THOMAS C. WHEELER, District Judge.
This case is before the Court on remand from the U.S. Court of Appeals for the Federal Circuit.
In considering SUFI's cross-appeal for recovery of overhead and profit, the Federal Circuit observed that "[u]nder applicable common law, damages for breach of contract should place the wronged party in as good a position as it would have been had the breaching party fully performed."
This case is part of a much larger series of administrative appeals and breach of contract actions spanning ten years of litigation, in which there have been thirteen decisions from the Armed Services Board of Contract Appeals ("ASBCA"), five decisions from this Court, and two appeals to the Federal Circuit.
Cumulatively, SUFI has succeeded in its quest to be compensated for the Air Force's breaches, including the recovery of lost profits and overhead caused by the Air Force's conduct. In the breach damages award exceeding $110 million, SUFI established its entitlement to more than $58 million in lost profits. SUFI also received overhead compensation relating to its performance of extra work under the contract. The issue now remaining is whether SUFI should receive additional profit and overhead as a mark-up on the attorneys' fees of its outside law firm, Crowell & Moring.
SUFI contends that it should receive a 25 percent profit on Crowell & Moring's attorneys' fees, based upon two provisions included in Modification 007 to the contract, dated February 18, 2000. These two provisions state as follows:
3.11.1 "Additional Work Requested"
3.11.2 "Facility Renovations"
(PX 58 at 1-2.)
These contract provisions on their face do not apply to SUFI's claim for recovery of attorneys' fees, and would not justify a mark-up on attorneys' fees. Neither section 3.11.1 nor 3.11.2 references anything about attorneys' fees or legal costs. Based upon the plain language of the clauses, they apply to "office moves, additional phones, and other requests [from the government] not covered under this contract," as stated in clause 3.11.1, and to "major" and "minor" renovations requiring the removal of "existing telephones, frames, and other equipment," as stated in clause 3.11.2.
Logic would support a distinction between contract performance work managed by SUFI under sections 3.11.1 and 3.11.2, and legal work managed and performed by SUFI's outside law firm. A negotiated profit and overhead rate would be entirely appropriate for SUFI's contract work, and indeed SUFI received this compensation as a mark-up on its claims. However, the Court is not aware of any contractual basis to grant SUFI a 25 percent mark-up on legal work performed by Crowell & Moring. Such a mark-up would have the effect of increasing Crowell & Moring's hourly billing rates by 25 percent for no apparent reason. SUFI does not cite any other contract provision supporting its claim for overhead and profit on fees.
Lacking any contractual basis for recovery, the Court will turn to the elements for establishing recovery under the common law of damages. Common law breach of contract damages "are recoverable where: (1) the damages were reasonably foreseeable by the breaching party at the time of contracting; (2) the breach is a substantial causal factor in the damages; and (3) the damages are shown with reasonable certainty."
First, looking to the foreseeability that a breaching party would expect to be charged for profit and overhead on top of attorneys' fees, the Court does not see any circumstances under which such a mark-up would be foreseeable. Profit normally is viewed as a reward for having assumed a business risk of some kind.
Compensation for overhead seemingly would be appropriate if SUFI had played some role, and had expended some time and effort, in assisting or overseeing the law firm's claim-preparation tasks. However, there is no evidence that SUFI played any significant role in this process. Given the contingent fee arrangement with Crowell & Moring, SUFI would have no reason or interest to oversee or manage the law firm's work. This was a case of a novice government contractor turning over the complete claim preparation work to an experienced and highly reputable law firm. Where SUFI did not add anything material to the claim preparation effort, it is difficult to understand why SUFI should receive an overhead component. The Air Force, as the breaching party, would not have found it foreseeable to pay SUFI overhead for not doing any material work.
Second, in assessing whether the breach of contract is a substantial causal factor for the claimed damages, the Court is simply unable to identify any damages. As noted above, the Court does not see that the Air Force's breach caused SUFI to lose any profit or overhead relating to the law firm's preparation of the claim. Simply put, the record does not support a finding that any profit or overhead damages relating to attorneys' fees even exist. SUFI already has received rulings awarding lost profits and overhead as part of its breach of contract claim. Thus, the breach of contract did not cause any additional damages.
