OPINION ORIGINALLY FILED UNDER SEAL ON JUNE 27, 2012
POST-TRIAL OPINION
FIRESTONE, Judge.
I. Background
This case involves Contract Disputes Act ("CDA") claims totaling $69,320,563.94 by plaintiff Raytheon Company ("Raytheon") against defendant the United States ("government") related to Raytheon's sale of certain business segments and the retention of assets and liabilities associated with the "defined benefit" pension plans
In
All of the sales at issue in this case were part of a corporate restructuring program that Raytheon began in 2000.
In particular, Raytheon seeks $56,274,371.39 from the government in connection with sale of the AIS segment; $8,693,533.76 from the government in connection with the sale of the Optical segment; $2,933,151.69 from the government in connection with the sale of the Aerospace segment; and $1,419,507.10 from the government in connection with the sale of the alleged PWF segment. Following review by the Defense Contract Management Agency ("DCMA") and the Defense Contract Audit Agency ("DCAA"), the contracting officer denied Raytheon's claims on the grounds that Raytheon had not paid the pension deficits it sought to recover from the government for the employees that remained within Raytheon's pension plans.
The court has issued two prior opinions in this case ruling on motions for partial summary judgment and summary judgment under Rule 56 of the Rules of the United States Court of Federal Claims ("RCFC"). In its first opinion, ruling on cross-motions for partial summary judgment, the court held that Raytheon's post-retirement benefit ("PRB") costs are not "pension costs" within the meaning of CAS 412-40(a), and cannot be included in the segment closing adjustments at issue in this case.
In its second opinion, the court addressed the government's motion for summary judgment on a series of issues, including the government's argument that Raytheon waived and transferred its claims for the Optical and AIS segment closing adjustments under the terms of the novation agreements entered into with Raytheon, the government, and the purchasers of each segment.
This third opinion follows the trial that was conducted in two phases over the course of eleven days in October and November 2011. In the first phase, the court heard testimony and received evidence regarding the issues surrounding the novation agreements. The second phase of the trial focused on the appropriateness of the various methods, assumptions, and calculations used by the parties in performing a post-1995 CAS 413 segment closing adjustment. The court heard live testimony from 21 witnesses and allowed 194 exhibits into evidence. Closing arguments were heard on February 16, 2012, following post-trial briefing.
A summary of the testimony and evidence introduced at trial and the court's findings of fact and conclusions of law for each segment are separately addressed below, starting with the AIS and Optical novation agreement issues and then proceeding with the segment closing calculations for each segment.
II. The AIS and Optical novation agreements did not act to waive and transfer Raytheon's CAS 413 segment closing claims
A. The AIS novation agreement
1. Testimony and evidence presented on the formation of the AIS novation agreement
AIS was established as a segment on January 1, 1999 from a consolidation of various businesses that Raytheon had previously acquired between 1995 and 1997: E-Systems, Inc. ("E-Systems"), Chrysler Technologies Airborne Systems ("CTAS"), and Texas Instrument ("TI") Systems. Pl.'s Ex. ("PX") 19.0002. The AIS segment was sold to L-3 Communications Integrated Systems ("L-3") on March 8, 2002.
AIS novation agreement;
The government contends that this waiver and release bars Raytheon's CAS claim for $56,274,371.39 from the sale of the AIS segment. Raytheon argues that the subject waiver and release does not extend to CAS claims. If the court finds that it does, then Raytheon argues the parties' actions demonstrate that the contract language should be reformed to exclude CAS claims because the parties did not intend to include those claims or that the parties' actions subsequent to the execution of the novation agreement vitiated the waiver with regard to those claims.
At trial, Raytheon presented testimony and evidence on the formation of the AIS novation agreement from John McGrath (DCMA Raytheon Corporate Office Defense Corporate Executive ("DCE")
The government sought to show through these same witnesses
The testimony and evidence received regarding the relationship between the AIS novation agreement and Raytheon's AIS segment closing claim is summarized below.
a. John McGrath
The parties presented the testimony of Mr. John McGrath—the government signatory to the AIS novation agreement—who testified regarding his involvement with the preparation and signing of the AIS novation agreement. Mr. McGrath testified that he worked for the DCMA from 1984 to 2006, and was assigned to Raytheon throughout his time with the DCMA. Tr. 1316.
In connection with the multiple Raytheon segment closings that took place in the early 2000s, including the AIS segment closing, Mr. McGrath testified to informal daily meetings held with his four person team, which at times included discussion of both CAS 413 issues under the purview of Mr. Dowd and corporate restructuring issues (including advance agreements
Mr. McGrath also attended a December 4, 2002 meeting at the DCMA's L-3 headquarters in New York. Tr. 1339-40. At this meeting, individuals from the DCMA and the DCAA responsible for reviewing all aspects of the sale of AIS from Raytheon to L-3 discussed topics including the AIS novation agreement and the CAS 413 segment closing.
Sometime between November 11, 2003 and November 14, 2003, while considering Raytheon's CAS 413 segment closing adjustment proposal for AIS, Mr. McGrath signed the AIS novation agreement on behalf of the government. Tr. 1329, 1376-77; PX 347.0003. Mr. McGrath testified that he did not believe when he signed the novation agreement that Raytheon had waived its CAS 413 claims under clause (b)(1), nor had anyone from the government, outside of this litigation, ever suggested to him that novation agreements affect CAS 413 claims. Tr. 1377, 1379. Mr. McGrath testified to his understanding of the purpose of the AIS novation agreement as follows:
Tr. 1378.
On December 1, 2003, Mr. McGrath sent another e-mail to Raytheon indicating that while he was still of the view that CAS 413 surpluses and deficits should be offset against one another, he had been informed by DCMA counsel, Mr. Brian Kingston, on November 19, 2003 that he would not be able to offset surpluses and deficits. . Tr. 1362-64; PX 335. This represented a change in the DCMA's position.
In July 2004, the DCMA and the DCAA issued a Joint Guidance regarding CAS 413 segment closing adjustments based on the ruling of the Court of Federal Claims in
Following receipt of the September 30, 2004 letter, Raytheon submitted an updated segment closing calculation and a demand for a contracting officer's final decision to Mr. McGrath. PX 19. Mr. McGrath denied Raytheon's CAS 413 segment closing claim for AIS on March 7, 2005. Tr. 1372-73, 1376; PX 20. The principle reason for denying the claim was again based on the failure to fund the pension costs in the current tax year. Tr. 1373; PX 20 ("Because Raytheon did not fund what it proposes as [the] Government's share of the AIS deficit in the year of segment closing, any deficit identified by Raytheon and proposed as an adjustment under CAS 413 is therefore an unallowable cost."). Mr. McGrath also noted another possible basis for denial:
Tr. 1373-74; PX 20.
On examination by the government, Mr. McGrath testified that when he signed the novation agreement on behalf of the government, he did not have any contact or conversation with the signatories for Raytheon or L-3 and never discussed the meaning of any of the paragraphs of the novation agreement. Tr. 1382. Mr. McGrath further testified that the government could not reimburse Raytheon unless Raytheon had funded the pension plan in the amount requested. Tr. 1383. Finally, Mr. McGrath testified that he did not receive a "claim" from Raytheon with respect to the AIS pension deficit until January 24, 2005. Tr. 1385.
On redirect with Raytheon, Mr. McGrath clarified that he had received a "certified claim" from Raytheon for the AIS segment closing deficit on January 24, 2005. He then explained that when a contractor informally asserts that it is entitled to money that is also considered to be a "claim" in a more "common" sense. Tr. 1385-86. Mr. McGrath further testified that prior to January 2005 he had himself referred to Raytheon's CAS 413 pension deficit proposal for AIS as a "claim" in the "common" sense including in an October 4, 2002 e-mail to Raytheon. Tr. 1386-87; PX 385.
b. Rodger Christiansen
Raytheon presented the testimony of Mr. Rodger Christiansen, a corporate contract specialist for the DCMA assigned to Raytheon's corporate office with a specialty in corporate restructuring and mergers and acquisitions, who testified regarding his involvement with the preparation of the AIS novation agreement. Mr. Christiansen, who also served for a brief period as the Acting DCE, was the primary person involved in drafting the AIS novation agreement for the DCMA. Tr. 1252, 1255. Mr. Christiansen testified that his primary point of contact with Raytheon on the novation agreement was Mr. James Schepley, and that he also interacted with Mr. James "Vince" McKenzie, who prepared the initial draft of the novation agreement. Tr. 1267-68.
Mr. Christiansen testified to knowing about the L-3 acquisition of AIS from Raytheon and the need for a novation process as early as January 16, 2002. Tr. 1269-71; PX 415. Mr. Christiansen further testified that novation agreements only include contracts for which final payment has not yet been paid, in contrast to closed contracts that are complete and for which final payment has already been made. Tr. 1274-77 ("I would be surprised if Raytheon would include a closed contract."). At the time he was working on the AIS novation agreement, he was aware that Raytheon's CAS 413 claims were being handled for the DCMA by Mr. Daniel Dowd, and both he and Mr. Dowd reported to the DCE on these issues. Tr. 1263-64.
On December 4, 2002, Mr. Christiansen attended a meeting of DCMA and DCAA personnel, including Mr. McGrath, Mr. Dowd, and Mr. Kingston, at the DCMA's L-3 headquarters in New York to discuss outstanding items from the AIS sale, including the AIS novation agreement and the ongoing CAS 413 pension reviews. Tr. 1281-83; PX 388. Mr. Christiansen testified that he could not recall any discussion of Raytheon potentially waiving its CAS 413 claims through the novation agreement. Tr. 1282-85. Moreover, Mr. Christiansen identified the open-items list for the regular Open Items meeting held on December 13, 2002, on which the status of the AIS CAS 413 segment closing review was indicated as "In Process, Need Government Participation," without any reference to the novation agreement. Tr. 1286; PX 389. Mr. Christiansen testified that it had never been suggested to him, prior to this litigation, that Raytheon had waived its CAS 413 claims by virtue of signing the AIS novation agreement. Tr. 1314.
The final version of the AIS novation agreement was approved by DCMA counsel on October 30, 2003. Tr. 1312; PX 404. Mr. Christiansen testified that the final version was in the form prescribed by the FAR, and agreed that in his experience deviation from the FAR form novation agreement did not occur. Tr. 1261. Mr. Christiansen testified that during the drafting process he took the position, shared by DCMA counsel Mr. Kingston, that novation agreements must adhere to the FAR language. Tr. 1279-80; PX 416. Mr. Christiansen further testified to multiple exchanges he had with Mr. Kingston, with representatives from L-3, and with Mr. McKenzie, between December 2002 and October 2003, in which Raytheon and the government attempted to ensure that the novation agreement conformed to the "boilerplate FAR language." Tr. 1287-1307. In the course of at least seventeen exchanges with Mr. Kingston, it was never suggested to Mr. Christiansen that Raytheon would waive its CAS 413 claim by signing the AIS novation agreement. Tr. 1312. Nor did Mr. McGrath suggest to Mr. Christiansen that Raytheon would waive its CAS 413 claim under the AIS novation agreement. Tr. 1313.
The AIS novation agreement was signed between November 11 and November 14, 2003 by Mr. John Harris for Raytheon, Mr. Steven Post for L-3, and Mr. John McGrath for the government. Tr. 1257, 1268; PX 347. Mr. Christiansen testified that the AIS novation agreement, as signed, "was in the form prescribed by FAR § 42.1204(i), 48 C.F.R. 42.1204(i) (2002)." Tr. 1260-61.
c. Daniel Dowd
Raytheon presented the testimony of Mr. Daniel Dowd, a corporate cost analyst for the DCMA assigned to Raytheon's corporate office with chief responsibility for overseeing Raytheon's compliance with the CAS. Mr. Dowd testified regarding his involvement with the preparation of the AIS CAS segment closing adjustment at the time the AIS novation agreement was being drafted. Tr. 1162-63, 1214-17.
Mr. Dowd also testified to attending the December 4, 2002 meeting of DCMA and DCAA personnel at the DCMA's L-3 headquarters in New York. He stated that he did not recall any discussion at that meeting of Raytheon risking waiver of its AIS CAS 413 claim by signing the novation agreement. Tr. 1197-99. Mr. Dowd identified the open-items list for the regular Open Items meeting held on December 13, 2002, on which the AIS CAS 413 segment closing review was identified as "In Process, Need Government Participation," without any reference to the novation agreement. Tr. 1199-1201; PX 389. Mr. Dowd testified that he had never prepared an Open Items status report for the AIS segment that mentioned that Raytheon had waived its CAS 413 segment closing claim under a novation agreement. Tr. 1200. Mr. Dowd also testified that prior to 2011 he never heard anyone assert that Raytheon waived its CAS 413 claims pursuant to a novation agreement. Tr. 1213.
In explaining the DCMA's consideration of Raytheon's proposed AIS segment closing adjustment, Mr. Dowd testified that the DCMA had planned to contribute toward Raytheon's deficit segment adjustments by using the deficits to offset Raytheon's surplus segment adjustments. Tr. 1173. Mr. Dowd testified to receiving a copy of Raytheon's initial claim for an AIS segment closing adjustment in a July 12, 2002 letter from Mr. Garvey to Mr. McGrath, which included a calculated deficit by Raytheon's actuary, Mercer, in the amount of $69,814,038. Mr. Dowd forwarded that letter to the DCAA and the DCMA's Contractor Insurance and Pension Review Center ("CIPR Center") for review of the calculations. Tr. 1192-94; PX 56; PX 85; PX 383. Mr. Dowd also testified that he received a copy of Raytheon's government share calculation for the AIS CAS 413 segment closing adjustment on February 25, 2003. Raytheon claimed that the government was responsible for 81.2 percent of the deficit, or $56,688,999. Tr. 1201-02; PX 57.
