Focus. Vol. 53, No. 19 May 11, 2011

Reprinted from The Government Contractor, with permission of Thomson Reuters. Copyright 2011. Further use without the permission of West is prohibited. For further information about this publication, please visit www.west.thomson.com/store, or call 800.328.9352. The Government Contractor Information and Analysis on Legal Aspects of Procurement Vol. 53, No. 19 May 11, 2011 Focus FEATURE COMMENT: NAFI Doctrine No More The Federal Circuit s Slattery v. U.S. Ends The Non-Appropriated Funds Instrumentality Doctrine As We Know It Slattery v. U.S., 635 F.3d 1298 (Fed. Cir. 2011) The U.S. Court of Appeals for the Federal Circuit s decision in Slattery v. U.S. generally has eliminated the non-appropriated funds instrumentality (NAFI) doctrine as a bar to jurisdiction under the Tucker Act, 28 USCA 1491 (and presumably also under the Contract Disputes Act, 41 USCA 7101 et seq.). See 53 GC 48. The NAFI doctrine has plagued private parties entering into agreements with various U.S. Government entities for several reasons: (1) NAFIs have enjoyed all the immunity of the Government while generally avoiding all liability exposure resulting from their actions or inactions (with the exception of the military and NASA exchanges); and (2) it often has been unclear whether a particular U.S. federal entity is a NAFI and not subject to suit until the Federal Circuit declares it so. Thus, Slattery should make contracting with entities related to or affiliated with the Government more stable and predictable, placing the onus on Congress to demarcate when a U.S. Government entity will be exempted from suit under the Tucker Act. How Did the NAFI Doctrine Get Started? NAFI has always been an ill-defined term. As the Government Accountability Office states in the Redbook, [T]here is no official definition or commonly understood opinion of what is or is not a nonappropriated fund activity. 3 GAO, Principles of Federal Appropriations Law at 15-226 15-227 (3d ed. 2008) (Redbook), available at www.gao.gov/special.pubs/ d08978sp.pdf. The most frequently acknowledged NAFIs are the military and NASA exchanges, which were originally set up to provide morale, welfare and recreational needs for officers and employees of the armed forces (and still serve that role today). See 10 USCA 2488(f) (providing general definition of nonappropriated fund instrumentality in the Department of Defense as exchanges or instrumentalities under the jurisdiction of the Armed Forces). Yet, even these specifically designated NAFI entities are often subsidized by appropriated funds. See Redbook at 15-246 (stating that a 1977 report found that the government spent over $600 million each year to subsidize DOD NAFIs ). The NAFI doctrine first found life based on the U.S. Court of Claims interpretation of a U.S. Supreme Court decision. See Slattery, 635 F.3d at 1304. In Standard Oil Co. v. Johnson, 316 U.S. 481 (1942), the Supreme Court determined that a California gasoline tax that exempted sales to the government of the United States or any department thereof also exempted Army post exchanges because the exchanges were arms of the government and partake of whatever immunities [the government] may have under the constitution and federal statutes. Id. at 483 85. The Court of Claims interpreted Standard Oil to limit its Tucker Act jurisdiction over military exchanges, relying heavily on the immunities phrase in Standard Oil and an Army regulation that stated military exchange contracts were not Government contracts. Borden v. U.S., 116 F. Supp. 873, 877 (Ct. Cl. 1953); see also Pulaski Cab Co. v. U.S., 157 F. Supp. 955, 956 57 (Ct. Cl. 1958) (following Borden); Gradall v. U.S., 329 F.2d 960, 964 (Ct. Cl. 1963) (following Pulaski and relying on Army regulations). These first several Court of Claims cases established a questionable foundation for what later would become the NAFI doctrine. For example, the majority in Borden arguably flipped the meaning of Standard Oil on its head and relied on a military regulation to limit the judicial jurisdiction established by Congress. One judge dissented to make 4-092-387-7 2011 Thomson Reuters

