PAUL W. GRIMM, District Judge.
This suit involves Defendant Republic of Korea's unsuccessful efforts through its Defense Acquisition Program Administration ("DAPA")
Feb. 4, 2016 Mem. Op. 6, ECF No. 43.
As a necessary and, indeed, intended byproduct of this absence of contractual privity between FMS buyers and sellers, foreign sovereigns forgo significant control over FMS transactions. See Trimble, 484 F.3d at 707 ("[T]he FMS program requires the intermediation of the United States and a back-to-back contract structure[, which] reflects the national security interests of the United States. . . ."). While the FMS Program allows foreign sovereigns "to take advantage of the United States' procurement contract experience or ability to obtain discounted prices," id. at 706, the Program requires FMS customers to permit the United States to "determine[] the contract type, select[] the contract source, and negotiate[] prices and contract terms with the individual contractor." Def. Inst. of Sec. Assistance Mgmt., The Management of Security Assistance 15-4 (27th ed. 2016) (emphasis added), available at http://www.disam.dsca.mil/pubs/DR/27th%20Greenbook.pdf. In short, the foreign sovereign must "trust[] the [U.S. Government] to negotiate a contract that meets [its] needs." Id.
This case arises from South Korea's efforts to participate in the FMS Program while retaining the level of control that it would exercise in a DCS transaction. In 2011, South Korea sought to upgrade its F-16 fighter fleet through the FMS Program. South Korea solicited bids from U.S. defense contractors. Joint Statement of Undisputed Facts ¶¶ 1-2, ECF No. 69. BAE and Lockheed Martin each submitted bids for the project. Joint Statement ¶ 2; BAE, Proposal for KF-16 Upgrade Program (Dec. 2, 2011), J.R. 117-521. In August of 2012, DAPA and BAE entered into a MOA that designated BAE as the defense contractor that DAPA wished to perform the upgrades. See Memorandum of Agreement (MOA) art. 7, J.R. 558.
In September 2013, the U.S. Government, DAPA, and BAE met to discuss the pricing of the upgrade program and agreed to divide the upgrade work between two separate LOAs, one addressing "pre-planning activities and long-lead support" items and the other addressing the bulk of the upgrade program. KF-16 Upgrade Program Meeting Minutes ¶ 15A (Sept. 5-10, 2013), J.R. 1445-56; Joint Statement ¶ 8. The meeting minutes note that the U.S. Government and BAE offered diverging estimates of the upgrades' cost. Id. ¶ 6, J.R. 1439. But the U.S. Government emphasized "that there is only one cost which is relevant, and that was the FMS program cost estimate provided by" the U.S. Government. Id. Nonetheless, the U.S. Government agreed to "work with BAE to achieve" South Korea's "aggressive . . . cost goals," while emphasizing that "there are no guarantees that future funding will not be required during program execution." Id. ¶ 15C, J.R. 1446.
One month later, the U.S Government and South Korea finalized a LOA for the preplanning components of the F-16 upgrades. Letter of Offer and Acceptance (LOA), J.R. 658-73. The LOA approved BAE as the contractor to perform the upgrades. LOA 3, Note 1, 6, Note 4, J.R. 659, 662. It also provided a $1.05 billion estimate for the upgrades, LOA 4, Note 1, J.R. 660, but obligated South Korea "[t]o pay . . . the total cost" of the upgrades "even if the [final] costs exceed the amounts estimated in the LOA," id. at 12, § 4.4.1, J.R. 667; see also SAMM § C5.F4, Standard LOA Terms § 4.4.1. Importantly, the LOA also required the two sovereigns "to resolve any disagreement regarding this LOA by consultations" and prohibited referral of any "disagreement to any international tribunal or third party for settlement." LOA 14, § 7.2; see also SAMM § C5.F4, Standard LOA Terms § 7.2.
About one year later, the U.S. Government informed South Korea that, despite its best efforts, the costs of the upgrades would exceed $1.705 billion. Letter from Col. David C. Wright, Acting Dir. Reg'l Affairs, U.S. Air Force, to Col. Kang, Byeong-Ho, Def. Acquisition Program Admin. (Aug. 21, 2014), J.R. 1448-49 (estimating cost of $2.060 billion); Letter from Heidi H. Grant, Deputy Under Sec'y, U.S. Air Force, to Brig. Gen. Kim, Won-sik, Def. Acquisition Program Admin. (Sept. 29, 2014), J.R. 1450-51 (estimating cost between $2.4 and $2.5 billion). The U.S. Government explained that it arrived at its revised estimate by consulting "historical data from similar F-16 development programs." Letter from Heidi H. Grant to Brig. Gen. Kim, Won-sik, J.R. 1450. In response, South Korea demanded that BAE pay DAPA $43,250,000 for violating the MOA. DAPA Notice of Claim, J.R. 1452-54; Joint Statement ¶ 13. About one month later, the U.S. Government terminated the Upgrade Program over South Korea's inability to agree to the revised price. Memorandum from Air Force Life Cycle Mgmt. Ctr. to BAE Sys. Tech. Sol. & Servs. Inc., J.R. 1465-1468; Joint Statement ¶ 16. Shortly thereafter, BAE filed its Complaint in this Court. ECF No. 1.
