`
`United States Court of Appeals
`for the Federal Circuit
`______________________
`
`SECRETARY OF DEFENSE,
`Appellant
`
`v.
`
`NORTHROP GRUMMAN CORPORATION,
`Appellee
`
`- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
`
`NORTHROP GRUMMAN CORPORATION,
`Appellant
`
`v.
`
`SECRETARY OF DEFENSE,
`Appellee
`______________________
`
`2018-1945, 2018-1990
`______________________
`
`Appeals from the Armed Services Board of Contract
`Appeals in Nos. 57625, 60190, Administrative Judge Rob-
`ert T. Peacock.
`
`______________________
`
`Decided: November 15, 2019
`______________________
`
`DANIEL B. VOLK, Commercial Litigation Branch, Civil
`Division, United States Department
`of Justice,
`
`
`
`2
`
`DEFENSE v. NORTHROP GRUMMAN CORPORATION
`
`Washington, DC, argued for Secretary of Defense. Also
`represented by JOSEPH H. HUNT, ROBERT EDWARD
`KIRSCHMAN, JR., PATRICIA M. MCCARTHY; ROBERT LYN
`DUECASTER, Contract Disputes Resolution Center, Defense
`Contract Management Agency, Chantilly, VA.
`
` DONALD B. VERRILLI, JR., Munger, Tolles & Olson LLP,
`Washington, DC, argued for Northrop Grumman Corpora-
`tion. Also represented by GINGER ANDERS; CHARLES BAEK,
`STEPHEN JOHN MCBRADY, NICOLE J. OWREN-WIEST, Crow-
`ell & Moring LLP, Washington, DC.
` ______________________
`
`Before PROST, Chief Judge, BRYSON and REYNA, Circuit
`Judges.
`
`REYNA, Circuit Judge.
`The Secretary of Defense appeals a final decision of the
`Armed Services Board of Contract Appeals finding that the
`United States Government improperly disallowed certain
`retirement benefits costs that Northrop Grumman Corpo-
`ration asserts are eligible for reimbursement. Northrop
`Grumman Corporation conditionally cross-appeals the
`Armed Services Board of Contract Appeals’ finding that the
`retirement benefit costs are unallowable under the appli-
`cable regulations because they were calculated using an
`improper accounting method. Because substantial evi-
`dence supports the Armed Services Board of Contract Ap-
`peal’s finding that Northrop Grumman Corporation never
`claimed and will never claim any of the disputed retire-
`ment benefits, we affirm and do not reach the cross-appeal.
`BACKGROUND
`I. Post-Retirement Benefits Costs
`This dispute concerns Northrop Grumman Corpora-
`tion’s (“Northrop”) accounting of costs for providing post-
`retirement benefits (“PRB”). PRBs are non-pension
`
`
`
`DEFENSE v. NORTHROP GRUMMAN CORPORATION
`
`3
`
`benefits that are made available to employees upon their
`retirement. Examples of PRBs include post-retirement
`health care, life insurance, disability benefits, and other
`welfare benefits. Relevant to these appeals is that PRBs
`can be modified or eliminated entirely, unlike pension ben-
`efits which cannot be modified by the employer.
`The Federal Acquisition Regulation (“FAR”)1 permits
`contractors such as Northrop to seek reimbursement from
`the federal government for its PRB costs. Only those PRB
`costs that are “allowable,” however, may be reimbursed by
`the government. Effective July 25, 1991, the FAR was
`amended to add FAR 31.205-6(o), which governed allowa-
`bility of reimbursement of PRB costs in government con-
`tracts. This amendment required PRB costs assigned to a
`given year to be funded by that year’s tax return deadline
`in order to be allowable. While the amendment permitted
`the use of accrual accounting2 methods for PRB costs, it did
`not expressly require that any specific accounting standard
`be used. However, effective February 27, 1995, the FAR
`was amended again, this time to require the use of the ac-
`counting standards set out in the Statement of Financial
`
`
`1 The version of the FAR in effect on July 8, 2005,
`applies to this case.
