Small business filed suit against U.S. Air Force

United States Federal Circuit Court of Appeals Reports

NIGHT VISION CORP. v. U.S., 06-5048 (Fed. Cir. 11-22-2006)
NIGHT VISION CORP., Plaintiff-Appellant, v. UNITED STATES,
Defendant-Appellee. No. 06-5048. United States Court of
Appeals, Federal Circuit. Decided November 22, 2006.

Appealed from United States Court of Federal Claims. Judge
Lawrence J. Block.

Stephen Novack, Novack and Macey LLP, of Chicago,
Illinois, argued for plaintiff-appellant. On the brief was
James S. DelSordo, Cohen Mohr LLP, of Washington, DC. Of
counsel on the brief were P. Andrew Fleming and John F.
Shonkwiler, Novack and Macey LLP, of Chicago, Illinois.

Kyle E. Chadwick, Senior Trial Attorney, Commercial
Litigation Branch, Civil Division, United States Department
of Justice, of Washington, DC, argued for
defendant-appellee. With him on the brief were Peter D.
Keisler, Assistant Attorney General, and David M. Cohen,
Director. Of counsel was Mark A. Melnick, Assistant
Director.

Jere W. Glover, Brand Law Group, P.C., of Washington, DC,
for amici curiae. With him on the brief was Andrew D.
Herman. Of counsel on the brief was Paul J. Seidman,
Seidman & Associates, P.C., of Washington, DC.

Before MAYER, Circuit Judge, FRIEDMAN, Senior Circuit
Judge, and GAJARSA, Circuit Judge.

FRIEDMAN, Senior Circuit Judge.

A small business concern contends that it had a
contractual commitment with the Air Force that, if it
successfully completed the first two phases of a research
and development contract, it would be awarded the contract
for further development and ultimate production of the
device it developed; and that the Air Force breached this
commitment when it awarded the production contract to
another company. The Court of Federal Claims dismissed the
breach-of-contract suit that the small business had filed,
ruling that the Air Force had not made any such contractual
commitment. Night Vision Corp. v. United States, 68 Fed.
Cl. 368 (2005). We affirm.

I

Congress created the Small Business Innovation Research
(“SBIR”) program to assist small-business concerns in
obtaining and performing research and development work.
See 15 U.S.C. § 638(a)-(d). The program requires
federal agencies to reserve some of their research and
development funds for small businesses. See 15 U.S.C.
§ 638(e)(4). The SBIR program has three phases.
Phase I involves “determining . . . the scientific and
technical merit and feasibility of ideas that appear to
have commercial potential.” Id. § 638(e)(4)(A).
Phase II is designed “to further develop proposals which
meet particular program needs.” Id. § 638(e)(4)(B).
Phase III involves “commercial applications of SBIR-funded
research and development” or “products or services intended
for use by the Federal Government, by follow-on non-SBIR
Federal funding awards” or “the continuation of research or
research and development that has been competitively
selected using peer review or scientific review criteria.”
Id. § 683(e)(4)(C). Funding for Phase III is
provided by either “non-Federal sources of capital” or
“non-SBIR Federal funding.” Id.

A. The basic facts in this case, as found by the Court of
Federal Claims, are largely undisputed. The Air Force
awarded the appellant Night Vision Corporation (“Night
Vision”), a small business concern, successive Phase I and
Phase II contracts to develop improved “Panoramic Night
Vision Goggles” (“Goggles”), which would have a broader
field of view than existing Goggles.

After Night Vision successfully developed a prototype under
the Phase I contract, it entered into a Phase II contract
to produce twelve prototypes of the Goggles. Night Vision,
which had only three employees, hired Insight Technology,
Inc. (“Insight”), which was not a small business, as a
subcontractor to assist in performing the contract.

