The Doctrine of Primary Jurisdiction and Federal Procurement Fraud: The Role of the Boards of Contract Appeals

• Author: by Captain Michael H. Ditton
• Pages: 02

On 15 September 1986, a federal district court judge issued rulings in a criminal fraud case brought against a major defense contractor that triggered shockwaves throughout the government contracts community. In United States u. Genernl Dynamics Corp.,' a federal judge held that the Armed Services Board of Contract Appeals (ASBCA) was a federal agency having primary jurisdiction over certain issues in a criminal contract fraud case. The criminal tlial WBS interrupted pending determination of ten questions by the board.* The decision was a potential precedent-setting victory far the defendants that derailed a highly publicized Department of Justice prosecution and disrupted other potential eases.3 This decision threatened to upset a longstanding ASBCA practice of refusing to decide cases involvmg criminal fraud.' It also appeared to expand the boards role from that

'Judge Advocste General's Corpe, United States Army Currently amgned m Trial Attorney, Contract Appeals Dwiaian, United States Amy Legal Selvices Agency Formerly asagmd as Officer in Charge, Wildfleeken Branch Office. V Corps, Federal Republic of Germany, 1984 to 1986. Trial Counsel. V Corpa, Frankfurt,

Federal Re.

public af Germany. 1963 to 1964, Platoon Leader and Executive Officer. Campany B.4th Battalion, 68th Armor. Aschaffenbug. Federal Republic OfGermany. 1976 to 1979B A lavmma cum Isudel. Univsrerty of Mmnewafa, 1975. J D , George Washington University %tmnal Law Center, 1982 Graduate. 99th Judge Advocate Officer

Basic

Course. 1962; 35th Judge Advocate Officer Graduate Course. 1987 Cosufhor of T k Prompt P q m n t Ad

Inereosrd Inlrpsl Llabtii.5 far the Go~emmnt,

The Amy Lawyer,Oel. 1982.at24.YemberofthebarsoftheCammonwealthofVagmia,theUnitedStateiCourtofAppealsfor theFourth Circuit, thsClsimaCoult,sndtheUniredSTates Army Coun of Military Review This anide was originally submdted ~n satiaiaefion of the Lheais elective of tho 36th Judge Advocate Officer Graduate ComaelUm~ed

States V. General Dynamic8 Carp, 644 F Svpp 1497 (C D Cal 1966). mb'd, 628 F.2d 1856 (9th Cir 19871

On June 19. 1987, the lstnct court judge dimmed the eiiminal fraud charge againat Generd Dynamics Corp and ssversl named defmdanta on motion of the De. partment of Justice IDOJ) Citing newly dacavered evidence. DOJ filed amendments to ita pleadings eiaentiaily sgresing with the defendant's contentions concerning the best effoone natwe of the contract. See infm notes 16.165, and 167 and accompanying text

"See 2.f.a text Bccompanylng notes 10.18'The Justice Department had indshniiely poetpaned a grand pry mveaflgatian of alleged fraud by Ford Asmspace. the other contractor awarded a Division An Defense gun (DIVAD) pmfatlpe cantract and the e~enfualw~nner of the DlVAD competition. lnards the Pentagon, Nau 26,1986. at 3 The Secretary ofDefenie caneeledihe DIVAD p'oject on 27 Augvst 1985 because of cancem% that the gun system ~ 8 8 madequate

for the Army's needs

'See infm section V D

of an adjudicatory body, deciding cases properly brought before it, to a full-fledged administrative agency issuing advisory opinions to federal courts.

Then, on Apnl2, 1987, the Ninth Circuit Court of Appeal8 reversed the district court in a split decisimj Holding that the Armed Services Board of Contract Appeals was not a regulatory body, the court re-fuused to apply the doctrine of primary jurisdiction.

This article evaluates the rationales for the district court and Ninth Circuit rulings in General Dynamics and explores the ramifications of applying the doctrine of primary jurisdiction in the area of government contract fraud Specifically. the questions presented are whether the primary jurisdiction doctrine allows referral of contract iasues in a criminal fraud case to a board of contract appeals, and if so, whether courts are required to refer those issues.

The doctrine of primaryjurisdiction is not a well-defined rule, but a discretionary tool judgea u ~ e to promote court-agency relationships To properly answer the questions presented the article 18 divided into six parts First we consider the decisions in General Dynom~cs.

