B-146071, AUGUST 7, 1961, 41 COMP. GEN. 90

B-146071, AUGUST 7, 1961, 41 COMP. GEN. 90

CONTRACTS - COST-TYPE - LITIGATION EXPENSES, ATTORNEY'S FEES - PATENT INFRINGEMENT SUITS - REGULATIONS - AMENDMENT - EFFECT ON PRIOR RIGHTS WHILE LEGAL EXPENSES INCURRED IN THE DEFENSE OF A PATENT INFRINGEMENT SUIT BY A CONTRACTOR WOULD NOT USUALLY BE AN ALLOWABLE ITEM OF COST UNDER A GOVERNMENT COST-TYPE CONTRACT ENTERED INTO AFTER THE DATE OF A REVISION TO PARAGRAPH 15-205.31 (C) OF THE ARMED SERVICES PROCUREMENT REGULATION, WHICH PRECLUDES PAYMENT OF EXPENSES IN PATENT INFRINGEMENT LITIGATION AS AN ALLOWABLE ITEM OF COST, IN A CASE IN WHICH THE CAUSES OF ACTION IN A SUIT--- UNAUTHORIZED USE OF TRADE SECRETS, PATENT INFRINGEMENT AND BREACH OF CONTRACT--- ARE INSEPARABLE FROM THE STANDPOINT OF COSTS NECESSARY TO DEFEND THE SUIT AND THE RECORD SHOWS THAT THE CONTRACTOR DEFENDANT HAS DONE EVERYTHING POSSIBLE TO ELIMINATE FROM THE SUIT THE CAUSE OF ACTION RELATING TO PATENT INFRINGEMENT, THE DEFENSE COSTS ON THE OTHER TWO CAUSES OF ACTION BEING ALLOWABLE, THE CONTRACTOR MAY BE PAID A PROPORTIONATE SHARE OF ITS LITIGATION EXPENSES AS AN INDIRECT COST IN THE PERFORMANCE OF THE CONTRACT. A REVISION OF A PROVISION IN THE ARMED SERVICES PROCUREMENT REGULATION RELATIVE TO THE PAYMENT OF LEGAL EXPENSES INCIDENT TO PATENT INFRINGEMENT SUITS AS AN ALLOWABLE ITEM OF COST UNDER A GOVERNMENT COST TYPE CONTRACT DOES NOT HAVE RETROACTIVE EFFECT IN THE DETERMINATION OF THE RIGHTS AND LIABILITIES OF THE PARTIES TO A CONTRACT ENTERED INTO BEFORE THE EFFECTIVE DATE OF THE REVISION.

TO CAPTAIN L. J. TRAHAN, DEPARTMENT OF THE ARMY, AUGUST 7, 1961:

BY LETTER DATED JUNE 7, 1961, FROM THE OFFICE OF THE CHIEF OF FINANCE, THERE WAS FORWARDED TO OUR OFFICE YOUR LETTER OF APRIL 13, 1961, WITH ENCLOSURES, REQUESTING A DECISION AS TO WHETHER FULL PAYMENT IS AUTHORIZED ON A VOUCHER FOR $8,611.10, COVERING A CLAIM OF THE BARNES ENGINEERING COMPANY, STAMFORD, CONNECTICUT, FOR REIMBURSEMENT OF EXPENSES ALLEGEDLY INCURRED DURING THE MONTH OF DECEMBER 1960, IN CONNECTION WITH THE PERFORMANCE OF ARMY CONTRACT NO. DA-19-020-ORD 5175, DATED MARCH 18, 1960.