`2 Accrual accounting (unlike cash accounting) fo-
`cuses on when transactions occur, rather than when pay-
`ments are made. Because PRB plans are funded well
`before retirement occurs and benefits are paid out, accrual
`accounting relies on actuarial assumptions such as life ex-
`pectancy to predict future costs while allocating those costs
`to current years.
`
`
`
`
`4
`
`DEFENSE v. NORTHROP GRUMMAN CORPORATION
`
`Accounting Standards 106 (“FAS 106”)3 to determine al-
`lowable PRB costs in government contracts.4
`At the time of the 1995 FAR amendment, Northrop ac-
`counted for its PRB costs using an accounting method that
`conformed to the requirements established by the Deficit
`Reduction Act of 1984 (“DEFRA”) rather than FAS 106.
`Following the 1995 FAR amendment, Northrop continued
`to account for its PRB costs for government contracting
`purposes using the DEFRA method, even though that
`method was no longer in compliance with the FAR.
`The DEFRA and FAS 106 both require the use of ac-
`crual accounting methods, but the actuarial assumptions
`underlying each method are different. The primary differ-
`ence between the DEFRA method and the FAS 106 method
`is that the DEFRA method calculates PRB costs based on
`current medical costs, while the FAS 106 method calcu-
`lates PRB costs to include future increases in medical costs.
`J.A. 32. As a result, annual PRB costs computed using the
`DEFRA method typically start lower and increase over
`time whereas annual PRB costs computed using the FAS
`106 method typically start higher and decrease over time.
`J.A. 2.
`
`
`3 FAS 106 as issued in 1990 is available on the Fi-
`nancial Accounting Standards Board’s website at
`https://www.fasb.org/jsp/FASB/Document_C/DocumentPa
`ge?cid=1218220123671.
`4 After
`the February 27, 1995, amendment,
`FAR 31.205-6(o)(2)(iii) provided in relevant part that “to be
`allowable, PRB costs . . . must be measured and assigned
`according to Generally Accepted Accounting Principles.”
`FAR 31.205-6(o)(2)(iii) (1995); see also 59 Fed. Reg. 67045
`(Dec. 28, 1994). It is undisputed that the reference to “Gen-
`erally Accepted Accounting Principles” in FAR 31.205-
`6(o)(2)(iii) refers to FAS 106. J.A. 3.
`
`
`
`DEFENSE v. NORTHROP GRUMMAN CORPORATION
`
`5
`
`Between 1995 and 2006, Northrop filed disclosure
`statements with the government on numerous occasions,
`disclosing its continued use of the DEFRA method. The
`government was aware that Northrop was not in compli-
`ance with the FAR, but it did not object to Northrop’s con-
`tinued use of the DEFRA method because its use resulted
`in lower reimbursement costs to the government. J.A. 99.
`Indeed, had Northrop used the FAS 106 method between
`1995 and 2005, the government would have paid an addi-
`tional $253 million during that period. See J.A. 32; Oral
`Arg. at 15:18–15:34; see also J.A. 1000 (member of DCAA
`testifying that the government saved $253 million between
`1995 and 2006). In addition, both the Defense Contract
`Management Agency (“DCMA”) and the Defense Contract
`Audit Agency (“DCAA”) informed Northrop during these
`years that the agencies found “no instances of noncompli-
`ance with applicable Cost Accounting Standards or with
`FAR Part 31 cost principles.” J.A. 4; see also J.A. 3–6. Alt-
`hough not reflective of official policy, DCMA even used
`Northrop’s continued use of the DEFRA method in its in-
`ternal training documents as an example of acceptable ac-
`counting methods under the FAR. J.A. 10, 33.5 At the
`time, DCMA members interpreted the FAR’s requirement
`that FAS 106 method be used as setting a ceiling on allow-
`able costs under the regulations, concluding that the differ-
`ence between the DEFRA and FAS 106 calculations would
`not become unallowable even if not assigned and funded
`within a given year as required by FAR 31.205-6(o)(3).6 Id.
