[00:00:00] Speaker 02:
Our first case for argument today is 23-1337, the Secretary of Defense versus Pratt & Whitney.

[00:00:07] Speaker 02:
How do I say your name?

[00:00:09] Speaker 00:
Kushner.

[00:00:09] Speaker 02:
Mr. Kushner, please proceed.

[00:00:13] Speaker 00:
Thank you, Your Honor.

[00:00:14] Speaker 00:
Good morning and may please the court.

[00:00:16] Speaker 00:
The board committed two errors in resolving the government claims before.

[00:00:20] Speaker 00:
First, it allowed Pratt to significantly understate the material cost of collaborator parts, thus shifting a substantial amount of indirect costs from Pratt's commercial customers to the government.

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And second, the board enforced an unauthorized and unenforceable agreement against the United States, even after finding, correctly,

[00:00:40] Speaker 00:
that the agreement violated the FAR.

[00:00:42] Speaker 00:
We asked the court to reverse both of these errors on appeal.

[00:00:44] Speaker 01:
Can we start with the jurisdictional issue here in particular?

[00:00:48] Speaker 01:
Can you tell me your view on whether the CAS 418 issue and the DRAG issue are part of the same claim or separate claims?

[00:00:56] Speaker 00:
So there are two separate claims, Your Honor.

[00:00:57] Speaker 00:
What we have explained in our briefing is that those two claims involve different issues.

[00:01:03] Speaker 00:
CAS 418 is about allocability, and the DRAG credits issue is about allowability.

[00:01:08] Speaker 00:
They involve two different sources of law, the CAST versus the FAR.

[00:01:13] Speaker 00:
And they lead to two different remedies.

[00:01:16] Speaker 00:
The CAST-418 claim is about how to allocate costs among Pratt's commercial and government contracts.

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And the drag credits claim is about the size of the indirect cost pool that needs to ultimately be allocated.

[00:01:30] Speaker 01:
Is there any quantum that needs to be determined for the drag claim?

[00:01:34] Speaker 00:
I'm sorry, Your Honor.

[00:01:35] Speaker 01:
Is there any quantum that needs to be determined for the drag claim?

[00:01:41] Speaker 00:
Yes, I believe there would have to be a determination of quantum.

[00:01:45] Speaker 00:
So ultimately, there would have to be a determination of quantum by the board.

[00:01:51] Speaker 03:
And it's a pretty complicated computation, right?

[00:01:54] Speaker 00:
It's a complicated computation on both claims, yes, Your Honor.

[00:01:58] Speaker 00:
So it would be a complicated computation on the CAST 418 claim, as well as on the drag credits claim, which is why we think that the rule that this court announced in Southern California Edison makes particular sense in this case.

[00:02:13] Speaker 03:
But that rule has never been applied in the board context, right?

[00:02:20] Speaker 03:
That rule has never been applied in the board context.

[00:02:24] Speaker 00:
I think you're correct, Judge Dyke.

[00:02:26] Speaker 00:
I'm not aware of a case applying Southern California Edison in the board context.

[00:02:30] Speaker 00:
We don't think that matters, because the final decision requirement comes from 28 U.S.C.

[00:02:36] Speaker 00:
section 1295A, and it's the same in 1295A3, which applies to the Court of Federal Claims, and 1295A10, which applies to board decision.

[00:02:46] Speaker 00:
It's the same final decision requirement, and it should mean the same thing.

[00:02:54] Speaker 00:
Now, going back to the errors that the board made here, as for the CAS 418 claim, we believe that the court's decision in Drumsfield resolves the issue because the court there recognized that, quote, the sharing of gross revenues, end quote, is the cost of collaborator parts to crack under the collaboration agreements.

[00:03:17] Speaker 00:
That holding also makes sense because the task before the board was to determine the cost to prep of procuring collaborator parts.

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Gross revenue share, or GRS, represents the true material cost of collaborator parts, because it does not account for any unrelated obligations, any unrelated program expenses that collaborators owe to PrEP.

[00:03:42] Speaker 00:
Net revenue share, or NRS, infuses these unrelated obligations into the equation, and by doing so, misrepresents the full cost of collaborator parts to PrEP.

[00:03:58] Speaker 01:
Is there any concern with us potentially finding that there is no jurisdiction over the CAS 14 claim, but then going ahead and reaching the merits on the DRAD claim?

[00:04:10] Speaker 01:
Do you see any concerns with that, or what would you say in response to that possibility, that hypothetical resolution?

[00:04:19] Speaker 00:
So and I think you're asking, Judge Cunningham, if the court agrees with us that these are two separate claims and that the drag credits claim was conclusively and finally resolved by the board, but the CAS 418 claim was not.

[00:04:34] Speaker 01:
That is correct.

[00:04:35] Speaker 00:
So I think there's a couple of issues with that.

[00:04:38] Speaker 00:
The first one would be, I think that would be inconsistent with SCE.

[00:04:42] Speaker 00:
where the court under very similar circumstances, where a tribunal below, different tribunal granted, but a tribunal below disagreed with the way the government is interpreting a statute or regulation.

[00:04:53] Speaker 02:
But that wasn't in the CDA context.

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And we have more important cases in the Contract Disputes Act context, like the United Pacific Insurance versus Roche case.

[00:05:02] Speaker 02:
Yes.

