The U.S. Court of Appeals for the Federal Circuit today ruled that the government was justified in terminating a $5 billion contract to develop a stealth bomber. The win is probably bittersweet -- or just bitter -- for one Justice Department official. Associate Deputy Attorney General Donald Verrilli argued for General Dynamics Corp., one of two defense contractors hired to build the aircraft, while he was still co-chair of Jenner & Block’s appellate and Supreme Court practice. He joined the department in February.
But we digress. In 1988, the government hired McDonnell Douglas Corp. (now Boeing co.) and General Dynamics to engineer the A-12 Avenger, a carrier-based aircraft nicknamed the “Flying Dorito” for its triangular shape. The original contract called for the development and testing of eight prototypes, with the first Dorito to be delivered in 1990.
Delays and design problems caused the contractors to miss their deadline, and the Defense Department modified the delivery schedules in 1991. The contractors, burning about $120 to $150 million a month on development, argued that the new schedules were unreasonable and asked for a new timetable. In exchange for some breathing room, the contractors said they would absorb a $1.5 billion loss and waive their claims for equitable adjustment.
Dick Cheney, then the defense secretary, would have none of it. The Navy terminated the contract and demanded the return of about $1.35 billion in payments, touching off 18 years of litigation that boomeranged between the U.S. Court of Federal Claims and the Federal Circuit. The appeals court heard arguments in December.
The court today ruled that the Navy was justified “in feeling insecure” about the project based on the contractors’ history of failing to meet milestones, financial difficulty, and performance on the A-12 job. The contractors failed to show that they were making progress “such that timely completion of the contract was not endangered or that there was an excusable stay,” wrote Chief Judge Paul Michel, who was joined by Judge Kimberly Moore, and Judge Marilyn Huff of the U.S. District Court for the Southern District of California, sitting by designation. The contractors will be required to repay the $1.35 billion in payments, plus interest accruing since 1991, for a total of about $2.8 billion.
“Today’s decision also represents a critical step toward bringing this long litigation to an end,” said Tony West, head of the Justice Department’s Civil Division, in a statement.
Michel, citing a 1990 letter from the contractors’ CEOs, noted that the Navy erred in stipulating to the contract and the contractors were unwise to accept it. “Alas, the law of contracts does not allow us to deviate from established principles of law and equity,” Michel wrote. He also noted that terminating a government contract for lack of progress without a specified completion date was the exception not the norm. Each party will bear its own court costs, the court ruled.
“This is indeed an unfortunate case for all parties involved,” Michel wrote.
Charles Cooper of Cooper & Kirk argued for McDonnell Douglas. Bryan Snee, deputy director of the Commercial Litigation Branch of the Justice Department’s Civil Divisoin, argued for the government.