Statement of Jurisdiction
The U.S. Court of Federal Claims had original jurisdiction over the instant dispute pursuant to 41 U.S.C. § 7104(b)(1) (2018) and 28 U.S.C. § 1491(a)(1) (2018) because this is a challenge to a federal agency’s final adverse decision on an express contract to procure services. This Court has jurisdiction over the instant dispute under 28 U.S.C. § 1295(a)(3) because this is an appeal from the U.S. Court of Federal Claims’ final decision. The Appellee filed a timely notice of appeal after the U.S. Court of Federal Claims rendered a final decision on the instant dispute. See Fed. R. App. P. 4(a)(1)(B)(i).
Statement of the Issues
I. Sovereign Acts Doctrine
Whether the agency’s change to the base access policy can be deemed a sovereign act when the contract’s four corners clearly contemplated convict labor use, the agency itself initiated the alleged sovereign act, and the base commander herself characterized the change as “large.”
II. Administrative Procedure Act
Whether the agency’s reinterpretation of the base access policy was arbitrary, capricious, and contrary to a constitutional right where the policy stated the agency would perform a “wants and warrants” check, but without notice, the agency reinterpreted the policy and began performing background checks, thus prohibiting contractor personnel without wants or warrants from accessing the base.
Statement of the Case
On March 2, 2007, the U.S. Air Force (the “Agency”) issued an Invitation for Bids (“IFB”) to construct seven dormitories on Francis E. Warren Air Force Base (“F.E. Warren AFB” or “base”) near Cheyenne, Wyoming. R. at 1–2. The seven dormitories were to serve as “unaccompanied housing” for the Ninetieth Missile Wing. R. at 1.
In response to the IFB, ACB Construction, Inc. (“ACB”), a construction contractor with years of experience working on F.E. Warren AFB, began preparing a comprehensive bid. R. at 2. ACB solicited subcontractor bids for framing and drywall installation in the seven dormitories. R. at 2. ACB selected Sac-O-Suds Construction, Inc. (“SOS”), a subcontractor ACB had worked with in the past, and which had more than twenty years of experience on F.E. Warren AFB. R. at 2, 11. ACB submitted its bid, including SOS’s bid, to the Agency on July 1, 2007. R. at 2. On September 1, 2007, the Agency awarded to ACB contract W2700-07-C-0019 (the “contract”). R. at. 2.
I. The Contract & the Base Access Policy
The contract contained standard Federal Acquisition Regulation (“FAR”) clauses, and supplemental agency-specific regulations and policy directives. The instant dispute, however, involves two contract clauses, supplemented by the Agency’s base access policy, that together govern contractor personnel’s ability to access F.E. Warren AFB.
The contract incorporated by reference the FAR 52.222-3 and 52.204-9 clauses. R. at 2. The FAR 52.222-3 clause, Convict Labor, states “[t]he Contractor is not prohibited from employing persons- (1) [o]n parole or probation … ; (2) [w]ho have been pardoned or who have served their terms; or (3) [c]onfined for violation of the laws … who are authorized to work.” FAR 52.222-3(b). The FAR 52.204-9 clause requires the contractor to “comply with agency personal identity verification procedures.” FAR 52.204-9(a).
The Agency’s base access policy set forth the “agency personal identity verification procedures” referenced in FAR 52.204-9. The policy was adopted pursuant to the Internal Security Act of 1950, 50 U.S.C. § 797, that provides the base commander authority to issue “defense property security regulations …for the protection or security” of F.E. Warren AFB. 50 U.S.C. § 797(a)(2)(A) (2018). Additionally, the Act’s implementing regulations provide the base commander with the authority “to grant or deny access to their installations, and to exclude or remove persons whose presence is unauthorized.” 32 C.F.R. § 809a.2(b) (2018). In exercising this authority, however, the base commander “must not act in an arbitrary or capricious manner,” and the commander’s “action[s] must be reasonable in relation to their responsibility to protect and to preserve order on the installation and to safeguard persons or property thereon.” Id. Moreover, “[a]s far as practicable, [the base commander] should prescribe by regulation the rules and conditions governing access to their installation.” Id.
Pursuant to her authority, F.E. Warren AFB’s base commander, Brigadier General Mona Lisa Vito, R. at 7, promulgated several regulations and policy directives forming the Agency’s base access policy. R. at 3–4. According to the record, the policy was first adopted in 2003 and subsequently amended in 2006. R. at 4. As relevant here, the base access policy provides:
Contractors will be permitted to enter F.E. Warren AFB by following the procedures set forth in this instruction.… Upon award of the contract, the contractor will be issued an [Entry Authority List (“EAL”)] … The contractor will need to submit the required information for the EAL, to the contract administrator…
prior to coming to F.E. Warren AFB.
Directive 31-101, Local Security Policy and Security Procedures for Contractors, ¶ 5. Moreover, the policy states:
The [visitors control center (“VCC”)] staff will forward the Contracting EAL to the 911 dispatch center. A 911 dispatcher certified on the National Criminal Information Center system (NCIC) will run the contractor names through the NCIC for wants and warrants. After the dispatcher completes the NCIC check, they will sign the letters and return them to VCC. Unfavorable results will be scrutinized and eligibility will be determined on a case-by-case basis by the Security Force Coordinator.
Installation Security Supplemental Instruction 31-101, ¶ 4.1.5.1.
Before contracting with ACB and during the first months of contract performance, the Agency interpreted the base access policy to permit contractor employees with criminal records access to F.E. Warren AFB following a “wants and warrants” check in the NCIC database. R. at 5. ACB and SOS both relied on the Agency’s consistent past practice of applying this policy when preparing and pricing their bids for the contract. R. at 5, 10.
II. Construction Phase 1
Three weeks following contract award, on September 21, 2007, CO Stan Rothenstein issued to ACB a notice to proceed with contract performance. R. at 4. About a week following the notice to proceed, the government held a meeting with contractors, including representatives from ACB and SOS. R. at 4. There, CO Rothenstein described the base access policy. R. at 4. Minutes from the meeting suggest that CO Rothenstein told contractors “[n]o one will be allowed on the installation if not on the EAL list.… The names will be sent to dispatch for background checks.… No one with outstanding warrants, felony convictions, or on probation will be allowed on the installation.” R. at 4–5. However, ACB’s project manager, who attended the meeting, testified that he did not receive a written document corroborating the CO’s statement and did not believe that the CO was announcing a change in the base access policy. R. at 5. And, for approximately four months following the meeting, the base access policy remained unchanged. R. at 5.
Shortly thereafter, ACB, SOS, and the other subcontractors began Phase I of construction. Because the “unemployment rate in Wyoming [was] at a historical low,” R. at 6, and “the construction industry [was] in need of qualified employees,” R. at 6–7, SOS and other contractors working on F.E. Warren employed qualified individuals with criminal records to perform various construction-related jobs, R. at 2. In accordance with past practices, SOS chauffeured its employees onto F.E. Warren AFB, and an SOS employee, a military veteran, helped to ensure SOS employees complied with the base access policy and gained access to the base. R. at 5, 7.
Unfortunately, during Phase I of construction on the seven dormitories, on another ACB jobsite, an ACB employee attacked his manager. R. at 5. The subsequent investigation revealed that the ACB employee had a violent criminal record. R. at 5. This unfortunate incident caused the Agency to change the base access policy during Phase II of construction. R. at 5.
III. Construction Phase II
As Phase II of construction began, SOS had to hire more employees to perform the contract work. R. at 5. As required under the contract, SOS submitted the additional employees’ names to the CO. R. at 5. However, despite SOS’s twenty-year plus history at F.E. Warren AFB, other missile alert facilities, launch facilities, weapons storage areas, nuclear power plants, and other high security areas, the Agency denied several SOS employees access to the base. R. at 5. Surprised at the base access denial, SOS’s president testified that during the company’s twenty-year plus history at F.E. Warren AFB and similar facilities “never … had we ever had anybody denied access for a construction project.” R. at 5. Corroborating this testimony, the Agency’s own records also indicate that they had previously allowed SOS employees with criminal records or in pre-release status to access the base. R. at 5.
