PATENT INFRINGEMENT PURSUANT TO A GOVERNMENT CONTRACT

By Dick Lieberman, Consultant and Retired Attorney

The Court of Federal Claims recently found that the United States had infringed the patent of a small business by purchasing bullets from a contractor, Alliant Techsystems, who was operating the Lake City Army Ammunition Plant. Liberty Ammunition, Inc. v. United States, No. 11-84C (Fed. Cl. Dec. 19, 2014). The court found that by requiring Alliant to use a design patented by Mr. P.J. Marx (now associated with Liberty Ammunition), under a patent known as the “ ’325 patent,” the U.S. had infringed the patent. Since the mid-1990s, the DOD sought a lethal, lead-free bullet to take the place of the former .22 caliber standard-issue NATO round, the M855. In 2010, the United States Department of the Army (“the Army”) began replacing the M855 with a new leadfree bullet, the M855A1 Enhanced Performing Round (“EPR”). The Army also replacing another bullet, the M80, with a similar lead-free design, designated as the M80A1 EPR. During the development of this ammunition, an individual now associated with Liberty Ammunition, Inc., Mr. PJ Marx, the inventor of the projectile covered by the ‘325 patent, contacted individuals at the DOD to share his design for a new, lead-free projectile. Liberty alleged that through these conversations with Mr. Marx, the Army copied its design and violated the terms of three nondisclosure agreements (“NDAs”) by disclosing confidential information within the Army to unauthorized recipients, including some who worked with vendors of ammunition to the Army. THE PATENT INFRINGEMENT SCHEME FOR GOVERNMENT CONTRACTS Section 1498(a) of Title 28 serves as a congressional waiver of the United States’s sovereign immunity and vests in the United States Court of Federal Claims the exclusive authority to adjudicate patent infringement claims against the federal government “[w]henever an invention described in and covered by a patent of the United States is used or manufactured by or for the United States without license of the owner thereof or lawful right to use or manufacture the same.” 28 U.S.C. § 1498(a). Section 1498, rather than the Tucker Act, 28 U.S.C. § 1491(a), grants the court jurisdiction over a claim for patent infringement. The statute further states, in pertinent part, that “the use or manufacture of an invention described in and covered by a patent of the United States by a contractor, a subcontractor, or any person, firm, or corporation for the Government and with the authorization or consent of the Government, shall be construed as use or manufacture for the United States.” 28 U.S.C. § 1498(a). Pursuant to 28 U.S.C. § 1498, the government is authorized to “take” a non-exclusive and compulsory license to any United States patent based on the theory of eminent domain. The government has consented to being sued only for the compulsory taking of a non-exclusive patent license, and therefore, the basis for recovery against the government under 28 U.S.C. § 1498 diverges from that in patent litigation between private parties under 35 U.S.C. § 271. Copyright 2015 Dick Lieberman, Permission Granted to PTAP This article does not provide legal advice as to any particular transaction 2 Section 1498 is a waiver of sovereign immunity only with respect to a direct governmental infringement of a patent. Direct infringement of a patent occurs when the government directly uses or manufactures the patented invention without a license, when, through a procurement contract or otherwise, the government consents to the use or the manufacture of the patented invention for its benefit without first obtaining a license. The relief provided by 28 U.S.C. § 1498(a) for direct infringement is the “reasonable and entire compensation” for the compulsory non-exclusive patent license. 28 U.S.C. § 1498(a), generally, requiring the U.S. to pay a reasonable royalty for its license as well as damages for its delay in paying the royalty. The court held that the M855A1 and the M80A1 projectiles directly infringed Mr. Marx’s patent and awarded a reasonable royalty of $15.6 million to Liberty Ammunition, Inc., plus future royalty payments until the patent expires. BREACH OF CONTRACT The Tucker Act grants the Court of Federal Claims subject matter jurisdiction to hear claims “against the United States founded either upon the Constitution, or any Act of Congress or any regulation of an executive department, or upon any express or implied contract with the United States, or for liquidated or unliquidated damages in cases not sounding in tort.” 28 U.S.C. § 1491(a)(1). To prevail on a breach-of-contract claim, the plaintiff bears the burden of proving: (1) the existence of a valid contract between the parties; (2) a duty arising from the contract; (3) a breach in duty; and (4) damages caused by the breach. For either an express or implied contract, the requirements are the same: (1) mutuality of intent; (2) consideration; (3) an unambiguous offer and acceptance; and (4) the existence of actual authority, express or implied, on part of the government signatory to bind the government to the contract. Four persons signed the nondisclosure agreements on behalf of the U.S.: (1) Lt. Col. Dean, Chief of the Smalls Arms Branch; (2) Mr. John Amick, a contractor supporting the Small Arms Branch; (3), Mr. Thomas Campion, a contractor for the Special Operations Command; and (4) Mr. Charles Marsh, a Navy employee at the Crane Naval Surface Warfare Center. The court held that there was no breach of contract on these nondisclosure agreements because none of the four signers on behalf of the government had actual or implied contracting authority. Furthermore, these nondisclosure agreements were never ratified by a government official who knew about the contracts and had the power to ratify them. TIPS: Recognize that the Court of Federal Claims has exclusive authority to adjudicate patent infringement claims against the federal government. This is a highly specialized area where a contractor should be represented by counsel familiar with patents and government contracts.

