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The Government Contractor®  -- COPYRIGHT Thomson/West © 2006

Information and Analysis on Legal Aspects of Procurement

Vol.  48, No. 29                              August 9, 2006 

Focus                       

¶ 272

FEATURE COMMENT: Plain Language Of The FLSA/SCA Price Adjustment Clause Covers Defined-Benefit Plans With No Fixed Dollar Value

Lear Siegler Servs., Inc. v. Secretary of Defense, 2006 WL 2088273 (Fed. Cir. July 28, 2006)

The Government may not deny a contractor’s price increase under the Fair Labor Standards Act and Service Contract Act Price Adjustment Clause (FAR 52.222-43) on the grounds that the contractor’s defined benefit health plan does not specify the contractor’s obligation in terms of a dollar amount, the U.S. Court of Appeals for the Federal Circuit has held. The Court reversed the Armed Services Board of Contract Appeals and granted summary judgment to the contractor, Lear Siegler Services Inc. (LSI).

In 2001, the Air Force awarded a firm-fixed price contract to LSI, under which LSI was to provide aircraft maintenance services at Sheppard Air Force Base, Texas. The contract ran from October 2001 to October 2002, plus multiple renewal options. LSI’s predecessor contractor was Lockheed Martin.

LSI’s contract incorporated terms of the SCA, which requires the contractor to pay prevailing wages and minimum fringe benefits to service workers. Under SCA § 4(c), known as the successor contractor rule, a contractor that succeeds a contractor with a collective bargaining agreement (CBA) in place must pay not less than the wages and fringe benefits required by that CBA. Thus, because LSI’s predecessor, Lockheed, had a CBA, LSI’s contract included an SCA wage determination that incorporated by reference the wages and fringe benefits in Lockheed’s CBA. LSI’s contract also included the FLSA/SCA Price Adjustment Clause, which requires the Government to reimburse the contractor for “increase[s] ... in applicable ... fringe benefits ... made to comply with ... [the] wage determination ....” Lockheed’s CBA, and thus LSI’s wage determination, required the contractor to provide its employees with a defined-benefit health plan. In contrast to a defined-contribution plan, a defined benefit plan obligates an employer to spend what ever is necessary to continue to provide employees with an agreed-upon level of benefits. A defined benefit plan thereby ensures that employees will continue to receive the same level of benefits (here, health coverage) even as costs rise. Although future costs of providing benefits under a defined benefit plan are not known with certainty at the time of contracting, LSI contended, and the Federal Circuit agreed, that such costs may reasonably be projected on the basis of actuarial determinations.

In February 2003, LSI submitted a request for a price adjustment under the SCA Price Adjustment Clause, seeking reimbursement for the increased costs of providing employees with the defined benefit health plan in the contract’s option year. The Air Force denied the request, and LSI appealed to the ASBCA. At the board, LSI argued that the plain language of the Price Adjustment Clause protected the contractor from the increased cost of providing any required, bona fide health and welfare benefit. Moreover, the Federal Circuit previously held in U.S. v. Service Ventures, 899 F.2d 1 (Fed. Cir. 1990), that a contractor is entitled to a price adjustment if its costs of providing SCA benefits (in that case, vacation) increase, if the wage determination has not changed.

The ASBCA denied LSI’s appeal and granted summary judgment to the Air Force. The board distinguished between increases in an employer’s cost of providing benefits, which the board deemed insufficient to trigger the Price Adjustment Clause, and increases in the benefits themselves. Any cost increase experienced by LSI, the board said, was caused by inflation and not by compliance with the SCA. Observing that there had been no “change in the CBA ... [or the] scope of benefits to be provided,” the ASBCA concluded that the CBA-based wage determination did not require LSI to incur the increased cost of maintaining the defined level of health benefit, and that the Price Adjustment Clause was, therefore, inapplicable. Finally, the board rejected LSI’s course of dealing argument, holding that a course of dealing cannot alter the meaning of an unambiguous contract term.