`
`
`5
`Internally, there was disagreement between mem-
`bers of the DCMA and the DCAA about whether Northrop’s
`continued use of the DEFRA method was acceptable.
`6 FAR 31.205-6(o)(3) provided: “To be allowable,
`costs must be funded by the time set for filing the Federal
`
`
`
`
`6
`
`DEFENSE v. NORTHROP GRUMMAN CORPORATION
`
`Because PRB cost calculations under the DEFRA
`method increase over time, and calculations using the FAS
`106 method decrease over time, Northrop predicted that its
`PRB cost calculations using the DEFRA method would ex-
`ceed those allowable under the FAR and FAS 106 in 2015.
`To avoid this eventuality, Northrop in 2006 switched from
`using the DEFRA method to using the FAS 106 method.
`As part of the switch, Northrop was required to calculate
`its “transition obligation”—the difference between the PRB
`costs that would have accrued had Northrop adopted the
`FAS 106 method in 1995 and the PRB costs that actually
`accrued due to its continued use of the DEFRA method. See
`56 Fed. Reg. 41,738, 41,739 (Aug. 22, 1991); FAS 106,
`¶ 110. Northrop’s transition obligation in 2006 would have
`been approximately $305 million.
`At the same time it adopted the FAS 106 method,
`Northrop amended its PRB plans. The amendment capped
`the annual amount Northrop would contribute to the PRB
`plans independent of future healthcare cost increases,
`thereby limiting the benefits available to its employees un-
`der those plans. As a result of this “negative plan amend-
`ment,” Northrop’s PRB cost obligations were reduced by
`approximately $307 million. Northrop subtracted these
`savings from its transition obligation, as required by FAS
`106. Northrop notified DCMA of its PRB plan amendment
`and its switch to the FAS 106 accounting method on Octo-
`ber 23, 2006, and November 3, 2006, respectively.
`On July 26, 2007, DCMA issued a notice of its intent to
`disallow costs. DCMA took the position that Northrop’s
`transition obligation was unallowable in future accounting
`periods because Northrop did not measure or fund its PRB
`
`income tax return or any extension thereof. PRB costs as-
`signed to the current year, but not funded or otherwise liq-
`uidated by the tax return time, shall not be allowable in
`any subsequent year.” FAR 31.205-6(o)(3) (1995).
`
`
`
`DEFENSE v. NORTHROP GRUMMAN CORPORATION
`
`7
`
`plans between 1995 and 2006 using the required FAS 106
`method, and therefore failed to timely assign the unfunded
`difference between the higher FAS 106 amount and the
`lower DEFRA amount to those years. J.A. 27. DCMA is-
`sued a Final Determination on April 9, 2008, disallowing
`approximately $253 million of Northrop’s PRB costs from
`its post-2006 reimbursement submissions.7 Northrop sub-
`mitted a certified claim for these funds on May 20, 2010.
`DCMA denied Northrop’s claim on February 18, 2011. As
`a result of the government’s disallowance, Northrop has de-
`ducted the disputed $253 million from its annual PRB cost
`reimbursement submissions since 2007, amortized over a
`20-year period—approximately $12.7 million annually.
`II. Proceedings Before the Board
`Northrop appealed DCMA’s denial to the Armed Ser-
`vices Board of Contract Appeals (“the Board”). The Board
`bifurcated the proceedings into two phases—entitlement
`and quantum. The Board held an evidentiary hearing in
`each phase.
