Government Contractor Defense:The Evolving Case Law on Protections Afforded to Companies Selling Products or Services to the U.S.(IND010)

• Speakers:

• Ray Biagini

Partner

Covington & Burling LLP

• Rich Johanson

Risk Manager

Leidos, Inc.

• Bryan Salek

EVP, GovCon Practice

Willis Towers Watson

Learning Objectives

• Summarize the Government Contractor Defense

• Examine key case law on the Government Contractor Defense

and other significant tort defenses used by federal contractors

• Illustrate real world application of the Government Contractor

Defense

• Plan for an effective, unified defense strategy with insurers

• Discuss proactive steps federal contractors can take to mitigate

their tort liability exposure

Background On The

Government Contractor Defense

Why Are

Federal Contractors

“Tempting Deep Pockets”

For Plaintiffs Tort Suits And

The U.S. Is Not?

GovCon vs. USG Exposure

• Agent Orange

• USS Vincennes

• USS Stark

• Friendly Fire Accidents

GovCon vs. USG Exposure

• Case Law Isolates Contractors as the Tortious Targets

• The Feres, Stencel and Hercules Decisions

• Military personnel cannot sue the United States for tort damages arising out

of incidents related to military service. Feres v. United States (1950)

• Contractors cannot sue the United States in tort for liabilities arising out of a

military accident. Stencel Aero Eng’g v. U.S. (1977)

• Civilian government personnel cannot sue the United States for tort damages

arising out of the performance of a federal contract because of the Federal

Employees Compensation Act bar

• Contractors cannot sue the United States for breach of implied warranties of

design specifications. Hercules v. United States (1996).

GovCon vs. USG Exposure• Moreover, DOD’s acquisition reform policies have often resulted in

an “historic shift” of discretionary decision-making from government to industry, such as striking balance between safety, efficacy and costs through use of performance-based contracts and commercialization techniques in military procurements

• Although the U.S. can be sued under the Federal Tort Claims Act, U.S. enjoys powerful tort protection even when its own negligence caused the accident

• Discretionary Function Exception

• Combatant Activity Exception

• In Country Exception

• All of this means that the contractor must know how to successfully assert the government contractor defense in tort suits filed against it

Significant Protection

Provided By The

Supreme Court In 1988 To

Federal Contractors

GovCon Defense

• Boyle v. United Technologies, the U.S. Supreme Court Established

the Government Contractor Defense for Contractors and based it

on the Government’s Discretionary Function Defense

• A government contractor can eliminate tort claims against it under

the government contractor defense if:

• The government meaningfully reviewed and approved reasonably precise

specifications for the product or service at issue

• The product or service conformed to the approved specifications

• The contractor warned the government of hazards actually known to the

contractor but not known by the government

GovCon Defense

• When a contractor is sued in tort for an alleged defective product it

sold to the government, its main defense is to prove the

government meaningfully reviewed and approved, i.e., exercised

government discretion, over the key design/safety decisions and

features

• This is the hallmark of the Government Contractor’s Defense

GovCon Defense

• Key legal battlegrounds on the Government Contractor Defense

• Does the defense only apply to military contracts? The stubborn Ninth and

Sixth Circuits

• What constitutes “approval”? Rubber-stamping does not; long-term use by

the U.S. does equal approval

• What constitutes “reasonably precise specifications”? Fifth and Ninth Circuits

require extremely precise specs

• The duty to warn split: the Sixth, Seventh and Ninth Circuits versus the

Second and Eleventh Circuits ─ the “prescribe/proscribe” rule

GovCon Defense

• Does the Contractor have a continuing duty to warn for the life of

the product? Timberline v. Bell Helicopter (S. Ct. Wash. 1994);

Niemann v. McDonnell Douglas (S.D. Illinois 1989)

• Does a Subcontractor have to warn both its prime and the United

States of hazards? Ramey v. Martin-Baker Aircraft Co. (4th Cir.

1989)

GovCon Defense

• Application of the Defense to Foreign Military Sales. Miller v.