[00:05:03] Speaker 02:
So how do you contend with that?

[00:05:04] Speaker 02:
I agree with you.

[00:05:06] Speaker 02:
SCE gives you some language that's helpful, but it's analogous.

[00:05:10] Speaker 02:
It's not in the exact context.

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context of this case.

[00:05:13] Speaker 02:
And we have cases in the exact context of this case, which seem to suggest otherwise.

[00:05:18] Speaker 02:
So how do we deal with that?

[00:05:19] Speaker 00:
So two things in that, Your Honor.

[00:05:20] Speaker 00:
In United Pacific, the case did not address the significance of SC.

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None of the parties raised it.

[00:05:26] Speaker 00:
The court didn't raise it.

[00:05:28] Speaker 00:
And so we don't know.

[00:05:29] Speaker 02:
So wait.

[00:05:30] Speaker 02:
So they didn't raise it so you think I can just treat it as therefore bad precedent because the issue wasn't raised?

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So even though they spoke to the issue,

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You don't think because they raised the right argument, I can just ignore it as precedent?

[00:05:45] Speaker 00:
I don't think you should ignore it as precedent, but you should take it as limited precedent.

[00:05:50] Speaker 03:
But have Teledyne and other cases that deal with it explicitly, right, in the board context?

[00:05:55] Speaker 00:
I'm sorry, which case?

[00:05:56] Speaker 00:
Teledyne.

[00:05:57] Speaker 00:
Teledyne.

[00:05:58] Speaker 03:
Well, Teledyne predates SCE.

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So we think to the extent of it.

[00:06:01] Speaker 03:
Well, but it has been overruled, right?

[00:06:02] Speaker 03:
And SCE couldn't overrule it.

[00:06:04] Speaker 00:
It has not been overruled.

[00:06:05] Speaker 00:
That's true.

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But to the extent SCE says something different than Teledyne, we think SCE should govern.

[00:06:12] Speaker 00:
Now.

[00:06:13] Speaker 02:
Why?

[00:06:14] Speaker 02:
I don't understand.

[00:06:15] Speaker 02:
You're like, because it's better for me.

[00:06:17] Speaker 02:
Why?

[00:06:18] Speaker 02:
We've got an earlier case that says something that doesn't help you.

[00:06:21] Speaker 02:
You've got SCE that says something that helps you.

[00:06:24] Speaker 02:
Then you've got a later case that's more on point that says something different but doesn't mention SCE.

[00:06:29] Speaker 02:
Why do you win?

[00:06:30] Speaker 02:
You're like an Oreo.

[00:06:32] Speaker 02:
I mean, I do prefer the vanilla over the chocolate sides.

[00:06:34] Speaker 02:
But you're bounded by precedent on both sides.

[00:06:37] Speaker 02:
It doesn't help you.

[00:06:38] Speaker 02:
Why should we just go with that one in the middle that you think is the most helpful for you when it's the least on point with the facts of this case?

[00:06:45] Speaker 00:
So we think the court should follow SDE, not because it's better for us, but because it makes the most sense.

[00:06:52] Speaker 00:
But it can't overrule Teledyne, right?

[00:06:56] Speaker 00:
It's true, Your Honor.

[00:06:57] Speaker 00:
It did not overrule Teledyne, but it does succeed Teledyne.

[00:07:01] Speaker 00:
And I think it explains it.

[00:07:02] Speaker 00:
What does that mean?

[00:07:03] Speaker 02:
It succeeds.

[00:07:04] Speaker 02:
I don't understand.

[00:07:05] Speaker 02:
It can't overrule it, but it succeeds.

[00:07:07] Speaker 02:
What does that mean?

[00:07:08] Speaker 00:
It explains a more nuanced understanding of what finality is.

[00:07:14] Speaker 02:
So you think it distinguished Teledyne somehow?

[00:07:17] Speaker 00:
It didn't distinguish Teledyne, but it provided another variation of finality that was not discussed in Teledyne.

[00:07:26] Speaker 00:
And Your Honor, if you think about the way this case is, we have not just

[00:07:31] Speaker 00:
the board disagreeing with the government's interpretation of CAST-418, but the board also disagreeing with Pratt's understanding of CAST-418, because Pratt advocated for the use of a completely different measure, MTC.

[00:07:44] Speaker 02:
So at the end of the day- But this part's jurisdictional.

[00:07:46] Speaker 02:
This is, right?

[00:07:47] Speaker 02:
This jurisdiction?

[00:07:48] Speaker 00:
Yes.

[00:07:48] Speaker 02:
And what do I review that?

[00:07:50] Speaker 02:
I'm sorry?

[00:07:50] Speaker 02:
How do I review it?

[00:07:52] Speaker 02:
Denovo.

[00:07:52] Speaker 02:
Denovo.

[00:07:53] Speaker 02:
So who cares?

[00:07:53] Speaker 02:
Who cares what the board disagreed with something they argued or what?

[00:07:57] Speaker 02:
Because I'm reviewing this Denovo.

[00:07:58] Speaker 02:
I've got to look at it and decide,

[00:08:00] Speaker 02:
these questions as a matter of law.

[00:08:02] Speaker 00:
I agree.

[00:08:02] Speaker 00:
But this will make sense, because at the end of the day, if this goes back to the board as a non-final decision, and the parties spend years figuring out what quantum looks like for NRS, we will end up before the court with the same arguments, year down the line.