`
`A. Entitlement Phase
`During the entitlement phase, the Board determined
`that Northrop’s use of the DEFRA method was not in com-
`pliance with FAR 31.205-6(o). J.A. 12. The Board pointed
`to Northrop’s concession that “there is no dispute that the
`DEFRA method did not comply with GAAP requirements,”
`as required by the FAR. Id. The Board also found that by
`
`7 Of the $304,754,315 that constituted Northrop’s
`transition obligation prior to factoring in its negative plan
`amendment, DCMA allowed $51,392,803, finding those
`PRB costs to be applicable to contracts awarded prior to the
`February 27, 1995, FAR amendment that required the use
`of the FAS 106 method. J.A. 1292 n.10. The remaining
`$253,361,512 in disallowed PRB costs is at issue in this ap-
`peal.
`
`
`
`8
`
`DEFENSE v. NORTHROP GRUMMAN CORPORATION
`
`not using the FAS 106 method, Northrop did not timely
`fund its PRB obligations to the full extent permitted by the
`FAR. Id. According to the Board, this rendered $253 mil-
`lion of Northrop’s transition obligation unallowable under
`FAR 31.205-6(o)(3). J.A. 12–13. The Board rejected sev-
`eral of Northrop’s arguments, including its contention that
`the FAS 106 method only set a ceiling for allowable costs
`under the FAR and any costs up to that amount should be
`allowable notwithstanding Northrop’s failure to fund those
`costs. J.A. 13–16. The Board explained that “no such lan-
`guage is contained” in FAR 31.205-6(o)(3), and thus the
`plain language of that regulation contradicted Northrop’s
`arguments. J.A. 13.
`The Board determined, however, that it could not re-
`solve Northrop’s argument that the government’s disallow-
`ance was improper because the negative amendment to
`Northrop’s PRB plans ensured that the $253 million in dis-
`puted PRB costs “have never been and will never be
`claimed or incurred.” J.A. 16. The Board explained that
`there was inconsistent testimony as to whether Northrop
`included the unallowable costs in its reimbursement sub-
`missions in 2007 and subsequent years, and those submis-
`sions were not in the record. J.A. 11, 16. The Board left
`the resolution of these quantum issues until the next phase
`of the proceedings. J.A. 17. Northrop moved for reconsid-
`eration, which the Board denied. J.A. 19–24.
`B. Quantum Phase
`During the quantum phase, the Board found that
`Northrop’s negative amendment to its PRB plans saved
`$307 million from its future PRB plan obligations, “en-
`sur[ing] that [Northrop] would not have to pay PRB costs
`arising from future increases in healthcare costs in excess
`of the fixed dollar ‘cap.’” J.A. 35. The Board further found
`that FAS 106 required Northrop to exclude these savings
`from its transition obligation calculations. Id. (citing FAS
`106, ¶ 28). Citing expert testimony, the Board explained
`
`
`
`DEFENSE v. NORTHROP GRUMMAN CORPORATION
`
`9
`
`that because the primary difference between the DEFRA
`method and the FAS 106 method is that FAS 106 requires
`accounting for future increases in healthcare costs, “the
`costs that were eliminated before computing the transition
`obligation were the same costs that comprised the $253
`million of unfunded pre-transition costs.” Id. The Board
`determined that, therefore, “it would not have been possi-
`ble for [Northrop] to include the $253 million of unfunded
`costs in its calculated PRB costs in 2007 or thereafter,”
`meaning that Northrop could not have claimed those costs
`for reimbursement. Id. According to the Board, Northrop’s
`use of the DEFRA method therefore “did not lead to any
`recovery of claimed but unfunded costs, or to duplicate re-
`covery,” and instead benefitted the government. J.A. 35–
`36, 40.
`The Board rejected the government’s argument that
`even though Northrop did not use the FAS 106 method be-
`tween 1995 and 2006, it nonetheless still incurred the ad-
`ditional $253 million in PRB costs “by operation of law” due
`to the FAR’s requirement of using the FAS 106 method.
