EFTA00797875

American Tel. & Tel. Co. v. U.S., 177 F.3d 1368 (1999) 
Keyeite Yellow Flag - Negative Treatment 
Distinguished by Gengler v. U.S. ex rel. its Dept. of Defense and 
Navy. E.D.Cal.. August 24.2006 
F.3d 1368 
United States Court of Appeals, 
Federal Circuit. 
AMERICAN TELEPHONE 
AND TELEGRAPH COMPANY, 
and 
Lucent Technologies Inc., 
Plaintiffs—Appellants, 
v. 
UNITED STATES, 
Defendant/Cross—Appellant. 
Nos. 95- 5153, 95- 5154. 
May 26, 1999. 
Synopsis 
Contractor sued Government under 
Contract Disputes Act for recovery 
of expenditures under research and 
development contract. The Court of 
Federal Claims, John P. Wiese, J., 32 
Fed.CI. 672, ruled that contract was 
void and that quantum meruit relief 
was available, but certified questions 
for interlocutory appeal. The Court 
of Appeals originally affirmed, but, 
on rehearing en banc, the Court 
of Appeals, Pauline Newman, Circuit 
Judge, held that: (1) Navy contracts for 
development of ship-towed, undersea 
surveillance system was for "major 
system or subsystem," for purposes 
of statute prohibiting Department of 
Defense from entering into fixed price 
contracts for development of major 
system or subsystem exceeding $10 
million unless certain conditions were 
met, and (2) Department's failure to 
comply with statute's requirements did 
not render contract void ab initio. 
Questions 
answered 
and 
case 
remanded. 
Rader, Circuit Judge, concurred in the 
result and filed opinion in which Mayer, 
Chief Judge, and Lourie, Circuit Judge, 
joined. 
Plager, Circuit Judge, dissented in part, 
concurred in part, and filed opinion. 
Opinion, 124 F.3d 1471, vacated. 
West Headnotes (5) 
Ill 
Public Contracts 
• Compensation 
United States 
• Compensation 
Navy 
contract 
for 
development of ship-towed. 
undersea surveillance system 
was for "major system or 
subsystem," 
for 
purposes 
of 
statute 
prohibiting 
Department of Defense from 
entering into fixed 
price 
contracts for development of 
major system or subsystem 
exceeding $10 million unless 
certain 
conditions 
were 
met, notwithstanding either 
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American Tel. & Tel. Co. v. U.S., 177 F.3d 1368 (1999) 
agency's reliance on separate 
statute to define major system 
as having $75 million floor 
or fact that contract was 
funded over multiple years. 
10 U.S.C.A. § 2302(5); Act 
December 22, 1987, § 101(b), 
Sec. 8118, 101 Stat. 1329. 
9 Cases that cite this headnote 
121 
Administrative Law and 
Procedure 
e- Erroneous or 
unreasonable construction; 
conflict with statute 
Although 
an 
agency's 
interpretation of a statute 
it 
administers 
is 
indeed 
entitled to deference, agency 
discretion does not extend 
to changing a clearly stated 
dollar figure. 
Cases that cite this headnote 
131 
Public Contracts 
1— Compensation 
United States 
Compensation 
Failure 
of 
of 
Defense 
with statute 
Department 
to 
comply 
setting forth 
internal review and reporting 
requirements for fixed price 
contract for development of 
major system or subsystem 
exceeding $10 million did not 
render such contract void 
ab initio, as statute itself 
did not announce sanction 
of contract invalidity, and 
contract 
had 
been 
fully 
performed. Act December 22, 
1987, § 101(b), Sec. 8118, 101 
Stat. 1329. 
24 Cases 
that 
cite 
this 
headnote 
141 
Public Contracts 
offr. Unauthorized or Illegal 
Contracts 
United States 
o- Unauthorized or Illegal 
Contracts 
Invalidation of government 
contract is not a necessary 
consequence when a statute 
or 
regulation 
has 
been 
contravened, but must be 
considered 
in 
light 
of 
the statutory or regulatory 
purpose, with 
recognition 
of the strong policy of 
supporting the integrity of 
contracts made by and with 
the United States. 
13 Cases that cite this 
headnote 
151 
Contracts 
o- Nature and Essentials in 
General 
The invalidation of a contract 
after 
it 
has 
been 
fully 
performed is not favored. 
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American Tel. 8 Tel. Co. v. U.S., 177 F.3d 1368 (1999) 
11 
Cases that cite this 
headnote 
Attorneys and Law Firms 
*1369 C. Stanley Dees, McKenna & 
Cueno, L.L.P., of Washington, DC, 
argued for plaintiffs-appellants. With 
him on the brief was J. Keith Burt. Of 
counsel on the brief were Thomas R. 
