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1 Case 1:13-cv SGB Document 1 Filed 03/11/13 Page 1 of 24 I FILED MAR U.S. COURT OF FEDERAL CLAIMS In the United States Court of Federal Claims SPERIENTCORPORATION, INC. Suite I Dublin Boulevard, Suite F Dublin, California Plaintiff, v. THE UNITED STATES, Defendant. ) ) ) ) ) ) ) ~ No.l3- r C ) Judge ) ) ) COMPLAINT FOR MONEY DAMAGES ON BREACHES OF EXPRESS CONTRACTS NATURE OF THE ACTION 1. Plaintiff Sperient Corporation, Incorporated, Suite 533, 4101 Dublin Boulevard, Suite F, Dublin, California (Sperient), a closely-held for-profit Nevada Corporation and a small business, ftles this Complaint under RCFC 7(a)(1).

2 Case 1:13-cv SGB Document 1 Filed 03/11/13 Page 2 of 24 Plaintiff Sperient seeks monetary relief under 28 U.S.C. 1491(a)(l). Plaintiff Sperient claims restitution damages of $632,765 for indirect costs incurred in its Fiscal Years 2007 through 2011, and restitution damages of $168,750 for the direct costs of a leased radar range incurred in its Fiscal Years 2007 through These direct and indirect costs were incurred under three cost plus fixed-fee type Contracts awarded under Phase II of the Small Business Innovation Research (SBIR) Program, 15 U.S.C. 638(e)(6)(B), for the performance of research and development activities. These three SBIR Phase II cost plus fixed-fee type Contracts are Contracts Numbers W31P- 4Q-07-C-0206, FA C-0135, and M C These three SBIR Phase II Contracts are not procurement Contracts subject to the Contract Disputes provisions, 41 U.S.C Cf, R&D Dynamics Corp. v. United States, 80 Fed. Cl. 715, (2007) (concerning jurisdiction over a "procurement" under 28 U.S.C. 1491(b)(l)). Nonetheless, because they are SIBR Phase II Contracts, they incorporate the ALLOWABLE COST AND PAYMENT - 2 -

3 Case 1:13-cv SGB Document 1 Filed 03/11/13 Page 3 of 24.. (DEC 2002) provision, 48 C.F.R ,48 C.F.R. Ch.l ( Edition). They are subject to Federal Acquisition Regulation (FAR) Part 31, "Contract Cost Principies and Procedures," 48 C.F.R. Part 31, 48 C.F.R. Ch.l ( Edition), and, more particularly, they are subject to FAR Subpart 31.2, "Contracts with Commercial Organizations," 48 C.F.R ,48 C.F.R. Subpart 31.2 ( Edition). Thermalon Industries, Ltd. v. United States, 51 Fed. Cl. 464, (2002). 3. The claimed direct and indirect costs were incurred, the claimed direct and indirect costs were properly allocable to these three SBIR Phase II cost plus fixed-fee type Contracts, and the claimed direct and indirect costs were allowable and reasonable. Because these claimed direct and indirect costs were allowable and reasonable, were allocable to these three SBIR Phase II cost plus fixed-fee type Contracts, and were claimed in compliance with Contract terms and the FAR Part 31.2 limitations on incurred costs, Thermalon, 51 Fed. Cl., at , Defendants' failures to reim

4 Case 1:13-cv SGB Document 1 Filed 03/11/13 Page 4 of 24 burse these incurred and claimed direct and indirect costs constitute breaches of these three SBIR Phase II cost plus flxed-fee type Contracts. 4. Plaintiff Sperient asks the Court to award Plaintiff Sperient a Judgment for the restitution damages incurred by Plaintiff Sperient as a result of Defendants' breaches of these three SBIR Phase II cost plus flxed-fee type Contracts. PARTIES 5. PlaintiffSperient is a closely-held for-profit small business incorporated in Nevada. The principal activity ofplaintiffsperient was research and development for the United States Department of Defense (DoD). Plaintiff Sperient ceased performing research and development for DoD after Defendants' breaches of these three SBIR Phase II cost plus flxed-fee type Contracts. 6. Plaintiff Sperient was awarded Contract Number W31P4Q-07-C-0206 by the United States Army Aviation and Missile Command, Redstone Arsenal, Alabama; the cost ceiling of this SBIR Phase II cost plus flxed-fee type Contract is $695,474 and the -4-