`The Board stated that the government “disregards funda-
`mental concepts related to cost ‘incurrence,’ and misfocuses
`on an ‘allowability’ regulation rather than [Northrop’s PRB
`plans].” J.A. 39. The Board explained that cost incurrence
`is defined by Northrop’s plan obligations, and thus the only
`costs that Northrop incurred prior to 2006 were those cal-
`culated using the DEFRA method. Id. The Board deter-
`mined, therefore, that Northrop did not “incur” the
`disputed $253 million between 1995 and 2006. Id.
`The Board also rejected the government’s argument
`that Northrop’s negative plan amendment had no effect on
`the costs Northrop incurred between 1995 and 2006. J.A.
`37, 41. The Board pointed to the unrebutted testimony of
`actuaries, who testified that Northrop’s transition obliga-
`tion was eliminated “as a consequence” of its negative PRB
`plan amendment. J.A. 41. The Board noted that the gov-
`ernment was justly concerned about allowability of
`
`
`
`10
`
`DEFENSE v. NORTHROP GRUMMAN CORPORATION
`
`Northrop’s transition obligation because the PRB costs
`that constituted that obligation were not timely funded be-
`tween 1995 and 2006 as required by the FAR. J.A. 40–41.
`The Board explained, however, that Northrop’s negative
`plan “amendment should have assuaged and eliminated
`the government’s valid concerns here” because it “removed
`properly objectionable portions [from] the transition obli-
`gation.” J.A. 42.
`The Board further found the government’s disallow-
`ance to be inconsistent with FAR 31.201-2(c), which pro-
`vides that only costs “in excess of the amount that would
`have resulted from using practices consistent with this
`subpart are unallowable.” J.A. 38 (quoting FAR 31.201-
`2(c)) (emphasis removed). The Board explained that alt-
`hough Northrop did not use the proper accounting method,
`it was undisputed that the PRB costs that Northrop calcu-
`lated using the DEFRA method did not exceed the amount
`that Northrop could have claimed if it had used the FAS
`106 method since 1995. Id. Combined with Northrop’s
`negative amendment to its PRB plans, this resulted in “no
`excess to disallow.” Id. (emphasis removed).
`Based on its findings, the Board concluded that
`Northrop’s negative plan amendment “ensured that
`[Northrop] would never incur the costs disallowed and ef-
`fectively mooted allowability issues associated with the
`transition obligation” because Northrop “has never, and
`will never, claim, and the government will never pay,” the
`disputed $253 million in disallowed costs. J.A. 41–42. Ac-
`cordingly, the Board sustained Northrop’s appeal, explain-
`ing that “the government suffered no damages” as a result
`of Northrop’s noncompliance with FAR 31.205-6(o). J.A.
`25, 42.
`Following the Board’s quantum phase decision, the
`government moved for reconsideration, which the Board
`denied on January 9, 2018. J.A. 45, 51. The Board rejected
`the government’s argument that the quantum phase
`
`
`
`DEFENSE v. NORTHROP GRUMMAN CORPORATION
`
`11
`
`decision was inconsistent with the earlier entitlement
`phase decision. The Board explained that during the enti-
`tlement phase, it only decided that Northrop failed to com-
`ply with the FAR requirement of using the FAS 106
`method. J.A. 45. The Board stated that the entitlement
`phase decision expressly left open the issue of the resulting
`financial consequences of Northrop’s noncompliance. J.A.
`46. The Board reiterated its quantum phase finding that
`“it is clear beyond cavil on a fully developed quantitative
`record that [Northrop] never has and never will incur and
`claim the disallowed costs and the government never has
`and never will pay any ‘excess’ resulting from the noncom-
`pliance.” Accordingly, the Board concluded that the gov-
`ernment failed to prove its quantum damages. J.A. 51.
`On appeal, the Secretary of Defense (“Secretary”) asks
`us to reverse the Board’s quantum phase decision that
`Northrop has never and will never claim reimbursement
`for the disputed $253 million in PRB costs because it did
`not incur those costs between 1995 and 2006. Northrop
`conditionally cross-appeals the Board’s entitlement phase
`decision that the $253 million in PRB costs that Northrop
`failed to timely fund between 1995 and 2006 are unallowa-
`ble. We have jurisdiction under 28 U.S.C. § 1295(a)(10).