Third, in deciding whether SUFI has shown damages with reasonable certainty, the only result the Court can reach with reasonable certainty is that no additional overhead and profit are warranted. It stands to reason that where the Court is unable to identify any damages, those damages cannot be shown with reasonable certainty. The record shows that SUFI did not perform any of the work and did not incur any risk justifying a profit. Therefore, SUFI has failed to establish any overhead or profit damages with reasonable certainty. Further, the Court is not aware of any precedent supporting an overhead and profit mark-up on an outside law firm's fees, and the parties have provided none.
Accordingly, applying the common law of breach of contract damages, SUFI is not entitled to any mark-up for overhead and profit on its law firm's attorneys' fees.
The parties disagree on the date when interest should begin to run for attorneys' fees, and whether the application of interest on expenses is still an open issue. Since Crowell & Moring handled this matter on a contingent fee basis, SUFI received no legal bills and incurred no liability for attorneys' fees as the work was being performed. Indeed, it is doubtful that as of today SUFI has paid anything to Crowell & Moring for attorneys' fees because the Air Force's obligation for breach damages to SUFI is not final. The Government contends and the Court agrees that the earliest date of interest accrual would be December 29, 2010, the date that SUFI submitted its claim for fees and expenses to the contracting officer. Def.'s Nov. 9, 2015 Br. at 16-17. The date of the claim is the time that SUFI formally put the Air Force on notice that payment of a sum certain would be expected. Every day thereafter represents a day that SUFI was denied the use of the funds. Therefore, starting interest on the date of claim submittal is a reasonable outcome, and would be in line with the treatment of interest under the Contract Disputes Act, 41 U.S.C. § 7109(a) (2011). Although this case is not governed by the Contracts Disputes Act, the parties likely would accept such a result as being typical in federal procurement law.
With regard to the running of interest on expenses, the Court agrees with SUFI that the Government has waived the right to challenge the Court's original judgment. Pl.'s Oct. 19, 2015 Br. at 4-6. The Government did not appeal this Court's ruling relating to interest on expenses, and therefore the original ruling remains undisturbed.
SUFI has recently raised for the first time that its attorneys' fees calculation should be based on the amount it is required to pay Crowell & Moring under the contingent fee agreement, rather than using the traditional lodestar method previously presented. Pl.'s Oct. 19, 2015 Br. at 7-10. As the Government points out, SUFI presented a traditional lodestar method of rates multiplied by hours in its claim to the contracting officer, in its complaint, in pretrial filings, during the trial, and on appeal to the Federal Circuit. Def.'s Nov. 19, 2015 Br. at 19-28. During the entire trial, and the discovery leading up to trial, the parties focused on the reasonableness of the attorneys' hourly rates and the amount of time spent.
At no time until now has SUFI argued for the recovery of fees based upon its contingent fee agreement. This 180 degree reversal has occurred despite the fact that SUFI has refused to produce the contingent fee agreement with Crowell & Moring. SUFI itself strongly asserted in a February 13, 2012 motion for summary judgment that "contingent fee arrangements between the client and the attorney are to be disregarded when setting the appropriate fee. . . ." Pl.'s Mot Summ. J. at 11. SUFI relied upon Supreme Court precedent that a plaintiff may not recover an amount pursuant to a contingent fee agreement.
The triggering event to SUFI's change of position is that this Court, and later the ASBCA, greatly increased the damages award for the Air Force's breach, and thus greatly increased the amount of the contingent fee that SUFI would pay. Yet, the Court's damages award stems from the
Finally, the Court doubts that it has subject matter jurisdiction of SUFI's significantly revised claim under the contingent fee agreement because that claim has never been presented to the contracting officer for a final decision. The Court acknowledges that some claims may be revised in litigation without having to be presented to the contracting officer.
For all of the foregoing reasons, the Court will not allow SUFI to change its method for recovering attorneys' fees to the amounts due under the contingent fee agreement.
Within fourteen days, on or before December 21, 2015, the parties shall file a joint status report indicating whether any further proceedings are necessary in this case, and if so, what those proceedings may entail.
IT IS SO ORDERED.