Both BAE and South Korea acknowledge that a FMS contract governed the intended F-16 upgrades, see Pl.'s Mem. 1; Defs. Opp'n 10-12, and that the FMS program prohibits a foreign sovereign from enforcing a FMS contract, see Pl.'s Mem. 2, 4; Defs.' Opp'n 5. South Korea argues, however, that the FMS program does not prohibit "FMS customers and U.S. contractors from negotiating and agreeing to [independent] contracts [such as the MOA] related to an FMS sale of military equipment or services" and that BAE is liable under the MOA for its failure to "use its best efforts to reach agreement with the [U.S. Government] to include certain contract terms and scope of work in the LOA between [the two sovereigns]." Defs.' Opp'n 5, 12; see also MOA art. 1, J.R. 555. BAE contends that the MOA is not divisible from the FMS transaction. See Pl.'s Mem. 16-17, Pl's Reply 12-13. If, as BAE argues, the FMS program bars South Korea from suing BAE for its asserted failure to secure South Korea's preferred contract price, then South Korea contends that it is entitled to damages for BAE's allegedly fraudulent or negligent misrepresentations about the validity and enforceability of the MOA. Defs.' Opp'n 18-19. BAE argues that the FMS Program also prohibits South Korea's Counterclaims and, in the alternative, that they are not cognizable. Pl.'s Mem. 17-19; Pl.'s Reply 13.
Summary judgment is proper when the moving party demonstrates, through "particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations . . ., admissions, interrogatory answers, or other materials," that "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a), (c)(1)(A); see also Baldwin v. City of Greensboro, 714 F.3d 828, 833 (4th Cir. 2013). If the party seeking summary judgment demonstrates that there is no evidence to support the nonmoving party's case, the burden shifts to the nonmoving party to identify evidence that shows that a genuine dispute exists as to material facts. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 585-87 & n.10 (1986). The existence of only a "scintilla of evidence" is not enough to defeat a summary judgment motion. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251 (1986). Instead, the evidentiary materials submitted must show facts from which the finder of fact reasonably could find for the party opposing summary judgment. Id. A "genuine" dispute of material fact is one where the conflicting evidence creates "fair doubt"; wholly speculative assertions do not create "fair doubt." Cox v. Cnty. of Prince William, 249 F.3d 295, 299 (4th Cir. 2001); see also Miskin v. Baxter Healthcare Corp., 107 F.Supp.2d 669, 671 (D. Md. 1999). The substantive law governing the case determines what is material. See Hooven-Lewis v. Caldera, 249 F.3d 259, 265 (4th Cir. 2001). A fact that is not of consequence to the case, or is not relevant in light of the governing law, is not material. Id.; see also Fed. R. Evid. 401 (defining relevance).
In ruling that this case should not be dismissed on forum non conveniens grounds, I held that the MOA and FMS contract "were inextricably intertwined" and that "enforcement of the MOA, in isolation from the much larger FMS LOA between South Korea and the United States would fly in the face of the FMS Program and the U.S. Government's directive, which implicates U.S. security interests." Feb. 4, 2016 Mem. Op. 23-24 (citing Sec'y of State for Defence v. Trimble Navigation Ltd., 484 F.3d 700, 707 (4th Cir. 2007)). In so ruling, I relied on Trimble, which held that an FMS customer could not sue a defense contractor as a third-party beneficiary of a LOA because "it would be contrary to the statutory scheme to imply a direct relationship between the domestic contractor and the foreign purchaser." 484 F.3d at 707. BAE contends that my prior ruling governs the outcome of this case. Pl.'s Mem. 16-17. South Korea raises two principal arguments for why that ruling does not resolve the matter, neither of which are availing.
First, South Korea suggests that the regulations governing FMS transactions permit foreign sovereigns to indirectly control the FMS contract prices through price competitions and that it can therefore hold BAE liable for its inability to ensure that the price estimated in its bid became the final contract price. Defs.' Opp'n 6-8, 12-18. BAE disputes South Korea's reading of the regulations but maintains that South Korea's claims would be barred even under its interpretation. Pl.'s Reply 4-11. BAE is correct.
South Korea's argument rests on two basic assertions about the FMS regulations: (1) that the regulations permit the FMS customer to "direct the [U.S. Government] to award the [FMS] contract . . . to a specific contractor"; (2) that they permit "a foreign government to hold a competition to select a contractor and in that competition, establish the price that should determine the price that the contractor charges the [U.S. Government] for its equipment and services." Defs.' Opp'n 6, 14-15.
