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Antideficiency Act.

Armed Services Board of Contract Appeals (ASBCA) Has Jurisdiction Over Claim Involving Open-Ended Indemnification Clause

In The Boeing Co., (1) the ASBCA determined that the Antideficiency Act (ADA) (2) did not bar its jurisdiction to hear a claim involving contracts containing open-ended indemnification clauses. (3) In this appeal of a sponsored claim, Boeing alleged that the Air Force was contractually liable to indemnify Boeing for its subcontractor's (the predecessor of Lockheed Martin Corporation, hereinafter Lockheed) costs for environmental investigation, remediation, and litigation. (4) Both Boeing's contracts with the Air Force and Lockheed's subcontracts with Boeing contained indemnification clauses for "unusually hazardous risks" citing either 10 U.S.C. [section] 2354 (5) or Public Law Number 85-804 (codified at 50 U.S.C. [section] 1431) (6) or both, which permit agencies, under limited circumstances, to insert indemnification clauses into their contracts. (7) After Boeing filed its appeal, the ASCBA denied the Air Force's motion to dismiss on jurisdictional grounds finding that the board did, in fact, have jurisdiction to hear the case (8) under the Contract Disputes Act (CDA). (9)

The subject appeal arose out of a series of contracts the Air Force awarded to Boeing from 1966 to 1973 for the development and production of short range attack missiles. (10) Both the development contract and the subsequent four production contracts contained nearly identical indemnification clauses obligating the Air Force to indemnify Boeing for specified losses to Boeing and also for certain claims filed against Boeing by third persons. (11) The contracts limited the Air Force's indemnification obligation to claims for loss or damage arising "out of the direct performance of the contract" which was "not compensated by insurance" and which "results from a risk defined in [the] contract to be unusually hazardous." (12) The contracts also authorized Boeing to insert similar indemnification language into its subcontracts so long as Boeing received prior written approval from the contracting officer; Boeing relied upon this authority and inserted this indemnification language into its related subcontracts with Lockheed. (13) As a result, the Air Force's contracts with Boeing stated that the Air Force would indemnify Boeing for certain losses to Boeing and also for claims filed against Boeing by third parties. Similarly, Boeing's subcontracts with Lockheed stated that Boeing would indemnify Lockheed for certain losses to Lockheed and also for claims filed against Lockheed by third parties. (14)

After Lockheed performed its subcontracts in Redlands, California from 1966 to 1975, Lockheed incurred financial losses for environmental investigation, remediation, and litigation for activities directly related to its subcontracts. (15) During performance of the subcontracts, Lockheed used trichloroethylene (TCE) and ammonium perchlorate (perchlorate) as the subcontracts required. (16) In 1997, the Santa Ana Regional Water Quality Control Board discovered TCE and perchlorate in the groundwater. (17) As a result, the water control board required Lockheed to perform environmental investigation and remediation at the site. (18) Between 1996 and 1999, Lockheed was named as a defendant in multiple lawsuits alleging its responsibility for the presence of TCE and perchlorate in the groundwater. (19) Although Lockheed attempted to recover its financial losses from its insurance carriers, Lockheed has been only partially indemnified. (20)

In February 2004, after Boeing submitted a sponsored claim on behalf of Lockheed pursuant to the indemnification clauses of its prime contracts, the contracting officer denied the claim. (21) Subsequently, Boeing appealed to the ASBCA arguing that the Air Force is contractually obligated to indemnify Boeing for Lockheed's financial losses directly resulting from Boeing's contracts with the Air Force and from Lockheed's subcontracts with Boeing. Because the Air Force denied Boeing's sponsored claim, Boeing further argued that the Air Force breached its contracts with Boeing by refusing to honor the contracts' indemnification provisions. (22)