In a letter dated August 11, 2003 from Mr. McGrath to Raytheon (a letter that Mr. Dowd believed he drafted on Mr. McGrath's behalf), the DCMA announced its initial finding of CAS noncompliance, finding Raytheon's AIS government share calculation was deficient because it was based upon sales data and not pension cost data. Tr. 1202-03; PX 337. In drafting the letter, Mr. Dowd consulted with DCMA counsel Mr. Kingston, and Mr. Kingston made no reference to denying Raytheon's CAS 413 claim on the basis of a novation agreement. Tr. 1203-04. As of October 14, 2003, the DCMA was continuing to consider, and Raytheon was continuing to pursue, Raytheon's AIS CAS 413 claim, and the DCAA was working with Raytheon to gather additional data to calculate the government participation rate for AIS. Tr. 1204-05; PX 89. These efforts actively continued into November 13, 2003, Tr. 1205-06; PX 61, at approximately the same time the AIS novation agreement was being signed, Tr. 1206-07. Mr. Dowd also received a copy of a December 1, 2003 e-mail from Mr. McGrath to Mr. Murphy indicating that, on advice of counsel dated November 19, 2003, he would not be permitted to offset Raytheon's pension surpluses against Raytheon's pension deficits. Tr. 1207; PX 335. However, he also understood that Mr. McGrath's still intended as of December 1, 2003 to reimburse Raytheon for the CAS 413 segment closing deficits, including the AIS segment deficit. Tr. 1209; PX 335. Mr. Dowd agreed that Raytheon continued to pursue reimbursement for the government's share of the AIS segment closing claim after November 2003 when it signed the AIS novation agreement, and that the DCMA and the DCAA continued to consider that claim after November 2003. Tr. 1212.
On examination by the government, Mr. Dowd testified that he did not consult the AIS novation agreement when he was reviewing the CAS 413 segment closing adjustment calculations for AIS, and reiterated that he did not participate in negotiating or drafting the AIS novation agreement. Tr. 1234-35. Moreover, Mr. Dowd testified that he had never read the waiver language in the AIS novation agreement during that time. Tr. 1235. He further testified that he continued to work on the CAS 413 issues after November 2003 because he had not been informed by anyone that Raytheon had waived its rights. Tr. 1235. Mr. Dowd testified that much of his effort during this time was dedicated to locating government share information. Tr. 1237. Mr. Dowd clarified that Raytheon's AIS segment closing calculation was noncompliant not only because it was based on sales rather than pension cost data, but also because it was based on an unrepresentative period. Tr. 1236-37; PX 337. Mr. Dowd further testified that the December 2002 meeting he attended at the DCMA's L-3 corporate headquarters occurred prior to Raytheon's filing of a certified claim. Tr. 1236. Mr. Dowd clarified that, to his knowledge, the first claim that DCMA received from Raytheon for the AIS segment closing adjustment was dated January 24, 2005. Tr. 1238; PX 19 (certified claim signed by Mr. Biggs Porter on behalf of Raytheon).
On reexamination by Raytheon, Mr. Dowd agreed that in the common sense of the word "claim," Raytheon had expressed to the government a belief that money was due to it well before 2005. Tr. 1239-40.
d. James Schepley
Raytheon also presented the testimony of Mr. James Schepley, Raytheon's Director of Policy for contracts at the time of the AIS segment closing in early 2002. He testified about his involvement in the preparation of the AIS novation agreement.
Mr. Schepley joined Raytheon following a twenty-four year career with the United States Air Force in which he reached the rank of full Colonel. Tr. 980. Approximately half of his Air Force career included responsibility for government contracting. Tr. 980. As Raytheon's Director of Policy for contracts for the corporation, Mr. Schepley's duties included overseeing all training activities for contracts and maintaining and modifying corporate policies regarding contracts when there were changes to the FAR or any of the supplements thereto that would affect Raytheon. Mr. Schepley also was responsible for overseeing other "special opportunities" including, as is pertinent to this litigation, novation of the contracts associated with the AIS segment. Tr. 984-85. Mr. Schepley testified that a novation agreement serves to transfer contract responsibilities to a third party and requires agreement by all three parties involved—in this case L-3, Raytheon and the government. Tr. 986. Mr. Schepley testified that a novation agreement contains the terms of the agreement itself, taken from the FAR, and an attached list of all the contracts that will be transferred—in this case from Raytheon to L-3.
Mr. Shepley coordinated and oversaw the preparation of the AIS novation agreement by the Contracts Group at Raytheon. Tr. 985. Mr. Schepley, along with Mr. McKenzie, drafted a letter of notification of the sale of AIS to L-3 on April 18, 2002, wherein they included a preliminary list of contracts that Raytheon expected to transfer to L-3 along with an anticipated request for a novation agreement. Tr. 989-90; PX 381. Mr. Schepley and Mr. McKenzie also drafted a novation agreement using the standard FAR language and sent this draft agreement to Mr. Christiansen. Tr. 990. Thereafter, pursuant to the FAR, the government reviewed L-3's management and financial capability to execute the contracts that were to be transferred under the novation agreement. Tr. 990. Following this review, which took approximately one and a half years, Raytheon again became involved in the novation process in Fall 2003. Tr. 990-91. The AIS novation agreement was executed in November 2003. Tr. 992; PX 347. Prior to execution of the agreement, Mr. Schepley was involved in the review of early draft versions, the purpose of which was to ensure that the language in the agreement "was consistent with" FAR Part 42.12 and the supplement to Part 42.12 in the Defense FARs, which provide for the addition of certain language to the FAR language. Tr. 992; PX 366; PX 367. It was Mr. Schepley's experience, both with Raytheon and with the Air Force, that sample contract language from the FAR was routinely used. Tr. 996. Mr. Schepley testified that, in his many years of government contracting experience, it was rare to negotiate deviations in language from the FAR, including the FAR form novation agreement, because the objective of the FAR is to standardize government contracts and because much of the FAR is governed by other federal law such that deviation may require different levels of approval. Tr. 996-97.
Mr. Schepley testified that he was unaware of any conversations concerning the scope of clause (b)(1) during the time the novation agreement was being drafted and that, prior to this litigation, no one suggested to him in any context that Raytheon waived its CAS 413 segment closing adjustment claims by virtue of the novation agreement. Tr. 999-1000.
On examination by the government, Mr. Schepley agreed that it was beneficial for both the government and the contractor to have uniformity and certainty in contracting through the various provisions of the FAR. Tr. 1001-02. Mr. Schepley also testified about two drafts of the AIS novation agreement dated March 4, 2002 and April 29, 2002 that included language in clause (b)(1) identical to that in the FAR form novation agreement found at FAR subpart 42.12. Tr. 1005-06, 1015; DX 209; DX 210. In a draft dated May 31, 2002, additional language had been added to clause (b)(1). Tr. 1018-19; DX 213 (including language that read, "Such claims and rights are recognized to have been transferred to the transferee"). At that time, there was a break in discussions over the novation agreement while the government performed a review of L-3's capability to take on the contracts that were to be transferred. Tr. 1022-23. In October 2003, Mr. Schepley was again brought in by Mr. John Harris to help complete the drafting process for the AIS novation agreement. Tr. 1023-24; DX 215. Mr. Schepley then asked Mr. McKenzie to take a look at the agreement, and thereafter Mr. McKenzie took the lead on commenting on the agreement. Tr. 1026. Mr. Schepley further testified that he did not have any discussions about the effect of the waiver in clause (b)(1) of the novation agreement and that he made no personal effort to determine whether there were any contract claims that Raytheon wished to exclude from the waiver in clause (b)(1). Tr. 1026-27.
e. James "Vince" McKenzie
Raytheon also presented the testimony of Mr. James "Vince" McKenzie, a senior contracts administrator with Raytheon, who testified regarding his involvement with the preparation of the AIS novation agreement. Tr. 1036. Mr. McKenzie was involved in producing the list of contracts to be transferred (or novated) to L-3 and writing the initial draft of the novation agreement itself. Tr. 1038. Mr. McKenzie testified that within the list of contracts there were both active contracts and completed contracts for which final payment had not yet occurred. Tr. 1039. Mr. McKenzie explained that more effort was expended in finalizing the list of contracts than in drafting the novation agreement, which he did by referring to FAR Part 42 at the direction of Mr. Schepley. Tr. 1038-39. Specifically, Mr. McKenzie used language from FAR 42.1204(i) to produce the initial draft of the AIS novation agreement. Tr. 1040-41 ("I had to fill in the blanks and so forth."); PX 427. Mr. McKenzie testified that his only thought process in copying clause (b)(1) into the AIS novation agreement was "use the FAR." Tr. 1042. In Fall 2003, when the parties were finalizing the AIS novation agreement, Mr. McKenzie was involved in reviewing the novation agreement and updating the final list of contracts to be novated by the agreement. Tr. 1044-45; PX 396; PX 397. After reviewing a draft of the novation agreement that existed in Fall 2003, Mr. McKenzie sent an e-mail to Mr. Schepley, Mr. Harris, and Mr. Christiansen that compared the draft to the FAR language. Tr. 1047-49.
Mr. McKenzie articulated his understanding of the purpose of the novation agreement as "at a date and time you snap a line and you take all ongoing contracts and any inactive contracts that had not yet been finally closed and you transfer those performance obligations, performance obligations related to those contracts, from — from say Raytheon to the new entity, L-3; and of course, the corresponding payment obligation for . . . performance of those contracts would then go to L-3 as opposed to Raytheon." Tr. 1042. With respect to his understanding of the effect of Raytheon's waiver on its AIS CAS 413 segment closing claim, at the time he prepared the draft novation agreement, and up until his participation in this litigation in 2011, Mr. McKenzie testified that he "didn't know anything about CAS 413." Tr. 1042-43. Mr. McKenzie further testified that he never had a conversation with anyone concerning Raytheon's CAS 413 segment closing claims prior to 2011. Tr. 1050.
f. John Harris
Raytheon also presented the testimony of John Harris, Raytheon's Vice President and Director of Contracts at the time the AIS novation agreement was signed, who testified to his involvement as the Raytheon signatory to the AIS novation agreement. Tr. 1083. Mr. Harris has held an array of contract management positions at every level within Raytheon over his 28 year career.
g. Michael Garvey
Raytheon presented the testimony of Michael Garvey, Raytheon's Director of Benefits Finance from 2000 through May 2003, who testified regarding his involvement in preparing Raytheon's proposed AIS CAS 413 segment closing adjustment. Tr. 254. Mr. Garvey was responsible for working with Raytheon's Actuary, Mercer, to produce Raytheon's CAS 413 segment closing analyses, including the segment closing analysis for the AIS divestiture. Tr. 255-56.
Mr. Garvey testified that in all his time working on the AIS segment closing calculations, no one ever suggested to him that Raytheon's CAS 413 claim for the AIS segment was precluded by a novation agreement between Raytheon and the government. Tr. 293-94. Mr. Garvey further testified that, to his knowledge, the subject of novation agreements had never come up in any context related to the AIS segment closing and that he was never involved in any discussions related to the AIS novation agreement. Tr. 293-94, 330.
h. Deborah Tully
Raytheon presented the testimony of Deborah Tully, Raytheon's Director of Benefits Finance beginning in May 2003, when she replaced Michael Garvey. Tr. 427. Ms. Tully, prior to being hired by Raytheon, worked in a variety of consulting capacities, including as an actuarial consultant and team leader for actuarial analysts at Mercer.
Ms. Tully was responsible for helping to gather government participation data for the CAS 413 segment closing analysis for the AIS segment, a task that she worked on with Mr. Terrence Murphy. Tr. 443-445. Ms. Tully also consulted with the DCMA and the DCAA in preparing her segment closing calculations. Tr. 445.
Ms. Tully testified that in all her time working on the AIS segment closing calculations, no one ever suggested to her that Raytheon's CAS 413 claim for the AIS segment was precluded by a novation agreement. Tr. 452. Ms. Tully further testified that she had no understanding of novation agreements prior to this litigation. Tr. 457-58.
i. Terrence Murphy
The parties also presented the testimony of Mr. Terrence Murphy, Raytheon's Assistant Controller for Government Accounting from 2000 to 2005, who testified regarding his involvement in preparing Raytheon's proposed AIS CAS 413 segment closing adjustment.
Mr. Murphy testified that when he was working on the AIS CAS 413 segment closing adjustment, he had no knowledge at all about the specific terms of the AIS novation agreement and was not involved in the creation of the novation agreement, though he was aware that a novation agreement was required when a business is sold to another business. Tr. 227-28. He also reemphasized that he never had any discussion with anyone from Raytheon or the government about the terms of the AIS novation agreement until this litigation. Tr. 229.
j. Robert Cann
The parties presented the testimony of Robert Cann, a Raytheon corporate manager of Government Accounting from November of 2001 to 2005 and director of Corporate Government Accounting following the retirement of Mr. Murphy. Tr. 369. In both capacities, Mr. Cann was responsible for interfacing with the DCAA and the DCMA regarding government accounting issues at the corporate level. Tr. 369. Mr. Cann was responsible, along with Mr. Murphy, for computing the government's share of the CAS 413 segment closing adjustment amount. Tr. 374. Along with Mr. Murphy, Mr. Cann was also responsible for preparing and negotiating Raytheon's corporate restructuring package with the government for the divestiture of the AIS segment, including Raytheon's CAS 413 segment closing adjustment proposal. Tr. 369-70, 389. Mr. Cann testified to a general understanding that a novation agreement was normally needed when a business is sold. Tr. 389. He further testified that during the negotiations regarding the AIS segment closing adjustment, the issue of the AIS novation agreement never came up and that he never heard anyone say that the novation agreement precluded Raytheon's CAS claims. Tr. 389. Mr. Cann further testified that he had no understanding one way or the other as to whether Raytheon had waived and transferred its AIS segment closing claim in the AIS novation agreement. Tr. 416-17.