[00:08:19] Speaker 02:
So more efficient.

[00:08:20] Speaker 02:
Your argument is it would be more efficient to have these two things handled together so that there isn't duplicative effort.

[00:08:26] Speaker 02:
That's your argument?

[00:08:27] Speaker 02:
That's like a tough week for jurisdiction.

[00:08:29] Speaker 02:
Because jurisdiction is like, you have it or you don't, right?

[00:08:32] Speaker 02:
It's not like, well, it would be more efficient.

[00:08:34] Speaker 02:
But you know how many people come up and ask me for advisory opinions on things?

[00:08:37] Speaker 02:
All the time.

[00:08:38] Speaker 02:
And I agree.

[00:08:39] Speaker 02:
In almost every case when they're asking for it, it's something that is most certainly going to come up below, and it would be more efficient for the whole process if I went ahead and decided it.

[00:08:47] Speaker 02:
But jurisdiction doesn't usually let me do that.

[00:08:49] Speaker 00:
So I agree with that, too.

[00:08:50] Speaker 00:
The practical consideration is that it would be more efficient.

[00:08:53] Speaker 00:
But what the court said in SCE is that when a tribunal disagrees with the way the government reads an applicable federal statute or regulation, that is a final decision, because it is a final determination that the government is misinterpreting a statute or regulation.

[00:09:08] Speaker 03:
And that's exactly what happened here.

[00:09:09] Speaker 03:
That would pretty much mean that in every case, you could appeal entitlement without regard to the resolution of quantum.

[00:09:17] Speaker 00:
I don't think it would apply in every case.

[00:09:20] Speaker 00:
I think there could be distinguishable circumstances.

[00:09:23] Speaker 03:
A few cases in which there would be no final judgment.

[00:09:26] Speaker 00:
In which there would be no final judgment.

[00:09:27] Speaker 03:
But mostly there would be, once there was an entitlement decision.

[00:09:31] Speaker 00:
So Judge Dyke, I think that would depend on the facts of this case.

[00:09:34] Speaker 00:
But in this case.

[00:09:36] Speaker 03:
Is there any difference in this case in terms of the jurisdictional issue between the drag claim and the other claim, if you view them as two separate claims?

[00:09:50] Speaker 00:
In terms of whether the court has jurisdiction?

[00:09:52] Speaker 00:
Yeah.

[00:09:52] Speaker 00:
Yes.

[00:09:53] Speaker 03:
So because there are two distinct claims... Okay, but I'm assuming there are two distinct claims, but in each one the quantum hasn't been determined.

[00:09:59] Speaker 03:
Is there a jurisdictional difference between the two?

[00:10:02] Speaker 00:
Yes.

[00:10:02] Speaker 03:
And what is it?

[00:10:04] Speaker 00:
The jurisdictional difference is that the drag credits claim was not remanded back to the parties for a computation of quantum.

[00:10:10] Speaker 00:
That was finally resolved.

[00:10:12] Speaker 00:
The board denied the government's drag credits claim.

[00:10:14] Speaker 00:
As for the CAS-418- Yeah, there's no sending it back for damages because the board said you don't get any, right?

[00:10:21] Speaker 00:
Exactly.

[00:10:21] Speaker 02:
They simply denied it outright.

[00:10:23] Speaker 02:
That claim is over.

[00:10:24] Speaker 02:
Nothing more for you to do with the board.

[00:10:26] Speaker 00:
That's right.

[00:10:26] Speaker 00:
So the court has jurisdiction under any reading of finality over the drag credits claim.

[00:10:32] Speaker 00:
The CAS-418 claim, again, we think it would be inconsistent with SCA if the court said it's not about jurisdiction.

[00:10:38] Speaker 03:
But the drag claim affects the overall computation, doesn't it?

[00:10:43] Speaker 00:
Yes, it does.

[00:10:45] Speaker 03:
So it factors in.

[00:10:47] Speaker 03:
There's no until there's a final determination.

[00:10:51] Speaker 00:
Sure.

[00:10:52] Speaker 00:
But Judge, it only factors in if the board doesn't deny the claim.

[00:10:55] Speaker 02:
It only factors in if you win on the drag claim.

[00:10:57] Speaker 00:
That's right.

[00:10:57] Speaker 02:
Like right now, the board is not going to take that into account on computation because they say you lose.

[00:11:02] Speaker 00:
Right.

[00:11:02] Speaker 02:
Right.

[00:11:02] Speaker 02:
So they're not they're not going to factor it in.

[00:11:04] Speaker 02:
If they do a computation, the drag claim is not going to be part of what they say.

[00:11:07] Speaker 02:
Now, what should we give them under the drag claim?

[00:11:09] Speaker 02:
Right.

[00:11:10] Speaker 02:
Right.

[00:11:10] Speaker 02:
So only if we overturn

[00:11:12] Speaker 02:
they're finding on live on the merits of the drag claim, do you get to go back and then argue how that impacts quantum?

[00:11:19] Speaker 00:
Yes, that's correct.

[00:11:20] Speaker 00:
OK.

[00:11:21] Speaker 00:
I'll just say one final.

[00:11:22] Speaker 03:
On the drag claim, so your contention is that this agreement was improper under the FAR and isn't binding.