The Air Force argued in its motion to dismiss that the ASBCA did not have jurisdiction to hear this claim because it was based on the contracts' "open ended indemnification clauses." (23) The ASBCA disagreed. (24) The Air Force contended that the ASBCA lacks jurisdiction because the Congress has not waived sovereign immunity in such indemnification cases. The Air Force argued that neither 50 U.S.C. [section] 1431 nor 10 U.S.C. [section] 2354 constitutes a waiver of sovereign immunity and further, that Boeing's and Lockheed's sole remedy under these open-ended indemnification clauses is to seek relief from the Secretary of the Air Force--vice from the ASBCA. Additionally, the Air Force contended that the ASBCA's exercise of jurisdiction in this case involving open-ended indemnification clauses would violate the ADA. (25)

In denying the motion to dismiss, the ASBCA held that the CDA clearly grants it jurisdiction to hear breach of contract appeals and further, that the ADA does not bar its exercise of jurisdiction in this case. (26) The ASBCA responded to the Air Force's ADA argument challenging jurisdiction to hear this appeal because it was based upon "open-ended indemnification clauses" by finding that the ADA is a "valid affirmative defense [and] ... does not oust a tribunal of jurisdiction." (27) Thus, while the ASBCA may exercise jurisdiction in cases involving alleged open-ended indemnification clauses, the government may nevertheless prevail on the merits of the case if it presents its ADA argument as an affirmative defense. (28)

GAO Reiterates: There Are No Federal Funds for Publicity and Propaganda

Last year, the Year in Review (29) discussed a series of GAO opinions stating that the expenditure of appropriated funds for publicity or propaganda purposes violates the ADA. (30) The GAO addressed this issue again in a 6 July 2006 letter to the Department of Education's General Counsel Office. (31) The GAO's letter responded to the Department of Education's transmission of its ADA report for "No Child Left Behind Act promotional activities, including a prepackaged news story and the Armstrong Williams subcontract." (32) The GAO stated plainly that the Department of Education violated that ADA. (33)

The GAO's letter referenced two separate cases involving the Department of Education's expenditure of appropriated funds for producing promotional materials. (34) In the first case, the GAO found that the agency violated the ADA by using appropriated funds for the production and distribution of prepackaged news stories promoting the activities of that agency. (35) Specifically, the agency contracted for the production of audio and video news stories which explained the agency's programs pursuant to the No Child Left Behind Act; these news stories did not disclose that the source of the stories was the Department of Education. (36) The GAO stated that these expenditures violated the ADA by obligating appropriations (for publicity and propaganda) in excess of their availability, because no funds were available for this purpose. Significantly, the GAO opined that if these news stories had clearly disclosed that their source was the Department of Education, then the GAO would not have considered the stories to violate the publicity and propaganda prohibition or the ADA. (37) It is significant that the Department of Justice recently issued a memorandum (38) stating that it disagreed, in part, with GAO's focus on disclosure of the source as the key to determining whether an agency had violated the publicity and propaganda prohibition. (39)

In the second case, the GAO found that the agency violated the ADA by using appropriated funds for a contract to pay an individual to comment on the agency's programs pursuant to the No Child Left Behind Act during his weekly television and radio programs. (40) Again, the GAO stated this contract violated the ADA by obligating and expending appropriations (for publicity and propaganda) in excess of their availability. As in the earlier related case, the GAO opined that if this contract had required the commentator to disclose that the agency was funding his comments, then the GAO would not have considered the comments to violate the publicity and propaganda prohibition. Expenditure of funds, in that case, would not have violated the ADA. (41) While this July 2006 GAO letter does not raise any unexplored issues, the fact that agencies continue to violate the ADA by expending large sums of appropriated funds for publicity and propaganda purposes (42) is a sufficient reason for agency counsel to be aware of these cases. Moreover, agency counsel should also understand DOJ's differing view on what constitutes a violation of the publicity and propaganda prohibition. (43)