The Government Contractor these points in Borden, 116 F. Supp. at 879 (Whitaker, J., concurring and dissenting in part) ( By what authority does the Army say that their contracts are not government contracts? Congress has not authorized it to do so. It authorized it to set up exchanges, but Congress did not authorize it to set aside a prior Act of Congress making the Government liable to suit on its contracts, express or implied. The quoted Army regulation is in derogation of the Act of Congress giving consent to suit on its contracts. It is, therefore, invalid. The Army cannot set aside an Act of Congress. ). But this same judge then relented in Pulaski Cab, concluding that perhaps the Government could eliminate Tucker Act jurisdiction by providing notice in the contract in other words, the Government could contract out of statutorily provided jurisdiction. See Pulaski Cab, 157 F. Supp. at 959 (Whitaker, J., concurring). Yet, a regulation or a contract provision cannot confer or divest a court of its statutorily provided jurisdiction. See Burnside-Ott Aviation Training Ctr. v. Dalton, 107 F.3d 854, 859 (Fed. Cir. 1997) ( [T]he CDA trumps a contract provision inserted by the parties that purports to divest the Board of jurisdiction, unless the contract provision otherwise depriving jurisdiction is itself a matter of statute primacy. ); see also Alliant Techsys., Inc. v. U.S., 178 F.3d 1260, 1270 (Fed. Cir. 1999) ( The jurisdiction of [the U.S. Court of Federal Claims] is defined by Congress, and the prudential considerations that the government presses upon us cannot alter the jurisdictional lines that Congress has drawn. ). Notwithstanding this shaky foundation, in the 1960s the Court of Claims expanded the nascent NAFI doctrine beyond military exchanges. In particular, the Court of Claims concluded that the Judgment Fund statute, 28 USCA 2517, limited the jurisdiction conferred by the Tucker Act. See Kyer v. U.S., 369 F.2d 714, 718 (Ct. Cl. 1966) ( While the terms of [the Tucker Act] are broad, its words must be read in conjunction with and must be regarded as limited by another statute [ 2517] which provides that our judgments are paid only from appropriated funds. ). The Court of Claims reasoned that because judgments under the Tucker Act are paid only from appropriated funds, in order to be actionable [in the Court of Claims] the transaction sued upon must be one which, in the contemplation of Congress, can obligate public monies. Interdent, Corp. v. U.S., 488 F.2d 1011, 1013 (Ct. Cl. 1973). This doctrine became entrenched at the Court of Claims and later at the Federal Circuit. See Denkler v. U.S., 782 F.2d 1003, 1004 05 (Fed. Cir. 1986) (Board of Governors of Federal Reserve System is a NAFI); McCloskey & Co. v. U.S., 530 F.2d 374, 375, 378 (Ct. Cl. 1974) (District of Columbia Armory Board is a NAFI); Novid Co. Ltd. v. U.S., 535 F.2d 5, 5 & 8 (Ct. Cl. 1976) (no jurisdiction because country-to-country agreement and modified disputes clause made Iran liable for project with the U.S. Corps of Engineers, not the U.S.); Manning v. U.S., 200 Ct. Cl. 756, 756 (1973) (no jurisdiction based on unidentified NAFI). The NAFI doctrine enunciated in Kyer also posed new challenges for litigants against almost any U.S. Government agency. While Kyer involved the Grape Crush Administrative Committee a locally run committee appointed by the secretary of agriculture, after Kyer it became obligatory for litigants to determine whether Congress ever provided or continued to provide appropriations to even the largest agencies. Could it be that the General Services Administration, an agency that has the purpose of procuring goods and services for other Government agencies, see 40 USCA 501(b)(1)(A), could itself be immune from suit for breach of contract because it is a NAFI? The question seems almost nonsensical, but the Court of Claims had to address this issue and others regarding major U.S. Government agencies when the question was raised during litigation. See Convery v. U.S., 597 F.2d 727, 729 30 (Ct. Cl. 1979) (GSA is not a NAFI); see also McCarthy v. U.S., 670 F.2d 996, 1002 (Ct. Cl. 1982) (U.S. Agency for International Development is not a NAFI); L Enfant Plaza Props., Inc. v. U.S., 668 F.2d 1211, 1212 13 (Ct. Cl. 1982) (Comptroller of the Currency not a NAFI); Norris Indus., Inc. v. U.S., 681 F.2d 751, 752 (Ct. Cl. 1982) (NAFI doctrine did not eliminate Tucker Act jurisdiction for foreign military sales); Hughes Aircraft Co. v. U.S., 534 F.2d 889, 906 08 (Ct. Cl. 1976) (same); DeMauro Constr. Corp. v. U.S., 568 F.2d 1322, 1328 (Ct. Cl. 1978) (NAFI doctrine did not eliminate jurisdiction where Army Corps of Engineers built dam in Okinawa, Japan in conjunction with local water authority); Butz Eng g Corp. v. U.S., 499 F.2d 619, 625 (Ct. Cl. 1974) (U.S. Postal Service is not a NAFI); Breitbeck v. U.S., 500 F.2d 556, 558 59 (Ct. Cl. 1974) (Saint Lawrence Seaway Development Corporation is not a NAFI). Congress Tries to Right Some Wrongs, Sort of In the meantime, Congress became alarmed that the Court of Claims was eroding Tucker Act jurisdiction and denying a remedy for private parties. In 1970, 2 The Government Contractor 2011 Thomson Reuters