5 Case 1:13-cv SGB Document 1 Filed 03/11/13 Page 5 of 24 fixed-fee is $54,226. Plaintiff Sperient was awarded Contract Number FA C by the Department of the Air Force, Eglin Air Force Base, Florida on May 23rd, 2008; the cost ceiling of this SBIR Phase II cost plus fixed-fee type Contract is $681,233 and the fixed-fee is $66,523. Plaintiff Sperient was awarded Contract Number M C-6544 by the United States Marine Corps Systems Command, Quantico, Virginia on August 27th, 2009; the cost ceiling of this SBIR Phase II cost plus fixed-fee type Contract is $280,646 and the fixed-fee is $19, Defendant's United States Army Aviation and Missile Command, Defendant's Department of the Air Force, and Defendant's United States Marine Corps Systems Command are Major Commands within Military Departments of the DoD, 10 U.S.C. 101(a)(8); DoD is an Executive Department of the United States, 5 U.S.C. 101; and DoD, the United States Army Aviation and Missile Command, the Department of the Air Force, and the United States Marine Corps Systems Command are instrumentalities of the United States. Defendant's United States Army Aviation and Mis

6 Case 1:13-cv SGB Document 1 Filed 03/11/13 Page 6 of 24 sile Command, Defendant's Department of the Air Force, and Defendant's United States Marine Corps Systems Command is each an "Agency" just as this term is defined in 28 U.S.C Defendant's United States Army Aviation and Missile Command, Defendant's Department of the Air Force, and Defendant's United States Marine Corps Systems Command are referred to, collectively, as "the Defendants." 9. Plaintiff Sperient is a proper party for purposes of the Equal Access to Justice Act, 28 U.S.C. 2412(d)(2)(B)(ii), i.e., Plaintiff Sperient is a private party and a closely-held for-profit Nevada Corporation which when this Complaint for Money Damages on Breaches of Express Contracts is filed has not over five-hundred employees and whose net worth does not exceed $7,000,000 averaged over the past three years. JURISDICTION 10. This Court has jurisdiction over this Civil Action under 28 U.S. C. 1491(a)(l). Defendants' failure to reimburse these direct and indirect costs incurred and claimed - 6 -

7 Case 1:13-cv SGB Document 1 Filed 03/11/13 Page 7 of 24 by Plaintiff Sperient is sufficiently final under 28 U.S.C. 1491(a)(l) because this Civil Action is a "claim... founded... upon any express... contract with the United, S tates. 11. This Civil Action is timely flied within six years after these breach claims first accrued, 28 U.S.C Defendants' Mountain View Branch Office, Western Region, Defense Contract Audit Agency (DCAA) in a letter dated September 12th, 2012 finally disallowed the indirect costs incurred and here claimed by Plaintiff Sperient. On December 20th, 2012 Plaintiff Sperient wrote Defendants' DCAA to provide additional detail supporting the direct costs incurred and claimed by Plaintiff Sperient for lease of a radar range. Defendants' DCAA took no action on these incurred and claimed direct costs in the sixty calendar-day period after the submission of this additional detail, a period of inaction which, under here inapplicable but nonetheless instructive Contract Disputes provisions, 41 U.S.C. 7103( )(5), is deemed a denial

8 Case 1:13-cv SGB Document 1 Filed 03/11/13 Page 8 of 24 AVERMENTS Equipment Rental Costs. 12. FAR (b)(1), "Rental costs," 48 C.P.R , 48 C.P.R. Ch.1 ( Edition), allows reimbursement of rental costs incurred under operating leases, and these allowable rental costs must be reasonable at the time of the leasing decision. Under FAR (b)(1)(i), "Rental costs," 48 C.P.R , 48 C.P.R. Ch.1 ( Edition), market rental costs for comparable leased property rule over any reasonableness determination. The equipment rental costs here claimed were incurred by Plaintiff Sperient in its Fiscal Years 2007 through Plaintiff Sperient has supported the reasonableness of these incurred and claimed equipment rental costs through the submission to Defendants' DCAA of competitive quotations from third-party lessors of the same or similar leased equipment, and these quotations document the rental cost for the same or similar equipment in a competitive market as of July In 2006 Defendants' DCAA accepted as reasonable these exact - 8 -