[00:11:30] Speaker 03:
So what then is your view as to how drag should be treated?

[00:11:36] Speaker 03:
As I understand it, your view is that it should be excluded from the overhead pool, correct?

[00:11:44] Speaker 00:
Drag should be subtracted from the overhead pool, that's correct.

[00:11:49] Speaker 02:
I'm getting a little signal from you.

[00:11:50] Speaker 02:
Nobody can hear you.

[00:11:51] Speaker 02:
You have to make that microphone be a little closer to you, like move your binder or something.

[00:11:55] Speaker 03:
Does that work?

[00:11:56] Speaker 03:
Yes, much better.

[00:11:58] Speaker 03:
So, assuming you win on that, how is drag to be treated then?

[00:12:04] Speaker 00:
So drag, drag is something that collaborators pay Pratt directly.

[00:12:10] Speaker 03:
I know what it is, yeah.

[00:12:11] Speaker 03:
But how should it be treated?

[00:12:14] Speaker 03:
It's excluded.

[00:12:15] Speaker 03:
Your view is it should be excluded from the overhead pool, right?

[00:12:18] Speaker 00:
It should be excluded from the indirect cost pools, including the overhead pool, yes.

[00:12:22] Speaker 03:
And then is drag treated as part of the parts cost?

[00:12:27] Speaker 03:
What in your view should be done with it?

[00:12:29] Speaker 03:
Nothing?

[00:12:30] Speaker 00:
Nothing.

[00:12:31] Speaker 00:
I mean, it's something that Pratt has already received payment for from its collaborators.

[00:12:35] Speaker 00:
So the government should not be paying for it in any part.

[00:12:37] Speaker 00:
And therefore, it should be excluded.

[00:12:39] Speaker 00:
The failure to do that would violate the FAR's credits clause.

[00:12:43] Speaker 00:
And that's where the board got it wrong.

[00:12:45] Speaker 00:
The board applied the incorrect burden of proof on the government's obligation to prove a violation of the FAR credits clause because it required the government to match up individual line items within the indirect cost pool

[00:13:00] Speaker 00:
to the drag that Pratt received from its collaborator.

[00:13:03] Speaker 00:
And that's nowhere to be found in the FAR.

[00:13:05] Speaker 01:
Can you clarify for us the specific relief you're seeking, whether that would be a reverse on the drag claim or et cetera?

[00:13:14] Speaker 00:
Yes, so on the drag credits claim, we asked the court to reverse, first and foremost, the board's incorrect holding that the Accord and Satisfaction doctrine resolves the claim against the government.

[00:13:29] Speaker 00:
That was wrong because the accounting agreement, the only accord that's at issue, is not a valid government contract.

[00:13:35] Speaker 00:
It violates multiple FAR provisions.

[00:13:37] Speaker 00:
And then once the court does that, we are also asking the court to clarify what the burden of proof on the government is to prove a violation of FAR 31.201-5, which is the credits clause.

[00:13:53] Speaker 02:
If we agree with you on a court and satisfaction, does that end it or do we have to reach that other issue?

[00:13:58] Speaker 00:
I think you would have to reach that other issue, Your Honor, because the board used the incorrect burden of proof.

[00:14:04] Speaker 00:
And if you simply reverse an accord and satisfaction and remand it back to them, they're going to do the same thing again.

[00:14:12] Speaker 00:
And so that's why we asked for the court to also clarify the burden of proof under the drag credits claim.

[00:14:18] Speaker 02:
OK, you want to save some time for rebuttal?

[00:14:20] Speaker 00:
That would be great.

[00:14:20] Speaker 00:
Thank you.

[00:14:21] Speaker 02:
Mr. Hall?

[00:14:26] Speaker 04:
Thank you, Your Honors.

[00:14:27] Speaker 04:
May it please the court?

[00:14:28] Speaker 04:
Jeff Hall from Pratt & Whitney.

[00:14:30] Speaker 04:
I'll start with jurisdiction.

[00:14:32] Speaker 04:
And I have two primary points, one of which may actually, it's an acknowledgment that may come as somewhat of a surprise to the court.

[00:14:42] Speaker 04:
But in following the questions, first of all, we felt duty bound to let the court know about the precedent you've referred to concerning decisions by a board addressing only entitlement in that quantity.

[00:14:58] Speaker 04:
We see SCES distinguish it is not a CDA case.

[00:15:03] Speaker 04:
We acknowledge if the board were to extend it to a CDA case, there would be jurisdiction.

[00:15:10] Speaker 04:
Now, there are some authorities of this court that give some room under the CDA.

[00:15:16] Speaker 04:
Judge Moore, I think you alluded to them.

[00:15:19] Speaker 04:
They say it's not perfect congruence with the strict finality requirement that's applied in district court judgments.

[00:15:26] Speaker 04:
This is the Orlando Helicopter's case and the Connecticut Builder's case that we cite.

[00:15:32] Speaker 04:
And they are based on the congressional intent to make the CDA a relatively swift and inexpensive means of resolving disputes.

[00:15:42] Speaker 04:
That is proved enormously elusive here.

[00:15:44] Speaker 04:
But we still have a ways to go in resolving this dispute.

[00:15:48] Speaker 04:
And so in those cases, this court has looked at the posture of the case and whether, in light of the particular history of the case, there is some efficiency.