Vol. 53, No. 19 / May 11, 2011 Congress attempted to close the loophole that the Court of Claims had opened in the Tucker Act. See H.R. Rep. No. 91-933, available at 1970 U.S.C.C.A.N. 3477, 3478. But, in considering how to close the loophole, Congress ran into a problem because some NAFIs, such as the American Red Cross and the Tennessee Valley Authority, were subject to other jurisdictional statutes or were not under the control of the Government. See Slattery, 635 F.3d at 1311. And it had difficulty defining a NAFI (or a nonappropriated fund activity, as the congressional hearings referred to it). See id. As one congressman noted, I am worried about the definition of nonappropriated funds. Every time I think of one, you give me another one; then I think of another possibility. Id. at 1312 (quotation and citation omitted). Ultimately, this concern for how to define NAFIs led Congress to amend the Tucker Act for only the military and NASA exchanges: For the purposes 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. P.L. 91-350, 84 Stat. 449, 449 (codified at 28 USCA 1491(a)(1)). Congress similarly amended the Little Tucker Act. Id. (codified at 28 USCA 1346(a)(2)). Several years later in 1978, when Congress enacted the CDA, it added language to the new law, arguably to parallel the amendments to the Tucker Act and Little Tucker Act. See Contract Disputes Act of 1978, P.L. 95-563, 3(a), 92 Stat. 2383, 2383 (codified, as amended, at 41 USCA 7102(a)). The Supreme Court commented on the amendments to the Tucker Act, but mainly to acknowledge that Congress had attempted to close a loophole. U.S. v. Hopkins, 427 U.S. 123, 126 (1976) ( The purpose of this amendment, as the reports of both Houses made clear, was to afford contractors a federal forum in which to sue nonappropriated fund instrumentalities by doing away with the inequitable loophole in the Tucker Act. ); see also Army & Air Force Exch. Serv. v. Sheehan, 456 U.S. 728, 734 n.4 (1982) (same). Yet even these statutory amendments regarding the military and NASA exchanges did not completely settle whether all such exchanges were meant to be covered by these amendments. For example, in subsequent litigation the Government asserted that Congress meant to limit the amendment to only the five named exchanges listed in the amendment, not related exchanges. The Federal Circuit turned aside this challenge. McDonald s Corp. v. U.S., 926 F.2d 1126, 1131 (Fed. Cir. 1991) (concluding that statute was not simply limited to five exchanges listed in statute, but the hundreds of exchanges established by the various military services). But application of the doctrine continued to yield odd results, including denying that morale, welfare and recreation entities were closely related enough to a military exchange to qualify as a listed military exchange in the amended Tucker Act. See Pacrim Pizza Co. v. Pirie, 304 F.3d 1291, 1293 (Fed. Cir. 2002) ( Because Pacrim s contract was with a local Morale, Welfare, and Recreation entity with supervision and contracting structures separate and distinct from an exchange, the contract does not meet the McDonald s threshold requirement that the NAFI be closely affiliated with a post exchange. ). Thus, a hole that Congress likely thought it had plugged, continued to leak. The statutory amendments also had some unintended consequences, leaving some litigants without a remedy against the exchanges in certain circumstances. For example, Congress did not amend 28 USCA 1498, which allows private parties to sue the Government for patent and copyright infringement under a separate statute, when it amended the Tucker Act, 28 USCA 1491. The Court of Claims concluded that no remedy was available for patent infringement against NAFIs even the military and NASA exchanges. See Interdent, 488 F.2d at 1013 14. Apotheosis: The Federal Circuit s Mechanical Test that Turns Government Agencies with Appropriations into NAFIs Notwithstanding the auspicious origins of the NAFI doctrine, and setting aside the statutorily recognized military and NASA exchanges, the Federal Circuit continued to expand the doctrine until it began regularly concluding that U.S. Government agencies that clearly received appropriated funds were NAFIs, and thus fell beyond the jurisdiction of the COFC under the Tucker Act. The Federal Circuit s NAFI test became a hammer, and every Government agency looked like a nail. The Federal Circuit arrived at an apotheosis of the NAFI doctrine with a four-factor test: A government instrumentality is a NAFI if: (1) It does not receive its monies by congressional appropriation. (2) It derives its funding primarily from its own activities, services, and product sales. (3) Absent a statutory amendment, there is no situ- The Government Contractor 2011 Thomson Reuters 3