In its appeal to the Federal Circuit, LSI asserted that neither the language nor the purpose and history of the Price Adjustment Clause supported the Air Force and ASBCA interpretation. First, LSI argued that the plain language and purpose of the clause do not require a CBA to state a cost of the fringe benefits in order for the contractor to be compelled to incur increased costs and be entitled to a price adjustment. Also, LSI argued that the plain language of the clause does not preclude a contractor from receiving a price adjustment when its increased costs were caused by inflation. To the contrary, the purpose of the clause is to protect the contractor from wage and fringe benefit inflation, thus also protecting the Government from receiving bids that include large contingencies. LSI pointed out that the board’s holding created a distinction between contractors with defined-contribution plans, who could be entitled to price adjustments, and contractors with defined-benefit plans, who could not get price adjustments and, there- fore, would have to include contingencies in their bids. The Federal Circuit reversed the ASBCA, saying that “we find no merit in the argument that the Price Adjustment Clause is triggered only by enlarged benefits rather than enlarged costs of providing those benefits.” The Court gave three reasons for its holding. First, it called the language of the clause itself “instructive,” explaining that the clause does not address increases in the nature of the contract’s requirements. Instead, it addresses the effect on the contractor, which logically can only refer to changes in cost.

Second, the Court said that this construction is consistent with other provisions of the regulatory scheme, which provide for the “equivalency” of fringe benefits to be measured not in terms of value to the employee, but by cost to the employer. See 29 CFR § 4.177(a)(3).

Third, citing its own precedent in Service Ventures, the Court noted that, as in LSI’s case, the language of the wage determination did not change. Thus, the contractor’s obligation remained nominally the “same” because it was still required to provide a specified level of benefits to each employee in a specified class. However, its cost of compliance changed because of changes in the number of employees in each benefit “class.” The Court said that, far from adopting a narrow view of what constituted a “change” to a wage determination, the Service Ventures Court instead held that the “benefits were due entirely to the wage determination applicable at the beginning of the renewal option period and were required to be paid ....” Thus, the contractor qualified for a price increase under the Price Adjustment Clause. LSI’s situation is analogous in that a wage determination (here, from a CBA) required the company to pay any amount necessary to meet its obligations to its employees. The absence of a change in the level of benefit provided by the defined- benefit plan is irrelevant, the Court said.

Comment—This case has generated significant interest in the contracting community. In fact, LSI’s position at the Federal Circuit was supported by an amicus curiae brief from the Professional Services Council, a contractor trade association, and a second amicus brief from the International Association of Machinists and Aerospace Workers, AFL-CIO. There is good reason for this level of interest and this unusual set of allies in a labor-related matter. First, defined benefit plans are ubiquitous; indeed, the authors are aware of several pending cases which were stayed or delayed awaiting the Federal Circuit’s decision. Second, had the Air Force’s position prevailed, service contractors would be far less likely to offer defined health benefits to their workers because contractors that offered such plans would be at a significant competitive disadvantage due to their inability to receive price increases under the SCA Price Adjustment Clause. Any contractor that wanted, or was required by a CBA, to provide defined benefits would have been forced to choose between including contingencies in its bids—thus making it likely that the bids would be too high—or accepting the risk of health and welfare cost increases in the contract’s outyears.

Because the plain language of the clause required a finding for LSI, the Federal Circuit did not reach LSI’s course-of-dealing argument. The ASBCA twice rejected LSI’s claim, even after the Air Force admitted in discovery that contractors have received price adjustments in the past under exactly the circumstances of LSI’s case. The Air Force contended that this was not a pattern that rose to the level of a legal course of dealing. In fact, the Air Force claimed, and the ASBCA apparently agreed, that such price adjustments were simply mistakes. Interestingly, a Freedom of Information Act request by LSI’s attorneys revealed that the Air Force had argued to the FAR drafters more than 20 years ago that the Price Adjustment Clause should never apply to CBA based wage determinations, a request that the FAR drafters rejected. LSI’s motion to have the Federal Circuit take judicial notice of the FOIA material was granted in a nonprecedential order that accompanied the decision, but it is not clear what role, if any, that material played in the Court’s decision. It remains to be seen what impact this will have on future course-of-dealing claims.

Perhaps the most interesting part of the case is the final order. The Court was not content just to reverse and remand the case back to the ASBCA. Instead, the Court directed summary judgment in favor of LSI. In recent times, the Federal Circuit has reversed boards of contract appeals in just five percent of cases. It is unusual to reverse and grant summary judgment to the contractor, given the deference the Court generally gives to ASBCA rulings. That alone makes this an exceptional case.

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This Feature Comment was written for the Government Contractor by Daniel B. Abrahams, partner, and Shlomo D. Katz, senior counsel, in the Washington, D.C. office of Epstein Becker & Green, P.C. They divide their practices between Government contracts and wage and hour issues, including the Service Contract Act. [Now Mr. Katz can be found at Brown Rudnick, LLP and Mr. Abrahams at Abrahams Wolf-Rodda, LLC.]