THE VOUCHER WAS PROVISIONALLY APPROVED BY THE CONTRACTING OFFICER'S REPRESENTATIVE AND YOUR DOUBT IN THE MATTER CONCERNS THE PROPRIETY OF MAKING PAYMENT OF CHARGES FOR $57.31 AND $14.33 TO COVER ALLOCATED PORTIONS OF LEGAL EXPENSES INCURRED IN THE DEFENSE OF THE SUIT IN THE CASE OF SERVO CORPORATION OF AMERICA V. BARNES ENGINEERING COMPANY AND ERIC M. WORMSER, CIVIL ACTION NO. 6882, U.S.D.C., DISTRICT OF CONNECTICUT, BASED UPON AN ALLEGEDLY UNAUTHORIZED USE OF TRADE SECRETS, ALLEGED PATENT INFRINGEMENTS AND AN ALLEGED BREACH OF CONTRACT ON THE PART OF ERIC M. WORMSER, VICE PRESIDENT OF THE BARNES ENGINEERING COMPANY AND FORMERLY AN EMPLOYEE OF THE SERVO CORPORATION OF AMERICA.

YOU STATE THAT THE SUMS OF $57.31 AND $14.33, ALLOCATED FROM GENERAL AND ADMINISTRATIVE EXPENSE, RELATE TO THE TRADE SECRET AND PATENT INFRINGEMENT AREAS OF THE SUIT AND ARE BUT A SMALL PORTION OF THE OVERALL COSTS OF DEFENDING THE SUIT WHICH WAS INSTITUTED IN SEPTEMBER 1957 AND IS STILL CONTINUING. IT IS REPORTED THAT THE BOSTON ORDINANCE DISTRICT TOOK THE POSITION THAT THE COSTS OF DEFENDING THE SUIT ARE UNALLOWABLE UNDER PART 2, SECTION 15, OF THE ARMED SERVICES PROCUREMENT REGULATION, ENTITLED " CONTRACT COST PRINCIPLES," BOTH PRIOR TO AND SUBSEQUENT TO REVISION 50, AND THAT THE BOSTON ORDINANCE DISTRICT HAS REFUSED TO COMPLY WITH REQUESTS BY THE BARNES ENGINEERING COMPANY FOR CONTRACT CLAUSES PROVIDING FOR REIMBURSEMENT OF SUCH LEGAL EXPENSES.

IN CONSIDERING THE AMOUNTS NOW CLAIMED AND THE POSSIBLE EFFECT OF THEIR ALLOWANCE ON DETERMINATIONS OF ALLOWABILITY OF COSTS UNDER PREVIOUS CONTRACTS WITH BARNES ENGINEERING COMPANY, YOU REQUEST OUR OPINION ON THE FOLLOWING QUESTIONS:

1. ARE LEGAL AND PATENT ATTORNEY FEES INCURRED IN THE DEFENSE OF THE SUIT AS THEY PERTAIN TO THE SEPARATE ALLEGATIONS OF THE PLAINTIFF, ALLOWABLE UNDER THE PROVISIONS OF PART 2, SECTION 15, ASPR, IN EFFECT PRIOR TO REVISION 50 THERETO?

2. ARE THE COSTS ATTRIBUTABLE TO THE DEFENSE OF THE SUIT, AS THEY PERTAIN TO THE THREE SEPARATE ALLEGATIONS OF THE PLAINTIFF, ALLOWABLE UNDER THE PROVISIONS OF PART 2, SECTION 15, ASPR, SUBSEQUENT TO REVISION 50 THERETO?

IN AN ENDORSEMENT DATED APRIL 28, 1961, FROM THE OFFICE OF THE CHIEF OF ORDNANCE, IT WAS RECOGNIZED THAT, AS A GENERAL RULE, THE ADMINISTRATIVE REGULATION DOES NOT PROHIBIT THE PAYMENT OF LEGAL FEES AND RELATED EXPENSES AS INDIRECT COSTS WHEN INCURRED IN THE GENERAL MANAGEMENT, SUPERVISION AND CONDUCT OF THE CONTRACTOR'S BUSINESS AS A WHOLE. HOWEVER, ATTENTION WAS INVITED TO PROVISIONS OF PART 2, SECTION 15, ASPR, WHICH CLASSES CERTAIN TYPES OF LEGAL EXPENSES AS UNALLOWABLE ITEMS OF COST. THE VIEW WAS EXPRESSED THAT LITIGATION EXPENSES IN THIS CASE COULD NOT BE ALLOWED AS A DIRECT COST BUT THERE WAS STATED TO BE SOME DOUBT AS TO WHETHER THE CONTRACTOR COULD BE PAID A PROPORTIONATE SHARE OF ITS LITIGATION EXPENSES AS AN INDIRECT COST IN PERFORMING ITS GOVERNMENT COST- TYPE CONTRACTS.

