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Raytheon Co. v. BAE Systems Technology Solutions & Services Inc.

Superior Court of Delaware

October 30, 2017

RAYTHEON COMPANY, Plaintiff,
v.
BAE SYSTEMS TECHNOLOGY SOLUTIONS & SERVICES INC., Defendant.

          Submitted: August 1, 2017

         Upon BAE Systems Technology Solutions & Services, Inc. 's Motion to Dismiss, GRANTED as to Counts I, III, V, VI and VII and DENIED as to Counts II and IV.

          Jack B. Jacobs, Esquire, Sidley Austin LLP, Wilmington, Delaware, Mark D. Hopson, Esquire (pro hac vice), Gordon D. Todd, Esquire (pro hac vice), Daniel J. Feith, Esquire (pro hac vice), Sidley Austin LLP, Washington, D.C., Attorneys for Plaintiff.

          John A. Sensing, Esquire, Matthew F. Davis, Esquire, Jesse L. Noa, Esquire, Potter Anderson & Corroon LLP, Wilmington, Delaware, Gregory M. Williams, Esquire (pro hac vice), Richard W. Smith, Esquire (pro hac vice), Katherine C. Campbell, Esquire (pro hac vice), Wiley Rein LLP, Washington, D.C., Attorneys for Defendant.

          MEMORANDUM OPINION AND ORDER

          Paul R. Wallace, Judge.

         I. INTRODUCTION

         Plaintiff Raytheon Company ("Raytheon") brings a Complaint against BAE Systems Technology Solutions and Services, Inc. ("BAE"), in seven counts: (1) breach of contract; (2) breach of the implied covenant of good faith and fair dealing; (3) contractual indemnification; (4) unjust enrichment; (5) negligent misrepresentation (pleaded in the alternative); (6) tortious interference with prospective contractual relations (pleaded in the alternative); and (7) a tort related to damaged trade and profession (pleaded in the alternative). The suit arises from BAE's and Raytheon's relationship and intended concert to upgrade a foreign government's military aircraft.[1]

         BAE now moves to dismiss all counts of Raytheon's complaint.[2]

         II. FACTUAL AND PROCEDURAL BACKGROUND

         A. South Korea's Initial F-16 Upgrade Program Bids.

         In 2011, the Republic of Korea's ("South Korea") Defense Acquisition Program Administration moved to upgrade the avionics systems and the mission system software on its military's 134 F-16 fighter jets.[3] The upgrade involved multiple components, including mission computers, mission software, and radar systems. Before entering into the Foreign Military Sales program ("FMS Program")-through which the United States Government buys defense articles or services from United States contractors on behalf of foreign end users[4]-South Korea conducted a competitive bidding process on its own.[5] South Korea solicited bids from BAE and Lockheed Martin to "perform the task of integrating the upgraded avionics systems into the aircraft, and separately solicited bids from Raytheon and Northrop [Grumman] to supply the radar units."[6]

         To help prepare its South Korean bid, Raytheon retained John Bean as a consultant.[7] Bean is a former Lockheed Martin employee with significant F-16 experience. Bean oversaw and assumed responsibility for Raytheon's bid development. His contract with Raytheon explicitly prohibited him from doing anything that would create a conflict of interest without informing Raytheon. It also prevented Bean from "represent[ing] a competitor on any particular matter in which Raytheon [was] involved."[8] Raytheon claims that while Bean was under this contract, he consulted with BAE on its negotiations with the United States Government for the South Korean FMS contract.[9] Raytheon and BAE bid separately to participate in their respective aspects of the program.

         In August 2012, South Korea selected BAE as its preferred systems integrator and entered into an agreement with the company.[10] That agreement included a price of $536 million and a requirement that BAE use its best efforts to integrate that price into an LOA with the United States Government.