GAO's Antideficiency Act Database

Two years ago, an amendment to the ADA first required agencies to submit completed ADA violation reports to the GAO, in addition to submitting such reports to the President and to Congress. (44) The amended reporting statute now states in pertinent part:
 If an officer or employee of an executive agency ... violates [the
 ADA], the head of the Agency ... shall report immediately to the
 President and Congress all relevant facts and a statement of
 actions taken. A copy of each report shall also be transmitted to
 the Comptroller General on the same date the report is transmitted
 to the President and Congress. (45) (italics added)


The Senate Committee Report which accompanied the foregoing amendment also required the GAO to "establish a central repository of Antideficiency Act reports" for all federal agencies. (46) In response to this requirement, the GAO has created a publicly-accessible ADA database containing the agencies' letters to the President, Congress, and the GAO for each reported ADA violation. (47) The database also lists the agency involved, the appropriation, the amount of the violation, and the facts surrounding the violation. The GAO maintains a file for FY 2005 violations and a separate file for FY 2006 violations. These files do not include, however, the agency's entire investigative report explaining the details of the individuals involved or any disciplinary action taken. (48)

For example, in the FY 2006 file on the website, the GAO lists thirteen ADA violations originating from both DOD and non-DOD organizations. (49) During this timeframe, nine of the reported ADA violations originated from DOD organizations. (50) Of these nine ADA violations originating from DOD, the type of appropriation misused most frequently was operations and maintenance (O&M). In one such case, the Army expended O&M funds to purchase commemorative coins to be used as gifts. In that case, no appropriation was proper because appropriated funds are generally unavailable to purchase gifts. (51) In another case, the Air Force expended O&M funds for a lease with an option to purchase an "Explosive Ordinance Disposal Vehicle." In that case, the Air Force should have used Other Procurement, Air Force funds. (52)

The GAO's ADA database is useful not only as a historical reference. It is also a practical resource that attorneys, commanders, service members and other government employees can use as a training tool. It is certainly less costly and less time-consuming to prevent ADA violations than it is to report and investigate them.

(1) ASBCA No. 54853, 6-1 BCA [paragraph] 33,270.

(2) The Antideficiency Act (ADA) is actually a series of statutes codified at 31 U.S.C. [section] 1341 et seq. The ADA prohibits an officer or employee of the government from obligating in excess or in advance of available appropriations. Id. The United States Supreme Court has stated, "the Antideficiency Act bars a federal employee or agency from entering into a contract for future payment of money in advance of, or in excess of, an existing appropriation." Hercules, Inc. v. United States, 516 U.S. 417 (1996). Both the federal courts and the GAO have held that absent statutory authority, open-ended indemnification clauses violate the ADA's prohibition against obligating appropriations in excess or and in advance of their availability because such clauses potentially obligate the government to unlimited liability. E.I. Du Pont De Nemours v. United States, 365 F.3d 1367 (2004); Honorable Alan K. Simpson, B-197742, 1986 U.S. Comp. Gen. LEXIS 758 (Aug. 1, 1986).

(3) Boeing, 6-1 BCA [paragraph] 33,270 at 164,890.

(4) Id. at 164,887.

(5) 10 U.S.C.S. [section] 2354 (LEXIS 2006). This statute authorizes the military services, with the approval of the military service secretary concerned, to insert indemnification clauses into "unusually hazardous" research and development contracts. Id. Such clauses state that the military service will indemnify the contractor for certain property losses or damages to the contractor and also for certain third party claims filed against the contractor. Id.

(6) 50 U.S.C.S. [section] 1431 (LEXIS 2006). This statute permits the President to authorize an agency to enter into contracts "without regard to other provisions of law ... whenever he deems that such action would facilitate the national defense." Id.