As SOS’s employees continued getting denied access to the base, SOS’s leadership questioned the base policy change, and informed agency officials that the denials were delaying and impacting SOS’s contract performance. R. at 5–7. After an alleged meeting between the Agency’s contracting, legal, and security staff, the CO informed SOS:
The ability to grant or deny an individual entry to federally controlled property rests with the individual appointed with the authority to grant or deny. In the case of F.E. Warren AFB, this authority is granted to the Security Force Coordinator. The Security Force Coordinator makes all decisions to grant or deny on a case-bycase basis. However, individuals who have been convicted as violent offenders or any sexual crime in nature will be denied entry to the installation.
R. at 7. SOS’s president responded to the CO clarifying, “people who were not sexual offenders or violent offenders, people with DUI convictions, drug convictions, criminal endangerment, etc., were also being denied access to F.E. Warren [AFB].” R. at 7. For approximately five months, while agency officials continued to deliberate the base access policy, SOS was told that agency officials were finalizing a new policy and recognized “how tight the labor pool is right now.” R. at 7–8. The Agency, on separate occasions, articulated disparate standards allegedly governing base access. R. at 7–9. The Agency informed SOS that “no one with a prior felony conviction is being permitted on installation,” “anyone convicted as a violent offender or of a sexual crime will be denied access to the installation,” and “any persons in the correctional system, paroled or under the supervision of a probation officer are not authorized on F.E. Warren AFB.” R. at 7–9.
Because the Agency refused to grant SOS’s employees access to the base, SOS was forced to take remedial measures. R. at 5–7. SOS, under pressure from ACB to stay on schedule and desperate to get manpower on the installation, reviewed hundreds of employee applications, interviewed countless applicants, and even escorted people onto the installation. R. at 5. Agency officials, however, continued to deny SOS’s employees access to the base, without explaining why the employees were being denied access to the base. R. at 6. At times, SOS even hired employees with no construction experience solely because those individuals could successfully obtain access to the base. R. at 6. Ultimately, SOS contracted with MCV Construction, Inc., whose employees had just completed another construction project on the base and had been cleared to work. R. at 6. That second-tier subcontractor completed approximately 90% of the framing work that ACB originally subcontracted to SOS. R. at 6.
Six months after agency officials first denied SOS’s employees base access, the Agency issued an “updated” memorandum purportedly governing “F.E. Warren AFB Installation Access for Contractor Personnel.” R. at 9. The policy alleged that the policy was effective immediately for all contractors and contractor personnel and that the policy’s intent was to preserve good order on the base. R. at 9. The policy further stated:
The 911 Dispatch Center will input all listed employees’ name and data into the National Criminal Information Center (NCIC) database for a background check in accordance with Department directives.
Unfavorable results from the background check will result in individuals being denied access to the installation, including, but not limited to, individuals that are determined to fall into one or more of the following categories: those having outstanding wants or warrants, sex offenders, violent offenders, those who are not probation, and those who are in a pre-release program. The definition of sex offender and violent offender can be found in the Wyoming Code.
R. at 9.
Importantly, at trial, General Vito, the base commander, acknowledged that, in her opinion, this change to the base access policy “was a large change.” R. at 9. Although the base commander alleged that the base access policy was intended to be fair and applied equally to everyone, she did not personally review individuals seeking access to the base, but instead delegated her authority to consider unfavorable results to the security force coordinator. R. at 9–10.
IV. Procedural History
A week after Air Force officials formally issued the new base access policy, SOS, through ACB, submitted a request for an equitable adjustment (“REA”), seeking to recoup $575,122.33 in additional funds expended in hiring and training new employees and performing work under an accelerated schedule. R. at 10. The request indicated that because the contract included the convict labor clause, SOS should have been allowed to employ previously convicted individuals; the clause was included in previous contracts; and SOS based its Phase II estimates on its ability use convict labor for the project, especially in light of a nationwide shortage of experienced construction workers and Wyoming’s low unemployment rate. R. at 10.
The Agency initially did not respond to the REA. R. at 11. Thereafter, on June 25, 2009, ACB resubmitted the REA and specifically requested a contracting officer’s final decision. R. at 11. The Agency, however, misplaced ACB’s request. R. at 11. In a letter dated September 12, 2009, the Agency suggested that ACB submit a certified claim to the Administrative Contracting Officer. R. at 11. Several months later, on July 28, 2010, ACB completed construction of the seven dormitories. R. at 11. Thereafter, ACB submitted a certified claim for $575,122.33 on behalf of SOS. R. at 11. When the Agency again failed to respond, on September 18, 2012, ACB filed an appeal with the U.S. Court of Federal Claims on a deemed denial basis. R. at 11.
Following trial, on January 4, 2019, Senior Judge Chamberlain Haller of the U.S. Court of Federal Claims issued an opinion and order resolving the dispute in ACB’s favor. The court granted ACB’s claim for the additional costs incurred and held that the change to the base access policy was a sovereign act, and that the Agency’s interpretation of the policy was inconsistent with the plain meaning of the regulation and not entitled to deference.
Summary of the Argument
The Court should reverse the U.S. Court of Federal Claims’ finding that the Agency’s change to the base access policy was a sovereign act, affirm the court’s finding that the Agency’s interpretation of the base access policy was arbitrary and capricious, and affirm the court’s decision to grant ACB’s claim for an equitable adjustment of $575,122.33.
This case is about maintaining contractor’s confidence in contracting with our federal government. Ruling that a sovereign act exists in this case undermines contractors’ ability to trust the government’s promises and provides the government an excuse to change its mind, not follow proper procedures, and still relieve itself of its contractual obligations. Here, because the contract’s four corners clearly contemplated convict labor use, the base access policy changed substantially and specially impacted ACB, and the Agency itself initiated the alleged sovereign act, the Court should hold that the base access policy is not a sovereign act. Furthermore, even if the base access policy were deemed a sovereign act, the Court should not excuse the Agency from liability under contract law principles because the Agency foresaw that base access policies would change and assumed the risk that convict labor would be used to perform the contract. Therefore, the Court should reverse the U.S. Court of Federal Claims’ finding that the change in base access policy is a sovereign act.
Moreover, the Agency’s interpretation of the base access policy was arbitrary and capricious and contrary to ACB and SOS’s rights under the Due Process Clause of the Fifth Amendment. Several months into contract performance, the Agency reinterpreted the phrase “wants and warrants” check in the base access policy and, in effect, substituted the phrase for a background check. Therefrom, the Agency began refusing to grant base access to ACB and SOS employees with criminal histories, but no wants or warrants. The Agency’s reinterpretation, however, was plainly erroneous and inconsistent with the regulation and not entitled to deference because it contradicted the unambiguous plain meaning of the policy and was also unreasonable. Additionally, the Agency failed to provide ACB or SOS with fair notice of the Agency’s reinterpretation of the base access policy. The Agency’s erroneous reinterpretation and failure to give ACB or SOS fair notice of the base access requirements caused the contractors to incur significant additional performance costs. Accordingly, the Court should affirm the U.S. Court of Federal Claim’s decision to set aside the Agency’s reinterpretation of the base access policy and affirm its decision to grant ACB’s claim for an equitable adjustment.
Argument
On appeal, this Court reviews the U.S. “Court of Federal Claims’ legal conclusions de novo and its factual findings for clear error.” Meridian Eng’g Co. v. United States, 885 F.3d 1351, 1354–55 (Fed. Cir. 2018) (citing John R. Sand & Gravel Co. v. United States, 457 F.3d 1345, 1353 (Fed. Cir. 2006)); see Fed. R. Civ. P. 52(a)(6) (stating standard for setting aside a trial court’s factual findings is clear error). Here, the Agency’s reinterpretation of its base access regulations involves resolving a legal question. See Perry v. Martin Marietta Corp., 47 F.3d 1134, 1137 (Fed. Cir. 1995) (“The interpretation of regulations incorporated into a contract is a purely legal question.”). This Court, therefore, reviews the decision below without deference.
