‘a percentage of the contract price reflecting the percentage of the work performed prior to the notice of termination, plus reasonable charges the Contractor can demonstrate[,] to the satisfaction of the ordering [agency] using its standard record keeping system, have resulted from the termination. . . .” On January 13, 2011, CMS awarded a task order to ACLR . . . . The task order incorporated the GSA contract by reference, thereby also incorporating the FAR 52.212-4(l) termination for convenience provision. . . . ACLR performed work for CMS between 2011 and 2015, eventually conducting at least 20 audits. For seven of those audits, ACLR obtained all necessary approvals from CMS, collected monies from private insurers, and was then paid contingency fees for its work on these audits. The remaining thirteen ACLR audits were not approved by CMS. Two of these, relating to payments to insurers for the years 2007 and 2010, are the subject of this appeal. . . . On July 22, 2015, ACLR filed a complaint in the Court of Federal Claims under the Contract Disputes Act . . . accusing CMS of breach of contract and breach of the implied covenant of good faith and fair dealing, by ‘failing to permit ACLR to recover improper payments identified’ during the 2007 and 2010 audits. . . . On March 23, 2020, following discovery, extensive briefing, and oral argument, the Court of Federal Claims issued a decision (i) denying ACLR’s motion for summary judgment for recovery of contingency fees for its efforts in connection with the 2007 and 2010 audits, and (ii) granting the government’s motion for summary judgment that CMS had committed no breach. . . . The trial court specifically found no breach of contract or duty of good faith and fair dealing because it concluded, instead, that CMS had constructively terminated the pertinent portion of the [Contract] for convenience, and was permitted to do so. Although, prior to the litigation, neither party had ever described what had occurred as a termination for convenience, the Court of Federal Claims determined that this was the only reasonable characterization of what had actually happened. Because the parties had not adequately addressed what recovery ACLR would be entitled to as a result of a termination for convenience, the trial court remanded the case to CMS. On remand, CMS’ contracting officer denied ACLR’s damages claim for the 2007 audit in its entirety, because ACLR had been ‘unable to identify sufficient documentation to support compensat[ion]. . . .’ For the 2010 audit, CMS awarded ACLR $157,318 in termination for convenience damages plus interest. The parties then returned to the Court of Federal Claims. ACLR filed an amended complaint, seeking termination for convenience damages ‘of at least $5,923,754,’ plus interest and attorney’s fees. . . . On November 19, 2021, the Court of Federal Claims denied ACLR’s motion for summary judgment. . . . The government . . . sought and obtained leave to file a motion for summary judgment based on ACLR’s purported failure to keep records sufficient to establish costs it was seeking to recover as damages. . . . The Court of Federal Claims granted the government’s motion.
Judge Stark began his analysis for the Federal Circuit by explaining that the panel would review the lower court’s grant or denial of summary judgment de novo.
After agreeing with the lower court that CMS did not breach the contract or the implied covenant of good faith and fair dealing, Judge Stark rejected ACLR’s claim that “the government waived its constructive termination for convenience defense.” Even though CMS failed “to invoke FAR 52.212-4(l) or make any reference to termination for convenience when it directed ACLR not to proceed with the 2007 and 2010 audits,” that made its termination for convenience merely “constructive rather than express.”
Turning to the merits, Judge Stark affirmed the lower court’s summary judgment for the government. He noted the contract “expressly authorized CMS . . . ‘to terminate [the contract] . . . for its sole convenience.'” After termination, Judge Stark highlighted, in turn “‘the Contractor,’ ACLR, ‘[should have] immediately stopped all work.” Judge Stark found that “the record only supports a finding that CMS constructively terminated the 2007 and 2010 audits for convenience.” Moreover, he noted, ACLR’s claim that CMS acted in bad faith by “enter[ing] in the [contract] with no intent to honor” it failed, because “no evidence . . . reasonably support[ed the] assertion.” Rather, the evidence “provide[d] an explanation for why the government terminated the contract for convenience,” and anyway did not suggest “CMS acted in bad faith when entering into” the contract.
Judge Stark briefly acknowledged that, although the court’s “analysis . . . focuse[d] primarily on ACLR’s breach of contract, the outcome [would be] no different for its claim for breach of implied covenant of good faith and fair dealing.” He highlighted the principle that “[t]he implied duty of good faith and fair dealing cannot expand a party’s contractual duties beyond those in the express contract.” So, as to this contract, Judge Stark noted, “[t]he implied covenant cannot be used to expand CMS’ payment duties beyond those to which it agreed.”
Judge Stark next rejected ACLR’s contention that, “even though [ACLR] never recovered a single dollar for CMS in connection with the 2007 and 2010 audits, the government should still . . . pay it [the] 7.5% contingency fee based on the tens of millions of dollars of potential overpayments ACLR identified.” Judge Stark agreed with the lower court’s finding that, while ACLR could “recover ‘a percentage of the contract price reflecting the percentage of work'” it performed, here ACLR’s “work ‘was terminated at the data analysis stage,” and so “the amount to which [ACLR] was technically entitled . . . remained at zero.'” Judge Stark explained that, “[s]ince 7.5% of zero is zero,” the lower court “correctly held that ACLR could not prove entitlement to any compensation in the form of a ‘percentage of the contract price.'”
Judge Stark also agreed with the lower court’s “denial of ACLR’s motion for summary judgment on its claim for” costs, such as attorneys’ fees, and those “purportedly incurred in preparation of settling its claim against the government.” He confirmed the lower courts reading of FAR 52.212-4(I). He explained it “requires the government, after terminating for convenience, to make ‘payment of reasonable charges’ incurred by the contractor that result from termination.'” But those costs, Judge Stark noted, “cannot include legal fees or other charges associated with ACLR’s pressing of a claim against the United States, as such fees are ‘not allowable costs, absent a waiver of sovereign immunity.'” And, here, he said, ACLR identified “no such waiver.”
Finally, Judge Stark addressed the lower court’s “grant of summary judgment to the government on the issue of ACLR’s record keeping system.” Judge Stark agreed with the lower court that “no reasonable factfinder could view ACLR’s record keeping system as regularly used, carefully thought-out, or even organized and orderly,” barring it from recovery under FAR 52.212-4(I). Although he agreed with ACLR that the statute’s reference to “‘its’ does not impose any broad prescription as to precisely how every government contractor must maintain its books and records,” that did not permit ACLR to “dump essentially every record it [could] find on the court and expect the court to sift through it and find a ‘standard record keeping system.'”
As a result of his analyses, the Federal Circuit affirmed the judgment of the Court of Federal Claims.