During Phase II, the Air Force indicated to Night Vision
that it might receive a Phase III contract. Night Vision,
68 Fed. Cl. at 372. That possibility led to tensions between
Night Vision and Insight, which demanded that Night Vision
guarantee that Insight would be the Phase III subcontractor
and would participate in production of Goggles following
the completion of Phase III. Id. The Air Force ultimately
mediated this dispute, after Insight stopped working on the
project, thereby endangering the completion of the Phase II
contract. Insight resumed performance of the subcontract
and the Air Force continued to discuss with Night Vision
the possibility of a Phase III contract. Id. at 372-73.

In the Spring of 1999, when performance of the Phase II
contract was well under way, the Air Force began to
investigate options other than a Phase III contract with
Night Vision for producing the Goggles; including directly
contracting with Insight. Id. at 373. On June 24, 1999, the
Air Force first informed Night Vision that it was unlikely
that it would be given a Phase III contract for the
Goggles. Four days later, the Air Force officially
announced it was considering a competitive procurement. Id.

Night Vision successfully completed the Phase II contract
on July 30, 1999. On August 27, 1999, the Air Force told
Night Vision at a meeting that it was considering whether
to use a Phase III contract or hold a competitive
procurement. Id. at 374-75. When Night Vision indicated its
unwillingness to submit a Phase III proposal unless it was
likely to result in a contract, the Air Force responded
that no guarantees could be made. Id. at 375. At this
meeting, the Air Force’s contracting officer took notes
that reflected her belief that Night Vision had at some
point been promised a Phase III contract, though she did
not indicate when, or by whom, she believed this promise
was made. Id. Night Vision never submitted a Phase III
proposal.

In December 1999, the Air Force issued a Program Research
and Development Announcement for Goggles, which initiated
the competitive procurement process. Id. at 375-77. Three
companies submitted bids: Night Vision, Insight, and Litton
Systems, Inc. (“Litton”). The Air Force rated Insight
first, Litton second, and Night Vision third, and awarded
the contract to Insight.

B. Night Vision then filed a five-count complaint in the
Court of Federal Claims. The court rejected all of those
claims. We discuss only those claims that Night Vision
pursues in this appeal.

The Court of Federal Claims dismissed, under its Rule
12(b)(6), for failure to state a valid claim for relief,
Night Vision’s claim that the Air Force had breached a
written contract that if Night Vision successfully
completed Phases I and II of the research and development
contract, it would be awarded a Phase III production
contract. Night Vision’s theory was that the Air Force’s
contractual commitment was provided by a statutory
provision that it contends was incorporated into the Phase I
and Phase II contracts. The Court of Federal Claims
rejected this argument “because the statute plaintiff seeks
to incorporate into the contract . . . imposes no
obligation or duty on either party to the contract.” Id. at
371.

The court granted summary judgment for the United States
on Night Vision’s claims that the Air Force (1) had made
the same commitment in an oral contract it had entered into
with Night Vision, which the Air Force breached, and (2)
had breached an implied-in-fact contract with Night Vision
containing that commitment. The court so ruled “because
plaintiff has failed to produce evidence that a government
representative with contracting authority made a contract
with plaintiff.” Id. at 371.

II

A. The only written contracts relating to these
arrangements between Night Vision and the Air Force
apparently were the Phase I and Phase II agreements. As
Night Vision indicates, neither of these documents
contained any explicit commitment that if Night Vision
successfully completed the first two phases, it would
receive a Phase III contract.

Night Vision contends, however, that such a commitment was
provided in a statutory provision which, it argues, the
Phase I and Phase II contracts should be deemed to
incorporate. It relies on the principle that “[t]he law in
effect when a Government contract is made becomes a part of
the contract.” Jackson v. United States, 216 Ct. Cl. 25, 36
(1978). Whatever may be the meaning and scope of that
principle in other situations, however, the statute that
Night Vision invokes does not provide such a commitment.

That statute is 15 U.S.C. § 638(j), which is
captioned “(j) Small Business Administration policy
directives for the general conduct of small business
innovation research programs,” and provides in pertinent
part:

(1) Policy directives

The Small Business Administration . . . shall, within one
hundred and twenty days of July 22, 1982, issue policy
directives for the general conduct of the SBIR programs
within the Federal Government, including providing for
. . . .