2. Findings of fact and conclusions of law
The consistent and overwhelming evidence adduced at trial establishes that not one of the government or Raytheon employees involved in the processing and signing of the AIS novation agreement or in the negotiations surrounding the AIS CAS 413 segment closing adjustment (several of whom were involved in both) understood that the waiver set forth in the AIS novation agreement, which was taken from FAR 42.1204(i),
In light of the consistent testimony of Raytheon and government employees, Raytheon once again seeks reconsideration of the court's earlier ruling that the novation agreement may bar the AIS CAS 413 segment closing claim. Raytheon argues that, consistent with all of the testimony, as a matter of law the novation agreement does not extend to Raytheon's segment closing claim. In the alternative, Raytheon argues that to the extent the novation agreement has some legal bearing on the segment closing claim, the evidence establishes that the novation agreement should be reformed to comport with the parties' contemporaneous and common understanding or vitiated to the extent the novation agreement bars the segment closing claim.
The government argues based on this same consistent testimony of government and Raytheon employees that reconsideration of the court's earlier ruling should not be granted. The government asserts that nothing in the testimony undercuts the government's legal contention that the novation waiver language set forth in FAR 42.1204(i) and incorporated into the AIS novation agreement bars Raytheon's AIS CAS 413 pension deficit-related claim. According to the government, the language in the agreement, which incorporated the FAR waiver provision, is intended to protect the government from further liability to Raytheon for contractual claims "in connection" with segment contracts and thus extends to Raytheon's CAS 413 claim that arises from the contracts held by AIS. The government argues that the court must interpret the waiver provision in light of the FAR and its general purposes and that the opinions of government and Raytheon employees are not relevant to the meaning of the novation agreement waiver.
The government further contends that the undisputed evidence establishes that the novation agreement waiver was not vitiated by government actions taken after the waiver was signed, because Raytheon did not file a "formal" claim for payment of the CAS 413 segment closing adjustment until after the novation agreement was signed by the parties. The government argues that Raytheon's submission of CAS 413 calculations to the government's contracting officer and the contracting officer's review of those calculations prior to and subsequent to the execution of the novation agreement was not enough to vitiate the waiver. In support of its legal argument, the government relies upon
Given the overwhelmingly consistent testimony of the government and Raytheon witnesses discussed above, the court finds that it must reconsider its earlier reading of the novation agreement waiver in
The court turns first to the purpose of novation agreements and of the waiver provision in particular. There is no doubt that the novation agreement authorized in the FAR is intended to protect the government. Through a novation agreement, the government legally recognizes a successor-in-interest to a government contract (or a list of contracts) following a transfer of that contract that would otherwise be prohibited by the Anti-Assignment Act. Generally speaking, the Anti-Assignment Act, 41 U.S.C. § 15, prohibits the transfer of a government contract.
The policies and procedures for implementing novation agreements that are codified at FAR 42.1204, allow the government, when it determines that it is in its interest, to enter into novation agreements for the recognition of a third party as a successor-in-interest to a government contract.
Federal contracting regulations have historically contemplated that a novation agreement shall ordinarily provide in part that:
Because the subject novation agreement is taken directly from FAR 42.1204, the court agrees with the government that it must construe the provision to effectuate the intent of the promulgators and not the parties.
Here, the court concludes that when it construes the above-quoted language in light of its purposes the waiver set forth in the novation agreement it must reject the government's reading. The waiver is intended to protect the government from multiple claims that might arise "in connection with" the specific contracts that are transferred from the seller to the buyer and identified in the attached lists.
In this connection, it is significant that Raytheon's pension obligations with regard to its former AIS employees were not transferred to L-3. Rather, under the asset sale purchase agreement to L-3, Raytheon retained its pension liabilities for its AIS employees. PX 41.0112 ("The Sellers shall retain all liability and responsibility for the defined benefit pension plans maintained by the Sellers in which Transferred Employees participate as of the Closing . . . ."). Because the pension obligation to the AIS employees was not transferred and the right of AIS employees to a pension is not specific to any of the novated contracts, nor any other specific contracts, the novation waiver was not triggered with respect to Raytheon's continuing pension obligations. Moreover, because Raytheon retained the pension liabilities, the government does not face the possibility of any conflicting pension-related claims for AIS employees from both Raytheon and L-3.
The importance of Raytheon retaining liability for the AIS pension is confirmed by the fact that under the CAS, if Raytheon had transferred all the pension funds and obligations associated with the AIS segment employees to L-3 as part of the sale, the sale would not have triggered a segment closing adjustment under CAS 413.
Finally, the court agrees with Raytheon that the court's reading of the novation agreement is further confirmed by the Federal Circuit's recent decision in
It is for all of these reasons that Raytheon's claim for payment of the AIS pension deficit based on its CAS 413 segment closing calculations is not barred by the waiver provided for in the AIS novation agreement. Accordingly, the court will consider Raytheon's AIS pension deficit claim.
B. The Optical novation agreement
1. Testimony and evidence presented on the formation of the Optical novation agreement
Raytheon acquired the Optical segment through its merger with Hughes Aircraft Company in December 1997 and sold it to B.F. Goodrich Company ("B.F. Goodrich") on March 1, 2001. By the terms of the asset purchase agreement between Raytheon and B.F. Goodrich, Raytheon retained the pension plan assets and actuarial accrued liabilities for Optical.
The Optical novation agreement was also modeled on the FAR 42.1204(i) form novation agreement. The standard text of clause (b)(1) included in the agreement reads as follows:
Optical novation agreement;
As noted above, the government contends that the above-quoted waiver in the novation agreement bars Raytheon's CAS claim for $8,693,533.76 from the sale of the Optical segment to B.F. Goodrich. Raytheon contends, as it did with regard to the AIS novation agreement, that the subject waiver in the Optical novation agreement does not extend to CAS claims, or if it does, the parties' actions both before and after entering into the novation agreement demonstrate that the contract language should be reformed to exclude CAS claims or vitiated with regard to the CAS 413 claim.
At trial, the parties presented testimony
a. John McGrath
DCE McGrath testified regarding his involvement with the review of Raytheon's CAS 413 segment closing claim arising from the sale of the Optical segment following execution of the Optical novation agreement.
Beginning in April 2002, Mr. McGrath became the DCMA's Raytheon Corporate Office DCE. Tr. 1317.
Mr. McGrath further testified that from January 2003 until September 30, 2004, the DCMA and the DCAA put a significant amount of time and effort into researching Raytheon's deficit calculations for its CAS 413 Optical segment closing claim. Mr. McGrath testified that he would not have requested this expenditure of resources if he had known he was going to deny Raytheon's request for government participation in the Optical segment closing adjustment. Tr. 1348. On February 10, 2003, Mr. McGrath sent Raytheon another e-mail restating his plan to settle all the CAS 413 segment closings individually while determining the final amount owed collectively as an offset and noting that his superiors at the DCMA had agreed. Tr. 1348-49; PX 333. Mr. McGrath had also consulted with DCMA counsel, Mr. Kingston, on this proposal. Tr. 1349. At a June 30, 2003 Open Items meeting, the Optical segment closing was again on the agenda. PX 393; Tr. 1353. Once again, waiver of Optical segment closing claims under a novation agreement was not discussed.
On December 1, 2003, Mr. McGrath sent another e-mail to Mr. Murphy indicating that he believed that CAS 413 surpluses and deficits should be offset against one another, but this view was not shared by DCMA counsel and thus he would not be able to carry out the offset plan. Tr. 1362-64; PX 335. Mr. McGrath testified that this e-mail represented a change in the DCMA's position. Tr. 1364. Despite the change in position on offsets, Mr. McGrath testified that he still intended to cover the government's share of Raytheon's Optical pension deficit. Tr. 1365. The Optical segment closing was again on the agenda at the December 11, 2003 and February 12, 2004 Open Items meetings without any discussion of the waiver in Optical's novation agreement. Tr. 1365-68; PX 408; PX 410. Indeed, Mr. McGrath reiterated in his testimony that he "had made an offer to Mr. Murphy to settle the Optical, so I don't think it was still being evaluated . . . . I ha[d]n't closed it." Tr. 1367. And again, at the June 10, 2004 Open Items meeting, the Optical segment closing was on the agenda, and Mr. McGrath was still considering Raytheon's request for government participation in the Optical segment's pension deficit. Tr. 1368; PX 412.
As noted above, in July 2004, the DCMA and the DCAA issued the DCMA/DCAA Joint Guidance. Tr. 1368-69; DX 114. Consistent with this guidance, Mr. McGrath denied Raytheon's request for government participation in the Optical CAS 413 segment closing pension deficit on September 30, 2004. Tr. 1368-69. The reason cited by Mr. McGrath for disallowing the pension costs was Raytheon's failure to fund the Optical pension costs by the federal tax deadline for the year of the segment closing. Tr. 1370; PX 298. Mr. McGrath did not cite the novation agreement as a reason for the disallowance. Tr. 1370. Following the September 30, 2004 letter, Raytheon submitted an updated segment closing calculation and a demand for a contracting officer's final decision. PX 25. Mr. McGrath denied Raytheon's CAS 413 segment closing claim for Optical on February 1, 2005. Tr. 1372; PX 26. The stated reason for denying the claim was Raytheon's failure to fund the pension costs in the current tax year. Tr. 1372; PX 26 ("Because Raytheon did not fund what it proposes as the Government's share of the Optical Systems' deficit amount in the year of the segment closing, any deficit amount identified by Raytheon and proposed as an adjustment under CAS 413 is therefore an unallowable cost.").
b. Daniel Dowd
Mr. Daniel Dowd also testified regarding his involvement with the preparation of the Optical CAS segment closing adjustment following execution of the Optical novation agreement.
Mr. Dowd testified that as of April 30, 2001, six weeks after the signing of the Optical novation agreement, the government cited Raytheon for failing to complete a CAS 413 segment closing adjustment for the sale of Optical to B.F. Goodrich. Tr. 1174; PX 343. At this time, the government was "still waiting to get any kind of calculation or claim or anything from Raytheon on that issue." Tr. 1221.
Mr. Dowd testified that Raytheon's initial CAS 413 segment closing calculation for the Optical segment, dated October 9, 2001 (approximately seven months after the Optical novation agreement was signed) asserted a $9,558,952 deficit associated with the Optical pension plan. Tr. 1176-77; PX 78. On October 18, 2001, Mr. Dowd sent a memo to the DCAA, requesting that the DCAA review Raytheon's CAS 413 submission for Optical. Tr. 1178-79; PX 371. The DCAA was "principally responsible for addressing the government participation." Tr. 1222. Also on October 18, 2001, Mr. Dowd sent a memo to the DCMA CIPR Center requesting that the CIPR Center review the segment closing adjustment calculation. Tr. 1179; PX 372. Mr. Dowd testified that the CIPR Center "would have reviewed the adjustment amount, the assets minus the liabilities. . . . Hopefully if we got the CIPR [report] in time, DCAA would incorporate the CIPR report into their final audit report and provide a bottom line number." Tr. 1221-22. Mr. Dowd testified that he would not have sent these two letters requesting review of these calculations if he had believed that Raytheon had already waived its Optical claim. Tr. 1179. Mr. Dowd testified to receiving a February 11, 2002 e-mail from DCMA counsel Mr. Kingston, stating that no one in the government had taken the position that the government would not participate in deficit segment closing adjustments. Tr. 1171-72; PX 376.
Mr. Dowd testified that as of June 18, 2002, the DCMA CIPR Center was still reviewing Raytheon's segment closing calculations for the Optical segment. Tr. 1181-82; PX 84. Mr. Dowd testified that as of August 14, 2002, the DCAA was still auditing Raytheon's segment closing calculations for the Optical segment. Tr. 1181. Mr. Dowd testified to receiving an August 14, 2002 audit report from the DCAA about the Optical segment, which incorporated the June 18, 2002 CIPR Center Report. Tr. 1179-81; PX 84. The audit report stated that the DCAA had accepted Mercer's deficit calculation submitted on behalf of Raytheon on March 7, 2002 and had also accepted Raytheon's proposed government participation percentage, determining that the government's share of the Optical deficit would be $8,182,463.
Mr. Dowd testified that it was his understanding that the DCMA was planning to use deficits to offset surplus segments. Tr. 1173. Mr. Dowd also testified to being copied on a December 9, 2002, e-mail from Mr. McGrath to Raytheon in which Mr. McGrath described an agreement between Raytheon and the government to settle all the CAS 413 segment closings together and offset surpluses and deficits against each other. Tr. 1182; PX 331. Mr. Dowd identified the open-items list for the regular Open Items meeting held on December 13, 2002; on the list, the Optical CAS 413 segment closing review was characterized as "DCAA completed field work. DCAA had an exit with Raytheon on preliminary audit results. $8 million in adjustment due to Raytheon," with no reference to a novation agreement. Tr. 1199-1201; PX 389. Mr. Dowd testified that he never prepared an Open Items status report for the Optical segment that mentioned that Raytheon had waived its CAS 413 segment closing claim by virtue of a novation agreement. Tr. 1200. Mr. Dowd also testified that prior to 2011 he never heard anyone assert that Raytheon waived its CAS 413 claims pursuant to a novation agreement. Tr. 1213.
Mr. Dowd further testified that he was the likely author of an April 22, 2003 letter from Mr. McGrath to Mr. Murphy at Raytheon, with a copy to Mr. Dowd, which stated that the DCMA agreed that the deficit adjustment amount for the Optical segment closing proposal was $8,182,463. Tr. 1192; PX 269.