United Technologies Corp. (S. Ct. Conn. 1995)

• Application of the Defense to Service Contracts, Technical

Manuals, Training Activities, and Computer Software ─ Best Case

is Eleventh Circuit Hudgens vs. Bell Helicopter (2003)

• What about COTS Products? The FAR defines a COTS Product

as “Customarily used for non-Governmental purposes.” To the

extent that COTS products are “customized” for military purposes,

the Government Contractor Defense will be triggered

Application of the Government Contractor Defense

• 1995: U.S. Office of National Drug Control Policy issues RFI

• Problem: How to inspect the millions of cargo containers entering the U.S. each year by sea, land and rail

• Solution: Non-invasive imaging technology

• Leidos (then SAIC) proposal: Vehicle and Cargo Inspection System (VACIS®)

• High throughput

• Similar to medical x-ray technology

Leidos VACIS® Configurations

Application of the Government Contractor Defense• 2010: Martinez v. SAIC, U.S District Court, Southern TX

• Plaintiff Jose Martinez started working as CBP officer in Brownsville, TX in 1996

• Certified to operate VACIS® in 2000

• 2010 – diagnosed with Multiple Plasmacytomas

• Plaintiff alleged cancer caused by 10 years’ exposure to gamma radiation from VACIS®

• Plaintiff succumbed to cancer in late 2010 at age 40

• Leidos responded to complaint asserting factual and legal challenges

• No evidence of radiation leakage or exposure from VACIS®

• Government Contractor Defense

• Political Question Doctrine

• 2015: Court grants summary judgment in favor of Leidos/SAIC based on Government Contractor Defense

Application of the Government Contractor DefenseFactors supporting successful outcome:

• U.S. Government either Dictated or Reviewed & Approved all significant features related to VACIS®, including:

• Type and quantity of radioactive material to be used

• Dimensions of radiation control areas

• Radiation safety training curriculum

• Multiple USG agencies tested, evaluated and approved design

• Thorough documentation

• Pre-shipment: Factory Acceptance Tests

• Post shipment: Site Acceptance Tests

• Daily radiation readings at Brownsville

• Declarations obtained from many government witnesses

• USG was not a party to the case

Pre-Loss Preparation

• Documentation is key

• Transmittal letters to accompany product delivery

• Repeat what customer ordered and specifications

• Who, What, When

• Confirm delivery per those specifications

• Advise of known risks

• Warranty & Disclaimers

• Inform your insurers

• Address any coverage gaps or exclusions

• Who controls defense

• Develop defense strategy prior to a loss

• Selecting the right attorney

• Aggressive defensive posture discourages additional plaintiffs

“Build-In” The GovCon Defense At Front End

• The U.S. and its contractors have a mutual interest in minimizing tort liability.

Through careful implementation, the government and industry can act now to

proactively and discriminately create a joint shield to future tort liability

• Real life success stories ── TSA Contract to reconfigure all U.S. airports

after 9/11 terrorist attacks; U.S. Navy Surface Warfare Center

• At the outset of contract activity, the contractor and government should

identify “high risk” design and safety issues

• Agree through Special H Clauses that such areas will be subjected to

meaningful detailed review and consideration by the government and the

contractor and ultimately approved by the government

• Ensure all known hazards are identified to the government, and addressed

and resolved by the government in writing

GovCon Defense as a Tort Mitigation Technique

• If successful, removes risk of settlement or judgment on current

case.

• Deterrent for future suits from similar or related plaintiffs to the

same event or circumstances. Contributes to the existing case

law, benefiting the entire GovCon industry.

• Will cause firms taking cases on a contingency basis against your

company think twice before accepting.

GovCon Defense – Risk Transfer Considerations• Based off the case law GovCons should receive lower rates than

true commercial companies that do not have this litigation exit

strategy.

• May encounter an uphill battle with claims adjusters who may not

understand the defense and its larger benefits.

• Secure pre approved counsel in the policy. Recommend

discussing this defense with your underwriter at renewal and

advise that the company may deploy it depending on the

allegations made in future tort suits.

Contractor on the Battlefield - Defenses• In the 1980’s, the U.S. decided that many logistical support

activities previously performed by “Green-Suitors” would be

outsourced to private contractors in future war theaters.

Contractors were “Force Multipliers”

• Operation Desert Storm and Operation Iraqi Freedom ─ Often

there were more Contractor Personnel in the war theaters than

military

• Contractors were performing highly dangerous activities and were not allowed

to be armed

• Contractors depended largely on the U.S. military for “force protection”

• Contractors are “flooding” back into Iraq and Afghanistan as hostilities grow

Contractor on the Battlefield - Defenses• Hundreds of injured or killed U.S. Military and Civilian Contractor

Personnel have sued U.S. Support Contractors in U.S. Courts as

have Foreign Nationals under the Alien Tort Claims Act

• Tort Suits have emerged from alleged abuse at Abu Ghraib; electrical systems

malfunctions; insurgent attacks on convoys; exposure to toxins; friendly fire

attacks; weapon system malfunctions; waste management

• But the April 2013 Supreme Court decision in Kiobel v. Royal Dutch

Petroleum Co. could eliminate most foreign nationals suits under the ATCS

because there is a presumption that U.S. laws do not apply to U.S.

