Teknowledge Corp. v. United States , 350 F. App'x 452 ( 2009 )

NOTE: This disposition is nonprecedential.
United States Court of Appeals for the Federal Circuit
2009-5053
TEKNOWLEDGE CORPORATION,
Plaintiff-Appellant,
v.
UNITED STATES,
Defendant-Appellee.
Benedict O’Mahoney, Teknowledge Corporation, of Palo Alto, California, for
plaintiff-appellant.
David M. Hibey, Trial Attorney, Commercial Litigation Branch, Civil Division,
United States Department of Justice, of Washington, DC, for defendant-appellee. With
him on the brief were Tony West, Assistant Attorney General, Jeanne E. Davidson,
Director, and Todd M. Hughes, Assistant Director.
Appealed from: United States Court of Federal Claims
Judge Thomas C. Wheeler
NOTE: This disposition is nonprecedential.
United States Court of Appeals for the Federal Circuit
2009-5053
TEKNOWLEDGE CORPORATION
Plaintiff-Appellant,
v.
UNITED STATES,
Defendant-Appellee.
Appeal from the United States Court of Federal Claims in Case No.
06-CV-310, Judge Thomas C. Wheeler.
____________________________
DECIDED: November 3, 2009
____________________________
Before MAYER, LOURIE, and RADER, Circuit Judges.
LOURIE, Circuit Judge.
Teknowledge Corporation (“Teknowledge”) appeals from the decision of the
United States Court of Federal Claims (“Claims Court”) granting summary judgment in
favor of the United States in Teknowledge’s suit for disallowed software amortization
costs that Teknowledge sought to allocate to its government overhead pool.
Teknowledge v. United States, 85 Fed. Cl. 235 (2009). Because we agree that
Teknowledge’s software costs are not allocable to the government, and therefore not
allowable, we affirm.
BACKGROUND
Teknowledge is an internet transaction company that provides service solutions
to allow processing of secure transactions over the Internet. In 1999, Teknowledge
began developing the TekPortal software, a customer information aggregation tool for
the finance service industry. The software was developed for use by both commercial
and governmental customers. However, the government has never purchased the
TekPortal software. The development of the software was done by a unit of
Teknowledge’s commercial segment.
In 2001, Teknowledge amortized costs related to the development of the
TekPortal software in the amount of $885,430. Teknowledge allocated 31 percent of
those costs, $273,776, to government contracts it had on other projects by charging that
amount of money to its overhead pool of indirect costs. On July 25, 2005, the Defense
Contract Management Agency (“DCMA”) issued a notice of intent to disallow the
amortized software costs claimed by Teknowledge for the development of TekPortal.
On January 19, 2006, the DCMA issued a final decision disallowing the costs. On April
24, 2006, Teknowledge filed a complaint in the Claims Court seeking disallowed
amortized software costs in the amount of $285,656. Both parties then filed cross-
motions for summary judgment. On January 7, 2009, the Claims Court granted the
government’s summary judgment motion and denied Teknowledge’s motion. The
Claims Court found that no genuine issue of material fact existed as to whether
Teknowledge’s development costs for the TekPortal product were allocable to the
government. The court concluded that the developmental costs were not allocable
under subpart 31.201-4 of the Federal Acquisition Regulation (“FAR”). The court found
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the costs were not incurred specifically for a contract and they did not benefit a contract
or other government work to which the costs could be distributed in reasonable
proportion to the benefit received. The court also found that the TekPortal development
costs were not necessary to the overall operation of Teknowledge’s business.
Therefore, the court concluded that these costs could not be allowable under FAR §
31.201-2.
Teknowledge timely appealed to this court. We have jurisdiction pursuant to 28
U.S.C. § 1295(a)(3).
DISCUSSION
We review a grant of summary judgment by the Claims Court de novo. Cienega
Gardens v. United States, 194 F.3d 1231, 1238 (Fed. Cir. 1998). Summary judgment is
properly granted when, viewing the evidence in the light most favorable to the non-
movant, the record indicates that there is “no genuine issue as to any material fact and
that the moving party is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c);
Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
Under the FAR, a contractor is allowed to charge to a government contract only
“those allocable costs which are allowable pursuant to Part 31 [of the FAR] and
applicable agency supplements.” 48 C.F.R. 31.201-1 (b). That part of the FAR
provides that:
A cost is allocable if it is assignable or chargeable to one or more
cost objectives on the basis of relative benefits received or other equitable
relationship. Subject to the foregoing, a cost is allocable to a Government
contract if it:
(a) Is incurred specifically for the contract;
(b) Benefits both the contract and other work, and can be
distributed to them in reasonable proportion to the benefits
received; or
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(c) Is necessary to the overall operation of the business,
although a direct relationship to any particular cost objective
cannot be shown.
48 C.F.R. 31.201-4. Under another provision of the FAR, a cost is allowable only if it is:
(1) reasonable; (2) allocable; (3) complies with the Cost Accounting Standards (“CAS”)
or generally-accepted accounting principles and practices; (4) complies with the terms
of the contract; and (5) complies with any limitation in FAR subpart 31.2. 48 C.F.R.
31.201-2.
