The Federal Circuit S Abrogation of the Nafi Doctrine: an En Banc Message with Implications

The Federal Circuit’s Abrogation of the NAFI Doctrine:

An En Banc Message with Implications for Other Jurisdictional Challenges?

W. Stanfield Johnson[*]

TABLE OF CONTENTS

I.Introduction......

II.History of the NAFI Doctrine......

A.The Genesis of the Rule......

B.Expansion of the Doctrine......

C.The Limited Congressional Correction......

D.NAFI Precedents After the 1970 Act......

III.The Slattery III Decision......

A.The Panel Decision......

B.The En BancDecision in Slattery III

1.The Tucker Act Waiver

2.Related Enactments Providing for Payment of Tucker Act Judgments from Appropriations

3.Review of the Kyer Line of Precedents

4.Dealing With the Counter Arguments

5.Resolving the Conflicting Precedents

IV.Conclusion: A Broader Message?......

I.Introduction

There is a widely-held perception, that the Court of Appeals for the Federal Circuit (Federal Circuit) has changed the law of government contracts inherited from its predecessor court over 30 years ago, the United States Court of Claims.[1] This view espouses that the Federal Circuit’s evolving government contracts law has become stricter and more formalistic in its assessment of contractor claims and defenses.[2] Consequently, whereas the U.S. Court of Claims stated that its mandate was to serve as the nation’s “conscience,”[3] the Federal Circuit’s decisions suggest that its priority is to protect the public fisc.[4]

The evolutionary character of government contracts law in the Federal Circuit has not taken place through en banc decisions, which should serve as the exclusive means of overturning the court’s prior precedent.[5] Rather, the evolution has resulted from an accretion over time of panel decisions. Indeed, the Federal Circuit’s most significant en banc contract decision, Winstar Corp. v. United States,[6] rejected sovereign defenses based on the principle that the United States as a contracting party is generally accountable under the law of contracts between private parties[7] – a jurisprudential premise echoed by the Supreme Court in its affirmance.[8] Yet subsequent panel decisions have disregarded this fundamental rule in rejecting contractor claims,[9]causing Professor Ralph C. Nash, Jr.,a leading commentator on government contracts law, to remark that the Federal Circuit has departed from the “decisional attitude” of the U.S. Court of Claims.[10]

In contrast to this history, the Federal Circuit issued its surprising and remarkable en banc decision in Slattery v. United States (Slattery III),[11] which boldly abrogated the long-standing “NAFI Doctrine” established by the U.S. Court of Claims sixty years before.[12] Under this jurisdictional rule, the Tucker Act[13] did not waive sovereign immunity from contract claims against non-appropriated fund instrumentalities (NAFIs) of the United States.[14] This bar was premised on the U.S. Court of Claims’ construct that statutes providing for appropriations to pay Tucker Act judgments – ultimately the Judgment Fund[15] – restricted the waiver of sovereign immunity and thus its jurisdiction.[16]

Slattery III, however, persuasively deconstructed the NAFI Doctrine’s rationale through an analysis of the history and purposes of the appropriation statutes.[17] The en banc decision, in an opinion by Judge Pauline Newman for a majority of six, held that “the jurisdictional foundation of the Tucker Act is not limited by the appropriation status of the agency’s funds or the source of funds by which any judgment may be paid.”[18] Slattery IIItherefore ended a seemingly entrenched rule, though one recognized to be unjust, and opened the court’s doors to NAFI contract claims.