I. The Agency's Change to the Base Access Policy is Not a Sovereign Act.
The sovereign acts doctrine is an affirmative defense the government may use when, in performing a contract to which the government is a party, an intervening event effected by the government in its sovereign capacity, hinders or obstructs contract performance. See United States v. Winstar Corp., 518 U.S. 839, 891–93 (1996). If the government properly asserts the sovereign acts defense, it is relieved from its contractual obligations. Id. at 892. The sovereign acts defense is intended to treat the government as a private party in a contractual relationship, despite the government’s sovereign acts and capacity. See Jones v. United States, 1 Ct. Cl. 383, 384 (1865) (explaining “[t]he two characters which the government possesses as a contractor and as a sovereign cannot be thus fused; nor can the United States while sued in the one character be made liable in damages for their acts done in the other”).
The U.S. Supreme Court has explained that the sovereign acts doctrine must balance the government’s “freedom to legislate with its obligation to honor contracts,” and has thus developed a two-pronged approach for determining whether a sovereign act may relieve the government from its contractual obligations. See Winstar, 518 U.S. at 896. To determine whether a sovereign act may relieve the government from its contractual obligations, first, the court must ascertain “whether the sovereign act is properly attributable to the [g]overnment as a contractor.” Id. Thus, the court must determine whether the government’s decision to implement a sovereign act is designed to relieve the government of its contractual obligations or is genuinely a sovereign act. Stockton E. Water Dist. v. United States, 583 F.3d 1344, 1366 (Fed. Cir. 2009). If the sovereign act is not attributable to the government as a contractor, the court must then ascertain whether the “act would otherwise release the [g]overnment from liability under ordinary principles of contract law.” Winstar, 518 U.S. at 896. While a majority of justices did not support the Supreme Court’s opinion in Winstar, the Federal Circuit has treated the Winstar plurality opinion “as setting forth the core principles underlying the sovereign acts doctrine.” Stockton E. Water Dist., 583 F.3d at 1366 (quoting Conner Bros. Constr. Co. v. , 550 F.3d 1368, 1374 (Fed. Cir. 2008)); see Winstar, 518 U.S. at 839.
A. The Agency’s Change in Base Access Policy Is Not a Sovereign Act Because It Is Not Public and General, Is Tainted by Self-Interest, Does Not Bear Upon Similar Contracts Between Citizens, and Is Not Incidental to the Accomplishment of a Broader Governmental Objective
Courts have examined various factors to determine whether the government’s alleged sovereign act is “properly attributable to the [g]overnment as a contractor,” in other words, whether the act is designed to relieve the government from its contract obligations. Winstar, 518 U.S. at 896; Stockton E. Water Dist., 583 F.3d at 1366.
First, courts have examined whether the government’s alleged sovereign act is public and general. See Winstar, 518 U.S. at 895–96. In assessing whether an alleged sovereign act is public and general, courts have examined the parties’ contractual agreement (i.e., the meeting of the minds) and the government’s expectation(s) in carrying out the supposed sovereign act, namely, whether the government’s actions were directed at the contract from which the government seeks relief. See, e.g., Winstar, 518 U.S. at 899–902 (holding Financial Institutions Reform Recovery Enforcement Act legislation (“FIRREA”) was not a public and general act because it eliminated the accounting treatment thrifts originally promised in contractual agreements with the government, it would not have made sense for thrifts to contract without that special accounting treatment, and Congress expected legislation to have that effect); Stockton E. Water Dist., 583 F.3d at 1367–68 (finding Reclamation Bureau’s decision to comply with statute and denying water to districts was not a public and general act because Bureau’s actions only affected the districts, were aimed at nullifying contracts with districts). But see Zafer Taahhut ve Ticaret A.S. v. United States, 833 F.3d 1356, 1365 (Fed. Cir. 2016) (holding no sovereign act because, among other things, contractor did not allege specific facts indicating U.S. Government’s negotiations with Pakistan concerning route closure were “specifically directed at nullifying contract rights”). Thus, courts have properly determined that a sovereign act existed where, among other things, the act had only an incidental effect on the claimant’s contract. See, e.g., Klamath Irrigation Dist. v. United States, 635 F.3d 505, 521–22 (Fed. Cir. 2011) (finding Reclamation Bureau’s failure to deliver water under contracts in response to other federal environmental agencies’ biological assessments and Bureau’s obligations under Endangered Species Act only incidentally affected claimant’s contract, and was thus a public and general act).
Importantly, in deciding whether an alleged sovereign act is public and general, the Supreme Court has expressed skepticism in alleged sovereign acts where the government has self-interest, that is, where the government wants private parties to bear the government’s costs in meeting its public responsibilities. Winstar, 518 U.S. at 896–97. Specifically, the Court has made clear:
The greater the [g]overnment’s self-interest … the more suspect becomes the claim that its private contracting partners ought to bear the financial burden of the [g]overnment’s own improvidence, and where a substantial part of the impact of the [g]overnment’s action rendering performance impossible falls on its own contractual obligation, the defense will be unavailable.
Id. at 898 (emphasis added). To help in making this determination and thus assessing the government’s self-interest in the allegedly public and general sovereign act, ACB respectfully requests that this court examine who (e.g., what governmental agency) initiated the alleged sovereign act. See Horowitz v. United States, 267 U.S. 458, 460–61 (1925) (finding U.S. Railroad Administration’s embargo on all freight silk shipments causing another federal agency to delay shipment to contractor was a public and general act); Jones, 1 Ct. Cl. at 384–85 (holding United States’ decision to withdraw troops from Indian country was a public and general act, even if government’s acts delayed contractor’s performance for Indian Affairs agency); see also Zafer Taahhut, 833 F.3d at 1364–65 (finding no sovereign act where route closures allegedly affecting claimant’s contract with the Army Corps of Engineers resulted from U.S. Government’s negotiations with Pakistani Government and U.S. not responsible for foreign nation’s acts). Examining who promulgated the alleged sovereign act is relevant to assessing the government’s self-interest because it provides insight into the degree to which the relevant authority considered (or not) the act’s impact on the complaining contractor, and (possibly) the different approval levels a proposed act went through to finally be implemented.
Second, and related to the first factor, courts have considered whether the government’s alleged sovereign act bears upon the claimant’s government contract as it bears upon all similar contracts between citizens. See Deming v. United States, 1 Ct. Cl. 190, 190–91 (1865) (holding Congress imposing additional duties and passing legislation increasing contractor’s performance costs was a sovereign act because it was a general law that did not specially affect claimant’s contract); Jones, 1 Ct. Cl. at 384 (“The laws of taxes and imposts affect pre-existent executory contracts between individuals, and affect those made with the government, but only to the same extent and in the same way.”); Wilson v. United States, 11 Ct. Cl. 513, 515, 520–21 (1875) (finding Military Governor’s order prohibiting all persons not in military service from accessing Washington, thus precluding contractor’s timely delivery, a general order “applying to all persons, and affecting the claimant precisely as though he had contracted with any private corporation”). Importantly, the Supreme Court, in Winstar, rejected the government’s argument that FIRREA legislation did not formally target specific transactions, noting that legislation can be written generally without targeting particular transactions, but still substantially affect the government’s contracting partners. See 518 U.S. at 902–03.
Additionally, courts consider whether the alleged sovereign act’s impact on the government contract is merely incidental to a broader governmental objective. See id. at 898; Conner Bros. Constr. Co., 550 F.3d at 1375–76 (explaining Army excluding contractor personnel after September 11, 2001, terrorist attacks served government’s broader objective of restricting compound access to minimize security threats as troops prepared to deploy and contractor’s personnel would have been able to observe troop’s staging activities). Cf. Gen. Dynamics Corp. v. United States, 563 U.S. 478, 486, 489 (2011) (holding superior-knowledge claims nonjusticiable where further litigation discovery risked revealing state secrets and threatened national security).