         Raytheon alleges that as soon as South Korea selected BAE, Raytheon's employees met with BAE's F-16 team to understand the system architecture in which its radar would be integrated.[11] At this point, Bean informed Raytheon of his potential conflict of interest and "theretofore undisclosed work for BAE."[12] BAE then hired Bean as "Vice President" and "General Manager for Global Fighter Programs."[13] Raytheon says Bean's duties with BAE then included coordinating with Raytheon and overseeing Raytheon's work on the South Korean program. Raytheon terminated Bean's consulting contract with it, but says, by then, Bean was already in a position to, and did in fact, use his insider knowledge of Raytheon to influence Raytheon's bid to benefit BAE and disadvantage Raytheon.[14]

         In April 2013, South Korea selected Raytheon as its preferred radar supplier, and entered into an agreement with it.[15] That agreement included a firm fixed price of $357, 987, 453 and an agreement to use its best efforts to reflect that understanding in an LOA with the United States Government. It also required Raytheon to maintain a bid bond for $17, 899, 373 to South Korea against failure to do so.[16]

         B. South Korea Negotiates with the United States Government for an FMS Contract.

         South Korea originally sought two separate FMS contracts with the United States Government. On August 1, 2012, South Korea submitted a request for the systems integration portion of the upgrade, designating BAE. On April 8, 2013, South Korea submitted a separate request for the radar portion of the upgrade, designating Raytheon.[17] The United States Government urged South Korea to submit a single request covering both; South Korea did so on September 17, 2013.[18]That combined request designated BAE as the systems integrator and prime contractor, with Raytheon as a subcontractor to BAE.[19] BAE asserts it did not request this arrangement; rather, the United States Government directed this.[20]

         Upon receiving that combined request, the United States Government began to evaluate how much such a request would cost South Korea. The United States Air Force estimated that the entire cost (including an increase for risk level) was between $2.15 and 2.2 billion.[21] South Korea objected to this estimate. But, in response, South Korea did agree to remove certain elements from its requested program. This reduced the estimated cost to $1.86 billion.[22] South Korea still objected to the price quotes.

         In September 2013, the United States Government, South Korea, and BAE "tentatively" agreed to a total estimated cost of $ 1.705 billion.[23] Approximately $1.3 billion of that price was attributed to BAE's and Raytheon's combined costs, with the balance covering the United States government's administrative costs.[24] The United States Air Force warned South Korea that there was a "high cost risk" and that "there [was] no guarantee [] that future funding [might] not be required during program execution."[25] Raytheon alleges it was informed of neither South Korea's cost concerns nor the Air Force's warning regarding cost risk.[26]

         The program was eventually split into two LOAs: LOA-1 and LOA-2. LOA-1 covered the limited work necessary for initial design and development of the upgrades, while LOA-2 covered actual production and integration of the systems.[27]

         On December 13, 2013, the United States Government and South Korea executed LOA-1. South Korea agreed to pay the United States approximately $ 185 million immediately.[28] The United States Government did not issue the prime contract to BAE until May 2014.[29] Meanwhile, both governments continued to negotiate LOA-2.

         C. BAE Subcontracts with Raytheon.

         Even though BAE did not yet have the prime contract with the United States Government, BAE subcontracted with Raytheon on December 31, 2013.[30] Raytheon alleges that this Subcontract went beyond the limited scope of LOA-1, and included Raytheon's performance for the entire upgrade program.[31] Raytheon claims that BAE made statements during the Subcontract negotiations that "were intended to induce Raytheon to enter the Subcontract and begin work on and invest its own funds in the program immediately."[32]

         BAE, however, says that the Subcontract was "undefinitized" and was not fully funded.[33] Until that occurred, BAE was only incrementally authorizing and funding certain activities, [34] and was not obligated to reimburse Raytheon for any amount over that which was allotted.[35] Further, even for the funded work, BAE could terminate the Subcontract for convenience if doing so was in its "best interest."[36]

         Raytheon claims that BAE informed it that BAE lacked resources for the full subcontract immediately, but would secure full funding promptly.[37] Raytheon also claims that BAE represented that the United States Government and South Korea would finalize the LOA-2 soon.[38] Raytheon says BAE never disclosed the ongoing issues.