9 Case 1:13-cv SGB Document 1 Filed 03/11/13 Page 9 of 24 same equipment rental costs when claimed by a related company, Advantaca Corporation, Livermore, California, a closely-held for-profit California Corporation. 13. Plaintiff Sperient has documented these incurred equipment rental costs through submission to Defendants' DCAA of a lease agreement and invoices between Plaintiff Sperient and Resperience, San Ramon, California (Resperience). The majority shareholder of Plaintiff Sperient holds a minority of the shares of Resperience; the majority shareholder of Plaintiff Sperient is not the "Managing Founder" of Resperience. The Managing Founder of Resperience alone has the power to control Resperience' s business affairs ("... the general management of Resperience business shall rest solely in the Managing Founder."). 14. Where rental costs are charged between organizations "under common control," these rental costs are disallowed, and cost recovery is limited to normal costs of ownership, i.e., depreciation, property taxes, insurance, and maintenance. FAR (b)(3), "Rental costs," 48 C.F.R , 48 C.F.R. Ch.1 ( Edi

10 Case 1:13-cv SGB Document 1 Filed 03/11/13 Page 10 of 24 tion); Neal & Company, Inc. v. United States, 17 Cl. Ct. 511, 519 (1989). This precept obtains because "purely formal business arrangements" are disregarded, and rented equipment is treated as owned equipment "where the contracting entity is so tied to the renting entity that for all intents and purposes the contractor owns the 'rented' equipment." Weaver-Bailey Contractors, Inc. v. United States, 20 Cl. Ct. 158, 160 (1990). 15. "Common control" allows disregard of both formal business arrangements and operating leases where it can be demonstrated there is direct or indirect control over the management and the policies of both entities. This direct or indirect control may arise by familiar influence, stock ownership, a trust relationship, or when the contracting entity and the leasing entity are not held to the usual standards of commercial leasing. Advanced Materials, Inc. v. United States, 54 Fed. Cl. 207, 213 (2002). But where reasonable rental costs are incurred under a formal business arrangement and an operating lease, these costs must be allowed in the absence of evidence these - 10-

11 Case 1:13-cv SGB Document 1 Filed 03/11/13 Page 11 of 24 rental costs are a sham to inflate lower ownership costs, and it is the Government's burden to prove, not the Contractor's burden to disprove, the existence of this sham. Weaver-Bailey Contractors, 20 Cl. Ct., at Plaintiff Sperient has demonstrated the reasonableness of Plaintiff Sperient's incurred and claimed equipment rental costs. Defendants' DCAA's letter of September 12th, 2012 disallows the equipment rental costs incurred by Plaintiff Sperient because Plaintiff Sperienfs majority shareholder "owns both Sperient (Lessee) and Resperience (Lessor)... "But an ownership interest in both the contracting entity and in the leasing entity is not by itself "common control." There is here no showing of direct or indirect control of both entities, here no showing that usual standards of commercial leasing have not been observed, here no showing these equipment rental costs incurred by Plaintiff Sperient were unreasonable, here no showing Plaintiff Sperient falsely obtained industry quotes to show Resperience equipment rental rates lower than market equipment rental rates, and here no showing that Defendants' did

12 Case 1:13-cv SGB Document 1 Filed 03/11/13 Page 12 of 24 not receive market value or better for the equipment rental costs claimed. Defendants' failure to reimburse incurred and claimed equipment rental costs of $539,100 is a breach of these three SBIR Phase II cost plus fixed-fee type Contracts. Radar Range Rental Costs. 17. The incurred direct costs of a radar range are based on a lease agreement between Plaintiff Sperient and another private party. This radar range, a property known as the "VTenn Range," is located in an unincorporated area of Alameda County, California and consists mostly of unimproved land together with a singlefamily residence, outbuildings, and an office structure used for antenna testing office space. Plaintiff Sperient has presented invoices documenting rental payments of $22,500 per month of use. The office structure and the unimproved land are at the rear of the single-family residence; the residence is leased by this third-party to Plaintiff Sperient' s Chief Financial Officer