Teknowledge challenges the criteria used by the Claims Court to evaluate
allocability of Teknowledge’s developmental costs under FAR § 31.201-4. Teknowledge
argues that the Claims Court erred in requiring Teknowledge to demonstrate a certain
benefit to the government from the development of the TekPortal software.
Teknowledge contends that allocability of the developmental costs may be determined
simply by the potential future benefits to be conferred upon the government by the
software. Teknowledge concedes that in 2001, the government had not purchased the
TekPortal software and there was no nexus between the software and an existing
government contract. Therefore, it argues, the Claims Court improperly looked for such
a nexus and concluded that any benefit to the government from the software would be
too remote and insubstantial to deem the costs allocable. Teknowledge argues that
under this Court’s precedent, FAR § 31.201-4 is an allowability provision that reflects
the allocability provision of the Cost Accounting Standards. Because the developmental
costs of the TekPortal software are “indirect” rather than “direct” costs, Teknowledge
argues, they are allocable under the CAS provisions and are not subject to disallowance
under the provisions of FAR § 31.201-4. Alternatively, Teknowledge argues that it has
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proven allocability under the requirements of FAR §§ 31.201-4 (b), (c). It argues that
the costs indirectly benefit the government and are necessary to Teknowledge’s overall
business. Under FAR § 31.201-4(b), Teknowledge argues it has satisfied the allocation
requirement by its distribution of the developmental costs to various government
contracts based upon potential future sales. According to Teknowledge, the fact that
such sales never came to fruition is not relevant to the allocation. Similarly,
Teknowledge argues that potential benefits to the government from the TekPortal
software are sufficient to satisfy FAR § 31.201-4(c). The potential benefits that
Teknowledge points to include its ability to execute its business plan and remain viable
by performing government contracts and developing software.
The government responds that this case presents a straightforward application
of FAR § 31.201-4. It argues that the amortized TekPortal development costs do not
meet any of the allocability requirements listed in the FAR. The government further
argues that these costs did not benefit a contract or any other governmental work,
directly or indirectly, and are not necessary to the overall operation of Teknowledge.
The government asserts that none of the material facts are in dispute and therefore the
Claims Court properly granted judgment as a matter of law. To the extent that
Teknowledge suggests that the FAR does not apply to the evaluation of its software
development costs, the government contends that Teknowledge has failed to show any
relationship under any standard between the costs and any government cost objectives.
We agree with the government that the Claims Court correctly held that the
developmental costs of the TekPortal software are not allowable as a matter of law. We
are not persuaded by Teknowledge’s argument that, following our decision in Boeing, it
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does not need to demonstrate any benefit arising from the developmental costs to any
government contract. See Boeing N. Am., Inc. v. Roche, 298 F.3d 1274 (Fed. Cir.
2002). In Boeing, we faced the question of which standard should apply for determining
the allocability of the settlement costs of a shareholder derivative suit. Id. at 1281-84.
In reaching the question whether such legal expenses are allocable, we noted “that CAS
does not require that a cost directly benefit the government’s interests for the cost to be
allocable.” Id. at 1284. Instead, the court emphasized that “benefit,” as required by the
FAR provisions, was a concept necessitating a contractor to show a nexus between the
contractor’s cost and the contractor’s government work in order to allocate the cost to a
government contract. Id. We agree with the Claims Court that Teknowledge has failed
to demonstrate a nexus between its software development costs and any government
work that it has contracted to do.
Regardless of the fact that the government never contracted with Teknowledge
to develop or use the TekPortal software, Teknowledge argues that these costs should
be allocable to its government contracts because of potential benefits that the software
provides. We find Teknowledge’s argument unpersuasive. As we have held previously,
where benefits to the government contract are remote and insubstantial, the
requirement of a “benefit” is not met. FMC Corp. v. United States, 853 F.2d 882, 886
(Fed. Cir. 1988). Given that Teknowledge’s costs resulted from work done in
anticipation of acquiring government purchase orders and contracts, the Claims Court
properly found that any benefit from the development of the TekPortal software to any
government work would be remote and insubstantial. Cf. KMS Fusion, Inc. v. United
States, 24 Cl. Ct. 582, 591-92 (Cl. Ct. 1991.) (holding that the cost of paying
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government affairs consultants was allocable to a government contract where there
were specific direct benefits to an existing contract).
We also reject Teknowledge’s argument that a sufficient nexus exists between
the costs and its government work because its software development costs are indirect,
not pertaining to a specific contract, but are allocable under various CAS provisions to
the different contracts that it has with the government. As the government points out,
there are no underlying government contracts that are in any way related to the
TekPortal software that would allow Teknowledge to properly allocate these indirect
costs under any accounting standard. Moreover, the Claims Court found that
Teknowledge has proffered no evidence to show how TekPortal keeps Teknowledge
afloat or will bring in new business in the future. The Claims Court therefore did not err
in concluding that Teknowledge had failed to show any nexus between the TekPortal
development costs and any government contract. Our decision in Boeing does not
mandate a different result.
We have considered Teknowledge’s remaining arguments and find them
unpersuasive. For the foregoing reasons, the Claims Court properly granted summary
judgment on the government’s motion. Accordingly, we affirm.
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