         D. The Subcontract Language.

         1. General Terms

         The Subcontract is titled "Undefinitized Contract Action." Raytheon asserts that these are standard in United States government contracting.[39] They allow the contractor to begin work with a payment guarantee, while realizing that some of the specific terms are not yet final.[40]

         The Subcontract states

This UCA constitutes an agreement between the parties on the terms and conditions set forth herein and signifies the intention of the parties to execute a form, definitive Firm Fixed Price type Agreement for the supplies/services described in Attachment 1, Supplies/Services, Prices, and Delivery Schedule, hereto consistent with the terms and conditions as specified in Attachment 2, UCA Terms and Conditions.[41]

         2. Funding

         As to the incremental funding, the Subcontract goes on

[BAE] has informed [Raytheon] that insufficient funding is available to support the program execution schedule prior to August 2014. At [Raytheon's] sole discretion, [Raytheon] may establish internal funding to assist the program in maintaining price and schedule. If and when sufficient funding is established on the Contract, these internally funded [Raytheon] costs shall be reimbursable under the Contract.[42]

         Under the terms of the funding schedule, BAE was to pay Raytheon $2.7 million in initial funding, $24.8 million on March 31, 2014, and be "fully funded in accordance with Attachment 11 [monthly funding schedule]."[43] Raytheon claims that these provisions regarding incremental funding made BAE "responsible for reimbursing Raytheon's full performance."[44] It claims "the Subcontract required BAE to allot funds and pay Raytheon even in the absence of a Government contract."[45]

         3. Termination

         The Subcontract also contains termination provisions. Section VI(C) allows BAE to terminate the Subcontract for convenience if "the parties fail to agree or fail to make progress to reach an agreement on terms and conditions of a definitive Agreement" or "the differences ... are not resolved within the time specified for definitization."[46] The Subcontract could also terminate automatically if the parties didn't execute a definitive agreement by the cutoff date.[47] Either way, "[Raytheon] shall be reimbursed with the termination for convenience clause indicated below, but not in excess of the maximum BAE [not-to-exceed provision of the Subcontract]."[48]

         The Terms and Conditions in Attachment 2 to the Subcontract incorporate a number of Federal Acquisition Regulation ("FAR") provisions, including the termination procedure "entitled Termination for the Convenience of the Government set forth in FAR 52.249-2 (Apr. 2012)."[49] Under that regulation, after receiving notice of termination from the United States Government, the prime contractor must immediately terminate all related subcontracts.[50] This procedure prevents recovery of future lost profits by the prime contractor.[51]

         4. Customer Communications Provision

         Section 5 of the Terms and Conditions states

With the exception of System Integrity, for which Raytheon shall be allowed to directly liaison and coordinate with the [United States] Government, [BAE] shall be solely responsible for all liaison and coordination with [South Korea], any higher tier contractor(s), or the [United States] Government, as it affects any applicable prime contract, this Contract, and any related contract. Except as required by law, [Raytheon] shall not communicate with [South Korea], any higher tier contractor(s), or the [United States] Government, with respect to the applicable prime contract or this Contract without prior written approval from [BAE]. . ., [52]

         The parties dispute whether this provision imposes merely a restriction on Raytheon's ability to communicate with the United States Government and South Korea, or actively places a duty on BAE to liaise and coordinate with the two countries on Raytheon's behalf.[53]

         5. Indemnification of Third-Party Claims

         Section 29 of the Terms and Conditions addresses indemnification. It states

[BAE] and [Raytheon] indemnify each other against third party claims to the extent directly caused and proportionate to the negligence of the indemnifying party. [Raytheon] shall indemnify, hold harmless, and at [BAE]'s election, defend [BAE] . . . from and against all losses, claims . . . causes of action . . . including, but not limited to, reasonable attorneys' fees, [litigation and settlement expenses], and court costs, to the extent directly caused and proportionate to the negligent acts or omissions of [Raytheon] . . . related to the execution of work to be performed or otherwise in the performance of its obligations under the contract. [BAE] shall indemnify, hold harmless and, at Raytheon's election, defend Raytheon ... from and against all losses, claims ... causes of action . . . including, but not limited to, reasonable attorneys' fees, [litigation and settlement expenses], and court costs, to the extent directly caused and proportionate to the negligent acts or omissions of [BAE] . . . related to of the execution of work to be performed or otherwise in the performance of its obligations under the contract.[54]

         In short, to be triggered, this clause requires three things: (1) a claim brought by a third party; (2) which is "directly caused and proportionate to the negligence of the indemnifying party;" and which is (3) "related to . . . the execution of work to be performed or otherwise in performance of the [indemnifying party's] obligations."