Here, it is evident that the Agency’s change in base policy was not a public and general act, and thus cannot be deemed a sovereign act. ACB’s contract with the Agency included a convict labor clause expressly allowing ACB to employ persons pardoned, who had served their terms, or on parole or probation. R. at 2; see FAR 52.222-3(b). However, the Agency denied several SOS employees access to the base — employees who had just completed other work on the same base. R. at 5. Thus, like Winstar, 518 U.S. at 862, 900, where FIRREA legislation was not deemed a public and general act because the government’s contracts with thrift institutions expressly included integration clauses through which the parties, as a condition of their agreement, intended to settle regulatory treatment of their thrifts and would not have otherwise rationally entered into a transaction; here, ACB’s contract expressly included the convict labor clause, thus reflecting the parties’ mutual intent that convicts be allowed to work on the base. R. at 2–6. Furthermore, given Wyoming’s low unemployment rates and the shortage of experienced construction workers nationwide, had ACB known of the Agency’s intent to change the base access policy, it would have been irrational for ACB to respond to the Agency’s IFB or to bid as it did. R. at 2, 5–6. Additionally, like Winstar, 518 U.S. at 900–01, where legislators realized that FIRREA would abrogate the government’s contractual commitments with thrift institutions “by changing the rules in the middle of the game;” here, Brigadier General Vito, the base commander, admitted that the change in base policy was a big change by stating, “I believe it was a large change.” R. at 9–10. Indeed, like Stockton East Water District, 583 F.3d at 1367–68, where the Reclamation Bureau’s decision to comply with a statute thereby denying water to various districts was not deemed a public and general act because it was aimed at nullifying contracts with the districts; here, the Agency’s change in base policy was aimed at nullifying ACB’s contract especially because even employees who were not violent or sexual offenders, and employees who had just completed work on another project on the base, were denied base access. R. at 5, 7, 11. Furthermore, unlike Zafer Taahhut, 833 F.3d at 1365, the above-mentioned and following facts make clear that the Agency’s actions were specifically directed at nullifying ACB’s contract rights. Accordingly, the Agency’s change in base policy cannot be deemed a public and general act.
In deciding whether an alleged sovereign act is public and general, this Court must also consider the government’s self-interest, that is, whether the government seeks to shift to private parties the government’s costs in meeting its public responsibilities. Winstar, 518 U.S. at 896. Here, the Agency issued an IFB used when the Agency considers only price and price-related factors in deciding what contractor to engage in business with. R. at 2; see FAR 6.401(a)(2). But see FAR 15.200(a), 15.201(b) (explaining under competitive negotiation procedures, before proposals are received, the government is allowed to exchange information with potential offerors and stating, “[t]he purpose of exchanging information is to improve the understanding of the [g]overnment requirements and industry capabilities, thereby allowing potential offerors to judge whether or how they can satisfy the [g]overnment’s requirements”). In issuing an IFB, the Agency confined itself to a restrictive contracting method and chose a contractor without being able to fully discuss its future contracting concerns. Until after the Agency had decided to contract with ACB, at the pre-construction conference, did the Agency indicate that certain types of individuals would be denied base access. R. at 4–5. The Agency now seeks to shift the cost of meeting its public responsibilities in failing to select an appropriate and flexible contracting method and appropriately expending taxpayer dollars to ACB. Thus, on this point, the Agency’s actions appear to be tainted by self-interest.
Furthermore, as mentioned, in assessing the government’s self-interest, this Court should also examine who (e.g., what agency) in the government initiated the alleged sovereign act. For example, unlike Horowitz, 267 U.S. at 460–61, where the U.S. Railroad Administration’s embargo on all freight silk shipments was deemed a public and general act when the embargo caused another federal agency to delay a silk shipment to a contractor; here, the base commander, through the security force coordinator, exercised sole authority to exclude persons from the installation — limited only by a regulatory instruction that the commander’s decision be reasonable in relation to preserving the installation’s order and not arbitrary or capricious. R. at 3. Thus, here, the Agency itself initiated the alleged sovereign act. Furthermore, unlike Klamath, 635 F.3d at 521–22, where the Reclamation Bureau’s failure to deliver water under contracts was deemed a public and general act because it was a response to other federal environmental agencies’ biological assessments and the Bureau’s obligations under the Endangered Species Act; here, authority to deny access to the base rested wholly with the Security Force Coordinator. R. at 4, 7, 10. In fact, as the CO indicated to ACB, “the ability to grant or deny an individual entry to federally controlled property rests with the individual appointed with the authority to grant or deny. In the case of F.E. Warren AFB, this authority is granted to the Security Force Coordinator.” R. at 7. Thus, again, the Agency itself initiated the alleged sovereign act, and presumably the alleged sovereign act resulted from a single agency’s less than considered judgement. Lastly, unlike Jones, 1 Ct. Cl. at 384–85, where the United States’ withdrawal of troops from Indian Country was deemed a public and general act even when the government’s acts delayed a contractor’s performance for the Indian Affairs agency; here, because Brigadier General Vito delegated her authority to consider unfavorable results to the security force coordinator, the coordinator retained nearly unfettered discretion to deny base access and, in fact, did deny base access to individuals who were not violent or sexual offenders and individuals who had previously been granted base access. R. at 7, 10. Accordingly, because the Agency itself initiated the change in base access policy or the alleged sovereign act, the Agency’s change in base access policy seems to have been tainted by self-interest, and thus cannot be deemed a public and general act.
Here, it is also evident that the Agency’s change in base policy does not bear upon ACB’s government contract as it bears on all similar contracts between citizens, and thus cannot be deemed a sovereign act. Unlike Deming, 1 Ct. Cl. at 190–91, where Congress imposed general laws that increased the contractor’s performance costs but did not specially alter the contractor’s contract; here, on May 21, 2008, the CO expressly stated that the Security Force Coordinator retained discretion to grant or deny base access on a “case-bycase basis,” and would deny base access to individuals previously convicted as violent or sexual offenders. R. at 7. In fact, the Security Force Coordinator denied base access to ACB and SOS employees who were not sexual or violent offenders and employees who had just finished working on another project on the same base. R. at 5, 7. Thus, unlike tax or impost laws that affect contracts between individuals and contacts with the government alike, Jones, 1 Ct. Cl. at 384; here, the Agency’s base policy change unduly affected ACB’s contract. While the Agency argues that the October 22, 2008, Memorandum was a policy applicable to “all contractors and contractor personnel” and was “always to be fair and equally applied to everybody,” R. at 9–10, the Supreme Court has made clear that legislation can be written generally without targeting particular transactions, but still substantially affect the government’s contracting partners. See Winstar, 518 U.S. at 902–03. Indeed, like Winstar, where the Supreme Court examined Congress’ intense concern with the FIRREA where legislators noted, “the bill radically changes the terms of previously negotiated transactions;” here, even though agency officials had acknowledged “just how tight the labor pool is right now,” the base commander proceeded to change base access policies and then admitted that the Memorandum was a “large change,” R. at 8–9, thus demonstrating that the change in base access policy, like FIRREA, “had the substantial effect of releasing the [g]overnment from its own contractual obligations.” 518 U.S. at 901 n.48, 902. Consequently, the Agency’s change to the base access policy specially and unduly affected ACB’s contract, and thus cannot be deemed a sovereign act.