(2) Modifications

Not later than 90 days after October 28, 1982, the
Administrator shall modify the policy directives issued
pursuant to this subsection to provide for . . . .

(C) procedures to ensure, to the extent practicable, that
an agency which intends to pursue research, development,
or production of a technology developed by a small
business concern under an SBIR program enters into
follow-on, non-SBIR funding agreements with the small
business concern for such research, development, or
production.

Finally, § 638(j)(3), directs that not more than 30
days after December 21, 2000, the administrator “shall
modify the policy directives issued pursuant to this
subsection” to meet various specified objectives.

The only specific requirement that § 638(j)(2)(C)
imposes is that the Administrator “modify the policy
directives issued pursuant to this subsection to provide
for . . . (C) procedures to ensure, to the extent
practicable, that an agency which intends to pursue . . . a
technology developed by a small business concern under an
SBIR program enters into follow-on, non-SBIR funding
agreements with the small business concern for such
research, development or production.” The Administrator has
done so. See SBIR Research Program Policy Directive, 67
Fed. Reg. 60,072, 60,075-076 (Sept. 24, 2002) (noting that
the special acquisition preference given to SBIR awardees
is “a preference and is not mandatory” and that “[i]t is
clear that Congress intends, to the greatest extent
practicable, that agencies issue Phase III awards to the
SBIR awardees that developed the technology”); SBIR
Research Program Policy Directive, 58 Fed. Reg. 42,607,
42,612 (Aug. 10, 1993) (“A Federal agency may enter into a
third phase agreement with a small business concern for
additional work to be performed during or after the second
phase period. . . . Agencies which intend to pursue
research, research and development or production of a
technology developed by a small business concern under the
STTR [Small Business Technology Transfer] Program will give
special acquisition preference . . . to the STTR company
which developed the technology”).

The statutory provision thus deals with modification of
“policy directives” to “provide for . . . procedures” to
“ensure to the extent practicable” the accomplishment of
the statutory policy that Phase III, “follow-on” contracts
should be awarded to small business concerns that have
successfully completed Phase I and Phase II projects.

Night Vision would interpret this provision as requiring
that the objective stated in sub-paragraph (C) be made a
mandatory provision of every Phase I and Phase II contract.
In effect, it would read into every such contract the
requirement that if a contractor successfully completes
Phase I and Phase II, the government must adopt Phase III
as the way to perform the production phase of the project
and award the Phase III contract to the small business
concern involved.

Night Vision’s interpretation is not supported by, and is
inconsistent with, the language and meaning of §
638(j)(2)(C), which does not impose such a requirement on
the government. Indeed, that provision deals with
“procedures” to accomplish the stated objective; it does
not mandate particular action to achieve those results.

Night Vision’s position would seriously limit the
government’s ability to select the form of procurement that
it considers most appropriate in the particular situation.
Once the prototypes have been successfully completed in the
Phase I and Phase II contracts and the government has
determined to go ahead with the acquisition of the
prototyped product, it is within the government’s
discretion to select the particular form the procurement
will take. It could be a Phase III contract, which the
statute favors, but does not require, awarded to the small
business concern that performed the Phase I and II
contracts. It could be a negotiated contract with a
particular supplier. Or, as was done in this case, it could
be a competitively-let contract. Cf. SBIR Research Program
Policy Directive, 67 Fed. Reg. at 60,075 (discussing
agencies’ alternatives to awarding Phase III contracts and
stating that “agencies are required to report only those
instances where a follow-on award with non-SBIR funds was
issued to a concern other than the SBIR awardee that
developed the technology to be pursued under the follow-on
reward”).

Nothing in § 638(j), however, bars the government
from making that choice or requires it to (1) select a
Phase III procurement and (2) award the contract therefor
to the small business concern that performed the Phase I
and II contracts. We decline to read into those contracts
such a requirement for, and commitment by, the government.
Whatever may be the policy favoring small business in the
present situation, there is simply no valid basis for
reading such a requirement into the contract.

