“Lost profits” are a standard measure of contract damages and, under long-standing precedent, are available as a basis for a judgment against the Government in a breach of contract case. That said, there aren’t that many cases in which a Government contractor actually demonstrates to the Court of Federal Claims or a Board of Contract Appeals that the various elements of a lost profits award have been satisfied under the applicable standards of proof—and then can get such an award affirmed on appeal. In last week’s SUFI Network Services v. US decision, another “lost profits” plaintiff had the vast majority of its lost profits award gutted by the Federal Circuit—and sent back for substantial additional determinations in a long-running lawsuit. The court’s opinion is instructive regarding the level of scrutiny that is given to such awards and the approach that Government contracts plaintiffs should consider in structuring claims for lost profits.
The SUFI Network case requires that you think back to a time when mobile phones weren’t ubiquitous, and travelers used the land lines in their hotel rooms and were charged exorbitant per-minute rates to call home. Under the contract at issue (which was awarded in 1996), SUFI Network installed a telephone system in U.S. military guest housing in Europe, with the understanding that it would earn profits based on “exclusive” access to guests and relatively high rates. But the travelers didn’t want to pay SUFI Network’s high rates, and the Agency facilitated guests’ avoidance of those rates in several ways, breaching its obligations under the contract.
The case began before the Armed Services Board of Contract Appeals, which issued a series of decisions over five years (2006-2010) awarding $7.4 million based on 11 different components of a lost profits recovery. The lawsuit was brought when the now-repealed Wunderlich Act applied, and it was initially appealed to the Court of Federal Claims. That court relied on the ASBCA’s fact finding but took a substantially different view of damages, awarding almost $119 million (of the $130.3 million claimed).
In its opinion, the Federal Circuit carefully picked through the 11 different components of the “lost profits” judgment, reversing or vacating much of the Court of Federal Claims’ decision—and finding fault with much of the earlier ASBCA opinion. The details of the reversal quickly get “into the weeds” and are beyond the scope of a blog post. But it should be noted that the appeals court was troubled by (and disagreed with) an aggressive assumption imbedded in several parts of SUFI Network’s claim. SUFI Network had asserted that phone calls in the “hypothetical, nonbreach world” would have “gone on for just as long” at higher rates charged by SUFI Network as they had on “the alternative networks” used “in the actual, breach world” by Agency personnel who were avoiding SUFI Network’s higher charges. That assumption seems counter-intuitive, and the Federal Circuit didn’t buy it—or several others put forward by SUFI Networks in support of its substantial damages claim.
There are three elements that a plaintiff seeking lost profits is required to demonstrate by a preponderance of the evidence: (1) the loss was the proximate result of the breach; (2) the lost profits caused by the breach were within the contemplation of the parties (because the loss was foreseeable) at the time of contracting; and (3) a sufficient basis exists to estimate lost profits with reasonable certainty. The last time the Court of Federal Claims and the Federal Circuit saw a large number of “lost profit” claims related to the regulatory contracts at issue in the Winstar cases (and in some of the Spent Nuclear Fuel cases); many of those plaintiffs’ claims could not satisfy at least one of the applicable requirements. (Full disclosure, I was part of DOJ’s team defending the Government in those cases from 1997 through 2006.)
Many of the Winstar-related plaintiffs sought substantial damages amounts based on aggressive assumptions (which were routinely characterized as “conservative”), and DOJ brought substantial resources to bear to fight just about every assumption and detail of the plaintiffs’ presentations. Given the high likelihood of the Government’s “we’ll fight on the beaches, on the landing grounds, in the fields [etc.]” response to aggressive assumptions in lost profits claims, plaintiffs seeking such recoveries should be realistic—and truly conservative—in working with experts to develop assumptions that will be used in lost profits models/claims. After all, obtaining a judgment after years of litigation, only to have to return and re-start much of the damages process more than 15 years after the contract was awarded isn’t in anyone’s best interest. That is a risk with any damages case, but given the skepticism with which the courts address lost profits recoveries, it is a consideration that Government contractors should take seriously when pursuing such claims.