`DISCUSSION
`We review the Board’s legal conclusions de novo. Par-
`sons Glob. Servs., Inc. ex rel. Odell Int’l, Inc. v. McHugh,
`677 F.3d 1166, 1170 (Fed. Cir. 2012). Interpretation and
`application of the FAR are issues of law that we review de
`novo. Id. We set aside the Board’s factual findings only if
`they are fraudulent, arbitrary or capricious, so grossly er-
`roneous as to necessarily imply bad faith, or not supported
`by substantial evidence. Laguna Constr. Co., Inc. v. Carter,
`828 F.3d 1364, 1368 (Fed. Cir. 2016); Rockies Exp. Pipeline
`LLC v. Salazar, 730 F.3d 1330, 1335 (Fed. Cir. 2013) (citing
`41 U.S.C. § 7107(b)(2)).
`
`
`
`12
`
`DEFENSE v. NORTHROP GRUMMAN CORPORATION
`
`Resolution of this appeal turns on whether substantial
`evidence supports the Board’s finding that Northrop’s neg-
`ative amendment to its PRB plans effectively eliminated
`the $253 million in disputed PRB costs from its transition
`obligation such that those costs were never and will never
`be charged to the government. We conclude that it does.
`The Board found that Northrop’s negative amendment
`to its PRB plans saved $307 million from its future PRB
`plan obligations, and the Secretary does not dispute this
`finding. J.A. 35; Appellant’s Br. 27.8 It is also undisputed
`that these savings resulted from capping the amount
`Northrop would pay in PRB costs regardless of future
`healthcare increases, thus removing the effect of those in-
`creases on its PRB cost calculations. J.A. 35; see J.A. 1539.
`The government also conceded that the major difference
`between the DEFRA method and the FAS 106 method is
`that the FAS 106 method accounts for future healthcare
`cost increases and the DEFRA method does not. J.A. 32,
`177. These undisputed facts support the Board’s finding
`that by eliminating the effect of future healthcare cost in-
`creases from its PRB obligation, Northrop’s negative plan
`amendment eliminated “the same costs that comprised the
`$253 million” in dispute. J.A. 35.
`The Board also cited to FAS 106, explaining that it re-
`quired Northrop “to exclude obligations associated with the
`future health care cost increases that were eliminated pur-
`suant” to its negative amendment prior to calculating its
`transition obligation. Id.; see also FAS 106, ¶ 28 (“[P]lan
`amendments shall be included in the computation of the
`expected and accumulated postretirement benefit
`
`8 The Board explained that the facts were substan-
`tively not in dispute below, and that the majority of its fac-
`tual findings were “in essence ‘stipulated.’” J.A. 26 n.2.
`Accordingly, the Board adopted the undisputed facts as
`proposed by the parties. Id.
`
`
`
`DEFENSE v. NORTHROP GRUMMAN CORPORATION
`
`13
`
`obligations.” (emphasis removed)). This evidence also sup-
`ports the Board’s findings that the disputed $253 million
`in unfunded pre-transition PRB costs were never part of
`Northrop’s transition obligation. J.A. 35.
`The Board’s findings are also supported by unrebutted
`testimony of Northrop’s independent actuary expert, Mr.
`McQuade, on which the Board relied. See id. Mr. McQuade
`testified that Northrop’s negative amendment eliminated
`the disputed $253 million from Northrop’s transition obli-
`gation because the amendment eliminated $307 million
`from Northrop’s accumulated post-retirement benefit obli-
`gation on which its transition obligation was based. J.A.
`821–22. He also testified that the amended PRB costs and
`the $253 million in unfunded costs “are both based on fu-
`ture increases in healthcare costs,” and by eliminating the
`effect of those increases on its PRB obligations, Northrop’s
`amendment more than eliminated its transition obligation.