-Reprinted by permission from Dick Lieberman

INCORPORATION BY REFERENCE

By Dick Lieberman, Consultant and Retired Attorney Black’s Law Dictionary (5th Ed. 1979) defines “incorporation by reference” as the “method of making one document ...become a part of another separate document by referring to the former in the latter, and declaring that the former shall be taken and considered as a part of the latter the same as if it were fully set out therein.” Agencies, which are the writers of government contracts, would be hard pressed to draft contracts without this artifice of language, and government contractors must be careful to understand its implications. A misuse of incorporation by reference was explained in a recent bid protest, IBM Corp. v. United States, No. 14-864C (Fed. Cl. Nov. 7, 2014). The Federal Acquisition Regulation (“FAR”) and Incorporation by Reference Almost every government contract incorporates contract clauses by reference. Indeed, a typical government contract may incorporate 10 to more than 200 clauses by reference. FAR 52.107 directs contracting officers to insert the provision at 52.252–1, Solicitation Provisions Incorporated by Reference, and the clause at 52.252–2, Clauses Incorporated by Reference, in solicitations and contracts in order to incorporate those provisions by reference. These two clauses are set forth below. FAR 52.252–1 Solicitation Provisions Incorporated by Reference. This solicitation incorporates one or more solicitation provisions by reference, with the same force and effect as if they were given in full text. Upon request, the Contracting Officer will make their full text available. The offeror is cautioned that the listed provisions may include blocks that must be completed by the offeror and submitted with its quotation or offer. In lieu of submitting the full text of those provisions, the offeror may identify the provision by paragraph identifier and provide the appropriate information with its quotation or offer. Also, the full text of a solicitation provision may be accessed electronically at this/these address(es): [insert one or more internet addresses]. FAR 52.252–2 Clauses Incorporated by Reference. This contract incorporates one or more clauses by reference, with the same force and effect as if they were given in full text. Upon request, the Contracting Officer will make their full text available. Also, the full text of a clause may be accessed electronically at this/these address(es):[insert one or more Internet addresses] If either of these clauses appears in a contract, the agency must merely list by title the clauses incorporated by reference, and presto, the full text of those clauses are thereby included in the solicitation or contract. Most importantly, the contractor is fully responsible for compliance with all clauses incorporated by reference, just as if they were typed in full in the contract. Copyright 2015 Dick Lieberman, Permission Granted to PTAP This article does not provide legal advice as to any particular transaction 2 So when you read a solicitation or a contract, it is imperative that you either read or fully understand the duties imposed by all clauses incorporated by reference. And understand that those duties are frequently the subject of cure notices, show cause notices, default notices, routine inspections or contractor claims and appeals. IBM v. U.S. So who went afoul of this very easy method of writing solicitations and contracts? None other than the IBM Corporation, which bid on a General Services Administration schedule contract to assist the Army in auditing its financial statements – a challenging task indeed. The solicitation was for a time and materials contract, and Section 2.14 stated maximum number of hours (level of effort) for each of six labor categories ( Director, Senior Manager, Managers, etc.). A question and answer attached to a solicitation amendment stated as follows: Question: Will the successful offeror have flexibility to reallocate the hours among labor categories during project execution, as