(7) Boeing, 6-1 BCA [paragraph] 33,270 at 164,883-86. These statutes permitting indemnification are implemented by FAR 50.403-2 wherein it allows the agency secretary to approve the insertion of indemnification clauses into contracts which are "unusually hazardous or nuclear." GENERAL SERVS. ADMIN. ET AL., FEDERAL ACQUISITION REGULATION REG. pt. 50.403-2 (July 2006) [hereinafter FAR]. STOP

(8) Boeing, 6-1 BCA [paragraph] 33,270 at 164,890.

(9) 41 U.S.C.S. [subsection] 601-613 (LEXIS 2006).

(10) Boeing, 6-1 BCA [paragraph] 33,270 at 164,883.

(11) Id. at 164,883-86.

(12) Id. at 164,883-84. The indemnification clauses in Boeing's contracts and Lockheed's subcontracts appears to be the FAR contract clause located at FAR 52.250-1. See U.S. GENERAL SERVS. ADMIN. ET AL., FEDERAL ACQUISITION REGULATION REG. pt. 50.403-2 (July 2006).

(13) Boeing, 6-1 BCA [paragraph] 33,270 at 164,884-86.

(14) Id.

(15) Id.

(16) Id.

(17) Id.

(18) Id.

(19) Id. at 164,887.

(20) Id.

(21) Id.

(22) Id.

(23) Id.

(24) Id.

(25) Id.

(26) Id. at 164,888.

(27) Id. at 164,890 (citing Do-Well Machine Shop, Inc. v. United States, 870 F.2d 637, 639 (Fed. Cir. 1989)).

(28) Id.

(29) See Major Andrew Kantner et al., Contract and Fiscal Law Developments of 2005--Year in Review, ARMY LAW., Jan. 2006, at 156-57.

(30) The GAO has held in numerous cases that obligating and expending funds for publicity or propaganda purposes violates the ADA's prohibition against obligating and expending funds in excess of their availability. Id. The GAO reasons that where an agency's appropriations act contains the typical Congressional prohibition against the use of funds for publicity or propaganda, there are no federal funds available for publicity or propaganda purposes. See Dep't of Health and Human Serv., Ctrs. for Medicare & Medicaid Servs.--Video News Releases, B-302710, 2004 U.S. Comp. Gen. LEXIS 102 (May 19, 2004); Office of Nat'l Drug Control Policy--Video News Release, B-303495, 2005 U.S. Comp. Gen. LEXIS 8 (Jan. 4, 2005). Thus, the expenditure of even one federal dollar for publicity and propaganda purposes would violate the ADA because the agency expended in excess of funds available. Office of Nat'l Drug Control Policy, 2005 U.S. Comp. Gen. LEXIS 8, at * 37.

(31) Dep't of Educ.--No Child Left Behind Newspaper Article entitled "Parents Want Science Classes That Make the Grade," B-307917, 2006 U.S. Comp. Gen. LEXIS 136 (July 6, 2006).

(32) Id. at * 1.

(33) Id.

(34) Id. In both cases, the agency obligated funds appropriated to it pursuant to the 2004 Consolidated Appropriations Act. This Act states, "No part of any appropriation contained in this or any other Act shall be used for publicity or propaganda purposes within the United States not heretofore authorized by the Congress." Pub. L. No. 108-199, [section] 624, 118 Stat. 3 (2004). Thus, Congress has made no funds available in this appropriations act for publicity and propaganda purposes. Congress has prohibited the use of appropriated funds for publicity or propaganda purposes in each of its annual appropriations acts since 1951. Prepackaged News Stories, B-304272, 2005 U.S. Comp. Gen. LEXIS 29 (Feb. 17, 2005).

(35) Dep't of Educ.--No Child Left Behind Act Video News Release and Media Analysis, 2006 U.S. Comp. Gen. LEXIS 171 (Sept. 30, 2005).

(36) Id. at * 2.

(37) Id. at * 15.