13 Case 1:13-cv SGB Document 1 Filed 03/11/13 Page 13 of Defendants' DCAA disallowed the incurred direct costs for radar range rental because Defendants' DCAA supposed that under FAR (b)(1)(v), "Rental costs," 48 C.F.R , 48 C.F.R. Ch.1 ( Edition), a FAR Subpart 31.2 limitation on incurred costs which demands consideration of "other provisions of the arrangement," the incurred direct costs for radar range rental resulted from a radar range lease agreement which was "a less than arm's length transaction." Other than the tenancy of Plaintiff Sperient's Chief Financial Officer in a separate single-family residence at the front of the leased radar range, Defendants' DCAA has not demonstrated how the separate residential lease affected the bargaining between Plaintiff Sperient and the third-party owner of both premises, and Defendants' DCAA cannot establish that the rental of the single-family residence is a provision of the operating lease for the radar range. 19. On December 6th, 2012 Plaintiff Sperient obtained an Appraisal of the radar range from a State of California Certified General Real Estate Appraiser. Because this - 13-

14 Case 1:13-cv SGB Document 1 Filed 03/11/13 Page 14 of 24 is a scarce special-use property, and because of the income its use can generate, the Appraisal valued the premises at $1,300,000 as of August 27th, 2012, and valued the monthly market rent for the radar range at $22,500. Plaintiff Sperient provided the Appraisal to Defendants' DCAA on December 20th, Defendants' DCAA took no action on these incurred and claimed direct costs in the sixty calendar-day period after the submission of this additional detail, a period of inaction which again, under here inapplicable but nonetheless instructive Contract Disputes provisions, 41 U.S.C. 7103(f)(5), is deemed a denial. 20. The limit of Defendants' DCAA's remit under FAR (b)(1)(v), "Rental costs," 48 C.P.R , 48 C.P.R. Ch.1 ( Edition), is "other provisions of the arrangement." The tenancy of Plaintiff Sperient's Chief Financial Officer in a separate single-family residence on the premises of the leased radar range is not a provision of the operating lease for the radar range. Defendants' failure to re

15 Case 1:13-cv SGB Document 1 Filed 03/11/13 Page 15 of 24 imburse incurred and claimed radar range rental costs of $168,750 is a breach of these three SBIR Phase II cost plus fixed-fee type Contracts. San Antonio, Texas Office Rental Costs. 21. Plaintiff Sperient paid $950 monthly rental for office space in a residence in San Antonio, Texas owned and occupied by one of Plaintiff Sperient' s consultants. This consultant had three forms of cancer, had undergone radical surgery, was receiving chemotherapy, and needed to work from his home since he could not travel. Plaintiff Sperient made accommodations to meet this consultant's special needs, observing the Americans With Disabilities Act of 1990 and its national mandate for elimination of discrimination against individuals with disabilities, 42 U.S.C (b)(l). Plaintiff Sperient did so by arranging for work space convenient both to the disabled consultant and to Plaintiff Sperient' s personnel. 22. These rental costs were incurred in Plaintiff Sperient' s Fiscal Years 2007 through Defendants' DCAA has disallowed these incurred and claimed rental - 15-