Mr. Dowd also received a copy of a December 1, 2003 e-mail from Mr. McGrath to Mr. Murphy indicating that on advice of counsel dated November 19, 2003, the government would not be permitted to offset Raytheon's segment closing surpluses and deficits. Tr. 1207; PX 335. However, the e-mail indicated that Mr. McGrath still intended to reimburse Raytheon for its CAS 413 Optical segment closing deficit. Tr. 1209; PX 335 ("for all situations where the Government has liability to Raytheon, it is still my intention to adjust final rates to reimburse Raytheon for these amounts"). Once the DCMA/DCAA Joint Guidance on the Teledyne decision came out in July 2004, the government took the position that it would not participate in any deficit segment closings where the pension costs had not been funded by the federal tax deadline for the year of the segment closing. Tr. 1210. The DCMA denied Raytheon's Optical claim for a segment closing adjustment on September 30, 2004, based on the current tax year funding requirement in the Joint Guidance. Tr. 1210-11; PX 298. After receiving the denial letter, Raytheon submitted a demand for a final decision for the Optical segment, which was denied by Mr. McGrath on February 1, 2005. Tr. 1211, 1231; DX 126; PX 26. Mr. Dowd testified that he understood that in the common sense of the word "claim," Raytheon believed that money was due to it and expressed that belief to the government well before 2005. Tr. 1239. Mr. Dowd agreed that Raytheon continued to pursue reimbursement for the government's share of the Optical segment closing deficit after the Optical novation agreement was signed in March 2001, and that the DCMA and the DCAA continued to consider that claim after March 2001. Tr. 1212.
c. Rodger Christiansen
Raytheon presented the testimony of Mr. Rodger Christiansen regarding the Optical novation agreement and CAS 413 segment closing.
In addition to providing a template for the Optical novation agreement, while acting as DCE, Mr. Christiansen received a letter from Raytheon in connection with the Optical CAS 413 segment closing on October 9, 2001, which constituted Raytheon's initial CAS 413 submission for the Optical segment. Tr. 1264-65; PX 78. Enclosed with Raytheon's letter was a calculation prepared by Mercer on behalf of Raytheon identifying a $9,558,952 deficit in the Optical pension funds.
On December 4, 2002, Mr. Christiansen also attended the meeting of DCMA and DCAA personnel at the DCMA's L-3 headquarters in New York to discuss outstanding items including the Optical and AIS segment closings. Tr. 1281-82; PX 388. Mr. Christiansen testified that he could not recall there being any discussion of Raytheon having waived its CAS 413 claims through the Optical or AIS novation agreements. Tr. 1282-85. Mr. Christiansen testified that it had never been suggested to him prior to this litigation that Raytheon had waived its CAS 413 claims by signing the Optical novation agreement. Tr. 1314.
d. Scott Faith
The parties presented the testimony of Mr. Scott Faith, Raytheon's Director of Contracts for the Surveillance and Reconnaissance Business at the time the Optical novation agreement was signed, who testified to his involvement as the Raytheon signatory to the Optical novation agreement. Tr. 1133. Mr. Faith has worked for Raytheon and Hughes Aircraft Company (prior to its acquisition by Raytheon) for twenty-eight years. Tr. 1130.
As Director of Contracts for the Surveillance and Reconnaissance Business, Mr. Faith was responsible for the oversight, management, administration, negotiation and closure of all contracts related to that business. Tr. 1133. The Optical Systems business reported to the Surveillance and Reconnaissance Systems business. Tr. 1134. With respect to the Optical novation agreement, Mr. Faith was responsible for obtaining the list of contracts that were to be novated to B.F. Goodrich, and he ultimately signed the novation agreement on behalf of Raytheon. Tr. 1133-34. Prior to signing the novation agreement, Mr. Faith reviewed a list of contracts prepared by the Optical contracts lead employee against the list that he had in his database to ensure that he had a complete list of contracts. Tr. 1133-34. This list included both active contracts (those for which performance remains ongoing) and inactive contracts (those for which performance is ended but final payment has not been received), but not closed contracts (those for which performance is ended and final payment had been received). Tr. 1137, 1141. Mr. Faith testified that the list of contracts that went along with the novation agreement involved more time and effort to put together than the novation agreement itself. Tr. 1135. With regard to the novation agreement itself, Mr. Faith testified that he was not involved in its drafting, that he was unaware whether it had been prepared by Raytheon or the government, and that he did not comment on or have any communications regarding the language of the agreement before signing it. Tr. 1142-43. Mr. Faith testified to reading the novation agreement before signing it and to understanding that its function was to transfer responsibility for performance of the contracts from Raytheon to B.F. Goodrich. Tr. 1143. Mr. Faith further testified to having no understanding of CAS 413 at the time he signed the novation agreement. Tr. 1144. Mr. Faith explained that responsibility for CAS compliance was housed at the corporate and segment levels because the CAS impact the entire business, not individual contracts. Tr. 1144-45. On questioning by the government, Mr. Faith testified that when he signed the agreement he did not have in mind any particular claims relating to the contracts or any particular intent to carve out any claims relating to the contracts. Tr. 1146-47.
e. Terrence Murphy
The parties also presented the testimony of Mr. Terrence Murphy, Raytheon's Assistant Controller for Government Accounting from 2000 to 2005, who testified regarding his involvement in preparing Raytheon's proposed Optical CAS 413 segment closing adjustment.
Mr. Murphy testified that during the time he was working on the Optical CAS 413 segment closing adjustment, he had no knowledge about the specific terms of the Optical novation agreement and was not involved in the creation of the novation agreement, though he was aware that a novation agreement was required when a business is sold to another business. Tr. 227-28. He also reemphasized that he never had any discussion with anyone from either Raytheon or the government about the terms of the Optical novation agreement until this litigation. Tr. 229.
f. Robert Cann
Raytheon presented the testimony of Robert Cann, a Raytheon corporate manager of Government Accounting from November of 2001 to 2005 and director of Corporate Government Accounting following the retirement of Mr. Murphy. Tr. 369. In both capacities, Mr. Cann was responsible for interfacing with the DCAA and the DCMA regarding government accounting issues at the corporate level. Tr. 369. Mr. Cann was responsible, along with Mr. Murphy, for computing the government's share of the adjustment amount. Tr. 374. Along with Mr. Murphy, Mr. Cann was also responsible for preparing and negotiating Raytheon's corporate restructuring package with the government for the divestiture of the Optical segment, including Raytheon's CAS 413 segment closing adjustment proposal. Tr. 369-70, 389. Mr. Cann testified to a general understanding that a novation agreement was normally needed when a business was sold. Tr. 389. He further testified that during the negotiations regarding the Optical segment closing adjustment, the issue of the Optical novation agreement never came up, and that he never heard anyone say that the novation agreement precluded Raytheon's CAS 413 claim. Tr. 389. Mr. Cann further testified that he had no understanding one way or the other as to whether Raytheon had waived and transferred its Optical segment closing claim in the Optical novation agreement. Tr. 416-17.
g. Michael Garvey
Raytheon presented the testimony of Michael Garvey, Raytheon's Director of Benefits Finance from 2000 through May 2003, who testified regarding his involvement in preparing Raytheon's proposed Optical CAS 413 segment closing adjustment. Mr. Garvey submitted a CAS 413 calculation for Optical on October 9, 2001, PX 78, following Raytheon's receipt of an initial finding of CAS non-compliance on April 18, 2001, PX 257. Mr. Garvey submitted Raytheon's government share calculation for Optical on March 7, 2002. Tr. 273; PX 83. Mr. Garvey was responsible for working with Raytheon's Actuary, Mercer, to produce Raytheon's CAS 413 segment closing calculation for Optical. Tr. 255-56.
Mr. Garvey testified to receiving a DCAA Audit report on the CAS 413 segment closing calculation submitted by Raytheon in which the DCAA took no exception to the total pension deficit proposed by Raytheon or to Raytheon's proposed government pension share. Tr. 276-81; PX 84.
Mr. Garvey testified that in all his time working on the Optical segment closing calculations, no one ever suggested to him that Raytheon's CAS 413 claim for the Optical segment was waived by a novation agreement between Raytheon and the government. Tr. 293-94. Mr. Garvey further testified that the subject of novation agreements never come up in any context related to the CAS 413 segment closing and that he was never involved in any discussions related to the Optical novation agreement. Tr. 293-94, 330.
h. Deborah Tully
Raytheon presented the testimony of Deborah Tully, Raytheon's Director of Benefits Finance beginning in May 2003, when she replaced Michael Garvey. Tr. 427. Ms. Tully testified regarding her involvement in preparing Raytheon's proposed Optical CAS 413 segment closing adjustment.
In her role at Raytheon, Ms. Tully was responsible for helping to gather government participation data for the CAS 413 segment closing analysis for the Optical segment, a task that she worked on with Mr. Terrence Murphy. Tr. 443-445. Ms. Tully also requested the assistance of the DCMA and the DCAA in her search. Tr. 445.
Ms. Tully testified that in all her time working on the Optical segment closing calculations, no one ever suggested to her that Raytheon's CAS 413 claim for the Optical segment was waived by a novation agreement. Tr. 452. Ms. Tully further testified that she had no understanding of novation agreements prior to this litigation. Tr. 457-58.
2. Findings of fact and conclusions of law
As with the AIS segment, the consistent and overwhelming evidence adduced at trial establishes that not one of the government or Raytheon employees involved in the processing and signing the Optical novation agreement or in the negotiations surrounding the Optical CAS 413 segment closing claim understood that the waiver set forth in the Optical novation agreement, which was taken from FAR 42.1204(i),
III. Segment closing calculations
A. AIS segment closing calculations
1. AIS findings of fact
As discussed above, Raytheon created the AIS segment on January 1, 1999 following a merger of various Raytheon holdings and sold the AIS segment to L-3 on March 8, 2002.
There were five Raytheon defined benefit pension plans covering AIS segment employees: 1) E-Systems, Inc. Salaried Employees Retirement Plan ("Greenville Salaried plan"); 2) Retirement Plan for Hourly Employees of Greenville Division of E-Systems, Inc ("Greenville Hourly plan"); 3) Raytheon E-Systems, Inc. Richardson/Waco Plan ("Richardson/Waco plan"); 4) Raytheon TI Systems Employees Pension Plan ("RTIS plan"); and 5) Raytheon Company Pension Plan for Salaried Employees ("Raytheon Salaried plan").
For each plan, as discussed above, the CAS 413-50(c)(12) segment closing provision required Raytheon to calculate the difference between the market value of the pension assets and the actuarial accrued pension liability for the segment. In addition, under CAS 413-50(c)(12)(vi) Raytheon was charged with calculating the government's share of any surplus or deficit amount determined for the segment.
As noted above, AIS and the other segment sales at issue in this case were part of a corporate restructuring program that Raytheon began in 2000. In addition to these segments, some of the segment sales involved pension surpluses, including the RE&C, Semiconductor, and Montek segment closings.
In December 2000, Raytheon submitted its first CAS 413 segment closing adjustment proposal for the surplus RE&C segment. Tr. 31-32 (Murphy); Tr. 1176 (Dowd). Raytheon and government representatives initially agreed to use RE&C as a model for the other segment closing adjustments, delaying submission of other CAS segment closing adjustment proposals until after the audit of the RE&C proposal was completed. Tr. 32-33 (Murphy); 1175 (Dowd); 358 (Garvey) (RE&C was to be used "as a template" for the rest of the segment closing submissions). However, the government later changed course and determined that it could not offset segment deficits and segment surpluses. Rather each segment closing would be resolved separately. PX 343; Tr. 33 (Murphy).
For each segment closing, including AIS, Raytheon submitted its segment closing analysis of pension assets and liabilities based on the calculations made by its pension actuary Mercer. Mercer also prepared reports on its analysis of the pension assets and liabilities of the various segments for review by the DCMA CIPR Center and the DCAA. The DCMA CIPR Center was responsible for reviewing Raytheon's calculation of the pension plan surplus or deficit amount. Tr. 530 (Dyer); Tr. 607-08 (Sheley
The lead Mercer actuaries who worked on these calculations and who testified at trial were Mr. Jonathan Barry (for the AIS and Aerospace segment), Mr. James Winer (for the Optical segment), and Ms. Deborah Tully
Raytheon first submitted its AIS segment closing calculations to the government on July 12, 2002.
In order to find the data necessary to prepare a government share calculation, Raytheon and government witnesses testified that Raytheon worked with the purchaser L-3, as well as the DCMA and the DCAA, to prepare "a reasonable determination of the government participation." Tr. 375 (Cann). In order to assist Raytheon, on January 7, 2003, the contracting officer forwarded Raytheon's request to the DCAA seeking assistance in gathering government participation data for the AIS segment.
During this same time frame, Raytheon provided similar government share calculations based on sales data for all segments, whether they were in surplus or deficit positions. Tr. 46-47 (Murphy) ("[I]f, for example, 75 percent of the sales were U.S. Government CAS covered contracts then we would apply the 75 percent to either the surplus or the deficit to come up with the government share."). The government ultimately agreed to settle surplus segments on the sales data approach.
On July 17, 2003, the DCAA issued an audit report stating that Raytheon's segment closing calculation for the AIS segment was noncompliant with CAS 413-50(c)(12)(vi) because the calculation was (a) based on sales data rather than pension costs and (b) based on an unrepresentative government participation period. PX 99.0001,.0003. The audit report did not identify any issues with respect to Raytheon's calculation of the pension deficit. By letter dated August 11, 2003, the contracting officer notified Raytheon of his initial finding that Raytheon was in noncompliance with CAS 413-50(c)(12)(vi) for the same two reasons stated in the July 17, 2003 DCAA audit report. PX 337. The contracting officer stated: "Raytheon has provided some additional information since its CAS 413 calculation was submitted to the Government in July 2002. Nevertheless, the Government still does not have the pension cost data, nor adequate support for a representative period, to be able to properly determine any adjustment under CAS 413."