long as we do not exceed the ceiling? Answer: As approved by the COR [Contracting Officer’s Representative], the successful offeror will have the flexibility to reallocate hours as long as the ceiling is not exceeded. IBM’s proposal was for $86 million, while the proposal of Ernst and Young (“EY”) was for $56 million--a significant difference. IBM’s proposal acknowledged flexibility to reallocate hours by labor category, with COR approval. However, EY’s proposal said that it “reserve[d] the right to reallocate hours between labor categories...provided [this] does not result in exceeding the ceiling price of the contract.” (EY made no mention of “COR approval” of such reallocation.) EY’s offer, in box 28 & 29 of its Standard Form (“SF”) 1449, Solicitation/Contract/Order for Commercial Items, was as follows: 28. CONTRACTOR IS REQUIRED TO SIGN THIS DOCUMENT AND RETURN 1 COPIES X__ TO ISSUING OFFICE. CONTRACTOR AGREES TO FURNISH AND DELIVER ALL ITEMS SET FORTH OR OTHERWISE IDENTIFIED ABOVE AND ANY ADDITIONAL SHEETS SUBJECT TO THE TERMS AND CONDITIONS SPECIFIED HEREIN REF: EY proposal 29. AWARD OF CONTRACT: REFERENCE ____OFFER DATED 05 MAR 2014. YOUR OFFER ON SOLICITATION (BLOCK 5) INCLUDING ANY ADDITIONS OR CHANGES WHICH ARE SET FORTH HEREIN, IS ACCEPTED AS TO ITEMS. SEE SCHEDULE. Copyright 2015 Dick Lieberman, Permission Granted to PTAP This article does not provide legal advice as to any particular transaction 3 IBM’s principal protest was that EY’s offer was ineligible for award because it incorporated EY’s proposal by reference in Block 28 by typing “REF: EY proposal,” and this proposal reserved EY’s right to reallocate labor hours in violation of Section 2.1.4 of the solicitation, as explained by the answer above. The Court held that EY’s proposal was not incorporated by reference in EY’s offer. The Court noted that no “magic words” are required to incorporate extrinsic material—all the contract or solicitation must do is use language that “leaves no relevant ambiguity about the identity of the document being referenced, nor any reasonable doubt about the fact that the referenced document is being incorporated in the contract.” Lakeshore Eng’g Servs. Inc. v. U.S., 748 F. 3d 1341, 1347 (Fed. Cir. 2014). The Court held that “no such clear and express language unambiguously communicates an intent to incorporate EY’s proposal here.” Unlike the FAR’s clear cut “incorporation by reference” language set forth in FAR 52.252-1 & 2 above, the Court found that the notations on the SF 1449 did not provide the clear, express or unambiguous evidence of an intent to incorporate the terms of EY’s proposal into the contract. The Court noted that item 28 is applicable where a solicitation, not a contract is being prepared. Further, item 29, which is used for a contract award, would identify parts of a proposal to be incorporated --but item 29 is not checked at all—it merely contains the date of EY’s proposal. Because the contract did not incorporate EY’s proposal, and did not include its reservation of right to change labor categories without COR approval, the contract as awarded holds EY to the exact requirements of the solicitation, and IBM’s protest was denied. TIPS (1) Understand the meaning of incorporation by reference, and examine all clauses so incorporated in your solicitation and contract. (2) When preparing an offer that includes clauses or other matter included by reference, keep a complete copy of the incorporated matter in your solicitation and contract files. Be sure you understand what you must do in order to comply with all incorporated clauses, and be sure that your cost proposal or bid reflects the costs all of this compliance. (3) If you seek to incorporate something by reference (such as a section or all of your proposal) in your offer to the government, use precise language in your offer such as the following, which should appear in your cover letter: “The offer of [X company] incorporates by reference Section 2 of the attached proposal which is to be included in the resulting contract.”