[00:15:59] Speaker 04:
This is one exception to the general rule, I think, Judge Moore, that you were referring to, where it would always be efficient.

[00:16:04] Speaker 01:
Counsel, what do you think about the possibility that we would reach the merits on the drag claim

[00:16:10] Speaker 01:
but conclude that there is no jurisdiction with respect to the CAS 418.

[00:16:16] Speaker 04:
Two thoughts on that, Judge Cunningham.

[00:16:17] Speaker 04:
First of all, we do maintain there is only one claim.

[00:16:21] Speaker 04:
The contracting officer's final decision asserted one claim, the CAS 418 violation for one remedy.

[00:16:28] Speaker 04:
One sum certain.

[00:16:31] Speaker 04:
The drag claim that is part of the case, we acknowledge that the theory is part of the case.

[00:16:38] Speaker 04:
But the contracting officer didn't cite the regulation, the credits clause regulation, that that theory is based on.

[00:16:46] Speaker 04:
And there was no separate claim there.

[00:16:49] Speaker 04:
Maybe more importantly, under the kinetic builders case, there is only one operative set of facts here.

[00:16:56] Speaker 04:
Kinetic builders said,

[00:16:57] Speaker 04:
To determine the number of claims, you look at the contracting officer's final decision, and you ask, is there a separate set of operative facts?

[00:17:06] Speaker 04:
Are they unrelated set of operative facts, or are they related?

[00:17:10] Speaker 04:
Here they are clearly related.

[00:17:13] Speaker 04:
The drag claim has always been part of the CAS 418.

[00:17:17] Speaker 04:
Claim the drag theory it has been referred to a claim by the by the board, but that does not determine it There is one set of operative facts, and there was one claim stated in contracting officers final decision So for that reason we don't think there's two claims And we don't agree that the drag claim seems to turn on the validity of the accounting agreement.

[00:17:39] Speaker 01:
Do you agree with that?

[00:17:40] Speaker 04:
Not entirely the accounting agreement is in part.

[00:17:43] Speaker 04:
Yes, it is one of two independent grounds though

[00:17:46] Speaker 04:
The accounting agreement that they challenge is not an advance agreement.

[00:17:51] Speaker 04:
But that doesn't mean it's unenforceable, as the board held.

[00:17:54] Speaker 04:
It is an enforceable contract supported by consideration that the government doesn't challenge.

[00:17:59] Speaker 04:
The government doesn't challenge consideration on appeal.

[00:18:02] Speaker 04:
But in addition, there is no evidence in the record.

[00:18:07] Speaker 04:
The board factually found this.

[00:18:10] Speaker 04:
based on testimony of witnesses on both sides that there is any portion of drag, which is a fixed reduction in revenue share, and overhead reimbursed by the government.

[00:18:23] Speaker 04:
There was never any reconciliation.

[00:18:26] Speaker 02:
DCA auditor heart testified to that and perhaps expert the van testified to it I can't take you back You never sort of finished on jurisdictions you were like building to something and then we stopped short of that So what were you gonna say?

[00:18:40] Speaker 02:
Are you gonna say the two claims stand or fall together on jurisdiction or were you gonna continue to?

[00:18:44] Speaker 02:
But what was your argument at the end of the day on that jurisdictional point?

[00:18:48] Speaker 04:
Two things, Your Honor.

[00:18:49] Speaker 04:
First, we do think the claims, we think there is one claim.

[00:18:53] Speaker 04:
And these two theories rise or fall together.

[00:18:56] Speaker 02:
OK, but suppose I didn't agree with that.

[00:18:58] Speaker 04:
Yes.

[00:18:58] Speaker 02:
Then what happens with jurisdiction?

[00:19:00] Speaker 04:
Well, then we think the court should take jurisdiction.

[00:19:04] Speaker 04:
If the court extends SBE, we see the benefits and advantages that are identified in the Orlando helicopter case.

[00:19:12] Speaker 04:
and the Connecticut Builders case for the court taking jurisdiction of the entire matter at this point.

[00:19:17] Speaker 04:
Given the factors that those cases say, the court may look at in the jurisdiction prediction concept in CDA cases.

[00:19:26] Speaker 04:
But we think, you know, right at the outset, we do think this would be an extension of the SCE case, but we think this precedent

[00:19:32] Speaker 04:
gives the courtroom to do it in the CDA context.

[00:19:36] Speaker 03:
But let's assume for the moment that there are two separate claims.

[00:19:39] Speaker 03:
Do you agree then, applying the Teledyne line of cases rather than the SCE, that there would be finality with respect to the drag claim?

[00:19:47] Speaker 04:
Well, there would be, except the Teledyne case, Your Honor, has this competing set of cases, the Connecticut Builders and the Orlando Helicopter case.

[00:20:00] Speaker 04:
which do suggest explicitly a relaxed context for the finality determination in some CDA cases.

[00:20:08] Speaker 04:
Do you think those would apply to the drag claim if they're treated as two separate claims?

[00:20:15] Speaker 04:
Yes, I think it would apply to the entire matter.

[00:20:18] Speaker 04:
The drag claim is a relatively small part of this, and the efficiency benefits in trying to advance the litigation

[00:20:26] Speaker 04:
would not be satisfied if the court were just to look at the drag claim.