Additionally, the Federal Circuit’s opinion in Slattery III extended beyond mere statutory analysis and suggested broader significance. Confronted by the dissenters’ powerful argument that the NAFI Doctrine had been authoritatively accepted for so long,[19] the en banc majority rested its decision on fundamental principles governing Tucker Act jurisdiction.[20] The court reaffirmed adherence to the rule, established by the Supreme Court in United States v. Mitchell,[21] that the broad Tucker Act waiver of sovereign immunity could not be limited except in unambiguous, authoritative terms.[22] In contrast, the dissenters relied on the often invoked contrary canon of construction that waivers of sovereign immunity have to be ”strictly construed.”[23] The majority rejected this maxim as applied to the Tucker Act.[24] Thus, the Federal Circuit’s en banc decision also stands for the broader proposition that jurisdiction over claims of contract breaches by government agencies exists “unless such jurisdiction was explicitly withheld or withdrawn by statute. . . .”[25]

This Article reviews the contours of the Slattery III decision in depth and concludes that the opinion not only overturned the NAFI Doctrine but also delivered a more powerful message. Part II of this Article examines the history of the NAFI Doctrine and how it became entrenched in government contracts law. Part III then discusses the Federal Circuit’s Slattery III opinion, beginning first with an overview of the panel decision and then a thorough analysis of Judge Newman’s majority en banc decision and the dissenting positions to which it gave rise. Part IV then concludes this Article by explaining the significance of the Slattery III opinion as delivering an arguably broader message regarding the use of jurisdictional rules to dismiss government contract claims.

II.History ofthe NAFI Doctrine

A.The Genesis of the Rule

The NAFI Doctrine stemmed from a 1942 Supreme Court decision that did not even involve the Tucker Act. In Standard Oil Co. of California v. Johnson,[26] the Court held that military post exchanges were immune from state taxation as “arms of the [G]overnment,” with “whatever immunities it may have under the [C]onstitution and federal statutes.”[27] In so ruling, the Court remarked that “[t]he [G]overnment assumes none of the financial obligations of the exchange[s].”[28]

This observation led the U.S. Court of Claims, in Borden v. United States,[29] decided in 1953, to deny Tucker Act jurisdiction over claims for breach of contract by the exchanges.[30] The court “reluctantly” reached this conclusion per the Supreme Court decision:

If this were a case of first impression we might be inclined to hold that the entire activity is so much an integral part of the Army’s actual operational structure as to make it a direct agency of the Government, notwithstanding the funds are not ordinarily appropriated for the operation of the exchanges.[31]

As a result, Chief Judge Jones, writing for the court, noted the “strange anomaly”:

For the Army to contend and to provide by regulation that it is not liable since it did not act in its official capacity would be like a man charged with extramarital activity pleading that whatever he may have done was done in his individual capacity and not in his capacity as a husband.[32]

Judge Whittaker dissented, stating that the majority’s conclusion “just cannot be.”[33] “The question of the liability of the United States on the contracts of post exchanges,” he wrote, was “not presented to the Supreme Court” in Standard Oil Co. of California.[34] Judge Whittaker concluded that “Congress did not mean for this to happen” and in the Tucker Act, “it gave its consent to be sued on its contracts.”[35] However, notwithstanding the anomaly recognized in both the majority and dissenting opinions, the U.S. Court of Claims established the NAFI Doctrine as it applied to military exchanges, with the caveat that the unfairness of “the situation should be called to the attention of the Congress.”[36]

B.Expansion of the Doctrine

Kyer v. United States,[37] decided in 1966, extended the NAFIDoctrine’s application beyond military exchanges and elaborated on the rule’s rationale.[38] In Kyer, the U.S. Court of Claims held that the Grape Crush Administrative Committee of the Department of Agriculture was not subject to a breach of contract lawsuit because it was a non-appropriated fund instrumentality “neither supported by appropriations nor authorized, in any manner, to obligate such funds.”[39]

To justify its decision, the court bridged jurisdictional enactments, including the Tucker Act, with a sequence of enactments providing for appropriations to pay for judgments rendered against the United States – i.e., the legislation creating the permanent, indefinite Judgment Fund.[40] The court’s logic went like this: if the Tucker Act judgments must be paid out of funds appropriated by Congress, there can be no jurisdiction and no waiver of sovereign immunity for breaches of contracts not supported by appropriated funds.[41]