The Government Contractor ation in which appropriated funds could be used to fund the federal entity. and (4) There is a clear expression by Congress that the agency was to be separated from general federal revenues. AINS, Inc. v. U.S., 365 F.3d 1333, 1342 (Fed. Cir. 2004) (internal citations, quotations and alterations omitted). Using this test, the Federal Circuit acknowledged that it often considers entities NAFIs even if GAO an arm of Congress does not; and these conclusions rely on its prior case law. For example, the Federal Circuit asserted that [r]evolving funds are not necessarily continuing appropriations, and, thus, a U.S. Government entity that ran based on a revolving fund approved by Congress could still be a NAFI. Id. at 1341. The Federal Circuit, by redefining what constitutes an appropriation, began declaring entities that receive federal appropriations to be NAFIs. See AINS, 365 F.3d at 1344 (declaring U.S. Mint a NAFI); Core Concepts of Fla., Inc. v. U.S., 327 F.3d 1331, 1338 39 (Fed. Cir. 2003) (declaring Federal Prison Industries a NAFI); Furash & Co. v. U.S., 252 F.3d 1336, 1341 42 (Fed. Cir. 2001) (declaring Federal Housing Finance Board a NAFI). GAO s position starkly contrasted with the Federal Circuit s: The Federal Circuit s definition of a NAFI for purposes of its jurisdiction has resulted in classifying entities that operate with permanent, indefinite appropriations as NAFIs. Although a permanent, indefinite appropriation is not reenacted each year in the annual appropriations process, it is an appropriation nonetheless. Consequently, GAO does not view revolving funds (permanent, indefinite appropriations) as NAFIs. Redbook at 15-236 15-237 (citations omitted). The Federal Circuit s four-factor test appeared to elevate a mechanical definition of a NAFI over the actual, functional congressional understanding of that term. Finally, the expansion of the NAFI doctrine also posed problems because the Federal Circuit faced causes of action under the Tucker Act based on an act of Congress or the Constitution. In each of these latter situations, the Federal Circuit had more recently concluded that a NAFI could be sued in the COFC under the Tucker Act. See Lion Raisins, Inc. v. U.S., 416 F.3d 1356, 1364 (Fed. Cir. 2005) (NAFI doctrine does not bar takings cause of action brought against NAFI); El-Sheikh v. U.S., 177 F.3d 1321, 1324 25 (Fed. Cir. 1999) (NAFI doctrine does not bar cause of action against NAFI based on statute unless Congress says otherwise). This made no sense. The Tucker Act does not vary the definition of the United States based on the source of a claimed right it instead states that the COFC has jurisdiction to render judgment upon any claim against the United States founded either upon the Constitution, or any Act of Congress or any regulation of an executive department, or upon any express or implied contract with the United States, or for liquidated or unliquidated damages in cases not sounding in tort. 28 USCA 1491(a)(1). If a NAFI were subject to suit based on the Constitution or a statute (absent contrary, explicit statutory direction), then there seemingly is no basis for withholding jurisdiction based on a contract. The Slattery majority recognized this inconsistency in its analysis, and ultimately concluded that the NAFI doctrine should be eliminated. See Slattery, 635 F.3d at 1309. Slattery Eliminates the NAFI Doctrine and Replaces It The Federal Circuit s Slattery decision reviewed most of this history and (a) concluded that the amendment of the Tucker Act to specifically allow jurisdiction for some NAFIs the military and NASA exchanges but not others, did not call for a different result; (b) rejected prior case law that concluded that the Judgment Fund statute could limit the COFC s Tucker Act jurisdiction; and (c) effectively eliminated the NAFI doctrine. First, in Slattery, the majority and dissent disagreed about the Tucker Act and CDA amendments that recognized jurisdiction for claims against the military and NASA exchanges. The dissent in Slattery asserted that the text of the Tucker Act and the legislative history surrounding the 1970 Act both confirm that the 1970 Act provided only a limited exception to the NAFI doctrine. Congress expressly revoked the NAFI doctrine for certain NAFIs (military and NASA exchanges), but it left all other NAFIs untouched. This interpretation is implicitly supported by the maxim of expression unius est exclusion alterius and explicitly supported by the act s legislative history and text. Slattery, 635 F.3d at 1327 28 (Gajarsa, J., dissenting). The Slattery majority responded by looking at the difficulty that Congress had in defining a NAFI (discussed above) and why it confined the amendment to the military and NASA exchanges. The majority 4 The Government Contractor 2011 Thomson Reuters