THE RECORD INDICATES THAT THE BARNES ENGINEERING COMPANY WAS INCORPORATED IN THE STATE OF DELAWARE ON NOVEMBER 4, 1954, THAT ITS TOTAL SALES FOR THE FISCAL YEAR ENDED JUNE 30, 1958, WERE APPROXIMATELY $1,395,000; THAT THE RATIO OF ITS GOVERNMENT WORK TO ITS TOTAL OPERATIONS DURING THAT FISCAL YEAR WAS 95 PERCENT; AND THAT ABOUT 48 PERCENT OF SUCH WORK RELATED TO PERFORMANCE UNDER GOVERNMENT COST-TYPE CONTRACTS.

PROBABLY MOST OF THE COST-TYPE CONTRACTS AWARDED TO THE BARNES ENGINEERING COMPANY WERE EXECUTED SUBSEQUENT TO THE ISSUANCE OF THE 1955 PART 2, SECTION 15, ASPR. ITS PROVISIONS, AS AMENDED FROM TIME TO TIME, ARE REQUIRED TO BE INCORPORATED IN VARIOUS TYPES OF COST REIMBURSABLE TYPE CONTRACTS, BUT A REVISION IN THE REGULATION WOULD NOT HAVE RETROACTIVE EFFECT IN DETERMINING THE RIGHTS AND LIABILITIES OF THE PARTIES TO A CONTRACT ENTERED INTO BEFORE THE EFFECTIVE DATE OF SUCH REVISION. THUS, REVISION 50, MADE ON NOVEMBER 2, 1959, WOULD NOT BE APPLICABLE IN DETERMINING THE ALLOWABILITY OF CLAIMED COSTS UNDER CONTRACTS ENTERED INTO WITH THE BARNES ENGINEERING COMPANY BEFORE THAT DATE. IT WOULD, HOWEVER, BE APPLICABLE UNDER NORMAL CIRCUMSTANCES TO CLAIMS FOR REIMBURSEMENT OF COSTS UNDER CONTRACT NO. DA-19-020-ORD 5175, WHICH IS DATED MARCH 18, 1960.

SUBSECTION 15-205 OF THE 1955 PART 2, SECTION 15, ASPR, LISTED VARIOUS ITEMS OF COST CONSIDERED TO BE UNALLOWABLE, INCLUDING COSTS FOR LEGAL, ACCOUNTING AND CONSULTING SERVICES INCURRED IN CONNECTION WITH ORGANIZATION OR REORGANIZATION, PROSECUTION OF PATENT INFRINGEMENT LITIGATION, DEFENSE OF ANTITRUST SUITS AND THE PROSECUTION OF CLAIMS AGAINST THE UNITED STATES. SIMILAR LANGUAGE WAS USED IN REVISIONS TO SUBSECTION 15-205 MADE ON AND PRIOR TO NOVEMBER 10, 1958. HOWEVER, THE NOVEMBER 2, 1959 REVISION ( REVISION 50) AND THE CURRENT SUBSECTION OF THE 1960 EDITION OF PART 2, PARAGRAPH 15-205.31 (C), ASPR, USE THE LANGUAGE "INCURRED IN CONNECTION WITH PATENT INFRINGEMENT LITIGATION," INSTEAD OF "PROSECUTION OF PATENT INFRINGEMENT LITIGATION.' THERE IS NO QUALIFICATION OF ANY KIND IN THE EXISTING REGULATION WHICH MIGHT IMPLY THAT LEGAL EXPENSES INCURRED IN THE DEFENSE OF A PATENT INFRINGEMENT SUIT WOULD BE CONSIDERED TO BE AN ALLOWABLE ITEM OF COST. IN OUR OPINION, SUCH AN EXPENSE COULD BE CONSIDERED AS AN ALLOWABLE ITEM OF COST UNDER THE REGULATION IN EFFECT PRIOR TO REVISION 50. THE COST-TYPE CONTRACTS OF THE BARNES ENGINEERING COMPANY ENTERED INTO PRIOR TO REVISION 50, WOULD NOT, HOWEVER, BE CHARGEABLE FOR GENERAL AND ADMINISTRATIVE EXPENSES OF SUCH CHARACTER INCURRED AFTER THE CONTRACT COMPLETION DATES.