         E. United States Government Terminates LOA-1.

         In early October 2014, South Korea requested a partial stop work order for LOA-1. On October 15, 2014, BAE told Raytheon to stop all work: Raytheon complied.[55] At the time of the stop work order, Raytheon had spent $38, 602 million of internal funds on the Subcontract "in reliance on BAE's repeated misrepresentations that it was close to securing the full funding for the Upgrade Program and would reimburse Raytheon for its investment."[56] Raytheon alleges that despite having received sufficient funds to reimburse it, BAE only paid Raytheon $26, 044 million of that figure.[57]

         On October 15, 2014, BAE asserted that the maximum funding and termination liability under the subcontract was $38, 355, 458.[58] After that was split between various Subcontract costs, it would leave Raytheon with almost $6 million in unpaid internal costs.

         On November 5, 2014, the United States Government and South Korea terminated LOA-1 because they were unable to agree on the price and scope of the Upgrade Program and of LOA-2.[59] Raytheon alleges that BAE withheld information about all the issues and negotiations between the United States Government, South Korea, and BAE up until that point. BAE immediately notified Raytheon of the termination, BAE terminated the Subcontract, and the parties then engaged in termination negotiations.[60]

         At an April 2015 negotiation meeting, Raytheon alleges that BAE acknowledged that Bean had been "too positive about the outcome for the Upgrade Program, which had clouded his judgment and soured [BAE]'s relationship with Raytheon."[61] In January 2016, Raytheon and BAE agreed to reallocate available funding to repay Raytheon.[62]

         F. South Korea Sues Raytheon and BAE in South Korea.

         On July 1, 2015, South Korea filed two separate suits in its home courts against BAE and Raytheon. South Korea claimed that both companies impermissibly raised their prices, resulting in an increase in the FMS price. South Korea said both companies did so in violation of the original agreements made between South Korea and BAE/Raytheon prior to any United States government involvement.[63]

         BAE countersued in the Maryland federal district court, seeking a declaration that South Korea could not sue BAE under the FMS Program.[64] In December 2016, that court granted summary judgment in favor of BAE, stating that South Korea's grievance is with the United States Government, not BAE.[65]

         G. Raytheon's Chancery Action is Dismissed.

         Raytheon brought suit against BAE in the Delaware Court of Chancery in 2016, alleging largely the same claims raised here. The Court of Chancery dismissed the two equitable claims, [66] and Raytheon elected to transfer its case here.[67]

         III. STANDARD OF REVIEW

         When considering a motion to dismiss pursuant to Superior Court Civil Rule 12(b)(6), the Court will:

(1) accept all well pleaded factual allegations as true, (2) accept even vague allegations as "well pleaded" if they give the opposing party notice of the claim, (3) draw all reasonable inferences in favor of the non-moving party, and (4) [not dismiss the claims] unless the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances.[68]

         The Court must accept as true all well-pleaded allegations.[69] And every reasonable factual inference will be drawn in the non-moving party's favor.[70] But the Court will "ignore conclusory allegations that lack specific supporting factual allegations."[71]

         "Dismissal is warranted where the plaintiff has failed to plead facts supporting an element of the claim, or that under no reasonable interpretation of the facts alleged could the complaint state a claim for which relief might be granted."[72] But, if the Court engages the standards described and finds the claimant may recover, the Court must deny the motion to dismiss.[73]

         IV. CHOICE OF LAW

         Raytheon and BAE both agree that New York law governs their relationship due to the choice-of-law clause in the Subcontract.[74] When contracting parties select a particular forum state's law to govern the contract and all matters arising from it, Delaware and New York both hold that the parties' choice of law covers both contract and related tort claims.[75]

         V. DISCUSSION

         A. Breach-of-Contract Claim.

         In order to state a claim for breach of contract under New York law, Raytheon must allege "the existence of a contract, the plaintiffs performance under the contract, the defendant's breach of that contract, and resulting damages."[76] Here, Raytheon must plainly plead and show that there was a contractual obligation that BAE breached.[77]

         Neither party disputes the validity and enforceability of the Subcontract. The parties instead dispute their obligations under the "undefinitized" Subcontract. Raytheon alleges that BAE failed to fund the Subcontract in accordance with the Subcontract's terms, failed to timely reimburse Raytheon, and improperly terminated the Subcontract. Raytheon further contends that it is entitled to lost profits damages due to BAE's breach.

