Did the Federal Circuit Just Eliminate Commercial Services?

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In a decision issued on November 17, JKB Solutions v. United States, the Federal Circuit held that the commercial item termination for convenience provision at FAR 52.212-4(l) incorporated by reference into a contract for commercial services did not apply because that provision “governs the termination of commercial item contracts for the government’s convenience, and it does not apply to service contracts ….” (emphasis added).

If taken to its logical conclusion, this remarkable decision would mean that no commercial “item” provision in the Federal Acquisition Regulation (FAR) applies to services even if incorporated in the contract, effectively overturning a decades-long understanding that the commercial item definition encompasses both goods and services. In one fell swoop, the Federal Circuit effectively eliminated the entire category of commercial services.

Background

JKB had entered into a three-year ID/IQ contract with the Army for instructor services, under which the Army issued three yearlong task orders.  The price of each task order included 14 classes, but each year the Army used JKB for fewer than 14 classes, using Army personnel to teach the balance of the classes, paying JKB only for the classes it actually taught.

As a result, JKB sued for breach of contract.  The Court of Federal Claims (COFC) held that the Army had constructively terminated the contract for convenience pursuant to FAR 52.212-4, which was incorporated by reference, and that the termination for convenience had not been in bad faith or an abuse of discretion because the contract was never actually terminated for convenience.  In so holding, the court concluded that JKB could only recover its termination for convenience costs, which it had not sought in its complaint. JKB appealed.

The Federal Circuit, after a lengthy discussion of the bad faith/abuse of discretion limitations to the government’s broad termination for convenience rights, suggesting that the Federal Circuit’s real concern was that it believed that the government had acted in bad faith, reversed the COFC’s decision.

Implications of the Decision

The November 17 decision holds that even though FAR 52.212-4 was incorporated by reference, the contract did not include an applicable termination for convenience provision because FAR 52.212-4 only applies to commercial item contracts, not commercial services contracts, overturning the decades-long understanding that “commercial item” encompassed both. The Federal Circuit vacated and remanded the case, directing the COFC to “consider whether the Christian doctrine applies to incorporate a termination for convenience clause and whether, in light of our case law, the doctrine of constructive termination for convenience applies in these circumstances.”

While seemingly trying to address the narrow question of whether the Army’s action was in bad faith, meaning that the constructive termination for convenience would have been improper, the Federal Circuit’s decision could have a much broader impact. The government procures billions of dollars of commercial services each year through the GSA Federal Supply Schedule program, under the FAR Part 12 commercial item rules. Indeed, the Department of Defense obligated more than $23 billion for commercial series in FY 2017 alone.

It is questionable whether many of those service providers would be willing to provide services to the government if they were subject to more burdensome non-commercial contract clauses.

For the time being, the JKB Solution decision appears to mean that commercial service contractors faced with termination for convenience have the option to argue that the commercial item termination for convenience provision does not apply and instead calculate costs relating to terminations using a provision such as the one recommended by the Federal Circuit, FAR 52.249-4, Termination for Convenience of the Government (Services) (Short Form).

Therefore, contractors finding themselves in this position should carefully consider which termination provision would be most beneficial.  But it also suggests that commercial item contractors could challenge the application of any of the commercial item terms at FAR 52.212-4, arguing that other FAR terms should apply and ought to be read in to their contract pursuant to the Christian doctrine. Given that the commercial item terms tend to be more favorable to contractors, this may not present much of an opportunity, but it does highlight the extraordinary impact of the Federal Circuit’s conclusion.

What Will the Impact Be?

Ultimately, however, the impact may be muted by a recent rule issued by the FAR Council.  On November 4, the FAR Council implemented a recommendation of the Section 809 Panel that the commercial item definition be bifurcated into “commercial product” and “commercial service” as a “way to provide clarity for the acquisition workforce, which may result in greater engagement with the commercial marketplace.”  This bifurcation was one of the suggestions included in “Recommendation 1” of the Section 809 Panel, which concluded that “the term commercial item is overly broad, encompassing both commercial products and services,” while noting other definitions that would benefit from clarification.

The Section 809 Panel, which was established by Section 809 of the FY 2016 National Defense Authorization Act, was created to “review and improve the functioning of the defense acquisition system and eliminate any regulations found unnecessary to achieve such improvements.” Its excellent, thorough report is available here.  While some may question whether definitional issues are the limiting factor for commercial entities considering entry into the government marketplace, this bifurcation is certainly timely in light of the recent JKB Solutions decision.

Takeaways for Government Contractors

Implementing the new “commercial services” definition, which will be effective on December 6, 2021, will not be immediate.  In the meantime, contractors with what they thought were commercial services contracts that incorporate FAR 52.212-4 or other “commercial item” provisions should, in light of the Federal Circuit’s decision, carefully evaluate whether there would be any benefit to the application of non-commercial item terms, particularly if they find themselves in a dispute with the government or have had a contract terminated for convenience.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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