IN THE CASE OF CONTRACT NO. DA-19-020-0RD-5175, EXPENSES INCURRED IN THE DEFENSE OF A PATENT INFRINGEMENT SUIT WOULD NOT USUALLY BE CONSIDERED AS AN ALLOWABLE ITEM OF COST IN VIEW OF THE REGULATION WHICH HAS BEEN IN EFFECT SINCE REVISION 50 OF NOVEMBER 2, 1959, AND THE FACT THAT THE CONTRACT WAS ENTERED INTO AFTER THAT DATE. HOWEVER, THE CAUSES OF ACTION IN THE SUIT HERE INVOLVED APPEAR TO BE INSEPARABLE FROM THE STANDPOINT OF COSTS NECESSARY TO DEFEND THE SUIT AND THE RECORD SHOWS THAT THE DEFENDANTS HAVE DONE EVERYTHING POSSIBLE IN AN ATTEMPT TO ELIMINATE FROM SUCH SUIT THE CAUSE OF ACTION RELATING TO ALLEGED PATENT INFRINGEMENT.

APPARENTLY THERE SHOULD BE NO DOUBT AS TO THE ALLOWABILITY OF DEFENSE COSTS RELATED TO THE OTHER TWO CAUSES OF ACTION UNLESS THE DEPARTMENT OF THE ARMY HAS REASON TO BELIEVE THAT THE DIFFICULTIES ENCOUNTERED BY THE CONTRACTOR WERE CAUSED BY CIRCUMSTANCES WHICH WOULD NOT JUSTIFY A FAVORABLE CONSIDERATION OF ITS REIMBURSEMENT CLAIMS. WE HAVE NOT BEEN FURNISHED ANY INFORMATION TO THAT EFFECT AND WE ASSUME THAT THE FACTS OF THE CASE ARE SUBSTANTIALLY AS STATED IN MEMORANDA SUBMITTED BY THE CONTRACTOR, INDICATING THAT THE SUIT RELATES PRIMARILY TO DATA SUPPLIED BY THE GOVERNMENT FOR USE IN PERFORMING BOTH FIXED PRICE AND COST-TYPE CONTRACTS OF THE BARNES ENGINEERING COMPANY WITH THE UNITED STATES, AND THE MANUFACTURE OF ARTICLES FOR THE GOVERNMENT WHICH MAY OR MAY NOT BE COVERED BY VALID PATENTS ISSUED TO THE SERVO CORPORATION OF AMERICA. APPARENTLY, AS CONTENDED BY THE CONTRACTOR, THE PLAINTIFF'S ONLY RECOURSE FOR ALLEGED PATENT INFRINGEMENTS IN PRODUCTION OF SUPPLIES FOR THE GOVERNMENT WOULD BE THE FILING OF A SUIT AGAINST THE UNITED STATES IN THE COURT OF CLAIMS, AS REQUIRED UNDER SECTION 1498, TITLE 28, UNITED STATES CODE.

IN VIEW OF THE PARTICULAR CIRCUMSTANCES, AND SINCE THE CLAIM FOR $8,611.10 UNDER CONTRACT NO. DA-19-020-ORD-5175 HAS BEEN APPROVED PROVISIONALLY BY THE CONTRACTING OFFICER'S REPRESENTATIVE, FULL PAYMENT OF THE CLAIM IS AUTHORIZED, IF THE TOTAL AMOUNT STATED IS OTHERWISE CORRECT. THE VOUCHER FOR $8,611.10 AND ITS ACCOMPANYING PAPERS ARE RETURNED HEREWITH.