Here, the Agency’s change to the base access policy is not merely incidental to a broader governmental objective. While the Agency argues that the change in base access policy was intended to preserve the base’s order and to protect personnel and facilities, again, the contract included the convict labor clause, expressly allowing convict labor use during contract performance. R. at 2, 9; see FAR 52.222-3(b). Furthermore, unlike Conner Bros. Constr. Co., 550 F.3d at 1375–76, where the Army excluded contractor personnel from the Army base in response to the September 11th terrorist attacks on the nation and the contractor personnel’s ability to observe troop’s staging activities, and unlike General Dynamics, 563 U.S. at 486, where state secrets disclosure threatened national security; here, the Agency was not responding to a national threat, preparing to deploy troops, nor risking national security through disclosure of state secrets. To the contrary, during SOS’s twenty-year history at the base and other missile alert facilities, launch facilities, weapons storage areas, nuclear power plants, and other high security facilities, its employees had never been denied access to a facility for a construction project. R. at 5. While ACB concedes that the Agency has an interest in preserving the base’s safety, the Agency’s actions demonstrated to ACB that convict labor use did not represent a safety or national security concern. Among other things, again, the Agency issued an IFB, used when a contract’s award will be based on price or price-related factors and it is not necessary to conduct discussions with offerors, and it included the convict labor clause in the contract. R. at 2; see FAR 6.401(a), 52.222-3(b). Consequently, the change in base policy was not merely incidental to a broader government objective, and thus cannot be deemed a sovereign act.
For these reasons, the Agency’s change to the base access policy cannot be deemed a sovereign act. However, even if it were deemed a sovereign act, the government may not be released from liability under ordinary contract law principles.
B. Even If the Agency’s Change in Base Access Policy Is Deemed a Sovereign Act, the Agency Is Not Released from Liability Under Contract Law Principles Because the Agency Foresaw That Base Access Policies Would Be Changed, and Assumed the Risk That Convict Labor Use Would Be Permitted.
Even if the Agency’s change in base access policy is deemed a sovereign act, the Court must determine “whether that act would otherwise release the [g]overnment from liability under ordinary principles of contract law.” Winstar, 518 U.S. at 896. This requirement is analyzed in accordance with the law of impossibility or impracticability because, under the common law, before a party is allowed to avoid liability for breach it must prove whether contract performance was rendered impossible. See id. at 904. Thus, to assess whether a sovereign act rendered contract performance impossible, the Supreme Court has adopted the Restatement (Second) of Contracts § 261 (Am. Law Inst. 1981), which states:
Where after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicated the contrary.
See Winstar, 518 U.S. at 904. Accordingly, to prove impossibility and thus be discharged of its contractual obligations, the party seeking discharge must prove: (1) an event occurred after the contract was made which rendered that party’s performance impracticable or impossible; (2) the event was not that party’s fault; and (3) the event’s non-occurrence was a basic assumption on which the contract was made. See id. In this case, because the Agency is seeking to be discharged of its contractual obligations, it must prove those elements. Furthermore, because this test is considered when, presumably, a proper sovereign act has been found, for the test’s second prong, this analysis assumes that the agency, as a contracting party, was not at fault for the sovereign act. Therefore, the following analysis will not survey the second prong.
Under the test’s first prong, courts have assessed whether the alleged sovereign act rendered contract performance objectively impossible and whether alternatives existed to the government’s selected course of action. See Stockton E. Water Dist., 583 F.3d at 1367 (stating impossibility defense excused performance only when it was objectively impossible to perform, thus government had to demonstrate agencies’ actions made it impossible for contracting agency to deliver full water amounts provided in contracts); Klamath, 635 F.3d at 522 n.14 (remanding case for government to establish whether contract performance was impossible and for court to assess whether to admit evidence for government to demonstrate that it lacked alternatives to halting deliveries under contracts).
Under the test’s third prong, the Court must determine whether the sovereign act’s non-occurrence was a basic assumption on which the contract was made. See Winstar, 518 U.S. at 905. This requirement’s premise is that “parties will have bargained with respect to any risks that are both within their contemplation and central to the substance of the contract.” Id. Accordingly, under this prong, courts have assessed whether the sovereign act’s occurrence was foreseeable and likely. See id. at 905–907 (finding no valid impossibility defense because changes in regulatory structure were both foreseeable and likely because the regulations were subject to “numerous statutory and regulatory changes over the years and changed three times in 1982 alone”). Courts have also assessed whether the contract allocated the risk of the sovereign act’s occurrence. See id. at 909–10 (holding no impossibility defense where documents setting accounting treatment for thrift institutions were not just regulatory policy statements, but risk allocation for possible regulatory change, and it would have been “madness” for thrifts to engage in transactions without protections). Thus, “where the ‘language or the circumstances’ indicate allocation of the risk to the party seeking discharge” the impossibility defense is foreclosed. Id.Id. at 908 (citing Restatement (Second) of Contracts § 261). See generally Conner Bros. Constr. Co., 550 F.3d at 1379 (stating contractor arguing Army’s performance not impossible because it contemplated emergency could result in base shutdown, and contract promised facilities would be “unoccupied and vacant” during construction, thus government assumed risk). Furthermore, the Supreme Court has acknowledged that even if a sovereign act triggers the government’s financial responsibility under provisions routinely included in government contracts, those provisions are still deemed binding. See Winstar, 518 U.S. at 908.
Here, the Agency’s change in base access policy, assuming it is deemed a sovereign act, did make it objectively impossible for the Agency to allow convict labor to enter the base. R. at 9. Even if the Agency’s performance was objectively impossible, the Agency still is not excused from liability under ordinary contract law principles because the Agency both foresaw that at some point it would need to change base access regulations/ policies, and assumed the risk that convict labor use, in particular, was allowed under the contract. Like Winstar, 518 U.S. at 905–06, where changes in regulatory structure were both foreseeable and likely because the regulations were subject to numerous changes; here, even if the Agency had not altered its base access policies before contracting with ACB, the base commander still retained authority to change the regulations/ policies, and base access was dependent on a policy that determined, on a case-by-case basis, whether someone would be allowed access to the base. R. at 2–4. Furthermore, because during the pre-construction conference (thus before performance commenced), once the Agency had already decided to contract with ACB, the Agency seems to have already been expressing its intent to change base access regulations, it seems that the Agency foresaw upcoming changes to the base access policy, but failed to express its intentions to ACB before contract formation. R. at 2, 4–5.
Lastly, because the Agency allocated to itself the risk that convict labor would be used for contract performance, it cannot be excused from performance under ordinary contract law principles. R. at 2. As mentioned, the Agency expressly included in the contract FAR 52.2223, Convict Labor, that allows contractors to use convict labor use in contract performance. R. at 2. Thus, like Winstar, 518 U.S. at 909–10, where the government, through documents setting an accounting treatment for thrifts, allocated to itself the risk of possible regulatory change; here, the convict labor clause’s inclusion in the contract allocated to the Agency the risk that ACB would use convict labor in contract performance. While the Agency may argue that the convict labor clause had to be included in the contract under a regulatory mandate FAR 22.202, the Supreme Court has acknowledged that even if a sovereign act triggers the government’s financial responsibility under provisions routinely included in government contracts, those provisions are still deemed binding. See Winstar, 518 U.S. at 908. Accordingly, the Agency here assumed responsibility that convict labor would be used for contract performance.
For these reasons, the Agency’s change in base policy cannot be deemed a overeign act, and, even if it could be deemed a sovereign act, the Agency may not be released from liability under ordinary contract law principles. Furthermore, the Agency’s interpretation of its base access regulations is not entitled to deference under the Administrative Procedure Act. The next section examines this issue.
II. The Agency's Interpretation of the Base Access Policy Was Arbitrary, Capricious, and Contrary to ACB's Consitutional Rights to Due Process.
The Administrative Procedure Act (“APA”) requires the Court to “set aside any regulation or interpretation of a regulation . . . [found] to be arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law; contrary to a constitutional right, power, privilege or immunity; … or without observation of a procedure required by law.” Reizenstein v. Shinseki, 583 F.3d 1331, 1334 (Fed. Cir. 2009) (quoting Smith v. Nicholson, 451 F.3d 1344, 1347 (Fed. Cir. 2006)); see 5 U.S.C. § 706(2)(A), (B), (D) (2018). Review of the agency’s interpretation “must ‘be searching and careful,’” but the Court “must not substitute [its] judgment for that of the [agency].” Los Angeles v. U.S. Dep’t of Commerce, 307 F.3d 859, 874 (9th Cir. 2002) (quoting Marsh v. Or. Nat. Res. Council, 490 U.S. 360, 378 (1989)).
