A messy dispute caught one company for millions of dollars of government refund demands

The CARES Act, enacted during the pandemic, let the government reimburse contractors for employees on paid leave: Those who could not access federal work sites ...

The CARES Act, enacted during the pandemic, let the government reimburse contractors for employees on paid leave: Those who could not access federal work sites or work remotely. One company took the money, then later faced a demand from the Navy for a $4 million reimbursement. It gets ugly. For more, Federal Drive with Tom Temin spoke with Haynes Boone partner Zach Prince.

Interview Transcript: 

Zach Prince So this case is less about the CARES Act reimbursement and more about some of the Byzantine challenges of navigating a claim against the government or in this case, a claim by the government against a contractor. So the claims against the government, as I’m sure many listeners are aware, are not like a claim against a ordinary party. And they’re hoops that you’ve got to jump through. And if you don’t jump through them, their ramifications. One of those ramifications for a long time has been dismissing a case outright, even if the arguments are brought up years later, even after an appeal has already been filed to the federal circuit and come back. You could lose out of years of litigation costs because of some jurisdictional trap. Now, the federal circuit has moved away from that, and so is the Supreme Court defining a lot of the requirements as procedural, not jurisdictional. That matters because a procedural trap is something that can be sprung in you at a very narrow window of time at the beginning of a case, not years later. So with that backdrop, it’s I want to talk about this case here, which somewhat avoided that issue. PAE was performing this long term cost reimbursable contract for the Navy in the Bahamas, operating the Atlantic Undersea Test and Evaluation Center. It’s a deepwater test facility for naval vessels, naval weapons, they do really interesting work there. PAE was the ONM operator. So at some point and the facts of this are a little unclear from the case because it wasn’t really at issue yet. PAE got some reimbursement from the Navy under the CARES Act so that Section 3610 of the CARES Act gave contractors the ability to get compensation from agencies to reimburse employees who had to stay at home because their jobs couldn’t be performed anywhere but on site and they couldn’t be on site. So at some point in 2021, the Navy starts exchanging letters with PAE. They say there’s some issue with these amounts that you charged us. The issues are not entirely clear and they’re starting to demand amounts back. This culminated in a March 2022 letter from the Navy with the title Demand for Payment for an allowable COVID cost.

Tom Temin Yeah, that’s pretty definitive sounding.

Zach Prince It certainly sounds like it to me. They said demand a bunch of times in this letter, they demanded reimbursement of $4.3 million plus applicable indirect rates plus 2% fee, with a breakdown included by CLIN and SLIN. So really specific.

Tom Temin CLIN being contract line item and SLIN being.

Zach Prince Contract sub line item.

Tom Temin Got it. Okay.

Zach Prince So sorry about that.

Tom Temin Chapter and verse, in other words.

Zach Prince That’s right. I mean, they said exactly. You billed us using these contract pieces in this way. We want it that all back. And if you don’t pay us back in 30 days, interest is going to start accruing. And it concluded with this invitation, PAE if you disagree, respond to us. Right. And maybe we’ll talk about a deferred payment plan. Deferred payment plan, of course, indicating that there is an amount owed and we’ve already asserted that amount. So PAE appeals, the Armed Services Board of Contract Appeals considers this a contract officer’s final decision, which is one of those requisites for filing a claim. About a year goes by in this litigation, and the Navy suddenly says, actually, we’re moving to dismiss this whole action because there was never a contracting officer’s final decision. This deprives the board of jurisdiction. This wasn’t a decision. This was just a letter. So I have a hard time.

Tom Temin That sounds like a pretty fine distinction.

Zach Prince It does. And I have a hard time with this argument from the Navy. I mean, it doesn’t pass the smell test, in my view. But the tricky thing for everybody dealing with government contracts claim, which is an important term in the Contract disputes Act, isn’t actually defined anywhere outside the FAR. So everybody’s got to look to the FAR and what the FAR says it requires in order to give any meaning to this.

Tom Temin Got it.

Zach Prince In this case, the Navy’s letter pretty clearly indicated that it was seeking reimbursement of specific amounts of allowable COVID costs and it asserted requirements for interest that would accrue if PAE didn’t pay. It doesn’t strike me that as a realistic question that this was a government claim. But the Navy made a few arguments. They said they were actually just inviting PAE to comment on the refusal to substantiate COVID costs. But I don’t know. It didn’t sound like a comment letter. It said, we demand $4.3 million.

Tom Temin Sure. We’re speaking with procurement attorney Zach Prince. He’s a partner at Haynes Boone. And so the. Were questions about whether the amount was owed in the first place. And now there are more questions about the process of the demand and what the legal and FAR status of that demand was.