Vol. 53, No. 19 / May 11, 2011 opinion reasoned, Legislative action to close a muchcriticized loophole cannot reasonably be understood as an endorsement of the loophole itself, and certainly not an endorsement of its future application. Slattery, 635 F.3d at 1313. Second, the Federal Circuit majority concluded that the Judgment Fund statute could not independently and collaterally limit Tucker Act jurisdiction as the Court of Claims concluded in Kyer. See Slattery, 635 F.3d at 1315 18 (discussing cases and relying on Evan Zoldan, The King is Dead, Long Live the King!: Sovereign Immunity and the Curious Case of Nonappropriated Fund Instrumentalities, 38 Conn. L. Rev. 455 (2006)). Relying on recent cases from the Supreme Court that have sought to catalogue what statutes are truly jurisdictional as opposed to mere claims processing statutes, the Federal Circuit concluded that the Judgment Fund statute was never meant to limit Tucker Act jurisdiction. See Slattery, 635 F.3d at 1320 (discussing Reed Elsevier, Inc. v. Muchnick, 130 S. Ct. 1237, 1244 (2010), Arbaugh v. Y&H Corp., 546 U.S. 500, 515 16 (2006), and Kontrick v. Ryan, 540 U.S. 443, 455 (2004)). Also, the majority stated that Tucker Act jurisdiction would be presumed, absent specific statutory authority repealing or removing that jurisdiction. Id. at 1320 21 (citing, inter alia, U.S. v. Mitchell, 463 U.S. 206, 216 (1984); Preseault v. ICC, 494 U.S. 1, 12 (1990); Reg l Rail Reorg. Act Cases, 419 U.S. 102, 126 36 (1974)). Finally, the Federal Circuit eliminated the NAFI doctrine, concluding that Tucker Act jurisdiction is not limited by the appropriation status of the agency s funds or the source of funds by which any judgment may be paid. Slattery, 635 F.3d at 1321. Early in the decision, the majority enunciated that [t]he jurisdictional criterion is not how the government entity is funded or its obligations met, but whether the government entity was acting on behalf of the government. See id. at 1301. This new criterion should hopefully have the effect of clarifying and simplifying access to the courts for contract disputes involving NAFIs. Coda: What s Next? The Federal Circuit (and its predecessor, the Court of Claims) created a special rule under its jurisdiction, where it now seems clear none should have existed. The Federal Circuit s new criterion should have the benefits of being more faithful to the text of the Tucker Act and simpler in application. It is, of course, possible or even likely that the Department of Justice will appeal this ruling. Its petition for a writ of certiorari is currently due May 28. But, it is not clear whether the Supreme Court will or should hear this appeal. The posture of Slattery bears some resemblance to ebay v. Mercexchange, LLC, in which the Supreme Court rejected the Federal Circuit s creation of a special rule for awarding injunctive relief in patent cases where the statute warranted none. See ebay Inc. v. Mercexchange, LLC, 547 U.S. 388, 393 94 (2006) (concluding that lower court erred when it used a categorical rule to deny injunctive relief in a broad swath of cases rather than using the traditional four-part test for granting injunctive relief). Here, the Federal Circuit (and the Court of Claims before it) added an impediment to Tucker Act jurisdiction where none was apparently intended. The Federal Circuit has finally attempted to right this ship on its own. The Supreme Court will hopefully recognize and uphold the Federal Circuit s action. F This Feature Comment was written for The Government Contractor by Daniel S. Herzfeld, who is a Counsel in the Government Contracts & Disputes Practice Group of Pillsbury Winthrop Shaw Pittman LLP and can be reached at daniel.herzfeld@pillsburylaw.com. The opinions and views of this article are those of the author and do not necessarily reflect those of Pillsbury Winthrop Shaw Pittman LLP. The author would like to thank his colleague Alex D. Tomaszczuk for his thoughtful comments on a draft of this article. The Government Contractor 2011 Thomson Reuters 5