Here, the Agency’s interpretation of the base access policy was arbitrary, capricious, and contrary to ACB’s constitutional right to due process. The Agency purports to interpret the phrase “wants and warrants” check in the base access policy as synonymous with a background check. R. at 9. However, the Agency’s interpretation was plainly erroneous and inconsistent with the regulation, and the Agency did not give ACB fair notice of the change in base access requirements. The Court, therefore, should “hold unlawful and set aside” the Agency’s interpretation. See 5 U.S.C. § 706(2). In addition, the Court should affirm the trial court’s finding on this issue and grant ACB’s claim for an equitable adjustment for the additional costs incurred during contract performance.
A. The Agency’s Interpretation of the Base Access Policy Was Plainly Erroneous, Inconsistent with the Regulation, and Not Entitled to Deference.
“Since this involves an interpretation of an administrative regulation a court must necessarily look to the administrative construction of the regulation if the meaning of the words used is in doubt.” Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 413–14 (1945). If the regulation is ambiguous, the agency’s interpretation is “controlling unless ‘plainly erroneous or inconsistent with the regulation.’” Auer v. Robbins, 519 U.S. 452, 461 (1997) (quoting Robertson v. Methow Valley Citizens Council, 490 U.S. 332, 359 (1989)). Deference is inappropriate, however, where there is “reason to suspect that the interpretation does not reflect the agency’s fair and considered judgment on the matter” or the agency’s interpretation is merely “a ‘post hoc rationalizatio[n]’ advanced by an agency seeking to defend past agency action against attack.” See id. at 462 (quoting Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 212 (1988)).
1. The Agency’s interpretation of the base access policy was plainly erroneous and inconsistent with the regulation because the Agency’s interpretation of the phrase “wants and warrants” check contradicts the policy’s unambiguous plain meaning.
Review of the Agency’s interpretation of the base access policy begins with the text of the regulation itself. See Los Angeles, 307 F.3d at 869. The Court must “determine whether the language at issue has a plain and unambiguous meaning with regard to the particular dispute in the case.” Id. (quoting Royal Foods Co. v. RJR Holdings Inc., 252 F.3d 1102, 1106 (9th Cir. 2001)). If a particular interpretation is “compelled by the language of the regulation,” Cathedral Candle Co. v. U.S. Int’l Trade Comm’n, 400 F.3d 1352, 1364 (Fed. Cir. 2005), the Court must give effect to the regulation’s unambiguous plain meaning. See Reizenstein, 583 F.3d at 1339 (Mayer, J., dissenting) (stating “surely, ignoring the regulation is inconsistent with the regulation”).
A regulation is ambiguous “if the meaning of the words used is in doubt.” Seminole Rock & Sand Co., 325 U.S. at 414. Mere disagreement over a regulation’s meaning, however, does not mean a regulation is ambiguous. Instead, the Court must examine the regulation’s text, aided by the traditional tools of regulatory construction, to determine if the text has an unambiguous plain meaning. See Cathedral Candle Co., 400 F.3d at 1362. Whenever possible, the Court should interpret the regulation’s text according to its ordinary meaning. See Auer, 519 U.S. at 461 (interpreting the phrase “subject to” in an agency regulation according to definitions in the American Heritage Dictionary and Webster’s New International Dictionary); Los Angeles, 307 F.3d at 872 (interpreting the phrase “feasible” in the Census Act according to definitions in Black’s Law Dictionary). The Court should also interpret the regulation so that, “if it can be prevented, no clause, sentence, or word” is rendered “meaningless.” Los Angeles, 307 F.3d at 872 (finding the phrase “feasible” in the Census Act ambiguous where giving the phrase its ordinary meaning would render another phrase meaningless).
Here, the meaning of the phrase “wants and warrants” check in the base access policy is unambiguous. The phrase’s unambiguous plain meaning describes situations where an individual is wanted by police in connection with a crime or a judge has issued a warrant for an individual’s arrest or to search the individual’s person or property. See Want, Oxford English Dictionary (2nd ed. 1989) (defining “want” as “to be sought by the police or a similar agency in connection with a crime”); Warrant, Black’s Law Dictionary (11th ed. 2019) (defining “warrant” as “[a] writ directing or authorizing someone to do an act, [especially] one directing a law enforcer to make an arrest, a search, or a seizure”). A background check, in contrast, means something entirely different. The Agency defines a background check as an examination of an individual’s criminal history, including “outstanding wants and warrants,” previous convictions for “violent” or “sexual” offenses, and present participation in a probation, parole, or pre-release program. R. at 9.
The Agency’s expansive interpretation of the base access policy exceeds the ordinary meaning of the phrase “wants and warrants” check and introduces additional requirements for base access not contemplated by the regulation itself. For example, a background check, unlike a “wants and warrants” check, includes an individual’s prior criminal history. This “large change” as the base commander characterized it, to the base access policy adds additional, unwritten factors for determining base access, and shifts the Agency’s focus away from present and towards past wrongdoing. R. at 9
The Agency’s attempt to expand the base access policy contradicts the unambiguous plain meaning of the policy and lacks precedential support. Unlike in Auer, 519 U.S. at 459–60, where the Supreme Court found the phrase “subject to” disciplinary pay deductions could mean either a theoretical or an actual possibility of a deduction; here, the phrase “wants and warrants” has only one established legal meaning. The same potential for dual meanings led the Ninth Circuit in Los Angeles, 307 F.3d at 872, to find the word “feasible” in the Census Act ambiguous. There, the court found the word susceptible to different interpretations: capable of being done or capable of being done successfully. See id. In contrast, here, the phrase “wants and warrants” check has one fixed legal meaning — that is, situations where an individual is wanted by police in connection with a crime or a judge has issued a warrant for an individual’s arrest or to search the individual’s person or property. Accordingly, the phrase is unambiguous.
The Agency nevertheless argues that the policy as a whole is ambiguous because it provides that, following the “wants and warrants” check, “[u]nfavorable results will be scrutinized and eligibility will be determined on a case-by-case basis” (“the unfavorable results clause”). R. at 4. At trial, a witness for the Agency testified that an individual with “a want or warrant . . . wouldn’t even gain access because they would be detained and turned over to the proper authorities until that warrant could be cleared.” R. at 14. According to the Agency, this renders the base access policy ambiguous because giving the phrase “wants and warrants” check its ordinary meaning would render the unfavorable results clause meaningless.
The Agency, however, is mistaken. Importantly, the Agency’s original, contemporaneous interpretation of the phrase “wants and warrants” check gave the phrase its ordinary meaning despite the unfavorable results clause. R. at 5. Moreover, the Agency’s witness conflates the terms want and warrant and ignores the legal distinction between an arrest and a search warrant. When the phrase “wants and warrants” check is given its ordinary meaning, the unfavorable results clause, rather than being rendered a nullity, gives the agency discretion to grant or deny an individual with a want or warrant access to F.E. Warren AFB when in the Agency’s best interest. Additionally, although the Agency may have only granted access on an extremely limited basis, the Agency’s decision to use its discretion sparingly does not render the unfavorable results clause meaningless.
Since the phrase “wants and warrants” check can be given its ordinary meaning without rendering the unfavorable results clause meaningless, the present dispute differs from the dispute in the Ninth Circuit’s Los Angeles case. There, the court found the phrase “feasible” in the Census Act ambiguous because giving the phrase its ordinary meaning — that is, “capable of being done” — would render the preceding phrase “if he considers it” meaningless. See Los Angeles, 307 F.3d at 870.