As also discussed above, in July 2004, the DCMA and the DCAA issued a Joint Guidance for implementing the Federal Circuit's ruling in
By letter dated January 24, 2005, Raytheon submitted a certified claim
Tr. 1373-74; PX 20.
At trial, Raytheon presented expert testimony from Mr. Steven Vernon
Raytheon's trial expert, Steven Vernon, presented calculations for each AIS pension plan as set forth on the chart below:
PX 428.0024. With regard to the government's share of the AIS ($68,256,693) pension deficit, Raytheon presented evidence to show the government's share of that pension deficit equal to $56,274,371.39, based on the following totals:
Mr. England, on behalf of the government, challenged some of the data and several of the assumptions used by Mr. Vernon to calculate Raytheon's AIS pension assets and liabilities. Mr. England testified that in his opinion Raytheon's AIS pension deficit was $66,215,724, or $2,040,969 less than Mr. Vernon's calculations, broken down as follows:
DX 241.0005. The government also challenged Raytheon's government share calculations. The government presented non-expert testimony and evidence to show that the government's share of the AIS segment closing deficit was $47,245,055:
Tr. 1445-92; DX 111; DX 112; DX 130; DX 178; DX 178A.
2. Standard of review
Before turning to the government's specific objections to Raytheon's AIS segment closing deficit calculation, the court first notes that under the CDA, the court reviews the ccontracting officer's decision de novo. 41 U.S.C. § 609(a)(3) (this provision of the CDA is now codified at 41 U.S.C. § 7104(b)(4)). The court also notes that in this case the burden of proof is on the government to establish that Raytheon's segment closing calculation violated the CAS.
It is against this backdrop that the court will first address the disputes with respect to the calculation of assets and liabilities that gave rise to the overall AIS segment closing deficit. These include: 1) Raytheon's accounting for retirees and other "inactives"; 2) Raytheon's use of linear interpolation for estimating the value of pension plan assets; 3) Raytheon's retirement assumptions upon the sale of a segment; 4) Raytheon's inclusion of phased-in-benefits in calculating pension liabilities; and 5) Raytheon's use of allegedly out-of-date benefit payment data in rolling forward pension assets and liabilities for one of the AIS pension plans. After addressing these issues, the court will turn to the parties' disputes over the calculation of the government's share of the AIS segment closing pension deficit.
3. The government has not met its burden with regard to Raytheon's calculation of the AIS segment closing adjustment deficit based on the calculation of plan assets and liabilities
a. Raytheon's search for inactives
One of the major differences between the parties' treatment of the AIS pension assets and liabilities relates to the treatment of "inactive" employees in Raytheon's calculations. "Inactives" are those employees who stopped working for the segment prior to the segment closing and who are either receiving or are entitled to receive a pension based on their work for the segment.
Raytheon does not dispute that the assets and liabilities for inactive plan participants had to be included in the segment closing adjustment calculation. Tr. 801-02 (Mr. Winer, a Mercer actuary who prepared the original Raytheon calculations, confirmed that such inactives must be included in the CAS 413 liability calculation); Tr. 1694-95 (Vernon) (including such inactives is "mandatory" under CAS 413 if records can be located);
The dispute over the inclusion of "inactives" is an issue that arises only in the context of composite pension plans, in which the pension assets and liabilities for many segments are accounted for in a single plan, as opposed to pension plans that are accounted for on a segment-by-segment basis. Tr. 1948 (England) ("The inactive participants are only excluded when Raytheon used composite accounting."). For the AIS segment, Raytheon accounted for the RTIS plan and Raytheon Salaried plan on a composite basis. Tr. 2081 (England). Where the pension plan has been accounted for on a composite basis, reconstructing the work history of each plan participant who may have moved from one business unit or segment to another is not only difficult, but can be impossible because there are no records.
CAS 413-50(c)(12)(ii)
After reviewing Raytheon's calculations for AIS, Mr. England noted that there were no assets or liabilities attributable to inactive participants included in Raytheon's segment closing adjustment calculations for the composite RTIS and Salaried Pension Plans. Mercer's initial segment closing calculations for those plans did not include any inactive participants. Tr. 849 (Barry); Tr. 2081 (England). Mr. England testified that Mercer's calculations were flawed because Raytheon failed to include inactive participants. Tr. 1943-44. Mr. England pointed to two primary pieces of evidence to support his opinion that inactives should have been included in Raytheon's calculation for the AIS portion of the RTIS and Salaried plans. First, Mr. England noted that inactives for the Salaried plan as a whole accounted for 62 percent of the total plan liability, and yet Raytheon's AIS segment calculation did not match that division between actives and inactives. DX 241.0049; Tr. 1942-44. Second, Mr. England noted that inactives should have been included in the calculation because in two other AIS plans accounted for on a segment-by-segment basis, the Greenville Salaried plan and the Greenville Hourly plan, inactives represented 63.87 percent and 52.14 percent of the total AIS segment liability, respectively. Tr. 1942. In Mr. England's opinion, if other units making up AIS had a significant number of inactives, then the same should be true for the RTIS and Salaried plans.
In order to correct for this alleged error in Raytheon's calculations, Mr. England performed a calculation for each composite pension plan in which he estimated the number of inactive plan participants he believed were likely to have been omitted in Raytheon's search. Mr. England utilized two different methods for estimating inactives in his segment-closing calculations. In one, he used a ratio based on the number of plan participants, and in the other, he used a ratio based on plan liabilities. Tr. 1949-50; DX 241.0054. For the RTIS plan, he assumed that the percentage of the RTIS plan's inactive members attributable to the AIS segment was the same as the percentage of the RTIS plan's active members attributable to the AIS segment. He based this calculation on existing data for active members in the RTIS plan as a whole and active members in the RTIS plan who were also in the AIS segment. Tr. 1949. He then took that ratio and applied it to the RTIS plan inactives.
While Mr. England challenged Raytheon's use of the "last place worked" approach to search for inactives, the evidence presented established that Raytheon's search for inactives using the "last place worked" approach was thorough and that under that approach Raytheon reasonably concluded that there were no AIS "inactives" associated with the RTIS and Salaried plans. In order to determine whether its segment closing calculations omitted inactive participants in the RTIS and Raytheon Salaried plans associated with the AIS segment, Raytheon had the Raytheon Benefits Center
Raytheon argues that there are three further reasons why there might not have been any inactives from the AIS segment associated with these composite plans. First, the AIS segment was in existence for only a short period of time compared to the pension plans as a whole, having been established in 1999 and closed on March 8, 2002. Thus, one might reasonably expect that fewer participants would have retired or terminated from AIS than from the pension plans as a whole. Second, in the case of RTIS, AIS had only thirty-four active participants in the plan and in a group that small, one might expect to find few or no inactive participants. Third, Mr. Vernon, Raytheon's expert actuary, also testified that in the case of RTIS, because participants could elect a lump sum payout or five-year certain annuity, if a participant elected one of those options, a common election in Mr. Vernon's opinion, the participant's liabilities would no longer be identified as part of the AIS segment after five years. Tr. 1603-04 (Vernon).
As previously stated, CAS 413-50(c)(12) requires that the contractor undertake a segment accounting exercise to determine the pension assets allocable to the closed segment pursuant to CAS 413-50(c)(5).
b. Raytheon's use of linear interpolation
Another major government objection to Raytheon's calculation involves Raytheon's use of linear interpolation when the actual value of total plan assets is not available at the time of the segment closing. This dispute implicates each of the pension plans in dispute in the AIS segment, including the Richardson/Waco plan, RTIS plan, and Salaried plan. CAS 413-50(c)(12)(iii) requires that the market value of the assets on the day of the segment closing be used, unless using that date would result in an inequitable calculation.
The evidence established that in performing Raytheon's segment closing calculations, Raytheon's actuary, Mercer, utilized linear interpolation to estimate the assets held in each of the pension plans associated with the AIS segment on the date of the AIS segment closing. Linear interpolation is a relatively straight forward method of estimation. In this case, the practice involved three basic steps. First, Raytheon took the value of the assets in a pension plan on the first day of the month in which a segment closing occurred and the value of the assets in that pension plan on the first day of the month following the segment closing and determined the difference in the two values. Second, Raytheon divided the difference in the value of the assets held by the pension plan by the number of days in the month to determine an average daily gain or loss for the month. Finally, Raytheon multiplied this average daily gain or loss against the number of days in the month, pro-rating the total growth or loss to the date of the segment closing.
Mr. England opined that this approach was in error and that Raytheon, instead, should have used proxy indices. In Mr. England's opinion, the use of published indices as a proxy is the preferred method for estimating asset values. Mr. England based his opinion upon his reading of Actuarial Standard of Practice No. 44: Selection and Use of Asset Valuation Methods for Pension Valuations ("ASOP 44"), an actuarial standard of practice that was adopted by the Actuarial Standards Board in 2007 for use in valuations performed on or after March 15, 2008.
Mr. England testified that using the proxy index approach required that he first make an assumption about the asset mix (the breakdown of assets between equities and fixed-income securities in the Raytheon master trust), and then select an index for each asset class. He testified that he assumed a "60/40 mix" of 60 percent equities and 40 percent fixed-income securities. He then explained that he selected a widely available index for each of the asset classes: the S&P 500 Index for the equities and the American Funds Bond Fund of America for the fixed-income assets. Tr. 1967 (England); DX 241.0062.
Mr. England conceded that there is nothing in the CAS or any other law that compels the use of proxy indices, but explained that in his view the use of proxy indices is the most reasonable method of estimating pension plan assets based on his understanding of ASOP 44. Mr. England testified that linear interpolation is appropriate for functions in which the values are continuously increasing or decreasing between the known values, as opposed to functions in which values may rise or fall between two endpoints. Tr. 1900-01 (linear interpolation is appropriate only for "monotonically increasing or decreasing functions"), Tr. 1964-66 (linear interpolation only appropriate for curves that "approximate" linear curves, and asset value curve is "clearly not linear"). Mr. England viewed proxy indices as a preferred method of estimating the assets in the Raytheon pension plans' portfolio, because ASOP 44 specifically mentions "appropriate published asset indices," while linear interpolation is included as among the universe of "[]other reasonable method[s]," and because section 3.2.6 of ASOP 44 requires consideration of asset volatility in selecting an asset estimation method.
In response to Mr. England's criticisms, Mr. Vernon and Mr. Winer both testified that linear interpolation is a commonly accepted actuarial technique,
Additionally, Mr. Vernon criticized Mr. England's use of a 60/40 mix of assets, explaining that the proxy indices selected and the percentage mix used by Mr. England did not coincide with the information known about the holdings of the plan. Mr. Vernon testified, in part, as follows:
Tr. 1683-86 (Vernon);
Mr. Vernon further testified that in his view the use of linear interpolation in this case complied with the requirements of ASOP 44.
The CAS is silent on how pension plan assets should be estimated where the value of plan assets are unknown on the date of segment closing. The court is also not aware of any CASB guidance on the subject of whether proxy indices, linear interpolation, or any other asset estimation method should be favored to value assets as of the segment closing date.
The court finds that the professional standard on which Mr. England relies, ASOP 44, permits rather than mandates the use of indices, allowing that an actuary "may" choose between more than one reasonable method of asset estimation.
c. Raytheon's use of a one-hundred percent retirement assumption
Another major dispute over Raytheon's segment closing adjustment concerns whether Raytheon impermissibly changed its actuarial assumptions with regard to the retirement of retirement-eligible plan participants in preparing its segment closing calculations for all of the plans in dispute in the AIS segment.
In its annual CAS 412 measurement of pension cost for all of Raytheon's pension plans, Mercer made two assumptions relevant to the retirement of plan participants. Mercer first assumed probabilities of termination of plan participants at various ages. Tr. 775-76 (Winer). Based on participants' assumed termination ages, Mercer then knew whether the person would be eligible under the plan to retire immediately at that age. If a participant was eligible to retire immediately at their assumed termination age, Mercer then assumed the participant would commence benefits immediately; otherwise, Mercer assumed the participant would defer the commencement of his or her benefits. Tr. 775 (Winer) ("[O]ur calculations assume that if somebody terminates over eligible for retirement, then you retire at that age. That's the way the actuarial calculations work."). Mr. Barry explained the process in his testimony as follows:
Tr. 896-97 (Barry).
In preparing the CAS 413 segment closing calculations for each of the plans in dispute, Mercer made one assumption relevant to the retirement of plan participants. Mercer assumed that if a participant (previously active and now terminated from Raytheon by virtue of the sale) was eligible to retire on the segment closing date (the date of termination) based upon his or her actual age and years of service, then the participant would retire and take benefits immediately. For each participant who was not eligible to retire, Mercer assumed the participant would defer the commencement of his or her benefits. Tr. 829 (Winer); Tr. 1671-72, 1747-48 (Vernon). Mercer further assumed that everyone eligible to retire on the day of segment closing retired that day. Tr. 1744 (Vernon). If a plan participant was eligible for early retirement the assumption was the participant would retire that day.
Mr. Winer provided the following example of how these two scenarios play out in practice:
Tr. 828-29 (Winer).
Mr. England explained that Mercer's assumption that all active participants eligible to retire would do so on the segment closing date ("one-hundred percent retirement assumption"), was not valid under the CAS because Mercer did not use this assumption in the annual valuations. DX 161.0030. Mr. England challenged Raytheon's one-hundred percent retirement assumption because this retirement assumption was different from the one that Raytheon used for purposes of its ongoing CAS 412 valuations and because Raytheon had not provided any persuasive actuarial experience to justify the change. Mr. England observed that in its annual pension calculation Raytheon, rather than assuming that all participants who left Raytheon with retirement eligibility would immediately retire, would normally assume that terminated-vested participants would not retire until they reached normal retirement age of sixty-five. Tr. 1909-10 ("[I]f you have somebody who is terminated with a vested benefit, you assume that they will retire at the normal retirement date . . . . you assume that they retire at age [sixty-five], and that is because the normal retirement date in all of these plans, I believe, is [sixty-five], but normally you would simply assume that all separated [] vesteds defer to age [sixty-five].");
Mr. England testified that in his opinion the effect of the error would be to overstate each of the plan's liabilities at segment closing, thereby unfairly increasing the segment pension deficit (or decreasing the segment pension surplus). He testified that in his experience not all retirement eligible participants do retire when a business unit is sold; some employees eligible to retire would retire, while others would choose to defer retirement because they would still be employed by the segment's buyer and would want to avoid any reduction in retirement benefit for retiring early. Tr. 1914-15 (England).