The FMS regulations provide:
DFARS 225.7304(a) (emphasis added). The obligatory "shall honor" language appears at odds with DFARS 225.7304(f), which directs the U.S. Government "not [to] accept directions from the FMS customer on source selection decisions." South Korea argues that the discretionary authority provided by DFARS 225.7304(f) only applies to sole-source requests that do not comply with the regulations referenced in DFARS 225.7304(a). Defs.' Opp'n 15-17 (citing In re: Julie Research Labs., Inc. Reconsideration, No. B-218244, 1985 WL 52865, at *2 (Compt. Gen. June 12, 1985)). In other words, South Korea views DFARS 225.7304(a) as an "exception" to the discretionary authority granted in DFARS 225.7304(f). Id. at 17. BAE argues that DFARS 225.7304(a)'s "shall honor" language applies only to subcontracts, not prime contracts. Pl.'s Reply 7 & n.3 (citing Hyperion, Inc. v. United States, 120 Fed. Cl. 604 (2015)). Whichever side's reading of the FMS regulations is better, there is no dispute that the U.S. Government did in fact honor South Korea's request for BAE to perform the FMS contract, LOA 3, Note 1, 6, Note 4, J.R. 659, 662; Joint Statement ¶ 11, so the parties' disagreement over this aspect of the regulations is immaterial because the dispute at hand centers on the price of the contract, not the entity intended to perform it.
Once a contractor is selected to perform a FMS contract, the U.S. Government determines the contract price, see DFARS 225.7303(a) (designating the U.S. Government as the entity that "[p]rices FMS contracts."), which it does in the same manner that it prices domestic defense contracts, id. Before negotiating a domestic military contract, the U.S. Government "obtain[s] certified cost or pricing data" to assist it in "establish[ing] a fair and reasonable price." FARS 15.402(a). The U.S. Government need not obtain such information, however, if an "adequate price competition" occurs. FARS 15.403-1(b)(1). Similarly, a FMS customer can avoid an obligation to provide "certified cost or pricing data," DFARS 225.7303(a), by "conduct[ing] a competition resulting in adequate price competition," DFARS 225.7303(b) (cross-referencing FAR 15.403-1(b)(1)). South Korea contends that the U.S. Government loses its discretion over the contract price by entering a FMS contract with a contractor selected by an adequate price competition. Defs.' Opp'n 7-8 (citing Defense Security Cooperation Agency (DSCA), Security Assistance Management Manual (SAMM) C.6.3.2 ("When foreign government conducts a competition for a weapon system . . . that competition should determine the price to be paid.); Memorandum from DSCA to Deputy Under Sec'y Army (Int'l Affairs) et al. attach. 1 (Jan. 19, 2000) ("[C]ompetitions run by foreign governments should determine the price to be paid . . . even if the sale to the foreign government is then processed as a foreign military sale. . . .")). But, as BAE correctly notes, the disputed regulations address the information the foreign sovereign must provide in order for a price to be determined and do not circumscribe the U.S. Government's ability to adopt a different price based on other information, Pl.'s Reply 5-6 & n.2, as the U.S. Government did here, Letter from Col. David C. Wright to Col. Kang, Byeong-Ho, supra, at 1 ("Based upon the most recent USG and contractor data, extensive analysis, . . . the USG's current independent cost estimate for program execution is in excess of $2.06B."); Letter from Heidi H. Grant to Brig. Gen. Kim, Won-sik, supra, at 1 ("We now estimate the total program cost at moderate risk to be $2.4B-$2.5B. This cost is based upon historical cost data from similar F-16 development programs. . . ."); KF-16 Upgrade Meeting Minutes 2-3 (Sept. 11, 17, 2014), J.R. 1697-98 (describing revised cost estimate methodology based on "other similar F-16 modifications," which was prompted by updated price estimates from BAE due to "the learning curve for both BAE and USG resulting from meeting the LOR requirements").
But in making its argument that the U.S. Government lost its right to determine the FMS contract price once South Korea selected BAE through an adequate price competition, it proves too much. This is because even if South Korea's characterization of the FMS regulations were accurate, its grievance is with the U.S. Government for violating the regulations, not BAE for breaching its contractual obligations. BAE complied with every step of the FMS process even as South Korea conceives of it. BAE participated in a price competition and identified the price at which it was willing to perform the FMS transaction. See Joint Statement ¶ 2; Proposal for KF-16 Upgrade Program, supra, § 3.17.8, J.R. 473-74 (providing cost for BAE's bid to perform F-16 upgrades).