Finally, the Agency’s decision to ignore the unambiguous plain meaning of the base access policy and interpret the phrase “wants and warrants” check as a background check impermissibly renders the convict labor clause in ACB’s contract meaningless. The clause provides that “[t]he [c]ontractor is not prohibited from employing persons — (1) [o]n parole or probation … ; (2) [w]ho have been pardoned or who have served their terms; or (3) [c]onfined for violation of the laws … who are authorized to work.” FAR 52.222-3. When properly interpreted, the base access policy and the contract function in tandem — the contract authorizes ACB to employ individuals with criminal pasts, while the base access policy permits those individuals to access F.E. Warren AFB so long as they do not have any present wants or warrants.
The Agency, however, argues that the contract permits ACB to employ individuals with criminal records, but “doesn’t guarantee them access to [F.E. Warren AFB.].” R. at 8. The Court, however, need not defer to the Agency’s interpretation of the convict labor clause because the Court need only defer to an agency’s interpretation of its own regulations. Moreover, since the contract contemplates construction of dormitories on F.E. Warren AFB, permitting ACB to employ individuals with criminal records, but denying them access to the base, renders the clause meaningless. Accordingly, it is the Agency’s purported interpretation, not the unambiguous, plain meaning of the regulation, that impermissibly renders a portion of the regulatory scheme meaningless.
Therefore, the unambiguous plain meaning of the base access policy compels the conclusion that contractor employees could be denied access to the base only where the individual was wanted by police in connection with a crime or a judge had issued a warrant for the individual’s arrest or to search the individual’s person or property. The trial court agreed, finding the Agency’s interpretation of the phrase “wants and warrants” check as synonymous with a background check “contradicts the plain meaning of the regulations.” R. at 15. The Court should affirm the lower court’s ruling.
2. The Agency’s interpretation of the base access policy was plainly erroneous and inconsistent with the regulation because the Agency’s interpretation conflicts with the Agency’s original, contemporaneous interpretation; conflicts with ACB’s contract; the Agency failed to consider the practical consequences of its interpretation; and the Agency’s policy preference is not controlling.
Assuming arguendo that the phrase “wants and warrants” check in the base access policy is ambiguous, the Court must determine whether “the government’s interpretation of the regulation is reasonable.” Reizenstein, 583 F.3d at 1337. Different factors contribute to the reasonableness analysis. The factors, however, are not weighted and no one factor is dispositive.
Reasonableness depends, in part, on whether the agency’s interpretation has remained consistent since the regulation’s promulgation. See Seminole Rock & Sand Co., 325 U.S. at 417–18 (finding an agency’s interpretation of the phrase “highest price charged during March 1942” reasonable, in part, where the interpretation remained consistent in public statements, reports to Congress, and private explanations). Accordingly, a change or modification to the Agency’s original, contemporaneous interpretation, without an intervening change to the regulation, weighs against the reasonableness of an interpretation.
Here, the Agency’s original, contemporaneous interpretation of the base access policy refused base access only where an individual was wanted by police in connection with a crime or a judge had issued a warrant for the individual’s arrest or to search the individual’s person or property. R. at 5. This interpretation remained consistent for years. R. at 3–5. Then, without an intervening change to the text of the regulation, the Agency reinterpreted the phrase “wants and warrants” check. R. at 5, 9. Thus, unlike Seminole Rock & Sand Co., 325 U.S. at 417–18, where the Supreme Court found that the phrase “highest price charged during March, 1942” referred to the price charged for an article actually delivered during that month, in part, because of the agency’s consistent administrative interpretation; here, the Agency’s lack of consistency suggests the Agency’s interpretation is unreasonable.
In situations where multiple regulations operate in tandem, reasonableness also depends, in part, on whether the agency’s interpretation comports with the larger regulatory scheme. See Reizenstein, 583 F.3d at 1337 (finding an agency’s interpretation of a regulation governing disability benefits reasonable where it was consistent with the agency’s interpretation of similar disability benefit regulations). Moreover, when multiple agencies administer a single statute or regulation, adopting the same or similar interpretation “add[s] significant force to the reasonableness of the [agency’s] interpretation.” Cathedral Candle Co., 400 F.3d at 1364 (finding the International Trade Commission’s interpretation of a confidentiality regulation reasonable where the Department of Commerce adopted the same interpretation and the two agencies administered one statutory scheme).
Here, as the trial court found, “the [Agency’s] interpretation is flawed in light of the fact that the contract incorporated FAR 52.222-3, which permits contractors to employ ex-felons.” R. at 15. When properly interpreted, the base access policy and the convict labor clause operate in tandem — the contract authorizes ACB to employ individuals with criminal pasts, while the base access policy permits those individuals to access F.E. Warren AFB provided they do not have any present “wants or warrants.” However, the Agency’s decision to perform background checks on ACB’s employees and prohibit ACB from employing individuals with criminal records nullified the convict labor clause. The Agency’s argument with regard to this factor is without support in the case law. For example, unlike Reizenstein, 583 F.3d at 1337, where this Court upheld as reasonable the Department of Veterans Affairs interpretation of a regulation covering the continuance of total disability ratings as applying to prospective, rather than retrospective, disability ratings because the interpretation comported with the agency’s interpretation of other regulations governing reductions in disability ratings; here, the Agency’s interpretation of the base access policy directly contradicts and, in effect, nullifies the convict labor clause.
The Agency attempts to avoid this inconsistency by interpreting the convict labor clause to permit ACB to employ individuals with criminal histories, without guaranteeing them access to the base. R. at 8. The Agency, however, has not identified another agency that has interpreted the convict labor clause in this manner. Nor, as explained above, is the Agency’s interpretation of the convict labor clause entitled to deference. Thus, unlike Cathedral Candle Co., 400 F.3d at 1364, where this Court upheld as reasonable the International Trade Commission’s interpretation of a confidentiality regulation to prohibit disclosure of a company’s support for an antidumping petition because the Department of Commerce had formally adopted the same interpretation and the two agencies jointly administered the antidumping regulatory scheme; here, the Agency’s interpretation of the base access policy and the convict labor clause must withstand scrutiny without the added reasonableness of ensuring compatibility with another agency. And, since the Agency’s interpretation creates a conflict between the base access policy and the contract, this factor also weighs against finding that the Agency’s interpretation was reasonable.
Reasonableness also depends, in part, on the practical consequences of the agency’s interpretation. See Auer, 519 U.S. at 461 (finding an agency’s interpretation of a regulation governing overtime pay reasonable where the interpretation avoided the potential imposition of unanticipated overtime liability); Reizenstein, 583 F.3d at 1337–38 (finding an agency’s interpretation of a regulation governing disability benefits reasonable where the interpretation avoided potential overcompensation that might have discouraged the Department of Veterans Affairs from awarding certain disability benefits).
Here, the Agency’s interpretation of the base access policy ignores the practical consequences associated with Wyoming’s low unemployment rate. During construction, ACB repeatedly explained to the Agency that because of the labor shortage they would frequently hire qualified individuals with criminal records. R. at 6–7, 10. ACB’s hiring practices not only helped individuals with criminal pasts reenter the workforce but provided the Agency improved performance at a reduced cost. Access to the larger labor pool also helped promote competition for construction projects on F.E. Warren AFB.
The Agency’s failure to consider the consequences of its interpretation of the base access policy distinguishes the present dispute from both Auer and Reizenstein. In Auer, the Supreme Court upheld as reasonable the Department of Labor’s interpretation of the phrase “subject to” deductions in pay as referring to situations where an individual’s pay was subject to deductions “as a practical matter,” in part, because this interpretation avoided potential unanticipated overtime liability. See 519 U.S. at 461. Similarly, in Reizenstein, this Court upheld the Department of Veterans Affairs’ interpretation of a regulation governing the continuance of total disability ratings as applying to prospective, rather than retrospective, reductions in disability payments, in part, because the interpretation avoided the possibility of overcompensation. See 583 F.3d at 1337–38. However, here, the Agency’s interpretation of the base access policy creates, rather than avoids, the practical consequences of Wyoming’s low unemployment rate. Thus, the practical consequences of the Agency’s interpretation undermine its reasonableness.