Mr. England testified that he did not have the data necessary to calculate how changing this assumption would affect the segment closing adjustment. Tr. 1916. Mr. England testified that for the Greenville Hourly plan, one of the plans that the court determined was no longer in dispute,
In response to Mr. England and in support of Mercer's calculations, Mr. Vernon reviewed Mercer's retirement assumption and stated that in his view Mercer's one-hundred percent retirement assumption was reasonable because the segment closing resulted in a change in the circumstances of the plan participants. Tr. 1671-73; Tr. 1748 (Vernon). Mr. Vernon testified that in his experience, when a government contractor sells a segment, most of the employees who are retirement-eligible do elect to begin collecting pension benefits, even if they accept employment from the successor contractor. Tr. 1676 (Vernon). Mr. Vernon agreed that in preparing the actuarial valuation reports for the various pension plans of Raytheon in this period, Mercer never assumed that one-hundred percent of the retirement eligible participants would retire as soon as they became eligible. Tr. 1747 (Vernon). However, Mr. Vernon distinguished between active participants and participants that are no longer active at the time of the segment closing, because at that point they would no longer be working for Raytheon. Tr. 1748-49 (Vernon) ("We're saying that we know the termination date, so this is not a change in assumption, retirement age assumption. It's a change — we know the termination date, so now they become inactive employees."). Mr. Vernon testified that this difference in factual circumstances justified the difference between the assumption used in the segment closing calculation and the ongoing valuation assumptions. Tr. 1672 (Vernon). In Mr. Vernon's view, the knowledge of the termination date, rather than prior assumptions about possible termination dates, should determine whether Raytheon should assume that a participant would defer benefit commencement or elect benefit commencement immediately at the time of segment closing. Tr. 1672 (Vernon). Mr. Vernon agreed with Mr. England that actual information regarding those participants who did retire at segment closing would produce a more accurate picture than a projection that one-hundred percent of those who were eligible to retire would retire on the day of segment closing. Tr. 1752-53 (Vernon). However, like Mr. England, Mr. Vernon never investigated the specific facts, Tr. 1752 (Vernon), and also like Mr. England, Mr. Vernon did not know whether Mercer's reliance on the one-hundred percent retirement assumption for the subject plan had any material impact on the segment's deficit. Tr. 1746 (Vernon).
The court again notes that Raytheon is required by CAS 413-50(c)(12)(i) to perform its segment closing adjustment with assumptions consistent with its on-going CAS 412 assumptions, unless the contractor revises its actuarial assumptions based on "persuasive actuarial experience." Here Raytheon asserts that actual data in the form of the age and eligibility of each plan participant on the date of segment closing together with expert actuarial opinion regarding retirement decisions justifies the "one-hundred percent retirement assumption" used for all terminated-pension eligible participants, regardless of whether they have reached age sixty-five. Raytheon contends that given these facts, its decision to change assumptions was reasonable and did not violate the provisions of the CAS.
The court agrees with Raytheon. Raytheon was able to support the change in its retirement assumption with evidence to show the number of pension eligible employees and with expert opinion to the effect that employees eligible to collect a retirement will ordinarily do so when a segment is closed. Without evidence to show that this change in assumption was factually incorrect or that correcting this assumption would make any material difference in the deficit owed to Raytheon, the court finds that Raytheon's retirement assumption in its AIS segment closing adjustment is supported and will not be set aside.
d. Raytheon's phase-in of plan benefits
At trial the court also heard testimony challenging Raytheon's segment closing adjustment for AIS on the grounds that Raytheon incorrectly phased-in recent benefit improvements under CAS 413-50(c)(12)(iv) ("Pension plan improvements adopted within 60 months of the date of the event which increase the actuarial accrued liability shall be recognized on a prorata basis using the number of months the date of adoption preceded the event date."). With respect to the phase-in of benefit improvements for the RTIS plan, Mr. England testified that Raytheon's calculations failed to comply with CAS 413-50(c)(12)(iv) because Raytheon prorated the benefits by years rather than by months. Tr. 1926-27 (England); DX 241.0065. Mr. England explained that this alleged mistake was slightly favorable to the government because it resulted in a reduction of plan liability in the segment closing adjustment calculation. Tr. 1927 (England) ("It is not a big error, and Mr. Vernon is correct that the error favors the government. . . ."). Mr. England explained that the error amounted to a $2,903 reduction in liability for the AIS segment. DX 161.0035-.0036. Mr. England also believed that Raytheon erred in prorating the amount of the increased liability from the time the benefit improvement was adopted in 1998, rather than at the time of the segment closing date in 2002.
Mr. Vernon testified that he agreed with Mr. England that there was an error in the phase-in of liabilities for the benefits improvements of the RTIS plan and that they should have been prorated by months rather than years. Tr. 1611. Mr. Vernon also agreed that the error worked to the benefit of the government.
Tr. 1611-12 (Vernon); Tr. 1688 (Vernon) ("We took the value of the benefit improvement as of the segment closing date, and that was what we applied the phase in to.").
Based upon the evidence and testimony presented it is undisputed that there was an error in the phase-in of benefits by Raytheon and that error favored the government. Accordingly, the court finds that Raytheon's AIS segment closing calculation must be corrected to reflect a $2,903 increase in the RTIS plan deficit in order to comply with CAS 413-50(c)(12)(iv). The court further finds Mr. Vernon's testimony persuasive that Mr. England was mistaken in his finding that Raytheon did not reflect the benefit improvement as of the segment closing date. Therefore, the court finds that Raytheon's calculations do not require correction in the amount of $773.
e. Raytheon's alleged use of out-of-date benefit payment data for the Salaried plan
Mr. England's final objection to Raytheon's calculation of AIS pension assets and liabilities related to his concern that Raytheon used outdated data as of the segment closing date in calculating the liabilities for the Salaried plan. At trial Mr. England testified that Raytheon's error resulted in "a small increase in the segment closing surplus" for the Salaried plan in the AIS segment. DX 241.0066. Mr. England testified that he understood that the government's share of the Salaried Plan deficit is zero. Tr. 2256 (England). Therefore, correcting for this error would have no effect on the monetary claim in this case. Because this error does not have any impact on the segment closing amounts owed by the government to Raytheon for the AIS segment closing, there is no reason to address the issue.
4. Raytheon's government share calculations comply with CAS 413
The court now turns to its findings and conclusions regarding the government share calculations. The government's share of the "adjustment amount" must be determined in accordance with CAS 413-50(c)(12)(vi), which states:
It is undisputed that the government participation percentage for the Raytheon Salaried plan is zero.
At trial, the government presented testimony to show that Raytheon failed to comply with CAS 413 by utilizing sales data rather than actual pension cost data when it prepared its government share calculation. The government also presented evidence to show that Raytheon had failed to account for the segment's pension deficit attributable to pension costs allocated to firm-fixed-price contracts prior to the 1995 CAS amendments or for the portion of the deficit attributable to pre-CAS contracts. The government contends, as a matter of law, that Raytheon must provide it with an equitable adjustment to account for the portion of the deficit attributable to pre-1995 CAS fixed price contracts and for the portion of the deficit attributable to pre-CAS contracts. The court will address these contentions in turn.
a. Raytheon's use of sales data versus general and administrative ("G&A") percentages
Raytheon prepared its government share calculation by following the example provided in CAS 413-60(c)(9). Tr. 48, 241-42 (Murphy). CAS 413-60(c)(9) provides the following illustration:
CAS 413-60(c)(9). Raytheon obtained the data for its government share calculation from the DCAA and records maintained by the segment. Raytheon witnesses testified that they did not use actual pension costs contributed by the government to calculate the government's share because Raytheon did not have the historical records needed to determine the amount of pension costs allocated to CAS-covered contracts and subcontracts. Tr. 46-48, 176-77 (Murphy). Where pension cost data were not available, Raytheon's witnesses testified that sales data can serve as a valid proxy for determining the government's share.
Raytheon presented evidence at trial to support the calculation of the government's share it submitted in its CDA claim. PX 428 at 23, 53. The evidence presented for the Greenville Salaried and Hourly plans showed that the government's share is approximately 78 percent, which gives rise to a $56,340,826.21 deficit share.
At trial, the government took issue with Raytheon's use of sales percentages as a proxy for pension cost contributions in determining the government's share of the AIS pension deficit. The government presented the testimony of Ms. Lynn Robbins, an auditor with the DCAA. She testified that she had undertaken an investigation of Raytheon's government share calculation using the criteria established in the DCMA/DCAA Joint Guidance. Tr. 1430. In her investigation, Ms. Robbins testified that she used G&A percentages (the general and administrative pool of expenses), where available, as a proxy to calculate the government's share based on her assumption that pension costs "go through G&A." Tr. 1539-42, 1547. Ms. Robbins explained that she understood that Raytheon allocated pension costs through a fringe benefit rate, but that the fringe benefit allocation eventually went through the G&A allocation base. Tr. 1539. Based on her investigation, the government determined that Raytheon had allocated more of the deficit to the government using its sales approach than would be allocated using the G&A approach, resulting in a total government share of the AIS pension deficit of $47,245,055.
In response to Ms. Robbins's testimony regarding the use of G&A percentages to calculate the government's share of pension costs, Raytheon presented the testimony of Mr. John Panetta, Raytheon's Director of Government Accounting. He stated based upon his experience at Raytheon that Raytheon did not allocate pension costs through the G&A rate. Tr. 2311 (Panetta). He explained, using the CAS Disclosure Statement for the former E-Systems sites at Greenville and Waco as an example, PX 358, that pension costs at Raytheon are allocated through the fringe benefit rate, not through the G&A rate. Tr. 2313-18 (Panetta). Mr. Panetta testified on cross-examination that he had not done any calculations using the "fringe rate" and did not know whether using the "fringe rate" would make a difference in Ms. Robbins's calculations. Tr. 2340.
In reviewing Raytheon's CAS 413 government share calculations, as when reviewing Raytheon's CAS 413 segment closing adjustment calculations, the court reviews Raytheon's calculations for compliance with the CAS and for reasonableness where the CAS and the CAS Board are silent. As with the other calculations mandated by the CAS, where perfect information is lacking, use of reasonable estimates and assumptions may be allowed.
The court finds, given the absence of pension cost data for CAS-covered contracts, that Raytheon reasonably relied upon sales data as a proxy for pension costs to produce its government share calculations pursuant to CAS 413-50(c)(vi). The illustration set forth in CAS 413-60(c)(9), contrary to the government's contentions, plainly endorses the use of sales data to determine the government's share. The illustration identifies the government's share based on the percentage of government work performed, stating, "80% of its work was performed under Government CAS-covered contracts. . . . Pursuant to 9904.413-50(c)(12)(vi), the adjustment due the Government for its 80% of previously-determined pension costs for CAS-covered contracts is . . . 80% times [the segment closing adjustment amount]." CAS 413-60(c)(9). In contrast to Raytheon's approach, which is identified in the CAS 413-60(c)(9) illustration, the approach used by Ms. Robbins is based on a simple application of G&A rates as a proxy for the government's share and is not supported by any express reference in the CAS. In addition, the approach used by Ms. Robbins is different from the approach the government previously accepted when it settled the surplus segment closings with Raytheon.
As discussed previously, Raytheon obtained the historical sales mix data from records maintained by the DCAA and the AIS segment.
In these circumstances, Raytheon reasonably followed the advice provided in CAS illustration 413-60(c)(9) to determine the government's share. Put another way, the court finds that it was reasonable for Raytheon to utilize sales data as a proxy for pension cost data when performing its CAS 413 government share calculations, where a reasonable search for historical data was performed, and actual pension cost data could not be located. The court further finds that the government's reliance on the investigation by Ms. Robbins is misplaced. The investigation relied on assumptions that were not correct and therefore does not provide any basis for second-guessing Raytheon's government share calculation.
b. The court lacks jurisdiction over the government's equitable adjustment claim
The government contends that Raytheon's government share calculation must be recalculated because Raytheon failed in its segment closing adjustment to account for pension costs that were paid before the segment closing provisions were added to the CAS in 1978 and for pension costs that were paid in connection with fixed price contracts between 1978 and 1995, before the CAS was amended in 1995. The government argues that it is entitled to an equitable adjustment removing these amounts from any amounts owed to Raytheon in connection with the AIS segment closing.
The court in
Based upon the clear line of precedent in this court and in the Federal Circuit, the court ruled in
The government presented evidence at trial, through the testimony of Ms. Robbins, to show that Raytheon had prepared its segment closing adjustment without removing from the government share the portion of the Raytheon deficit attributable to the amounts subject to an equitable adjustment. Ms. Robbins testified that under the DCMA/DCAA Joint Guidance, the equitable adjustment should be included as part of the CAS 413 government share calculation.
Raytheon does not dispute that it did not incorporate the government's claimed equitable adjustment in its segment closing adjustment. It argues, however, that as a matter of law the equitable adjustment is not part of the segment closing adjustment, but is instead a contract change subject to the claim requirements of the CDA. Under FAR 52.230-2, a contractor or the government is entitled to "an equitable adjustment . . . if the Contractor is required to make [a change] to the Contractor's established accounting practices." Because including pre-CAS contracts and fixed price contracts before 1995 in the segment closing mix represents a change from past contract accounting practice, an equitable adjustment is available to either the contractor or the government to the extent the amended CAS 413 results in the government or contractor owing more under the amended CAS than it would have owed under the original CAS.