In sum, § 638 imposes no duty on the government to
award a Phase III contract to a concern that successfully
completes a Phase II contract. Section 638 creates no
rights for any private entities and therefore is not a
“regulation . . . intended to define and state the rights
of a class of persons.” Berg v. United States, 192 Ct. Cl.
176, 183 (1970). The Court of Federal Claims correctly
ruled that “nowhere does it [§ 638] impose an
obligation directly upon a procuring agency nor does it
create any enforceable rights under a SBIR contract.” Night
Vision, 68 Fed. Cl. at 383.

Indeed, if Night Vision believed it had a contractual
commitment from the Air Force to give it a Phase III
contract, one would expect it to submit a proposal for such
contract — which it did not do.

B. Night Vision contends that, even if there was not a
written contract or provision requiring the Air Force to
give it the Phase III contract, such an obligation was
created by oral promises of Air Force officials that Night
Vision would receive such a contract. Although the
contracting officer denied that she had so promised, other
statements of hers indicate that such promises may have
been made. Night Vision also points to deposition testimony
by its officers and, by Insight employees, that it received
such promises, although the officers and employees did not
state by whom or when those promises were made. Night
Vision argues that, because of these conflicting views on
the factual issue, summary judgment was improper.

The fatal flaw in this argument, as the Court of Federal
Claims pointed out, is that Night Vision “failed to produce
evidence that a government representative with contracting
authority made a contract with plaintiff.” Night Vision, 68
Fed. Cl. at 371. Although the contracting officer has broad
discretion to execute and amend contracts, administer
contractual performance and decide contractual claims, her
authority does not include determining the type of
procurement to be used for a particular transaction. That
is a decision to be made by other officials of the Air
Force, who have that authority — in this case
apparently by Donald L. Utendorf, the Chief of the Research
and Development Contracting office for the Technology
Directorates at Wright-Patterson Air Force Base in December
1999. Id. at 376. Not only has Night Vision failed to
attribute the alleged oral promises to an official
authorized to make them, but much of the evidence upon it
which it relies does not even identify the official who
allegedly made the promises.

C. Night Vision further contends that even if there was no
valid oral contract to award it the Phase III contract,
there was an implied-in-fact contract to do so. “An
implied-in-fact contract is one founded upon a meeting of
the minds and `is inferred, as a fact, from the conduct of
the parties showing, in the light of the surrounding
circumstances, their tacit understanding.'” Hanlin v.
United States, 316 F.3d 1325, 1328 (Fed. Cir. 2003)
(citation omitted).

The elements of an implied-in-fact contract are the same
as those of an oral express contract. Trauma Serv. Group v.
United States, 104 F.3d 1321, 1325 (Fed. Cir. 1997). One of
the elements Night Vision was required to show was “actual
authority on the part of the government’s representative to
bind the government.” Flexfab, L.L.C. v. United States, 424
F.3d 1254, 1265 (Fed. Cir. 2005) (emphasis omitted) (citing
Schism v. United States, 316 F.3d 1259, 1278 (Fed. Cir.
2002) (en banc)). The flaw we pointed out in Night Vision’s
oral contract theory — the failure to show that the
Air Force officials who allegedly promised a Phase III
contract had the authority to make that commitment —
also is fatal to the implied-in-fact contract theory.

D. We are mindful of the strong public policy, reflected in
the SBIR program, favoring the awarding of government
research and development contracts to small business
concerns, as the Small Business Technology Council
discusses in its amicus curiae brief. That policy, however,
cannot prevail over the fatal defects in Night Vision’s
case that we have discussed. Night Vision undoubtedly had
the hope, and perhaps the expectation, that if it
successfully completed the Phase I and Phase II contracts,
it would be given a Phase III contract. Unfortunately for
Night Vision, however, it did not have such a binding
contractual commitment from the Air Force. Since its entire
theory in this appeal is that the Air Force breached a
contractual commitment, it cannot prevail.

CONCLUSION

The judgment of the Court of Federal Claims dismissing
Night Vision’s complaint is

AFFIRMED.