Second,

a review of several Supreme Court eases traces the historical development of the primary jurisdiction doctrine. Recent lower court decisions then illustrate it8 current status. Third, the defense industry is analyzed to determine the nature afthe industry and its regulatory scheme. Next, the issues in a criminal fraud case are examined through a discussion of criminal jurisdiction, procurement fraud theones, and various courts' application of the primary jurisdiction doctrine inenminal cases. Fifth, the powers and functions of boards of contract appeals are established through a review of their historical role and the impact of the Contract Disputes Act.? Finally, after a reexamination of the Geneml Dynamics decisions, the article proposes a so. lution in the form of a balancing test to resolve the applicability of the primary junsdiction doctrine to criminal contract fraud eases. We turn now to the General Dynamics case

1. THE GENERAL. DYNAMICS DECISIONS

   General Dynamics arose out ofthe Army's attempts to procure the division air defense gun (DIVAD, also known as the Sergeant York). As one of two private defense companies competing for award of a

   ~

   dUnited States v General Dynamxs Carp, 828 F2d 1356 (9th Clr 1967,sSee mfm seciian IIA'41 OSC $5 601.613 '1982 & Supp 111 19851

   1M)

   15881 PRIMARY JURISDICTION

   large production contract to provide a new air defense weapon, Gen. era1 Dynamics was awarded a contract in 1578 to develop and manufacture two prototype DIVAD vehicles.8 In this preproduction con-had bath contractors would hain Army crews and furnish field aupport and training aids during the testing phase. The contract awarded to General Dynamics originally provided for progress payments in the amount of about thirty-one million dollars, but this amount was eventually increased to forty-one million dollars in 1980. The two prototypes were delivered for testing m 1980. Ford Aerospace and Communications Corporation won the competition during development and operational testing. It received a baseyear production contract with three annual production options. Following a public controversy over Sergeant Yark's capabilities, the Secretary Of Defense canceled the procument in August 1985 before exercising the third production option

   The Defense Contract Audit Agency (DCAA) audited the preproduction contract and issued a report in 1584 lo It found that cenain costs associated with developing the DIVAD prototypes were mis-charged to accounts on other government contracts." As a result, over seven million additional dollars had been recovered by General Dynamics, thus preventing a loss on the DIVAD contract The Amy referred the matter to the Department of Justice (DOJ), which con. vened a grand jury in 1984. The grand jury returned an indictment in December 1986 against the Pomona division of General Dynamics and several named defendants.'z

   Following the indictment, counsel for General Dynamics filed a notice of appeal with the ASBCA The board subsequently denied the appeal, holding that It did not have jurisdiction over cases mvolwng fraud General Dynamics filed two more appeals shortly thereafter onclaims submitted to acantractingofficeron thecost reimbursement contracts The contracting officers had withheld payment far certain costa charged to bid and proposals (B&P) and independent research and development (IR&D) accounts because of the fraud mvestiga- dConlraef number DAAK10-78-C-0058 The vehicle was ala0 known by Its desiqnatron ,,sergeant Yorv

   S News h World Rep, Sap 9, 1986, at 11.l"Deiense Contract Audit Agency Audit Rspart No 4501-3A486364 Mar 14, 1981""he other conrraetl. Army number DAAX40-78-C.0281 and New number N000123. 76.1233, were cast-rrimburssmsnt csnlrsild unrelated to the DlVAD contract"The named defendants included a corporate vm.preadent, the Pomona division general manager, ths DIVAD PTOJ$CL manager, and the hnancial admmmslrator Iomvernment emplayees were charged

   LdGeneral Dynamics C o p , ASBCA Na 32291,SS-2 E C A. ICCH) T 18,903

   tion." On March 10, 1986, the board issued an order directing the contracting officer to issue decisions an these claims.Ie

   Back in the distnct court the General Dynamics defendants filed a motion to dismiss the indictment an the grounds that the doctrine of primary jurisdiction required initial consideration of certain con-tract interpretation issues by the ASBCA

   On 15 September 1986, Judge Ferdinand F. Fernandez granted th18 motion in part by staying the criminal proceedings and referring ten questions concerning contract issues in the case to the ASBCA li The judge reasoned that the highly regulated defense industry and the complex nature of the DIVAD contract produced ISBU~B

   requiring

   specialized expertise outside the conventional experience of judges. He also stated that failure to use the ASBCA would lead to a great lack of uniformity due to a danger of inconsistent court rulings

   The Department of Justice filed an appeal of Judge Fernandez's ruling with the Ninth Circuit Court of appeal^.'^ DOJ argued that the primary Jurisdiction doctrine should be limited to cases where Congress has determined that the receiving agency Or board should exercise the primary role In deciding the questions under review. and several feadors identified by the distnct cowi actually militated against application of the doctrine.2o

   The ASBCA adhered to Its refusal to accept jurisdiction ofthe mat. ter and reieeted the referral?' Noting that it had no iurisdictian under

   I'The two ~ppeals were docketed together 86 m e ~abe.

   ASBC.4 So 32494.191, on26 February 1966 BLP and IRLD B C C O Y ~ ~ J are indirect cost p~ala that B contractor may eifabliih to recover costs borne I" rarking on projects ~n anticipation ofpreparing B bid 01 perfoarmmg prelimmarj research related to a government contract Since the DWAD contract was a...