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Appeals from the United States Court of Federal Claims in No. 05-CV-0448, Judge Nancy B. Firestone.
KAREN L. MANOS, Gibson, Dunn & Crutcher LLP, of Washington, DC, argued for plaintiff-cross-appellant. With her on the brief were JOHN W.F. CHESLEY and GRETA B. WILLIAMS.
C. COLEMAN BIRD, Senior Trial Counsel, Commercial Litigation Branch, Civil Division, United States Department of Justice, of Washington, DC, argued for defendant-appellant. With him on the brief were STUART F. DELERY, Principal Deputy Assistant Attorney General, JEANNE E. DAVIDSON, Director, and KIRK T. MANHARDT, Assistant Director. Of counsel on the brief was LAWRENCE S. RABYNE, Attorney, Defense Contract Management Agency, of Arlington Heights, Illinois.
RICHARD D. BERNSTEIN, Willkie Farr & Gallagher LLP, of Washington, DC, for amicus curiae. With him on the brief were CARTER G. PHILLIPS and HOWARD STANISLAWSKI, Sidley Austin LLP, of Washington, DC.
Before REYNA, TARANTO, and CHEN, Circuit Judges.
Reyna, Circuit Judge .
This appeal concerns Raytheon Company's (" Raytheon" ) calculation and payment of pension fund adjustments pursuant to Cost Accounting Standard 413, 48 C.F.R. § 9904.413, following the sale of three business segments. The United States Government appeals the judgment of the Court of Federal Claims (" trial court" ) awarding Raytheon $59,209,967.30 as the Government's share of pension cost deficits related to two of the business segments. Raytheon cross-appeals the trial court's rejection of its request for recovery with respect to the third business segment on the basis that Raytheon applied the wrong asset allocation method in its adjustment calculation. We affirm the decision of the trial court.
A. Segment Closings
In this appeal, we address whether segment closing adjustments are ordinary " pension costs" subject to the Federal Acquisition Regulation's (" FAR" ) timely funding requirement. See 48 C.F.R. § (" FAR" ) 31.205-6(j)(2)(i). In the early 2000s, Raytheon underwent a major reorganization that involved the sale of at least eight business segments, including the three segments at issue in this appeal--Aircraft Integrated Systems (" AIS" ), Optical Systems (" Optical" ), and Aerospace Division (" Aerospace" ). As part of each sale, Raytheon retained the assets and liabilities of the defined-benefit pension plans associated with those segments. Raytheon also calculated segment closing adjustments as required by the Cost Accounting Standards (" CAS" ). Raytheon determined that, while some of its business segments had pension surpluses, the three segments
at issue in this case had pension deficits. Although Raytheon paid the Government its share of the surpluses, the Government refused to pay its share of the deficits (which Raytheon calculated to be around $69 million).
On November 8, 2004, and January 24, 2005, Raytheon submitted certified claims for recovery of the deficits pursuant to the Contract Disputes Act. See 41 U.S.C. § 7103 (2011). The contracting officer issued final decisions denying these claims on February 1, 2005, and March 7, 2005. The contracting officer concluded that the segment closing adjustments were subject to the FAR's timely funding requirement, and the pension deficits were therefore unallowable because Raytheon failed to fund the full amount of the pension deficits in the same year as the segment closings. See FAR 31.205-6(j)(2)(i). The contracting officer further concluded that Raytheon's segment closing calculations " do not comply with CAS 413[.]"
B. Applicable Regulations
In general, whether a contractor is required to comply with the CAS depends on the dollar value and type of contracts it has received from the Government. See 48 C.F.R. § § 9903.201-1 to -2. A standard contract clause at FAR 52.230-2, Cost Accounting Standards (Apr. 1998) (hereinafter the " CAS clause" ), is incorporated into all CAS-covered contracts. The CAS clause requires the contractor to " [c]omply with all CAS, including any modifications and interpretations indicated thereto. . . ." FAR 52.230-2(a)(3). The CAS clause also allows the contractor or the Government to seek an equitable adjustment for any increased costs incurred due to a required change in the contractor's established accounting practices that were made to comply with future modifications to the CAS. See id . § 52.230-2(a)(4)(i).
Two CAS provisions generally govern the accounting treatment of pension costs--CAS 412 and CAS 413. CAS 412 requires contractors to fund pension costs within the cost accounting period in which those costs are assigned. 48 C.F.R. § 9904.412-50(d)(1). CAS 412 defines the components of a pension cost as the following:
For defined-benefit pension plans, except for plans accounted for under the pay-as-you-go cost method, the components of pension cost for a cost accounting period are (i) the normal cost of the period, (ii) a part of any unfunded actuarial liability, (iii) an interest equivalent on the unamortized portion of any unfunded actuarial liability, and (iv) an adjustment for any actuarial gains and losses.