16 Case 1:13-cv SGB Document 1 Filed 03/11/13 Page 16 of 24 costs because the lessor was "a consultant and any indirect business expenses related to his services should be accounted for in the consultant's fee." Defendants' DCAA goes on: "A prudent business person would not reimburse indirect consultant expenses in addition to the consultant's fee." 23.FAR , "Determining reasonableness," 48 C.P.R , 48 C.P.R. Ch.1 ( Edition), cabins cost reasonableness determinations to a single conceptual anchor point, and this single conceptual anchor point is judging cost reasonableness in terms of some other cost figure. Kellogg, Brown & Root Services, Inc. v. United States, 107 Fed. Cl. 16, 40 (2012). Defendant's DCAA does not enjoy the right to make business judgments for Plaintiff Sperient; it cannot have rightfully decided that rent paid to Plaintiff Sperient's consultant for office space occupied by four of Plaintiff Sperient personnel was unreasonable absent a judgment about the reasonableness of the cost paid for the space occupied and absent a judgment about the cost paid Plaintiff Sperient's consultant for his services. Neither can Defend

17 Case 1:13-cv SGB Document 1 Filed 03/11/13 Page 17 of 24 ants' DCAA ignore the national mandate of the Americans With Disabilities Act of 1990, 42 U.S.C (b)(1). Defendants' failure to reimburse incurred and claimed San Antonio, Texas Office rental costs of $57,000 is a breach of these three SBIR Phase II cost plus fixed-fee type Contracts. Other Indirect Costs. 24. Defendants' DCAA disallowed other indirect costs incurred and claimed by Plaintiff Sperient contending, variously, that credit card service expenses incurred to prepare Plaintiff Sperient to process credit card sales when Plaintiff Sperient would move into Phase III of the three SBIR Contracts, 15 U.S.C. 638(e)(6)(C), were not allocable as they would benefit only commercial Contracts (which is the point of Phase III SBIR Contracts), and that all of the wireless telephone costs incurred by Plaintiff Sperient were unreasonable because the wireless telephones were provided to other of Plaintiff Sperient's consultants and to the owner of the radar range leased to Plaintiff Sperient

18 Case 1:13-cv SGB Document 1 Filed 03/11/13 Page 18 of It was the Defendants' who requested that Plaintiff Sperient obtain the ability to accept credit cards as payment. There is no requirement in the FAR Part 31.2limitations on incurred costs, no requirement in these three SBIR Phase II cost plus fixedfee type Contracts, and no requirement of the United States Internal Revenue Service which restricts allowable costs or business deductions for wireless telephones to those expenses incurred only for W -2 employees. 26. And again, Defendants' DCAA has made no judgment about the reasonableness of these incurred and claimed costs by comparing these costs with other costs. FAR (c), "Determining allocability," 48 C.P.R , 48 C.P.R. Ch.l ( Edition), permits costs to be allocated to cost-type Contracts if these costs are "necessary to the overall operation of the business, although a direct relationship to the business cannot be shown." A reasonable cost is allowable and allocable "if it is otherwise necessary to the overall operation of the business." Thermalon, 51 Fed. Cl., at

19 Case 1:13-cv SGB Document 1 Filed 03/11/13 Page 19 of It is Plaintiff Sperient, not Defendants' DCAA, which is entitled to determine just which incurred indirect costs are otherwise necessary to overall business operations. Defendants' failure to reimburse incurred and claimed indirect costs of $36,665 is a breach of these three SBIR Phase II cost plus fixed-fee type Contracts. COUNT! DEFENDANTS' REFUSAL To REIMBURSE PLAINTIFF SPERIENT'S INCURRED EQUIPMENT RENTAL COSTS Is A BREACH OF THESE THREE EXPRESS SBIR PHASE II CONTRACTS. 28. Plaintiff Sperient incorporates and re-alleges Paragraphs Numbers 1. through 27. above as if now fully set forth. 29. Plaintiff Sperient has shown the reasonableness, allowability, and allocability of Plaintiff Sperient' s incurred and claimed equipment rental costs. Defendants' have not shown common control of both Plaintiff Sperient and the private-party entity from which Plaintiff Sperient leases this equipment, and neither have Defendants' shown these equipment rental costs claimed by Plaintiff Sperient are a sham to inflate lower ownership costs. Once Plaintiffs discharge their burden of proving the reason