(38) The Department of Justice (DOJ) disagrees with the GAO's opinion that an agency's mere failure to disclose the source of the prepackaged news story is the key factor in determining whether the agency has violated the publicity and propaganda prohibition. See Memorandum, Principal Deputy Assistant Attorney General to General Counsels of Executive Branch, subject: Whether Appropriations May Be Used for Informational Video News Releases (Mar. 1, 2005). The DOJ memo is available at http://omb.gov. DOJ opines that the central issue is whether the news story advocates a particular position--regardless of whether it discloses the news story's source. Id. Moreover, the DOJ memorandum clearly articulated that executive department agencies receive legal advice from DOJ and not from the GAO. Id. The DOJ memo was disseminated throughout the federal executive branch by the OMB as an attachment to a letter dated 11 March 2005. Memorandum, Principal Deputy Assistant Attorney General, to General Counsels of Executive Branch, subject: Whether Appropriations May Be Used for Informational Video News Releases (Mar. 1, 2005). The OMB memo containing the DOJ memo is also available at http://omb.gov (last visited Nov. 6, 2006). See also Memorandum, Office of Management and Budget, Use of Government Funds for Video News Releases (Mar. 11, 2005).

(39) Dep't of Educ.--No Child Left Behind Newspaper Article entitled "Parents Want Science Classes That Make the Grade," B-307917, 2006 U.S. Comp. Gen. LEXIS 136 (July 6, 2006). The GAO further commented in this letter to the Department of Education that Congress endorsed GAO's opinion in a conference report (unrelated to the Department of Education) accompanying the Emergency Supplemental Appropriations Act for FY 2005 specifically requiring an agency to disclose the source of the prepackaged new story. Id. See also H.R. Rep. No. 109-72 (2005). The Emergency Supplemental Appropriations Act for FY 2005 contains language similar to the language in the conference report. Pub. L. No. 109-13, [section] 6076, 119 Stat. 231 (2005).

(40) Contract to Obtain Servs. of Armstrong Williams, B-305368, 2005 U.S. Comp. Gen. LEXIS 173, at * 1.

(41) Id. at * 34.

(42) In 2006, the GAO released a report concerning government contracts awarded for the purpose of advertising agencies' internal programs. U.S. GOV'T ACCOUNTABILITY OFFICE, GAO-06-305, at 2 and 23, Media Contracts: Activities and Financial Obligations for Seven Federal Departments (Jan. 13, 2006). While this report did not consider whether such contracts were permissible under the ADA, the report provides some perspective on the amount of money DOD spends on media advertising, Id. at 2-3. This report stated that from fiscal year 2003 to fiscal year 2005, DOD alone expended over $1.1 billion on 152 media advertising contracts, Id. at 23.

(43) See explanation of DOJ's view at supra note 38.

(44) 31 U.S.C.S. [section] 1351 (LEXIS 2006). See also Consol. Appropriations Act, Pub. L. No. 108-447, [section] 1401, 118 Stat. 2809, 3192 (2004) (amending the ADA by requiring agencies to submit ADA reports to the GAO). Prior to the amendment, agencies were required to submit ADA reports to the President and to Congress, but not to the GAO. Id.

(45) 31 U.S.C.S. [section] 1351.

(46) S. REP. NO. 108-307, at 43 (2004). See also Transmission of Antideficiency Act Reports, B-304335, 2005 U.S. Comp. Gen. LEXIS 47 (Mar. 8. 2005).

(47) Gov't Accountability Office, Legal Products, Antideficiency Act Violations, http://www.gao.gov (last visited 3 Dec. 2006).

(48) Id.

(49) Id.

(50) Id. Of the nine DOD ADA violations listed on GAO's ADA website for FY 2006, six originated from Army organizations, two originated from Air Force organizations, and one originated from a Navy organization, Id.

(51) Id.

(52) Id. The Army reported a similar violation where it used O&M funds for the lease of armored vehicles where it should have used the Other Procurement, Army appropriation. Id.
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Author:Lawson, Marci A.
Publication:Army Lawyer
Date:Jan 1, 2007
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