`J.A. 830. Mr. McQuade further testified that the govern-
`ment “will never pay for the $253 [million] of unfunded
`costs because those costs have been eliminated.” J.A. 822.
`This testimony is substantial evidence that supports the
`Board’s findings that it would have been impossible for
`Northrop to include the disputed $253 million in its post-
`2006 PRB cost calculations or to subsequently claim those
`costs for reimbursement from the government, and that as
`a result, the government’s disallowance of those costs was
`improper. J.A. 35, 42.
`On appeal, the Secretary frames his challenge to the
`Board’s decision as disputing the Board’s legal interpreta-
`tion and application of FAR 31.205-6(o) to undisputed
`facts. Appellant’s Br. 25; Appellant’s Reply Br. 19. We dis-
`agree with this characterization. The dispute here is not
`over whether Northrop violated FAR 31.205-6(o) by using
`the DEFRA method or whether Northrop’s $253 million in
`
`
`
`14
`
`DEFENSE v. NORTHROP GRUMMAN CORPORATION
`
`unfunded PRB costs are unallowable.9 Rather, the Secre-
`tary disputes the Board’s factual findings that those unal-
`lowable costs were not charged to the government by virtue
`of being excluded from Northrop’s transition obligation by
`Northrop’s negative amendment to its PRB plans. As ex-
`plained above, these factual findings are supported by sub-
`stantial evidence and are therefore “final and conclusive.”
`41 U.S.C. § 7107 (2012).
`We also disagree with the substance of the Secretary’s
`arguments. The Secretary argues that because Northrop
`underfunded its PRB costs by $253 million between 1995
`and 2006 by using a noncompliant accounting method,
`those costs will always remain “unallowable” pursuant to
`FAR 31.205-6(o)(3), and the government is therefore re-
`quired to disallow that amount from Northrop’s future PRB
`reimbursement claims. Appellant’s Br. 25–26. This argu-
`ment would have merit had Northrop not amended its PRB
`plans because that underfunded amount would then have
`been part of the Northrop’s transition obligation. As the
`Board correctly explained, however, Northrop’s negative
`plan amendment mooted the issue of allowability by elimi-
`nating the disputed $253 million from the transition obli-
`gation. J.A. 41. Thus, Northrop never actually submitted
`any unallowable costs for reimbursement, and the govern-
`ment had no basis to disallow that amount from Northrop’s
`post-2006 reimbursement submissions.
`The crux of the Secretary’s argument is his assertion
`that Northrop’s negative plan amendment was a separate
`event from its switch to the FAS 106 method. Appellant’s
`Reply Br. 4, 9; see also Oral Arg. at 4:30–4:49,
`
`9
`In its conditional cross-appeal, Northrop does chal-
`lenge the Board’s determination at the entitlement phase
`that these costs are unallowable under FAR 31.205-6(o).
`We do not reach this question, however, because we affirm
`the Board’s quantum decision.
`
`
`
`DEFENSE v. NORTHROP GRUMMAN CORPORATION
`
`15
`
`http://oralarguments.cafc.uscourts.gov/default.aspx?fl=
`2018-1945.mp3. Based on this assertion, the Secretary ar-
`gues that Northrop’s negative plan amendment cannot off-
`set the disputed $253 million in PRB costs because had
`either of these events happened without the other, the gov-
`ernment would be entitled to disallow the disputed $253
`million. Appellant’s Br. 25–26; Appellant’s Reply Br. 4–10.
`We disagree.
`Both events occurred simultaneously in this case, and
`Northrop’s negative plan amendment had a direct effect on
`its adoption of the FAS 106 method. We agree that the
`amendment did not go so far as to transform Northrop’s
`underfunded $253 million in PRB costs into allowable costs
`under FAR 31.205-6(o). The amendment, however, low-
`ered the entire accumulated value of Northrop’s PRB
`plans, which was used to calculate its transition obligation.