20 Case 1:13-cv SGB Document 1 Filed 03/11/13 Page 20 of 24 ableness, allowability, and allocability of incurred costs, Defendants carry "the burden of establishing the existence of a legal provision, such as a statute, regulation, or contract clause, that would bar the claimed cost." Thermalon, 51 Fed. Cl., at 472. Plaintiff Sperient has discharged its burden; Defendants' cannot. 30. Defendants' failure to reimburse incurred and claimed equipment rental costs of$539,100 is a breach of these three SBIR Phase II cost plus fixed-fee type Contracts. COUNT II DEFENDANTS' REFUSAL To REIMBURSE PLAINTIFF SPERIENT's INCURRED RADAR RANGE RENTAL COSTS Is A BREACH OF THESE THREE EXPRESS SBIR PHASE II CONTRACTS. 31. Plaintiff Sperient incorporates andre-alleges Paragraphs Numbers 1. through 27. above as if now fully set forth. 32. Through the Appraisal of December 6th, 2012 Plaintiff Sperient has shown the reasonableness, allowability, and allocability of the incurred and claimed direct costs of radar range rental. Defendants' have not shown that the tenancy of Plaintiff Sperient' s Chief Financial Officer in a separate single-family residence on the premises of - 20-

21 Case 1:13-cv SGB Document 1 Filed 03/11/13 Page 21 of 24 the leased radar range is a provision of the operating lease for the radar range, and this is the only basis under Contract terms and FAR Part 31.2limitations on incurred costs upon which these incurred costs may be disallowed. 33. Defendants' failure to reimburse incurred and claimed radar range rental costs of $168,7 50 is a breach of these three SBIR Phase II cost plus fixed-fee type Contracts. COUNT III DEFENDANTS' REFUSAL TO REIMBURSE PLAINTIFF SPERIENT's INCURRED SAN ANTONIO, TEXAS OFFICE RENTAL COSTS IS A BREACH OF THESE THREE EXPRESS SBIR PHASE II CONTRACTS. 34. Plaintiff Sperient incorporates and re-alleges Paragraphs Numbers 1. through 27. above as if now fully set forth. 35. Defendants' cannot ignore the national mandate of the Americans With Disabilities Act of 1990,42 U.S.C (b)(l). Defendants' cannot have rightfully decided that rent paid to Plaintiff Sperient' s consultant for office space occupied by Plaintiff Sperient was unreasonable absent a judgment about the reasonableness of - 21-

22 Case 1:13-cv SGB Document 1 Filed 03/11/13 Page 22 of 24 the cost paid for the space occupied and absent a judgment about the costs incurred by Plaintiff Sperient for these consultant services. 36. Defendants' failure to reimburse incurred and claimed San Antonio, Texas Office rental costs of $57,000 is a breach of these three SBIR Phase II cost plus fixedfee type Contracts. COUNT IV DEFENDANTS' REFUSAL To REIMBURSE PLAINTIFF SPERIENT's OTHER INCURRED INDIRECT COSTS Is A BREACH OF THESE THREE EXPRESS SBIR PHASE II CONTRACTS. 37.Plaintiff Sperient incorporates andre-alleges Paragraphs Numbers 1. through 27. above as if now fully set forth. 38. Defendants' are not entitled to determine just which incurred indirect costs are otherwise necessary to overall business operations. 39. Defendants' failure to reimburse incurred and claimed indirect costs of $36,665 is a breach of these three SBIR Phase II cost plus fixed-fee type Contracts. -22-

23 Case 1:13-cv SGB Document 1 Filed 03/11/13 Page 23 of 24 PRAYER FOR R ELIEF WHEREFORE, Plaintiff Sperient respectfully requests: (a) that the Court a-ward Plaintiff Sperient breach damages for $801,515; and (b) that the Court grants Plaintiff Sperient such other and further relief as may be just and proper. Virginia State Bar Number March 11th, 2013 ALBO & OBLON, L.L.P. Courthouse Plaza 2200 Clarendon Boulevard, Suite 1201 Arlington, Virginia Telephone: (703) Facsimile: (703)

24 Case 1:13-cv SGB Document 1 Filed 03/11/13 Page 24 of 24 Mobile: (703) Electronic Mail: lawyer@procurement-lawyer.com Attorney of record for Plaintiff, Sperient Corporation, Incorporated. -24-