70 Fed. Cl. at 662 n.17.
Given the nature of the government's claim, Raytheon next argues that the government is not entitled to an equitable adjustment in this case because it failed to make a claim against Raytheon or receive a decision from the contracting officer and thus failed to comply with the requirements of the CDA. In such circumstances, Raytheon argues, this court lacks jurisdiction to award the equitable adjustment to the government.
The court agrees with Raytheon and therefore, despite its earlier ruling, must conclude that it does not have jurisdiction over the government's equitable adjustment claim. First, as explained in
5. The government's share of the AIS segment closing adjustment pension deficit is $56,276,815.61
For the foregoing reasons, based on its findings of fact and conclusions of law, the court holds that Raytheon's AIS segment closing adjustment (altered to reflect a $2,903 increase in the RTIS plan deficit,
B. Optical segment closing calculations
1. Optical findings of fact
Raytheon sold its Optical segment on March 1, 2001 to B.F. Goodrich. PX 78.0002. As discussed above, by the terms of the asset purchase agreement between Raytheon and B.F. Goodrich, Raytheon retained the pension plan assets and actuarial accrued liabilities for Optical. PX 230.0048. There is no dispute that under CAS 413-30(a)(20) the March 1, 2001 sale resulted in a "segment closing" requiring Raytheon to perform CAS 413-50(c)(12) segment closing calculations for the Optical segment's defined benefit pension plan. The Raytheon Nonbargaining Retirement Plan for former Hughes Aircraft employees ("Nonbargaining plan") was the only Raytheon defined benefit pension plan covering Optical segment employees. In accordance with the CAS 413-50(c)(12) segment closing provision, Raytheon prepared a segment closing calculation to determine the difference between the market value of the pension assets and the actuarial accrued pension liability for the Optical segment. The Nonbargaining plan covers employees in many different Raytheon segments and was historically accounted for on a composite basis under CAS 413-40(c) and 413-50(c)(1). Tr. 782 (Winer). As a result, Raytheon needed to allocate plan assets to the Optical segment under CAS 413-50(c)(5) as required by CAS 413-50(c)(12)(ii). In addition, under CAS 413-50(c)(12)(vi) Raytheon was charged with calculating the government's share of any surplus or deficit amount determined for the Optical segment.
The basic facts of the origin and history of the Optical segment and Nonbargaining plan were not disputed at trial. Optical was established as a segment in 1990, when Hughes Aircraft Company ("Hughes") acquired the Electro-Optics Technology Division of the PerkinElmer Corporation. PX 16.0542; Tr. 679 (Winer). When the segment was established by Hughes, its participants were covered by the Hughes Nonbargaining Retirement Plan ("Hughes Nonbargaining plan").
Prior to November 30, 1991, the Hughes Nonbargaining plan required employee contributions, in addition to employer contributions, in return for a more generous benefit package. PX 16.0541-42; Tr. 1624-25 (Vernon). In 1991, the pension benefit formula was changed to make the plan funded through employer contributions only (called a "noncontributory" plan) for employees hired on or after December 1, 1991. These post-1991 employees were entitled to a less generous benefit than those who had been making contributions. PX 16.0542; Tr. 679-81 (Winer). When Hughes acquired PerkinElmer, the PerkinElmer employees were also covered under the Hughes Nonbargaining plan as noncontributory participants. Tr. 679-81 (Winer). After the entire Hughes Nonbargaining plan became noncontributory, contributory participants were allowed to continue to make contributions as before and receive benefits under the more generous contributory formula, or they were given the option to stop contributing and receive benefits under the noncontributory formula. Tr. 679-80 (Winer).
On December 17, 1997, Raytheon and Hughes merged. PX 134.0048; Tr. 1087 (Harris); Tr. 1625 (Vernon). The Raytheon Nonbargaining plan at issue was established using the assets and liabilities from the Hughes Nonbargaining plan that Raytheon acquired as part of the merger. DX 8.0005; PX 134.0048; Tr. 1625-26 (Vernon). According to Mercer, as of December 1, 1999, there were a total of 582 active participants in the Optical segment, 19 contributory participants and 563 noncontributory participants. DX 29.0002. From the time the segment was created until the date of segment closing, the only known employer contribution (by Hughes or Raytheon) made to the Nonbargaining plan was made by Hughes in the plan year beginning December 1, 1991. In that plan year, Hughes paid a total of $55,172,000 to the Hughes Nonbargaining plan ("the $55,172,000 contribution"). The Nonbargaining plan was fully- or over-funded at that time and remained fully- or over-funded at the time of segment closing. Tr. 1627 (Nonbargaining plan was "fully funded"), 1628 ("over-funded"), 1633 ("fully-funded"); PX 18.0011 ("over[-]funded").
On March 1, 2001, Raytheon sold Optical to B.F. Goodrich. PX 78.0002. On April 18, 2001, the DCMA and the DCAA cited Raytheon for initial CAS 413 noncompliance for its failure to prepare a segment closing calculation for Optical. PX 257.0003; Tr. 39 (Murphy).
On October 9, 2001, Raytheon submitted its segment closing calculations for the Optical segment to the government. PX 78. The calculations prepared by Mercer included both a "recommended" adjustment and an "alternative" adjustment. The "recommended" adjustment identified a pension deficit. The "alternative" adjustment identified a pension surplus. The "recommended" calculations showed a segment closing adjustment with a pension deficit for the Optical segment in the amount of $9,558,952. Mercer's "alternative" calculation showed a segment closing adjustment with a pension surplus of $11,438,570. PX 78.0004-.0005. Mercer candidly recognized in its submission to the government that the significant difference in outcomes turned on how CAS 413-50(c)(5) was applied. In Mercer's words at the time, "[y]ou can see that there is quite a difference between the two methods." PX 78.0005. The differences were not attributable to any employee contributions. Mercer did not include employee contributions in its calculations. Tr. 810-11, 813 (Winer);
More specifically, the primary reason for the difference between Mercer's two calculations stemmed from Mercer's treatment of the noncontributory participants in its (c)(5)(i) calculation as compared to its (c)(5)(ii) calculation. PX 78.0003. In the "recommended" calculation, Mercer divided the Optical segment into three employee groups and separately calculated the pension plan assets allocable to each group: (1) legacy contributory participants; (2) PerkinElmer noncontributory participants who joined the plan on January 1, 1990; and (3) other noncontributory participants who joined the plan after January 1, 1991. PX 78.0002-.0004; Tr. 278 (Garvey).
Mercer determined the pension assets attributable to the contributory plan participants by applying the ratio of pension liabilities attributable to the contributory plan participants who had last worked at the Optical segment compared to all of the contributory participants in the Nonbargaining plan.
By separating out the contributory and noncontributory groups in the calculation, Mercer allocated none of the pension asset surplus that existed before the plan became noncontributory (prior to 1990, when both employees and the employer contributed to the plan) for the pensions of the post-1990 noncontributory group. The $55,172,000 contribution alone would not be enough to pay the pensions for the noncontributory employees in the Nonbargaining plan, and it was for this reason that the "recommended" calculation gave rise to a pension deficit attributable to this group.
Mercer's "alternative" calculation, which gave rise to a pension surplus, was based on Mercer's use of the CAS 413-50(c)(5)(ii) method for determining pension assets allocable to the Optical segment. Under the "alternative" calculation, Mercer treated the Optical segment as a single segment, treated the $55,172,000 contribution as a contribution to the Nonbargaining plan as a whole (as opposed to a contribution for the non-contributory participants only), and did not separate out the contributory and noncontributory plan participants from each other. In other words, the entire segment and was treated as single unit. Under this method, the Nonbargaining plan surplus was applied across the board to both the contributory and noncontributory plan participants.
As with its AIS segment closing adjustment, Raytheon did not include a government share calculation in its initial government submission.
The Optical segment closing adjustment was reviewed by the DCMA CIPR Center and the DCAA.
On June 18, 2002, the DCMA CIPR Center issued its report on the Optical segment closing adjustment calculation. PX 108. The CIPR Center report noted that the Raytheon proposal had two methodologies for calculating the CAS 413 adjustment amount.
In an August 14, 2002 audit report, the DCAA did not "take exception" to Raytheon's government share calculation for the Optical segment of 85.6 percent. PX 269; PX 110.0002. Nor did the DCAA take exception to the Optical segment closing adjustment deficit amount for pension costs in the amount of $9,558,952.
During the following year, the government contracting officers and Raytheon discussed settling Raytheon's Optical CAS 413 claim by partially offsetting the Optical segment deficit amount against surpluses Raytheon owed the government in connection with the "surplus" segment closings. PX 269; PX 331; PX 332; PX 389.0004; PX 393.0003; Tr. 1190, 1201 (Dowd); Tr. 1344-45, 1353-54 (McGrath); Tr. 127 (Murphy).
On August 11, 2003, following the Federal Circuit's ruling in
As previously stated, in July 2004, the DCMA and the DCAA issued the DCMA/DCAA Joint Guidance for implementing the Federal Circuit's ruling in
By letter dated November 8, 2004, Raytheon submitted a certified claim for the government's share of the Optical segment closing adjustment. PX 25. In its certified claim, Raytheon asserted a government participation percentage of 96.89 percent based upon total government participation in all cost- and fixed-type contracts for the year 1991, when Hughes owned the Optical segment and an employer contribution was identified as having been made to the Nonbargaining plan.
At trial, Raytheon supported its segment closing adjustment claim for Optical through its expert, Mr. Vernon. Mr. Vernon's final calculations for the Nonbargaining plan and the Optical segment were slightly different from Mercer's calculations and are set forth on the chart below:
PX 428.0035, .0054;
PX 428.0035, .0054;
The government challenged Raytheon's segment closing adjustment for the Optical segment with testimony from its expert, Mr. England. Mr. England challenged the data and assumptions used by Raytheon to calculate pension assets and liabilities. He testified that in his opinion Raytheon's Optical segment closing adjustment should reflect a surplus of $20,431,049, as set forth on the chart below:
DX 241.0005; Tr. 1973, 2013, 2024-2026 (England). In brief, Mr. England testified that Raytheon erroneously relied on the (c)(5)(i) method because Raytheon did not have "readily determinable" data to support its asset allocation for the entire segment and thus Raytheon should have used the (c)(5)(ii) method to determine the pension assets attributable to the Optical segment. Tr. 1990-2002 (England). He also testified that Raytheon, in its calculations, erred by failing to include more than five inactive participants attributable to the Optical segment. Tr. 1973-90 (England). Finally, he testified that Raytheon erred in excluding the surplus attributable to employee contributions from the pension asset calculation. Tr. 2004, 2007-12 (England).
The government also challenged Raytheon's government share calculations. The government presented testimony and evidence to show that the government's share of the Optical segment closing surplus is 48.37 percent, or $9,882,498:
The court will first address the parties' specific disputes with respect to the calculation of assets and liabilities that gives rise to Raytheon's Optical segment closing adjustment claim. It will then turn to the remaining Optical segment-related issues.
2. Standard of review
In its analysis of Raytheon's compliance with the CAS, the court will be guided by the same principles it followed in reviewing Raytheon's AIS claim.
3. Raytheon erred as a matter of law in failing to follow CAS 413-50(c)(12)(ii) in allocating pension assets to the Optical segment
Whether Raytheon is entitled to collect on any adjustment of previously determined pension costs in connection with the Optical segment closing turns on whether the segment closing adjustment for the Optical segment involves a pension deficit or pension surplus. The outcome of this question depends on whether Raytheon correctly followed the requirements for asset allocation set forth in CAS 413-50(c)(12)(ii), which requires a contractor performing segment closing calculations on a composite plan to follow one of the methodologies prescribed in CAS 413-50(c)(5). In particular, the court must determine whether Raytheon properly applied CAS 413-50(c)(5)(i) when it elected to treat the post-1990 Nonbargaining plan noncontributory participants differently from the pre-1990 Nonbargaining plan contributory participants.
Raytheon contends that its reliance on (c)(5)(i) was proper because it possessed a data point from which it "readily determin[ed]" the "necessary data" required to identify the assets contributed by (and therefore allocable to) the Optical segment to the Nonbargaining plan as a whole. Raytheon supports this contention with Mr. Vernon's analysis of the Optical segment asset allocation. Mr. Vernon's allocation of assets to the Optical segment is based on undisputed evidence showing the $55,172,000 contribution to the Nonbargaining plan by Hughes in the plan year beginning December 1, 1991. Mr. Vernon conceded that there were no data available to determine pension contributions from the beginning of the plan in 1951. Tr. 1638 (Vernon). However, Mr. Vernon stated, based on the $55,172,000 contribution, that he was able to determine the pension asset share allocable to the noncontributory plan participants in the Optical segment and the share allocable to the contributory plan participants in the Optical segment. It is not disputed that the Nonbargaining plan is a single plan and uses the same pot of money to pay defined benefits to both noncontributory participants and contributory plan participants; nonetheless, Mr. Vernon assumed for purposes of the segment closing calculation that contributions to the plan should be treated separately. He assumed, as did Mercer, that the $55,172,000 contribution was for the benefit and use of the noncontributory participants alone.
Mr. Vernon testified, based on his calculations for both the noncontributory and contributory participants in the Nonbargaining plan, that there was a plan deficit for noncontributory participants and a surplus for the contributory participants. As with Mercer, this result was dictated by his apparent assumption that the $55,172,000 contribution was to pay benefits for noncontributory participants only and that these participants are paid only from that contribution. He also found that the surplus for the contributory participants was due to the historic contributions made by Hughes (and the government) to the plan starting in 1951. In combining these totals, he determined that the assets allocable to the Optical segment from the Nonbargaining plan result in an overall pension deficit of $8,693,533.76 for the Optical segment.
