Tomorrow is “Small Business Saturday,” (November 26), so it’s a good time to reflect upon the especially challenging regulatory and legal environments such businesses have faced in recent years. Even though the federal government maintains an entire agency whose mission is purportedly to assist small businesses—the Small Business Administration—regulators seem ever oblivious to their impact on entrepreneurs. The National Labor Relations Board’s (NLRB) effort to redefine who is an “employer” and the NLRB’s and the Department of Labor’s (DOL) enmity toward independent contracting are two current examples. A third is DOL’s so-called Fiduciary Rule, which hits sole-practitioner and small-business investment and insurance advisors especially hard.
Small businesses are also at a particular disadvantage when disputes with the government end up in court. A recent US Court of Federal Claims decision, SUFI Network Services, Inc. v. US, exhibits government’s unfortunate willingness to exploit its power in disputes with a small business and the role courts can play in protecting entrepreneurs’ rights.
SUFI contracted with the US Air Force (USAF) in 1996 to be the exclusive long-distance-call service provider for the guest lodging facilities on Air Force bases in Germany. Over the next 8 years, USAF personnel made it impossible for SUFI to successfully offer services. For example, calling cards were provided to guests to circumvent SUFI’s service. Also, requests by SUFI that government phones be removed from the facilities were repeatedly ignored. SUFI declared that the USAF had committed a material breach of the contract and ceased services in August 2004. As required by the contract, SUFI filed a claim with its contracting officer for $130 million in damages. The officer awarded $133,000.
Obviously dissatisfied, SUFI appealed to the Armed Services Board of Contract Appeals (hereinafter, Board), increasing its request to $163 million. The Board partially granted all but 7 of SUFI’s 28 claims, but awarded only $3.8 million. From January 2006 to November 2011, SUFI filed 10 motions for reconsideration with the Board. Each time, the Board acknowledged errors in the Board’s previous determination, corrected the errors, and slightly increased SUFI’s damages to an eventual $7.4 million.
SUFI appealed the final Board decision to the US Court of Federal Claims (hereinafter, Claims Court) in 2011. The Claims Court concluded that the contract “was completely mismanaged by the Air Force,” which “only had itself to blame for a totally botched program of grand proportions.” The court awarded SUFI $118,764,081. The government appealed the Claims Court’s ruling to the US Court of Appeals for the Federal Circuit, which upheld the lower court’s findings of error but vacated the award and remanded the matter back to the Board for a new damages determination.
The Board awarded SUFI $111,849,000 this time. The USAF moved for reconsideration, which the Board rejected. It also increased SUFI’s award by $1.4 million. This decision left the government at an impasse. Under a 1972 US Supreme Court precedent, absent proof of bad faith by the contractor, the government cannot appeal a decision of the contract appeals board.
Completely disregarding that precedent, the government appealed the $113 million award to the Claims Court. The Claims Court denied the appeal last year, as did the Federal Circuit when the government sought its review.
On June 17, 2016, SUFI filed a request with the Claims Court for attorneys’ fees and costs, arguing that the government had acted in bad faith throughout the dispute. In his introduction to the October 19 opinion granting the request, a clearly exasperated Claims Court Judge Thomas C. Wheeler wrote:
There have been one contracting officer decision, thirteen Board decisions, three decisions from this Court … and two Federal Circuit decisions within an eleven-year period. The Court hopes to finally put this case to rest.
The court found that it had the authority under 28 U.S.C. § 2412 to award fees for all of SUFI’s hours before the Board, the Claims Court, and the Federal Circuit. It also found that the government had acted in bad faith prior to and throughout the litigation. Judge Wheeler explained how USAF’s pre-litigation conduct “left SUFI with no choice but to seek formal adjudication.” Despite the willful nature of the contract breach, USAF delayed entering into a settlement agreement for 7 months, and then argued before the Board that the agreement was unenforceable.
USAF’s lawyers acted in bad faith during the proceedings before the Board, the court explained. Among the actions the court cited were refusal to share necessary documents with SUFI, which at times “amounted to spoliation.” The Board’s repeated errors throughout SUFI’s many requests for reconsideration, and its consistently ruling “in every possible way to cut back SUFI’s damages” led Judge Wheeler to conclude that “there is a strong inference that the Board was attempting to shield the Air Force from costly judgments.”
Judge Wheeler even specifically mentioned the Department of Justice’s role in the government’s bad-faith actions. DOJ’s decision to appeal the final Board damages determination “despite clear precedent indicating that the Government was bound by the Board’s decision” was “without legal basis” and “merely delayed payment to SUFI without justification.”
Some may consider SUFI Network Systems to be just an extreme example of bad-faith government litigation tactics. Perhaps. The decision, however, is also a positive reminder that some businesses which litigate against the mighty federal government can seek attorneys’ fees. The availability of those fees, and small businesses’ willingness to pursue them, should deter federal agencies’ pursuing frivolous actions or using questionable tactics to fend off challenges. Small businesses often exist on very thin profit margins; they shouldn’t be forced to spend those profits needlessly against obstinate federal overseers who abuse their authority.
Also published by Forbes.com on WLF’s contributor site.