[00:20:31] Speaker 04:
The CAS 418 issue is the one that would make jurisdiction make sense from the standpoint of efficient resources.

[00:20:42] Speaker 04:
Unless the court has other questions on jurisdiction, I will move to the GRS theory.

[00:20:48] Speaker 04:
GRS, gross revenue share, is a calculation.

[00:20:53] Speaker 04:
It is a calculation based on engine list prices.

[00:20:57] Speaker 04:
It is not based on actual prices.

[00:21:01] Speaker 04:
It is before a deduction of something called FIA.

[00:21:05] Speaker 04:
FIA, the record shows clearly, are enormous price discounts that Pratt Supplies provides to its airline customers because the market dictates that.

[00:21:17] Speaker 03:
And those discounts get passed on in the parts clause.

[00:21:20] Speaker 04:
Well, those discounts are taken out, and they are not revenue.

[00:21:26] Speaker 04:
The amount of those discounts included in GRIs is the parts cost.

[00:21:30] Speaker 04:
Well, they reduce the revenue.

[00:21:33] Speaker 04:
They're not revenue to begin with, and they do reduce the amount that the collaborators are ultimately paid.

[00:21:39] Speaker 04:
Because they're not real revenue and they're not shared with collaborators They're not part of the parts cost and they totaled about two billion dollars and inclusion of these inflated amounts It has the measure of them of the parts cost would produce distorted allocations that's exactly what calves for 18 aims to prevent and

[00:22:02] Speaker 04:
And so the GRS is enormously inflated because it's not real revenue, and it's not shared with collaborators.

[00:22:11] Speaker 04:
And therefore, it doesn't satisfy Rumsfeld.

[00:22:14] Speaker 02:
Why do you think NRS is a better measure than GRS for what Pratt actually pays for collaborator parks?

[00:22:21] Speaker 04:
Well, we do think NRS is better, but we think MTC.

[00:22:26] Speaker 04:
Because NRS, Your Honor, does not include these price discounts which Pratt

[00:22:32] Speaker 04:
does not receive his revenue and they are not shared with collaborators.

[00:22:36] Speaker 04:
So if the measure of the parts price is revenue share payments, GRS does not qualify.

[00:22:46] Speaker 02:
But I think maybe what the government would say in response to that is that if NRS was used, that would force the government to cover all indirect costs the contractor has for all of your both commercial and military segments.

[00:23:01] Speaker 02:
I'm not sure, but I think Mr. Kushner is going to get up and tell me that afterwards.

[00:23:04] Speaker 04:
Well, that wouldn't be accurate if you did, Your Honor, because the difference between GRS and NRS is two things, primarily.

[00:23:10] Speaker 04:
It is the FIA discounts, which are not revenue, and it is drag.

[00:23:15] Speaker 04:
And drag is part of the sharing of the joint venture-like responsibilities.

[00:23:21] Speaker 03:
Well, your point is that the discounts reduce the actual parts cost.

[00:23:24] Speaker 04:
Yeah, they reduce the revenue.

[00:23:26] Speaker 04:
before it's even shared.

[00:23:28] Speaker 04:
And revenue share... Well, you're making it too complicated.

[00:23:30] Speaker 03:
They reduced the parts cost, right?

[00:23:32] Speaker 04:
I guess I just resist the idea that they were part of the parts cost to begin with, but I agree with the mathematical effect, Your Honor.

[00:23:40] Speaker 04:
And the court in Rumsfeld, as you know better than probably anybody, said revenue share payments comprise the price of

[00:23:48] Speaker 04:
The court did not say it's gross revenue share.

[00:23:52] Speaker 04:
And when the court said gross revenue share is consideration, it didn't say it's the exclusive consideration.

[00:23:58] Speaker 04:
It's undisputed that the collaborators provide many other things, including sharing in expenses and risks.

[00:24:07] Speaker 04:
So gross revenue share, we submit it's not revenue and it's not shared with the collaborators and therefore... What happens to the drag costs?

[00:24:17] Speaker 03:
Assume you were to lose on the court of satisfaction point.

[00:24:20] Speaker 03:
What happens to drag costs?

[00:24:23] Speaker 03:
There's nothing more to be done with them?

[00:24:25] Speaker 04:
Well, there is, Your Honor, and there's been a failure of proof, and this burden of proof... What's the issue then?

[00:24:31] Speaker 04:
The issue is whether any amount of drag, which is a percentage share reduction in the revenue share, it's just a 3% or 4% reduction,

[00:24:41] Speaker 04:
actually covers specific, is meant to cover any specific overhead expenses that the government... Is your point that the government is not paying drag so it's not part of the parts cost?

[00:24:53] Speaker 04:
Our point is the government... Yes, that is true and also it is true that

[00:25:01] Speaker 04:
that there is no showing of any violation of the credits clause.

[00:25:06] Speaker 04:
There's no apportionment of drag and identification with any cost the government reimbursed grant for.

[00:25:13] Speaker 04:
And I do not believe the government has appealed or cited any authority in support of this burden of proof argument.

[00:25:20] Speaker 04:
The board found

[00:25:21] Speaker 04:
that drag was the shared obligation and that there was no evidence based on testimony of DCAA auditor Hart and Ms.

[00:25:31] Speaker 04:
Levan for Pratt that there was no portion of drag was shown to be reimbursed by the government.