Id. § 9904.412-40(a)(1). CAS 412 also defines a defined-benefit pension plan as a type of pension plan in which " the benefits to be paid or the basis for determining such benefits are established in advance and the contributions are intended to provide the stated benefits." Id. § 9904.412-30(a)(10). Because a defined-benefit pension plan guarantees the payment of future benefits, the contractor must deposit enough money into the fund to cover all benefit payments to participants. Determining the proper amount to deposit into the fund first requires making estimates
on a wide range of variables, such as the expected growth of the pension fund's assets and the length of time before participants retire. These estimates are known as " actuarial assumptions." The standards that guide actuarial assumptions are set forth in the CAS, which define an " actuarial assumption" as " an estimate of future conditions affecting pension cost; for example, mortality rate, employee turnover, compensation levels, earnings on pension plan assets, changes in values of pension plan assets." Id. § 9904.412-30(a)(3).
CAS 412 requires a contractor to determine its pension costs for each cost accounting period using an " immediate-gain actuarial cost method" that takes into account the contractor's best actuarial estimates in light of past experience and reasonable expectations. See id . § 9904.412-40(b). To the extent this pension cost calculation results in an unfunded actuarial liability, CAS 412 requires the contractor to amortize this liability in equal annual installments for a period of 10 to 30 years. See id . § 9904.412-50(a). CAS 412 defines an unfunded actuarial liability as " [t]he excess of the actuarial accrued liability over the actuarial value of the assets of a pension plan." Id. § 9904.412-30(a)(2). In other words, a pension fund has an unfunded actuarial liability when the value of benefits already earned in prior years exceeds the estimated future value of the fund.
CAS 413 governs the adjustment and allocation of pension costs. In particular, CAS 413 provides for two types of pension cost adjustments: (i) adjustments based on actuarial gains and losses (i.e., differences between estimates and actual experience); and (ii) adjustments based on a closed segment's pension surplus or deficit. Normally, CAS 413 requires actuarial gains and losses to be amortized in equal annual installments over a 15-year period. See 48 C.F.R. § 9904.413-50(a)(2). When a business segment closes, however, there are no future periods within which to adjust the pension costs applicable to that segment. Accordingly, the Cost Accounting Standards Board (" CAS Board" ), which has " exclusive authority to prescribe, amend, and rescind cost accounting standards," 41 U.S.C. § 1502(a)(1) (2011), recognized that " a means must be developed to provide a basis for adjusting such costs," Preamble to CAS 413, 42 Fed. Reg. 37,191, 37,195 (July 20, 1977). Such a means was developed and is set forth in CAS 413.
CAS 413 requires the contractor, following a segment closing, to " determine the difference between the actuarial accrued liability for the segment and the market value of the assets allocated to the segment[.]" 48 C.F.R. § 9904.413-50(c)(12). The difference between the market value of the assets and the actuarial accrued liability for the closed segment represents an adjustment of previously-determined pension costs. Hence, the goal of a segment closing adjustment is to determine the present value of the pension plan at the time of the segment's closing and to adjust the plan's value to ensure it is fully-funded to meet the promises made to the plan's participants. The Government and the contractor then allocate the resulting surplus or deficit between them. In 1995, the CAS Board amended CAS 413 to require, among other things, the use of a specific formula to determine the resulting allocation between the Government and the contractor. See 60 Fed. Reg. 16534, 16552 (Mar. 30, 1995). If the adjustment results in a surplus, the Government may
be entitled to recover its share from the contractor. See 48 C.F.R. § 9904.413-50(c)(12)(vi). If the adjustment results in a deficit, the contractor may be entitled to recover its share from the Government. See id . The Government's share of any adjustment surplus or deficit is allocable to contracts within the same year as the segment closing. Id. § 9904.413-50(c)(12)(vii).
While CAS 412 and 413 govern the accounting treatment of pension costs, FAR 31.205-6(j) governs their allowability. In particular, this FAR provision requires all pension costs assigned to the current year to be " funded by the time set for filing of the Federal income tax return or any extension thereof." FAR 31.205-6(j)(2)(i). This timely funding requirement is repeated under sub-paragraph (j)(3), which addresses " defined-benefit pension plans," and provides that " pension costs (see 48 CFR 9904.412-40(a)(1)) assigned to the current accounting period, but not funded during it, shall not be allowable in subsequent years[.]" Id. § 31.205-6(j)(3)(i)(A). But sub-paragraph (j)(4), which addresses segment closings and requires that any " adjustment amount shall be the amount ...