Alternatively, South Korea attempts to characterize the MOA between DAPA and BAE as an "offset agreement." Defs.' Opp'n 17. This sleight of hand is unavailing. The FMS regulations note that the U.S. Department of Defense "does not encourage, enter into, or commit U.S. firms to FMS offset arrangements," but they do not prohibit defense contractors from entering into them. DFARS 225.7306. The term "offset" as used in the regulations is "an inducement or condition to purchase military supplies or services, including benefits such as coproduction, licensed production, subcontracting, technology transfer, in-country procurement, marketing and financial assistance, and joint ventures." PGI 225.7303-2(a)(3)(A) . Such offsets encompass:
Id. As BAE correctly notes, none of the offset agreements contemplated by the regulations "govern the terms and conditions of the FMS transaction." Pl.'s Reply 12.
The MOA made BAE responsible for ensuring that the LOA included predetermined contract terms, including the contract price. MOA arts. 1-2, 3(2), J.R. 555-56. It did not, as contemplated by the regulations' definition of offsets, confer an ancillary benefit to one party or the other to engage in the FMS transaction. See PGI 225.7303-2(a)(3)(A). For example, the MOA did not obligate BAE to produce components for the upgrades in South Korea or require South Korea to purchase unrelated products from BAE. Rather, it sought to shape the scope and cost of the FMS transaction.
Neither South Korea's interpretation of the FMS regulations nor its characterization of the MOA as an offset agreement negates my view that "the crux of the Trimble opinion applies" here. Feb. Mem. 4, 2016, Op. 23. Enforcement of the MOA as an independent contract divisible from the FMS transaction would run counter to U.S. national security interests. See id. at 23-24. Although the instant case and Trimble differ in that South Korea does not seek third-party beneficiary status, South Korea, like the FMS customer in Trimble, seeks to do indirectly what the FMS regulations prohibit it from accomplishing directly—namely sue BAE for its performance on an FMS contract. BAE is entitled to a declaration that the FMS Program and federal common law bar South Korea from suing BAE for breaching the MOA. I will therefore grant summary judgment in its favor. Accordingly, I will dismiss as moot Counts I, II, III, and V of BAE's Second Amended Complaint, which all argue that BAE should prevail on the merits of South Korea's contract-law claims. See Second Am. Compl. ¶¶ 68-82, 89-96, ECF No. 22.
Since the FMS Program's structure bars a breach-of-contract claim against BAE, South Korea contends that BAE is liable for fraudulently or negligently misrepresenting its capacity to ensure the adoption and enforcement of South Korea's preferred contract terms. But South Korea advances no authority for its argument that it may bring torts arising out of a contract claim against BAE, and BAE is quick to point out that "a tort claim cannot be based on an alleged breach of contract." Pl.'s Mem. 18 (citing Kwang Dong Pharma. Co. v. Han, 205 F.Supp.2d 489, 495 (D. Md. 2002)).
South Korea does not address this argument, apart from noting its perceived need for "additional discovery concerning BAE's actual representations about the KF-16 Upgrade Program." Defs.' Opp'n 20. Discovery concluded in this case on November 11, 2016. See Mar. 33, 2016 Paperless Order, ECF No. 59 (approving Motion to Modify Scheduling Order, ECF No. 58). South Korea could have requested an extension of the discovery deadline but has not. If between filing its Opposition on May 16, 2016 and the discovery deadline South Korea had discovered evidence of representations made by BEA independent from the MOA itself on which South Korea relied to its detriment, it could have requested permission to file a surreply. Again, it did not. Thus, the Court will not speculate about the existence of evidence outside the record that supports South Korea's tort Counterclaims. Accordingly, BAE is also entitled to summary judgment in its favor with respect to those Counterclaims.
During the pendency of the case, I granted BAE's Motion for Preliminary Anti-Suit Injunction "until the resolution of the threshold issue of subject matter jurisdiction and the pending motion for summary judgment." July 19, 2016 Mem. Op. & Order 36-37. Having determined that the Court does have subject-matter jurisdiction over the matter and can exercise it, Oct. 24, 2016 Mem. Op. & Order, and because I now will grant summary judgment in BAE's favor, I will also lift the preliminary injunction. Should South Korea proceed with its claims against BAE in its own courts, BAE may defend against the claims by asserting any claim or issue preclusion that this judgment may afford it under Korean law.
The FMS Program is specifically structured to require disagreements that arise during FMS transactions to be resolved through sovereign-to-sovereign consultation rather than through litigation. Permitting South Korea to enforce a contract against BAE that holds the contractor accountable for ensuring that predetermined contract terms govern the FMS transaction would run contrary to the FSM Program's structure and the national-security interests that underlie it. BAE is therefore entitled to a declaration that South Korea's breach-of-contract claims are unenforceable. Moreover, South Korea's tort Counterclaims fail because a party's alleged breach of contract, by itself, cannot be the basis of fraud or negligent misrepresentation claims. BAE is entitled to summary judgment.
A separate Order follows.