Zach Prince Yeah, that’s right. So the claim itself, I think, will ultimately get resolved. There’s going to be some litigation. The Navy actually withdrew the letter that it says wasn’t a claim, although it said they’re conducting a DCA audit and they’re going to pursue these amounts anyway, which is why the board really didn’t put much stock in that. They’re not going to dismiss this thing. That’s then going to come right back because the Navy is still seeking it.

Tom Temin What was their strategy in withdrawing the letter then and saying and verbally saying we’re still going to pursue it?

Zach Prince You know, I’m really not sure about it. I think the Navy was trying to suggest that this wasn’t a claim. And so we don’t have to follow the procedural requirements for a claim. So it’s just a letter. You know, maybe it was jumping the gun and we’re going to take it back. But really, we still want these amounts and we still have an issue with it. I don’t know. It’s a strange litigation strategy.

Tom Temin So what can the company do to respond at this point? What’s a good strategy if you’re a contractor and you’re demanded money? Well, we are pulling back the demand because it wasn’t really a decision. So now we’re pulling back the letter, making the demand, but we still want the money back. What the heck does that mean?

Zach Prince I think I would have done the same thing PAE did. You get this letter. Your lawyers look at it and they say this is a contracting officer’s final decision, and you want to go to the Armed Services Board of Contract Appeals. You’ve got 90 days starting now, so go do it. You don’t want to get stuck in a trap because you did construe something as a demand when it was. You could have, I guess, gone back to the Navy and said, please provide clarification, but they might have eaten up enough time giving you that clarification that you lose the chance to go to the board. So I think if you get to the board and the government says, actually we’re taking it back after a year of you wasting litigation costs, you do again what PAE did here. Which is you say board, don’t dismiss this thing, it’s still a live issue. You’re just going to cause us to incur the same costs again, trying to resolve this dispute. We’re going to be back where we are today in a year or two.

Tom Temin So as a company, you need to keep it alive in the original form to keep procedures and timelines and deadlines intact. In other words.

Zach Prince You do because the government is going to waste time. I mean, from my experience with claims against the Navy in particular, things can take a lot of time and you’ve got outstanding amounts that are challenged or that are owed to you and they want to go through a DCA audit and then they want to go through another DCA audit. And years down the road, maybe you’re just back at the board and nobody’s memory is fresh anymore. All your people are gone and you’ve just got to come up with evidence based on scattered documentary of records. It’s much better to resolve these issues when it’s fresh on everybody’s mind.

Tom Temin Yes, because DCAA itself can be years behind in audits, and those audits don’t exactly take place in 72 hours either.

Zach Prince No, they don’t. They’re doing a little better now than they had been, but they’re still not exactly what I think most people consider timely.

Tom Temin And as a company, you don’t want that kind of eternal sword of Damocles over your head that some day, gosh, we got to cough up $4 million, $4.3 million. I mean, that’s real money to a small contractor.

Zach Prince It is. It’s probably a little less impactful for a company of PAE size, but it’s still $4.3 million is $4.3 million. And every couple of years, this thing pops up again. And then you have to get your lawyers fresh and your executives fresh. And that costs more than it would have if you just gone right on through it and gotten resolved.

Tom Temin So what is the current status of the whole claim and the counterclaim?

Zach Prince So the board rightfully rejected all of the government’s arguments about why this really wasn’t a claim. I think those arguments were really silly on the Navy’s part. And it said, Yeah, we found that there’s a some certain which is something you have to have to have a claim against the government or a claim by the government that you appeal from. They said it otherwise followed all the procedural requirements. So as a matter of fact, you are wrong government. But what they failed to do, and I wish they had done, is file on the heels of this recent federal circuit decision in ECC International, where the federal Circuit said requirements for claims that aren’t coming from a statute are not jurisdictional. All of the things here with the far definition of claim are not jurisdictional. This matters. Jurisdictional is a big lawyer word, but it really does matter because it has an impact on when the Navy can bring it up as a defense, if it’s jurisdictional. Any time the court has to bring it up on its own board, has to bring it up on its own. If it hasn’t, it could be years later and this has happened or contractors get trapped. You spend millions of dollars in litigation fees. You’ve got a meritorious claim that you win. And then wait a minute, you failed some little jurisdictional problem. We’re avoiding the whole thing from the outset. The Federal Circuit said, actually, a lot of these requirements are not jurisdictional. This is one of them, by the way, that all the issues the Navy was arguing here would have been one of them. The board should have said that. Instead, they just dropped the footnote and said, it doesn’t really matter that there’s this federal circuit decision because in any case, you satisfied it. But that’s not very helpful when you’ve sometimes got aggressive counsel on the other side that’s going to assert any claim they can, no matter how late it is, you want to be able to say, look, we already have the board interpreting it this way, which is the right way. You’re a year in. You can’t bring up these arguments.

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