Finally, reasonableness also depends, in part, on whether the agency’s interpretation furthers “the purposes served by the regulation.” Cathedral Candle Co., 400 F.3d at 1364–65 (finding an agency’s interpretation of a confidentiality regulation reasonable where the interpretation furthered the policy of protecting commercially valuable information from disclosure); see Reizenstein, 583 F.3d at 1337 (finding an agency’s interpretation of a regulation governing disability benefits reasonable where the interpretation was consistent with the policy of protecting veterans from arbitrary reductions in benefits). Importantly, this factor “invites the judiciary to cherry-pick among policies purportedly the source of the regulation.” Reizenstein, 583 F.3d at 1339 (Mayer, J., dissenting). The Court, therefore, must ensure that the text of the regulation and the aforementioned factors are not “ignored when [their] application would not further the policy goals” of the agency. Id.
Here, the base access policy serves the purpose of “protecting personnel and property” and “maintaining order on [F.E. Warren AFB].” See 32 C.F.R. § 809a.2(a) (2018). The Agency, however, can achieve this purpose with a “wants and warrants” check, as contemplated by the base access policy. The Agency’s reinterpretation of the base access policy was a response to an isolated and unfortunate incident. R. at 5. However, the base access policy, as originally interpreted, helped ensure the safety and security of personnel and property on F.E. Warren AFB for more than half a decade. R. at 3–5. Apart from the incident in February 2008, the Agency has not shown that performing wants and warrants checks, rather than background checks on contractor personnel, failed to protect “personal and property” and “maintain order on [F.E. Warren AFB].” 32 C.F.R. § 809a.2(a). Regardless, ACB does not argue that the Agency’s interpretation of the base access policy is “at odds with the purposes served by the regulation.” Cathedral Candle Co., 400 F.3d at 1364.
The Agency’s policy preference, however, is not controlling. To allow the Agency’s policy preference to control the reasonableness of the Agency’s interpretation would ignore the regulation’s text; the Agency’s original, contemporaneous interpretation of the regulation; the text of the convict labor clause; and the practical consequences of the Agency’s interpretation. Accordingly, the weight of the evidence supports the conclusion that the Agency’s interpretation of the base access regulation is unreasonable and, therefore, plainly erroneous and inconsistent with the regulation.
B. The Agency’s Interpretation of the Base Access Policy Was Contrary to ACB’s Constitutional Right to Due Process Because the Agency Failed to Provide ACB with Fair Notice of the Base Access Requirements.
“A fundamental principle in our legal system is that laws which regulate persons or entities must give fair notice of conduct that is forbidden or required.” FCC v. Fox Television Stations, Inc., 567 U.S. 239, 253 (2012). “This requirement of clarity in regulation is essential to the protections provided by the Due Process Clause of the Fifth Amendment.” Id. And the Due Process Clause “requires the invalidation of laws that are impermissibly vague.” Id. at 253–54 (finding an agency failed to provide broadcasters with fair notice that a fleeting expletive or momentary nudity would be deemed actionably indecent where, after the broadcasts aired, the agency reversed its previous position). The party asserting the constitutional injury, however, must also demonstrate prejudice stemming from the lack of fair notice. See id. at 255–56 (finding prejudice where an agency, without first providing broadcasters fair notice that a fleeting expletive or momentary nudity would be deemed actionably indecent, imposed a fine of approximately $1,200,000 on one broadcaster and imposed potential legal and reputational harm on another).
Here, the Agency failed to provide ACB with fair notice of the base access requirements, thus violating the APA. The APA states that “each agency shall make available to the public [and] publish in the Federal Register for the guidance of the public … statements of general policy or interpretations of general applicability formulated and adopted by the agency.” 5 U.S.C. § 552(a)(1)(D) (2018). In the alternative, the APA instructs agencies to also “make available for public inspection in an electronic format … those statements of policy and interpretation which have been adopted by the agency and are not published in the Federal Register.” Id. § 552 (a)(2)(B).
The Agency, however, failed to contemporaneously “publish in the Federal Register,” id. § 552(a)(1), or “make available for public inspection,” id. § 552(a)(2), its reinterpretation of the base access policy. The Agency changed its interpretation of the base access policy on or around February 1, 2008. R. at 5. Once construction Phase II began, the Agency, for the first time, began denying ACB employees with criminal records, but no wants or warrants, access to F.E. Warren AFB. R. at 5. However, the Agency did not adopt its reinterpretation of the policy until October 22, 2008, when General Vito signed the “updated” policy memorandum, “F.E. Warren AFB Installation Access for Contractors.” R. at 9. And ACB did not receive notice of the formal reinterpretation until the Agency forwarded ACB the updated policy memorandum on October 30, 2008. R. at 9. Moreover, in the months between the change to the base access policy and ACB gaining “fair notice of conduct that [was] forbidden” — that is, employing individuals with criminal records — the Agency provided ACB with inconsistent or incomplete explanations of the change. R. at 7–9.
Here, the Agency’s failure to give ACB fair notice of the base access requirements mirrors the Federal Communications Commission’s (“FCC”) failure to give broadcasters fair notice that a fleeting expletive or momentary nudity was actionably indecent. In Fox Television Stations, Inc., the Supreme Court found that the FCC violated the broadcaster’s right to due process because the FCC changed its position regarding indecency following the allegedly indecent broadcasts. See 567 U.S. at 258. Similarly, here, the Agency changed its position regarding base access for contractor employees with criminal records after construction on the dormitories began. R. at 5. And, following the unwritten change to the Agency’s interpretation, the Agency provided ACB with vague, inconsistent, and oftentimes incorrect statements of the new policy. R. at 7–9. The Agency did not give ACB fair notice of the reinterpretation until the Agency forwarded ACB the updated policy memorandum on October 30, 2008, more than nine months after the initial change. R. at 9. As a result, ACB spent several months during construction hiring employees only to have them denied access to the base. R. at 6. Eventually, SOS hired a second-tier subcontractor whose employees were not being denied access to complete the vast majority of the project. R. at 6. And, in so doing, both ACB and SOS incurred hundreds of thousands of dollars in additional performance costs. R. at 10.
Additionally, CO Rothenstein’s isolated statement during the September 30, 2007, conference that “[n]o one with outstanding warrants, felony convictions, or on probation will be allowed on the installation,” did not give ACB fair notice of the Agency’s reinterpretation of the base access policy. R. at 5. Importantly, CO Rothenstein’s statement did not accurately state the base access policy, evidenced by the Agency’s willingness to grant base access to ACB employees with criminal records prior to Phase II of construction. R. at 5. For those months, the Agency’s interpretation of the base access policy remained unchanged. Thus, like in Fox Television Stations, Inc., 567 U.S. at 256–57, where the Supreme Court rejected the FCC’s argument that an isolated statement from a 1960 FCC decision that “televising of nudes might well raise a serious question” provided fair notice that momentary nudity could be deemed actionably indecent where the Agency’s actual practice suggested otherwise; here, CO Rothenstein’s isolated statement contradicted the Agency’s actual practice when applying the base access policy.
In conclusion, the Agency’s failure to provide ACB with fair notice of the Agency’s reinterpretation of the base access policy, in violation of the APA, prejudiced ACB and violated ACB’s rights under the Due Process Clause of the Fifth Amendment. The Court, therefore, should “hold unlawful and set aside” the Agency’s interpretation of the base access policy as “contrary to [a] constitutional right.” 5 U.S.C. § 706(2)(B).
Conclusion
For these reasons, ACB respectfully requests that this Court reverse the U.S. Court of Federal Claims’ holding concerning the sovereign acts doctrine, affirm that court’s decision concerning the APA, and affirm that court’s decision granting ACB’s claim for an equitable adjustment.
Respectfully submitted,
Stephanie Villalta
Christopher Hebdon
March 17, 2019
Attorneys for Plaintiff-Appellee