[00:25:39] Speaker 04:
That's a failure of the credits clause, which at the end of the day is the basis for this.

[00:25:44] Speaker 04:
The APA accordance had a second.

[00:25:46] Speaker 03:
You're making it too complicated.

[00:25:47] Speaker 03:
I'm sorry.

[00:25:48] Speaker 03:
I'm asking you a simple question, assuming you lose.

[00:25:51] Speaker 03:
On the Court and Satisfaction question, what happens to drag?

[00:25:55] Speaker 03:
Your view is that there's nothing more to be done with it at that point?

[00:26:02] Speaker 04:
If we lose on the Court and Satisfaction, we would be arguing on the Credits Clause, which is an independent obstacle the government faces on drag.

[00:26:12] Speaker 04:
That would be the immediate consequence, Your Honor, and the board found and relied on both grounds in its decision.

[00:26:19] Speaker 04:
two grounds to deny their drag-spread theory.

[00:26:22] Speaker 04:
I briefly, perhaps in a minute, would just like to reference our cross-appeal issue, which is MTC.

[00:26:37] Speaker 04:
And MTC is the negotiated estimate of parts.

[00:26:42] Speaker 04:
And the government says, and the board found that, or held, that MTC was inconsistent with Rumsfeld and CAS 418.

[00:26:53] Speaker 04:
And we submit that was an error of legal interpretation.

[00:26:57] Speaker 02:
Rumsfeld did not have... Just to be clear, we only reach a cross-appeal if we say we have jurisdiction over CAS 418, right?

[00:27:03] Speaker 04:
Yes, I agree.

[00:27:05] Speaker 04:
Making sure.

[00:27:10] Speaker 04:
I'm sorry, the Rumsfeld did not reach MTC, Pratt did not use MTC until two years after Rumsfeld was decided.

[00:27:19] Speaker 04:
The court held revenue share payments, comprised parts of parts, but did not say that was the exclusive measure.

[00:27:28] Speaker 04:
And as the CAS-418— The problem is that MTC is an estimate, it's not an actual

[00:27:32] Speaker 04:
That's correct, Your Honor.

[00:27:34] Speaker 04:
And the CAS recognizes there are times when you don't have a per part price, like we have here.

[00:27:42] Speaker 04:
For example, when the government furnishes material or a contractor furnishes material to the engine maker, there's no per part invoice.

[00:27:50] Speaker 04:
alternative measures can be used.

[00:27:52] Speaker 04:
That was the CAS 419 legislative history.

[00:27:56] Speaker 04:
Not adopted, but in not adopting it, the board said we agree and endorse the accounting principles behind it.

[00:28:03] Speaker 04:
This is one of those cases where we don't have per-part prices, and revenue share payments will cause fluctuations that MTC will avoid, and CAS 418's purpose is consistent allocations based on a reasonable proportion of the causal beneficial relationship.

[00:28:20] Speaker 01:
Council, are you aware of any case law that would prevent us from reaching a different conclusion in terms of jurisdiction on the CAS 418 claim and the DRAD claim, assuming we think they're two separate claims?

[00:28:34] Speaker 04:
Not beyond what we've discussed and cited, Your Honor.

[00:28:37] Speaker 04:
I think we maintain that there are one claim, but I understand your premise is that there were two.

[00:28:44] Speaker 04:
And we think I don't have anything to add beyond what I've cited.

[00:28:51] Speaker 04:
If the court has no further questions, I'll save the brief time to show you the bottle.

[00:28:55] Speaker 04:
Very good.

[00:28:56] Speaker 04:
Thank you.

[00:28:58] Speaker 02:
Mr. Kushner?

[00:29:00] Speaker 02:
Give him two minutes.

[00:29:09] Speaker 00:
Thank you.

[00:29:10] Speaker 00:
So I'll start with MTC.

[00:29:14] Speaker 00:
The board correctly resolved the MTC issue.

[00:29:16] Speaker 00:
It correctly held that MTC is not the material cost of collaborator parts, because it would violate Rumsfeld.

[00:29:22] Speaker 00:
MTC is not revenue share.

[00:29:24] Speaker 00:
And in Rumsfeld, the court clearly said that revenue share is the cost of collaborator parts, because that's what the collaboration agreements provide.

[00:29:32] Speaker 00:
And as you correctly pointed out, Judge Dyke, MTC is not an actual cost.

[00:29:36] Speaker 00:
And the CAS requires an actual cost to be used.

[00:29:40] Speaker 02:
But did Rumsfield ever consider whether CAS compliant measures, aside from revenue share, existed?

[00:29:47] Speaker 00:
Well, it didn't because it doesn't matter.

[00:29:50] Speaker 00:
The collaboration agreements say that revenue share is the cost of collaborator parts.

[00:29:56] Speaker 00:
That's what the collaboration agreements provide.

[00:29:59] Speaker 00:
These are the same collaboration agreements in this case as they were in Rumsfeld.

[00:30:03] Speaker 00:
As long as that's the cost under the collaboration agreements, that's the cost that has to be used.

[00:30:09] Speaker 03:
Let me give you a hypothetical.

[00:30:11] Speaker 03:
Suppose this revenue share agreement said the cost of a part is $1,000, OK?