`Thus, although the amendment did not affect the allowa-
`bility of the disputed $253 million, it cannot be viewed in
`isolation from Northrop’s adoption of the FAS 106 method
`because the amendment completely eliminated Northrop’s
`transition obligation.
`The Secretary further contends that because the two
`events should be treated separately, the government is en-
`titled to receive the full benefit of Northrop’s negative plan
`amendment. Appellant’s Br. 27; Appellant’s Reply Br. 21.
`The Secretary asserts that if Northrop had properly ac-
`counted for its PRB costs using the FAS 106 method since
`1995, then the government “would have realized the full
`$307 million in cost reductions” upon Northrop’s amend-
`ment to its PRB plans in 2006. Appellant’s Br. 27. Instead,
`the Secretary contends, the government has been deprived
`of the benefit of Northrop’s amendment. We disagree. It
`is undisputed that the government has already benefitted
`by saving $253 million between 1995 and 2006 as a result
`of Northrop’s use of the DEFRA method. See J.A. 32; see
`also J.A. 1000 (member of DCAA testifying that the gov-
`ernment saved $253 million between 1995 and 2006); Oral
`
`
`
`16
`
`DEFENSE v. NORTHROP GRUMMAN CORPORATION
`
`Arg. at 15:18–15:34 (government’s counsel conceding that
`had Northrop used the FAS 106 method between 1995 and
`2005, the government would have paid an additional $253
`million during that period). Rather than attempting to re-
`cover a lost benefit, the Secretary in essence now seeks to
`benefit twice from Northrop’s noncompliance with FAS
`106.10
`The Secretary next argues that the Board erred by de-
`termining that Northrop never incurred the full PRB costs
`as calculated under FAS 106, even though Northrop calcu-
`lated a lower PRB cost amount using the DEFRA method.
`Appellant’s Br. 28–31; Appellant’s Reply Br. 14–15. The
`Secretary contends that regardless of which method
`Northrop used to calculate its PRB costs between 1995 and
`2006, Northrop still incurred the same PRB costs because
`its employees were earning their benefits during that time.
`Appellant’s Br. 29–30; Appellant’s Reply Br. 16. According
`to the Secretary, those costs are therefore necessarily part
`of Northrop’s transition obligation and must be disallowed
`because Northrop did not timely fund those costs. Appel-
`lant’s Reply Br. 16. Whether Northrop incurred these
`costs, however, is immaterial to our analysis because
`Northrop never charged the government the disputed $253
`million. As a member of DCAA admitted to the Board, the
`government therefore “has not been damaged.” J.A. 933–
`34. Nor can Northrop charge those costs to the government
`in the future because its negative amendment eliminated
`
`
`10 We note that the government did not object to
`Northrop’s use of the DEFRA method while Northrop was
`saving the government money between 1995 and 2006.
`J.A. 3–5, 32–33. The government even internally approved
`of Northrop’s accounting practices. J.A. 33. It was only
`after Northrop adopted the FAS 106 method and amended
`its PRB plans to eliminate its transition obligation that the
`government changed its position.
`
`
`
`DEFENSE v. NORTHROP GRUMMAN CORPORATION
`
`17
`
`those costs from its transition obligation, as required by
`FAS 106. See J.A. 35, 38, 820–21; FAS 106, ¶ 28.
`CONCLUSION
`We have considered the Secretary’s remaining argu-
`ments and find them unpersuasive. We conclude that sub-
`stantial evidence supports the Board’s finding that
`Northrop’s negative PRB plan amendment effectively elim-
`inated Northrop’s transition obligation. We therefore af-
`firm
`the Board’s decision
`that
`the government’s
`disallowance of the disputed $253,361,512 of Northrop’s
`PRB costs was improper and dismiss Northrop’s condi-
`tional cross-appeal.
`
`AFFIRMED
`
`