The government contends that Raytheon's segment closing adjustment, which leads to an overall pension deficit for the Optical segment, does not comport with (c)(5)(i) because the "necessary data" were not "readily determinable for certain prior periods," and that in such circumstances, Raytheon was required by the CAS to use CAS 413-50(c)(5)(ii) to determine the Optical segment's share of pension plan assets. The government explains that under (c)(5)(i), the following "necessary data" must be "readily determinable": the "amount contributed by, or on behalf of, the segment" to the plan at issue, "the income received on such assets," and "benefits and expenses paid."
The court agrees with the government that under the facts of this case, Raytheon did not have "readily determinable" the "necessary data" to employ the methodology in (c)(5)(i), and therefore Raytheon was required to use (c)(5)(ii) in allocating pension assets from the Nonbargaining plan for all participants (both contributory and noncontributory) to the Optical segment. First, even if it is appropriate in other circumstances to divide a single pension plan into parts based upon differences in the beneficiary scheme, the division in this case was not proper. CAS 413-50(c)(5)(i) is the preferred method for attributing pension assets to a segment only where there is sufficient "readily determinable" data available to support reasonable assumptions regarding the segment's contribution to the pension asset base as a whole. Where, as here, (c)(5)(ii) had to be used because there were not readily determinable data for a large portion of the pension asset calculation, (c)(5)(ii) had to be used for the segment as a whole.
The reasons for rejecting Raytheon's hybrid approach to CAS 413-50(c)(5) compliance is obvious in this case. To begin, by dividing the Nonbargaining plan between contributory and noncontributory participants, Raytheon ignored the significant pension surplus associated with the plan as a whole and created an artificial $8,972,581 deficit in the Optical segment. Next, to the extent Raytheon had data regarding asset contributions (in the form of the $55,172,000 contribution for a single plan year), it made assumptions in relying on that data which were contrary to fact. The evidence established that the Nonbargaining plan was fully-funded in 1991 and that thus there was no deficit created by changing the Nonbargaining plan from a contributory to noncontributory plan. In addition, the evidence established that the $55,172,000 contribution went into the plan as a whole and therefore was used to help pay the benefits to both the noncontributory and contributory plan participants. Tr. 1627-28, 1633 (Vernon); PX 18.0011. In such circumstances, dividing the calculation between the two groups was not justified. Finally, once Raytheon recognized that it did not have "readily determinable" data to allocate any pension assets allocable to the contributory participants without resorting to the ratio established in (c)(5)(ii), and discovered that the plan had a significant pension surplus, Raytheon could not simply ignore those facts.
Based on the foregoing discussion, the court finds that Raytheon's segment closing adjustment for Optical does not comport with CAS 413-50(c)(12). Therefore, Raytheon is not entitled to recover the government's share of the deficit it calculated for its Optical segment closing claim. More specifically, the court finds that Raytheon's Optical segment closing adjustment calculation does not comply with the CAS requirements for allocating assets from a single composite pension plan to the Optical segment found in CAS 413-50(c)(12)(ii) and CAS 413-50(c)(5). Raytheon's calculation artificially divided the Nonbargaining plan's pension plan assets and impermissibly mixed the (c)(5)(i) and (c)(5)(ii) methods. Moreover, it made assumptions in its (c)(5)(i) calculations that were contrary to the facts: Raytheon erroneously assumed that the noncontributory participants are not beneficiaries of the pension surplus in the Nonbargaining plan and then incorrectly created a separate and identifiable pension deficit attributable to the noncontributory participants in that plan. Where, as here, the government established that Raytheon relied on assumptions contrary to known facts and where the necessary data were not "readily determinable" for the segment as a whole, the contractor was required to use the (c)(5)(ii) method for the entire calculation. For all of these reasons, Raytheon is not entitled to any recovery in connection with its claim for the Optical segment closing adjustment.
4. The court does not possess jurisdiction to determine and set-off any Optical segment pension surplus claimed by the government for the first time at trial
The court must now address whether it has jurisdiction to proceed further and decide, as asserted by the government for the first time at trial, whether the government is entitled to a set-off of any Optical CAS 413 segment closing adjustment surplus. The government asserts that the court has jurisdiction to enter a judgment determining and setting-off any such surplus against the CAS 413 segment closing deficits owed to Raytheon, as determined in the other CAS 413 segment closings at issue in this case. The government contends that if the court exercises jurisdiction and makes findings determining the government's share of any Optical segment pension surplus, the government would then be entitled to either a set-off in this case or to seek compensation in another venue.
Raytheon argues that the court does not have jurisdiction to reach the government's claim for a set-off, because there has been, to date, no final contracting officer's decision either asserting a government claim for payment or a finding that Raytheon is indebted to the government for any Optical segment closing surplus, as required under the CDA. In addition, Raytheon asserts that the government's claim, raised at trial more than six years after the Optical segment closing, also fails under the CDA's statute of limitations.
For the reasons that follow, the court agrees with Raytheon, and holds that because the government's claim for the pension surplus as a set-off is governed by the CDA, and because the government did not comply with the CDA, the court does not have jurisdiction over the government's claim for a set-off based on the Optical segment closing adjustment surplus.
The "comprehensive procedures" of the CDA govern the resolution of contract disputes that arise between the government and contractors.
Because the government's claim for a set-off based on the Optical pension surplus is governed by the CDA, the government must show either that it complied with the CDA or that it is exempt from obtaining an administrative decision from the contracting officer establishing Raytheon's liability for the surplus.
The CDA requires that "[a]ll claims by the government against a contractor relating to a contract shall be the subject of a decision by the contracting officer." 41 U.S.C. § 605(a)
The government acknowledges that it does not have a contracting officer decision finding Raytheon liable for a pension surplus in connection with the Optical segment closing in accordance with the decision criteria identified above. Rather, Raytheon presented a certified claim to the government seeking a determination that:
PX 25. The contracting officer denied Raytheon's claim in a written decision, stating:
PX 26. Therefore, the court cannot base its jurisdiction on any specific agency decision establishing Raytheon's liability for the Optical segment surplus.
In addition, the government cannot establish this court's jurisdiction over its set-off claim on the grounds that the court has jurisdiction over Raytheon's Optical claim. The fact that there was a decision on Raytheon's claim does not excuse the government from having to provide its own contracting officer decision. Each specific claim has to have been the subject of a contracting officer decision. Joseph Morton Co., 757 F.2d at 1281.
The purpose of this requirement is to ensure that the contractor is on notice of its potential liability.
Finally, the decisions of the Fifth and Seventh Circuits in
In sum, because the government needed a CDA decision in order to obtain payment from Raytheon for the Optical pension surplus and failed to obtain one, and because the court cannot find any reason for excusing the government's failure to comply with the CDA's jurisdictional requirements, this court will not exercise jurisdiction over the government's claim for a set-off of the pension surplus arising from the Optical segment closing. Accordingly, the court does not reach the government's additional arguments relating to the proper calculation of the Optical segment closing adjustment and the government's share thereof.
C. PWF was not a "segment" within the meaning of CAS 413-30(a)(19) and therefore its sale did not trigger the need for a segment closing adjustment
As previously discussed, the evidence at trial established that Raytheon underwent a period of restructuring following its merger with Hughes, TI, CTAS, and E-Systems in the 1990s. As a part of this restructuring, Raytheon set up internal service centers known as the "Centers of Excellence" that specialized in the production of a particular product for use by Raytheon's other businesses. Tr. 376-77 (Cann) ("The Centers of Excellence were assigned to certain segments for management purposes, and they produced Printed Wire Fabrication, printed wiring boards, CCA would have been Circuit Card Assembly, and MF would have been Metal Fabrication."). One of the businesses within the Centers of Excellence was the PWF business, which was responsible for producing printed wire circuit boards used in Raytheon's aerospace and defense businesses.
On November 8, 2004, Raytheon submitted a certified claim to the government for the government's participation in a pension deficit it calculated for the alleged PWF segment.
At trial, Raytheon presented evidence to support its claim for the government's participation in a PWF segment closing adjustment in the amount of $1,419,507.10, based on composite calculations performed on the two pensions plans — the RTIS and Nonbargaining plans — with participants in the alleged PWF segment.
The government challenges Raytheon's claim based on evidence that demonstrates PWF did not meet the definition of a "segment" under CAS 413-30(a)(19) and therefore, no segment closing adjustment was triggered by the sale of PWF to Tyco. The government also challenges Raytheon's segment closing adjustment for the alleged PWF segment on the merits with testimony from its expert, Mr. England.
The court will first address its findings with regard to whether the PWF business meets the definition of a segment under the CAS. CAS 413 defines the term "segment" as follows:
CAS 413-30(a)(19).
The government argues that the evidence at trial made clear that the PWF business unit was not a segment within the meaning of CAS 413-30(a)(19). First, the government points to the fact that the limited evidence presented established that PWF was one of three internal service centers, which reported to a home office as a part of a Centers of Excellence reporting unit. PX 28.0002 (Raytheon's certified claim identifying PWF as "an internal service center"); Tr. 238-239 (Murphy) ("PWF was
Raytheon argues in response that PWF is a segment because the government treated it as a segment when the government required Raytheon to submit a CAS 413 segment closing adjustment following the sale of PWF.
Based on the evidence presented at trial, the court agrees with the government that the PWF business was not a segment within the meaning of CAS 413-30(a)(19). First, Raytheon did not produce evidence to show that PWF met the definition set forth in the CAS. Raytheon did not present any testimony or evidence to show that PWF ever "report[ed] directly to a home office" as required by the CAS 413-30(a)(19). Second, as the government correctly observes, the only reference to PWF found in the CAS disclosure statement submitted by Raytheon identifies PWF as part of a segment and not as a segment on its own. PX 426.0001, .0017. Raytheon's CAS disclosure statement clearly designates "Centers of Excellence" as the "Company or Reporting Unit" and later as the "[s]egment or business unit reporting directly to a home office." PX 426.0001. The disclosure statement identifies PWF among the individual businesses listed within an "Item Description" of the "Reporting Unit." PX 426.0017. Therein, PWF was listed as among the "Corporate Service Centers aligned to ES [Electronic Systems]."
Taken together, the court finds that the evidence weighs in favor of the government's position and that the government has met its burden in establishing that PWF was not a segment. Accordingly, the sale of PWF to Tyco should not have triggered a segment closing adjustment. Raytheon's claim for payment of the government's share of the pension deficit identified for PWF in Raytheon's segment closing adjustment must be rejected.
D. Aerospace segment closing calculations
On June 8, 2001, Raytheon sold the Aerospace segment to Veritas Capital. PX 33. The parties agree that under CAS 413-30(a)(20) the June 8, 2001 sale resulted in a "segment closing" requiring Raytheon to perform CAS 413-50(c)(12) segment closing calculations for each of the Aerospace segment's defined benefit pension plans. There were two Raytheon defined benefit pension plans covering Aerospace segment employees: 1) Raytheon Aircraft Company Retirement Income Plan for Salaried Employees and 2) Raytheon Aircraft Holdings Base Retirement Plan.
On January 24, 2005, Raytheon submitted a certified claim to the government for the government's participation in the pension deficit Mercer had calculated for the Aerospace segment. PX 33. As with Raytheon's claims arising out of the AIS and Optical segment closings, the government contracting officer denied Raytheon's certified claim in its entirety by a contracting officer's final written decision dated March 7, 2005. PX 34. The primary reason stated by the contracting officer for denying Raytheon's certified claim was Raytheon's failure to fund the pension costs in the current tax year pursuant to FAR 31.205-6(j)(1)(i) and (j)(2)(i)(A).
Raytheon then filed its claim in the Court of Federal Claims and sought the government's participation in the following segment closing adjustment deficit:
PX 428.0041. The court previously held that the government could not challenge Raytheon's asset and liability segment closing adjustment calculations for these two plans in the Aerospace segment because of the government's judicial admission to the court that those calculations were not in dispute.
Therefore, the only issue remaining concerning the Aerospace segment closing is the proper calculation of the government's share of the Aerospace pension deficit. In the same manner as previously discussed for the AIS segment, Raytheon has performed a government share calculation based on sales data for the Aerospace segment as follows:
PX 428.0054; PX 33.
The government contends that Raytheon's Aerospace segment government share calculations must be rejected because Raytheon failed in its calculations to account for pension costs that were paid in connection with fixed price contracts between 1978 and 1995, when the original CAS was in effect. The government argues that it is entitled to an equitable adjustment removing these amounts from the amounts owed to Raytheon in connection with the Aerospace segment closing. The government has offered no alternative government share calculation of its own for the Aerospace segment. For the reasons stated previously,
Accordingly, the court finds that the government's share of the Aerospace segment closing adjustment is
IV. Conclusion
For the foregoing reasons, the court finds that Raytheon's claims for the AIS and Optical segments are not barred by the AIS and Optical novation agreements and that Raytheon is entitled to the following government share amounts on its segment closing adjustment claims:
Because the government has not provided a contracting officer's decision on its claims for an equitable adjustment or for a set-off, the court also finds that it does not possess jurisdiction over those claims, and therefore the government is not awarded any monetary relief in this case. Accordingly, the court directs the Clerk to enter judgment for Raytheon in the amount of
FootNotes
CAS 413-30(a)(20) (emphasis added).
CAS 413-50(c)(12) (emphasis added).
CAS 413-50(c)(12)(vi).
AIS novation agreement;
Optical novation agreement;
Id.
41 U.S.C. § 605(c)(1) (this provision of the CDA is now codified at 41 U.S.C. § 7103(b)).
CAS 413-30(a)(13). CAS 413 further defines an "active" pension plan participant as "a participant whose employment status with the employer has not been terminated."
CAS 413-50(c)(12)(vi).
Comment
User Comments