corporations’ bad acts that occur on foreign soil unless it is shown the

corporation’s misconduct also occurred on U.S. soil in a material way

Battlefield Defenses

• Defense Base Act ── Unless the Contractor/Employer intended to harm his employee, the sole remedy for injury or death to a contractor employee is administrative and his tort suit against his employer is prohibited

• The Political Question Doctrine ── Tort suits brought by military or civilian personnel against contractors but which in reality challenge key military judgments and discretionary decisions are “non-justiciable.” If a contractor’s defenses require judicial review of sensitive military judgments, the suit should be dismissed

• The Combatant Activity Exception ── Tort suits are eliminated if the contractor proves it was integrated into the military’s command and control apparatus and injuries/death arose out of U.S. military combat activities. Also, the DOJ supports the extension of this doctrine to protect contractors sued in combatant-related activities

Battlefield Defenses

• State Secrets Doctrine ── Tort suits that implicate classified

information about product’s design or the military’s rules of

engagement usually results in dismissal of such suits

• Derivative Sovereign Immunity ── This doctrine can eliminate

contractor liability where the contractor was acting at the direction

of the U.S. and there is no evidence that the contractor was acting

“outside the scope” of the contract

Proactive Steps By

Federal Contractors To

Minimize Tort Exposure

Federal Indemnity Clauses

• 10 U.S.C. § 2354 ── The Secretary of DOD is authorized to indemnify R&D contractors for 3rd party tort liabilities, including litigation and settlement expenses, for bodily injury or death from a risk the contract identifies as “unusually hazardous” and for which the contractor’s insurance is not responding. DOD can pay such liabilities from (1) funds obligated for the performance of the contract or from funds available for R&D, not otherwise obligated; or (2) funds appropriated for those payments

• P.L. 85-804 ── Certain federal agencies, including DOD, can provide “extraordinary contractual relief” to their contractors, including indemnification for 3rd party tort liabilities, where the Secretary of the agency determines to do so would “facilitate the national defense.” To the extent the contractor’s insurance is not responding to 3rd party liabilities, the federal agency that granted P.L. 85-804 indemnity must indemnify the contractor for such litigation expenses, settlements, etc. to the extent they arise out of a risk the contract defines as “unusually hazardous.” The federal agency’s requirement to pay is not limited to the availability of appropriate funds

• FAR 52.228-7, Insurance-Liability to Third Persons ── For most cost-type

federal contracts, the DOD and civilian agencies must reimburse a contractor for

liabilities, including litigation and settlement expenses, to the extent NOT

compensated by the contractor’s insurance and subject to the availability of

appropriated funds at the time the contingency occurs. This reimbursement occurs

even if the contractor acted negligent but is not applicable if the contractor’s

directors, officers or managers acted with willful misconduct or lack of good

faith

• FAR 31.205-33, Professional and Consultant Service Costs ── For most costs-

type federal contracts, contractors can bill the U.S. for “professional and consultant

services” which are “rendered by persons who are members of a particular

professional” and who are “not officers or employees of the contractor.” These

include services acquired to enhance a contractors “legal, economic, financial, or

technical positions.” Such fees shall be allowable when supported by evidence of

the nature and scope of the service and when reasonable in relation to the

services rendered. See also FAR 52.216-7, Allowable Cost and Payment; and

31.205-47, Costs Related to Legal and Other Proceedings

Federal Indemnity Clauses

The U.S. SAFETY Act ──

The Most Potent Risk

Mitigation Tool For Homeland

Security Contractors

The U.S. SAFETY Act

• Key risk mitigation technique to eliminate or minimize exposure from tort suits arising from terror attacks

• SAFETY Act was passed in 2002, is landmark Tort Reform Legislation and can eliminate enterprise ─ threatening liability for Homeland Security companies

• If Anti-Terror Technology (product, services, cyber, etc.) approved by DHS, the Tort Protections are:

• Presumption of immunity from liability

• No punitive damages

• Any liability capped at terror insurance limits

• Suits can only be in federal court

• Retroactive and extraterritorial application

• Protects suppliers, vendors, etc. as well as customers who buy SAFETY Act approved technology and as such is a “market discriminator;” also applies to companies who deploy anti-terror technology to protect their own assets

Questions and Discussion