         The New York Court of Appeals has stated that "[t]he fundamental, neutral precept of contract interpretation is that agreements are construed in accord with the parties' intent[, ]" and "[t]he best evidence of what parties to a written agreement intend is what they say in their writing[.]"[78] "Thus, a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms."[79] "The threshold question of whether a contract is unambiguous, and the subsequent construction and interpretation of an unambiguous contract, are issues of law within the province of the court."[80] The Subcontract here is complete, clear and unambiguous on its face, and thus will be accorded its plain meaning.

         1. The Subcontract Contained No Provision Promising Full Payment.

         The undefinitized nature of the Subcontract meant that until the contract was "fully funded at contract definitization, " BAE's liability was governed by the "Limitation of Buyer's Obligation" provision-which made BAE liable only for incrementally authorized and funded activities.[81] Specifically, the Limitation of Buyer's Obligation Provision provides that BAE was not

obligated in any event to reimburse [Raytheon] in excess of the amount allotted to the contract for those [incrementally funded] item(s) regardless of anything to the contrary in the clause entitled 'Termination for Convenience of the Buyer' unless additional funds are subsequently allotted to the contract.[82]

         Raytheon contends that the phrase "unless additional funds are subsequently allotted" means that BAE was solely responsible for allotting funds to the Subcontract. But this reading contradicts the purpose of the provision and would render BAE's obligation limitless. Instead, the plain meaning of the phrase is that if BAE were to allot additional funds to the Subcontract prior to definitization, its liability would be increased correspondingly to cover that amount. This reading is consistent with paragraph (d) of the Limitation of Buyer's Obligation Provision, which contemplates the allocation of additional funds.[83]

         Raytheon claims that BAE is obligated to fund Raytheon's work for the entire project, that such obligation was absolute, and that such obligation was neither contingent on the negotiations finalizing nor the contract definitization.[84] But where in the Subcontract does that obligation arise? Raytheon can't say.

         Raytheon alludes to the Estimated Termination Liability Schedule's "full funding" obligation.[85] But Raytheon incants nothing that requires BAE to pay a full amount. The mentioned Schedule itself is "estimated" and limits what Raytheon can receive in termination amounts-doing so based upon when termination occurs and what performance had by then been authorized. Too, the Subcontract states that BAE was merely "expected" to provide additional funding in accordance with the schedule.[86]

         2. Raytheon Spent Internal Funds at its Own Risk.

         Raytheon's internal expenses, spent without BAE's authorization and at Raytheon's "sole discretion, "[87] were incurred at Raytheon's risk. The Subcontract states that such internal expenditures were only reimbursable "[i]f and when sufficient funding is established on the Contract[.]"[88]

         If Raytheon seeks to recover its internal funds that were spent post-Subcontract, but prior to any authorization by BAE, and for which the United States Government has not provided funding, it is barred by the express language of the contract.

         While if Raytheon seeks to recover its internal funds that were spent post-Subcontract, but prior to any authorization by BAE, and for which the United States Government has provided funding, it is covered by the termination negotiations. Raytheon concedes that because of the payments made under those negotiations, it has no outstanding unreimbursed costs.[89]

         Lastly, if Raytheon seeks recovery of any pre-South Korean project expenses it incurred while trying to develop a radar system, there is no contractual basis for such recovery.

         3. The Subcontract was Not Impermissibly Terminated.

         Raytheon claims that the contract was impermissibly terminated. The Subcontract allowed BAE to terminate on two potential grounds: (1) convenience, or (2) absence of progress towards definitization. BAE could terminate the Subcontract for convenience if doing so was in its "best interest."[90] Raytheon contends that the termination was impermissible because BAE based its termination on the fact that the United States Government terminated its prime contract with BAE, and as such, did not meet the failure to make progress toward definitization requirement.[91] Raytheon goes on to claim that "the Subcontract did not permit BAE to terminate for convenience... ."[92] Raytheon's reading is plainly wrong.

         BAE could terminate the contract if doing so was in its "best interest, " and the Subcontract explicitly says that BAE can terminate for convenience.[93] Failure to make progress toward definitization is not, as Raytheon suggests, a "condition precedent" to termination for convenience. Failure-to-make-progress and ...


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