Thus, in the court’s words: “While the terms of [the Tucker Act] are broad, its words must be read in connection with and must be regarded as limited by another statute which provides that our judgments are paid only from appropriated funds.”[42] In Kyer, there was no mention of military exchanges or citation to either Standard Oil Co. of California or Borden, but the court again expressed the sentiment that “the result reached spells an unduly harsh outcome . . . sorely need[ing] congressional correction.”[43]

C.The Limited Congressional Correction

In 1970, Congress addressed the NAFI Doctrine and the inequitable result it fostered, but, as it turned out, Congress only offered a limited correction to the jurisdictional loophole.. A Senate bill would have eliminated the doctrine entirely by providing that “an express or implied contract with a non-appropriated fund activity of or under the United States or a department or agency of the United States shall be considered an express or implied contract with the United States.”[44] Citing Kyer, Borden, and other decisions, the Senate Report explained that:

S.980 will fill a gap in the Tucker Act’s waiver of immunity of the United States to claims based upon contracts with departments or agencies of the Government . . . . The courts have repeatedly held . . . that the Federal Government’s liability to suit . . . only exists with respect to contract obligations to be paid out of appropriated funds.[45]

The Senate Report therefore described the NAFI Doctrine as “an anachronistic and baseless distinction” to Tucker Act jurisdiction.[46]

The House disagreed with S.980 and blocked the Senate’s sweeping addition to the Tucker Act.[47] The House Report expressed concern about the unavailability of data concerning non-appropriated fund activities, the uncertainty about the definition of such activities, and the potential lack of resources to reimburse the Government should lawsuits against these activities be allowed.[48] The report concluded that “Congress ought not to expose the Federal Government to liability for allnonappropriated fund activities unless such data is assembled.”[49]

Consequently, the House changed the legislation by extending jurisdiction only to specified military post exchanges and NASA exchange councils.[50] The House Report explained that “[t]hese types of activities have sufficient assets . . . to reimburse the United States in the event of any judgment incurred by them which is paid by the United States,” and thus “this proposal would result in no costs to the taxpayers.”[51] This limited House version passed in 1970 (the 1970 Act) and added the following language to the Tucker Act:

For the purpose of this paragraph, an express or implied contract with the Army and Air Force Exchange Service, Navy Exchanges, Marine Corps Exchanges, Coast Guard Exchanges, or Exchange Councils of the National Aeronautics and Space Administration shall be considered an express or implied contract with the United States.[52]

The 1970 Act became the subject of discussion by the Supreme Court in United States v. Hopkins,[53]where the issue was whether a claim against the Army and Air Force Exchange Service arose from an “appointment,” rather than a “contract” of employment within the Tucker Act’s breach of contract jurisdiction.[54] Based on the 1970 Act, jurisdiction existed with respect to contracts with the military exchanges, which the Court acknowledged in its opinion.[55] The Court also acknowledged the “series of decisions by the Court of Claims to the effect that it lacked jurisdiction over claims concerning the activities of non-appropriated fund instrumentalities.”[56] The Court did not object to this rule, except to note its harsh result.[57]

D.NAFI Precedents After the 1970 Act

Subsequent to Congress’ enactment of the 1970 Act, the U.S. Court of Claims proceeded on the premise that the NAFI Doctrine - though limited by the statute -remained viable, and that Kyer’s jurisdictional analysis still had to be addressed. What emerged from the case law was a set of refinements that produced differing results as applied. Between 1970 and the creation of the Federal Circuit in 1982,[58]U.S. Court of Claims panels issued a series of decisions that distinguished Kyer and softened its inequitable impact. These decisions sustained Tucker Act jurisdiction, even though the entity at issue was financially self-supporting, because the panels found that Congress had not unambiguously separated the agency from appropriated funds.[59] Perhaps the most important illustration of this trend is L’Enfant Plaza Properties, Inc. v. United States.[60] This decision acknowledged Kyer, stating:

The jurisdictional grant under the Tucker Act is limited by the fact that judgments awarded by this court are to be paid out of appropriated monies. Jurisdiction can only be exercised, therefore, over cases in which appropriated funds can be obligated.[61]

However, the court in that case found that whether an agency had been financially self-sufficient was “not dispositive.”[62] Instead, the court required “a clear expression by Congress that the agency was to be separated from general federal revenues.”[63] This requirement thus added to Kyerand flowed from the Tucker Act itself. As the court explained:

The Tucker Act . . . is a broad waiver of sovereign immunity granting jurisdiction to this court over contract claims against the Government. If the agency involved in the dispute operates as a governmental body and within its statutory authority, this court acquires jurisdiction absent a specific indication that Congress did not intend the agency to be covered.[64]

By requiring “a firm indication from Congress that it intended to absolve the appropriated funds of the United States from liability,” the court sought to harmonize Kyer with the “broad waiver of sovereign immunity” in the Tucker Act.[65]

The Supreme Court decision in the Regional Rail Reorganization Act Cases(Rail Act Cases),[66] issued four years after the 1970 Act, involved a takings claim founded upon the Constitution rather than a government contract breach, but nonetheless became a crucial factor in the U.S. Court of Claims’ tailoring of the NAFI Doctrine.[67] The Court addressed whether limitations on federal funds beyond those expressly committed by the Rail Act[68] restricted the takings jurisdiction granted by the Tucker Act.[69] The Court’s answer was driven by its definition of the issue:

The question is not whether the Rail Act expresses an affirmative showing of congressional intent to permit recourse to a Tucker Act remedy. Rather, it is whether Congress has in the Rail Act withdrawn the Tucker Act grant of jurisdiction to the Court of Claims to hear a suit involving the Rail Act “founded . . . upon the Constitution.”[70]

Subsequently, in Convery v. United States,[71] the U.S. Court of Claims limited Kyer by citing to the Rail Act Cases, “wherein the Supreme Court made it abundantly clear that stronger and more explicit statutory language than that relied on by defendant is required to deprive a claimant of his Tucker Act remedy.”[72]

However, in more recent decisions, Federal Circuit panels developed a pattern of denying Tucker Act jurisdiction based upon the NAFI Doctrine. While these decisions cited and ostensibly followed L’Enfant Plaza Properties, Inc., they at least weakened the explicitness test the U.S. Court of Claims had derived from the Rail Act Cases. In Furash & Co. v. United States,[73]for example, the Federal Circuit foreshadowed the outcome with this historical recitation:

The jurisdictional grant in the Tucker Act is limited by the requirement that judgments awarded by the Court of Federal Claims must be paid out of appropriated funds. . Based on that requirement, it has been held that absent some specific jurisdictional provision to the contrary the Court of Federal Claims lacks jurisdiction over actions in which appropriated funds cannot be used to pay any resulting judgment.[74]

The panel cited L’Enfant Plaza Properties, Inc., Kyer, and the Supreme Court decision in Hopkins, which it described parenthetically as “recognizing the jurisdictional limitation for non-appropriated fund instrumentalities, but holding that disputes over contracts with military exchanges could be adjudicated by the Court of Claims because of a specific grant of jurisdiction.”[75] Furash & Co. identified this jurisdictional grant as the 1970 Act, which provided only “a narrow exemption from the doctrine for certain entities. . . .”[76]

In Furash & Co., the panel found a “clear expression” that the Federal Housing Finance Board’s operations were to be funded through assessments against banks, not from general fund revenues, even though the authorizing statute did not “expressly prohibit” appropriation of funds to the Board.[77] “[T]he absence of such an express statement,” however,did not end the inquiry for the panel.[78] Rather, with one “single narrow exception,” the panel found that “Congress intended the Finance Board to be a financially self-sufficient instrumentality designed to operate without the benefit of general appropriated funds.”[79]