-Reprinted by permission from Dick Lieberman

WHAT GOVERNMENT BREACH PERMITS A CONTRACTOR TO CEASEPERFORMANCE?

By Dick Lieberman, Consultant and Retired Attorney Government contracts, although unique because of their special rules, are still subject to many of the same principles that are part of general contract law. One of those general rules is that a material breach of a contract by one party fully justifies the other party in stopping work—or in the case of a Government contract, a material breach by the Government fully justifies a decision by the contractor to stop work. But the important question is, what is a “material” breach by the government? A recent case involving the Department of Veterans Affairs (“VA”) goes directly to the heart of the matter. Kiewit-Turner, a Joint Venture v. Dept of Veterans Affairs, CBCA 3450, Dec. 9, 2014. This blog further discusses possible material breaches when the government does not pay proper contractor invoices. KIEWIT-TURNER (“KT”) In Kiewit-Turner, the civilian board was asked to issue a “declaratory judgment”on whether or not the contractor was entitled to stop work. A declaratory judgment is a “binding adjudication of rights and status of litigants even though no consequential relief is awarded.” Blacks Law Dict. (5 th Ed. 1979). The Board was asked to address three questions: (1) Did a contract modification known as SA-7 obligate the VA to provide a design of a medical center campus in Aurora, CO that could be built for $582,840,000? (2) Did the VA materially breach the contract when it failed to provide a design that could be built for that dollar amount? (3) If such a breach occurred, is the contractor entitled to stop work? The Board answered “yes” to all three questions. When KT was brought into the project, a Joint Venture Team separate from KT, consisting of several architects, had been awarded a contract to design the buildings. VA established a construction cost target, known as the “Estimated Construction Cost at Award” (“ECCA”) at $582,840,000. By the time KT had submitted its proposal, the VA had been advised by KT and an independent company that the cost of construction would be more than $677 million. The VA and KT attempted to reduce the price, and agreed to work with KT to do so. Modification SA-7 was agreed to in November 2011 by both parties, and it stated that “The VA shall ensure the Architect Engineering Team [the Joint Venture Team] will produce a design that meets their Estimated Construction Cost at Award with use of alternate and other methods as a safety net. During 2012 and 2013, the VA acknowledged that the ECCA was $199 million above the ECCA agreed to. However, the VA asserted that the ECCA in SA-7 was not a “material provision, and it didn’t have to reduce the project to that amount. Copyright 2015 Dick Lieberman, Permission Granted to PTAP This article does not provide legal advice as to any particular transaction 2 The Board held that VA had breached the clearly stated requirement of SA-7 by not causing the design to be adjusted so its cost was less than the ECCA. The board looked to the Restatement to determine whether a breach is material, which says: In determining whether a failure to render or to offer performance is material, the following circumstances are significant: (a) the extent to which the injured party will be deprived of the benefit which he reasonably expected; (b) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived; (c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture; (d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances; (e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing. Restatement (Second) of Contracts, § 241 (1981); see also Hansen Bancorp, Inc. v. United States, 367 F.3d 1297, 1311–1312 (Fed.Cir.2004). The Board concluded that VA’s breach of its contract with KT, by failing to provide a design which could be constructed for the ECCA, was of vital importance, as it went to the essence of the agreement. The breach was material under each of the 5 Restatement standards. Finally, the Board noted that “[u]pon material breach of a contract, the non-breaching party has the right to discontinue performance of the contract.” Stone Forest Industries, Inc. v. United States, 973 F. 2d 1548, 1550-1551(Fed. Cir. 1992), citing Restatment (Second) of Contracts § 241 cmts a & b. The choice of remedy is up to the non-breaching party. The Government asserted that if the contractor continued performance without protest, notwithstanding the Government’s breach, then the obligations of both parties remained in force and only a claim for damages could be entertained, citing Northern Helex v. U.S., 455 F 2d 546 (Ct. Cl. 1972). However, the Board noted that in this case, KT proceeded on construction under strenuous protest, and asked the VA to suspend performance. The Board found that KT, as a matter of law, had a right to stop performance. GOVERNMENT FAILURE TO PAY INVOICES Contractors are rightfully upset if invoices or progress payments are not paid by the Government. The Government’s continued failure to pay the invoices may represent a material breach by the Government, fully justifying a decision to stop work. [I]t is a condition of each party’s remaining duties to render performances to be exchanged under an Copyright 2015 Dick Lieberman, Permission Granted to PTAP This article does not provide legal advice as to any particular transaction 3 exchange of promises that there be no uncured material failure by the other party to render any such performance due at an earlier time. Restatement (Second) of Contracts § 237 (1981). A contractor is under no duty to continue to render required performance where the government has materially breached the contract. Dry Roof Corp., ASBCA No. 29,061, 86-2 BCA ¶18,972. A mere delay in paying a contractor is not a material breach, but total failure to pay over many months is. Northern Helex Co. v. United States, 197 Ct. Cl. 118 (1972). When is failure to pay an invoice a government breach? When the financial incapacity of a contractor to perform is caused by the acts or omissions of the government, any contractor default would be excused and the contract would be deemed to have been terminated for the convenience of the government, however, the burden is on the contractor to establish that the payments were erroneously withheld and that the withholding of such payments was the primary or controlling cause of the contractor's default. TGC Contracting Corp. v. United States, 736 F.2d 1512, 1515 (Fed. Cir. 1984). So the contractor has to make a strong showing that any failure to pay was erroneous and such a failure to pay was a primary or controlling cause of the contractor’s default or ceasing of performance. R.C. Hudson & Associates, Inc., ASBCA No. 20711, 76-2 B.C.A. (CCH) ¶ 12201 (Oct. 26, 1976). See also Sterling Millwrights, Inc. v. United States, 26 Cl. Ct. 49, 90-91 (1992) TIPS: (1) If you continue to perform your contract when you believe the government has breached it, file letters with the contracting officer stating your strong objections to the breach, and your strong protest to continuation of performance. Make it well known that you believe the Government has breached and you do not believe you have the obligation to continue—but you may continue anyway and seek breach damages. (2) If the government has breached and you cannot financially continue, you should so advise the government, and then appeal any resulting default termination, basing your appeal on the government breach.

-Reprinted by permission from Dick Lieberman