[00:30:17] Speaker 03:
And as a result of agreements with the airlines, eventually that cost is reduced.

[00:30:29] Speaker 03:
$800 because of a rebate.

[00:30:31] Speaker 03:
Are you still maintaining that under those circumstances, the cost of the part is $1,000 rather than $800?

[00:30:38] Speaker 00:
So I think your question is not so much about MTC.

[00:30:43] Speaker 00:
I think it's the difference between GRS and NRS, correct?

[00:30:48] Speaker 00:
Yeah.

[00:30:48] Speaker 00:
If it's a true discount the way you described, and I think we're talking about FIA.

[00:30:55] Speaker 00:
If FIA is a true discount the way you described, then I think you would be correct.

[00:31:00] Speaker 00:
Because Pratt's cost is subject to the revenue that it receives from commercial customers.

[00:31:07] Speaker 00:
If that revenue goes down, revenue share goes down as well.

[00:31:10] Speaker 00:
Here's the problem with that.

[00:31:11] Speaker 00:
Number one, we don't have evidence about whether FIA really is akin to a discount.

[00:31:17] Speaker 00:
We've asked the board to get access to FIA agreements that Pratt has to figure out whether it really is a discount, and the board denied our motion to compel.

[00:31:27] Speaker 00:
That's number one.

[00:31:27] Speaker 03:
Number two, even if FIA is akin... If we were to decide that this is a relevant issue, are you suggesting that we should say that there should be more discovery on this issue?

[00:31:40] Speaker 03:
You didn't raise that.

[00:31:41] Speaker 00:
Well, if it matters for the purpose of deciding whether NRS is appropriate, then perhaps there should be more discovery.

[00:31:50] Speaker 00:
But here's the second point, and I think it's also an important one.

[00:31:53] Speaker 00:
Even if FIA is treated as a simple discount, it still would not justify using NRS, because NRS includes other program expenses other than FIA that are not a discount by any stretch of that word.

[00:32:08] Speaker 03:
But that seems like a separate issue.

[00:32:12] Speaker 00:
It is, Your Honor, but the board used NRS as the cost of collaborator parts.

[00:32:17] Speaker 00:
That means that everything subtracted from GRS to arrive at NRS would have to be a discount.

[00:32:23] Speaker 00:
And that's simply not true because drag, you know,

[00:32:25] Speaker 00:
It's not a discount.

[00:32:26] Speaker 00:
It's not something that goes to commercial customers at all, whether it's a rebate or it's a discount.

[00:32:31] Speaker 00:
They don't see it.

[00:32:32] Speaker 03:
No, no, no.

[00:32:33] Speaker 03:
It's just the revenue sharing that results in a discount.

[00:32:36] Speaker 03:
To the extent that the revenue sharing results in a discount to the parts cost, that should reduce the parts cost.

[00:32:41] Speaker 03:
That's the simple argument that's being made.

[00:32:44] Speaker 00:
Well, sure, but everyone agrees, both us and Pratt agree, that FIA and drag are not directly related to the cost of revenue parts.

[00:32:54] Speaker 00:
Pratt has said that in the red brief multiple times.

[00:32:57] Speaker 00:
It's said it on page 5 of the red brief with respect to FIA, and it's said it on page 17, I believe, with respect to drag.

[00:33:04] Speaker 00:
So those costs are not directly related to the cost of collaborator parts, which is why a measure like NRS that allows Pratt to subtract both of those things, it cannot be the material cost of collaborator parts.

[00:33:20] Speaker 02:
Okay, thank you, counsel.

[00:33:21] Speaker 02:
We're going to give Mr. Hall three minutes for rebuttal because we went over with Mr. Kushner, but you rebuttal, as you I'm sure understand, is limited to the cross field.

[00:33:34] Speaker 04:
Yes, Your Honor, thank you.

[00:33:35] Speaker 04:
And I'll be brief.

[00:33:39] Speaker 04:
On MTC, in no sense did the Rumsfeld Court reach the issue.

[00:33:45] Speaker 04:
It was not presented.

[00:33:47] Speaker 04:
And it does not say, as I think one of the Court's questions suggested, that revenue share payments is the exclusive method.

[00:33:57] Speaker 04:
In 2006, the parties agreed, at the time Pratt settled Rumsfeld,

[00:34:02] Speaker 04:
that ultimately, if there was a dispute concerning collaborator parts, Pratt would work with the government to either adopt revenue share payments or another CAS-compliant method.

[00:34:16] Speaker 04:
Both parties recognized, not exclusive.

[00:34:21] Speaker 04:
Second, the collaboration agreements, I heard it said,

[00:34:26] Speaker 04:
don't answer the question either about the revenue share parts by themselves.

[00:34:31] Speaker 04:
They don't say that revenue share is the cost of parts.

[00:34:36] Speaker 04:
The collaboration agreements don't say that.

[00:34:39] Speaker 04:
And Rumsfeld said revenue share payments comprise the cost of parts, as the Court knows, didn't reach MTC.

[00:34:48] Speaker 04:
And unless the court has other questions, those were the additional points that limited to the cross appeal.

[00:34:53] Speaker 02:
Thank you, counsel.

[00:34:54] Speaker 02:
I thank the counsel.

[00:34:56] Speaker 02:
This case is taken under submission.

[00:34:58] Speaker 04:
Thank you.