Suher, and Dean L. Grayson, Lucent 
Technologies, Inc., of Washington, 
DC. 
Bryant G. Snee, Assistant Director, 
Commercial Litigation Branch, Civil 
Division, 
Department 
of 
Justice, 
of Washington, DC, argued for 
defendant-cross appellants. With him 
on the brief was David M. Cohen, 
Director. Of counsel on the brief were 
Robert D. Hogue, James H. Haag, 
Attorneys, Office of General Counsel, 
Department of the Navy, of Arlington, 
Virginia. 
Caryl A. Potter, III, Sonnenschein 
Nath & Rosenthal, of Washington, DC, 
for amicus curiae Electronic Industries 
Alliance and Aerospace Industries 
Association of America, Inc. With him 
on the brief were Elizabeth A. Ferrell, 
of Washington, DC; Alan M. Posner, 
of Chicago, Illinois; and Roger K. 
Heidenreich, of St. Louis, Missouri. 
John Lloyd Rice, Miller & Chevalier, 
Chartered, of Washington, DC, for 
amicus curiae Federal Circuit Bar 
Association. With him on the brief was 
Clarence T. Kipps, Jr. Of counsel on the 
brief were L. James D'Agostino, Reed 
Smith Shaw & McClay, of McLean, 
Virginia; and George Hutchinson, 
Executive Director, Federal Circuit Bar 
Association, of Washington, DC. 
Before 
MAYER, 
Chief 
Judge, 
NEWMAN, 
PLAGER, 
LOURIE, 
CLEVENGER, RADER, SCHALL, 
BRYSON, and GAJARSA, Circuit 
Judges. * 
Opinion 
Opinion for the court filed by Circuit 
Judge NEWMAN, in which Circuit 
Judges 
CLEVENGER, 
SCHALL, 
BRYSON, 
and 
GAJARSA 
join. 
Opinion concurring in result filed by 
Circuit Judge RADER, in which Chief 
Judge MAYER and Circuit Judge 
LOURIE join. Opinion dissenting-in-
part and concurring-in-part filed by 
Circuit Judge PLAGER. 
NEWMAN, Circuit Judge. 
We took this appeal and cross-appeal 
en banc to reconsider the questions 
of law presented, upon certification 
for interlocutory appeal, concerning 
the applicability of § 8118 of the 
Defense Appropriations Act of 1987 to 
a contract between the Department of 
the Navy and the American Telephone 
and Telegraph Company. The Court of 
Federal Claims ruled that in view of the 
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American Tel. & Tel. Co. v. U.S., 177 F.3d 1368 (1999) 
failure of the Department of Defense to 
comply with § 8118, the contract, which 
had been performed, was void ab initio. 
We now hold that the contract was 
not void, and remand to the Court of 
Federal Claims for further proceedings 
in accordance with this premise. 
The Reduced Diameter Array Contract 
This contract arose in Cold War 
response to the new 
ultra-quiet 
Soviet 
submarines, 
which 
were 
difficult to monitor using available 
technology and equipment. Effective 
antisubmarine response requires that 
hostile submarines be reliably detected, 
classified, located, and tracked. The 
Navy, among its programs for this 
purpose, 
employed 
an 
integrated 
undersea acoustic sonar system called 
the Surveillance Towed—Array Sensor 
System (SURTASS). In SURTASS a 
suitably equipped surface vessel tows an 
array of undersea detection equipment 
through the ocean, while the equipment 
collects and transmits appropriate data 
for processing on shipboard and for 
transmission to shore-based facilities. 
The President's Annual Report *1370 
to the Congress for fiscal 1987, on 
the topic of Antisubmarine Warfare 
Forces, referred to SURTASS as 
"[o]ne of our most important ongoing 
programs in this area." Id. at 188. 
On 
December 
31, 
1987, 
after 
competitive bidding, the Navy awarded 
AT & T a fixed price incentive 
fee contract for a subsystem of 
SURTASS, referred to as the Reduced 
Diameter Array. The contract was 
a 
"Total 
Package 
Procurement," 
requiring design of shipboard and 
shore-based electronics, ship-winch 
interface and tow cable, and an 
acoustic and electronic array some 
8,000 feet long, to meet the new Soviet 
submarine capabilities. The contract 
required research, development, and 
the delivery and 
testing of an 
engineering development model, at 
a fixed ceiling price of $19,221,630, 
and included an option to the 
Navy to acquire a second engineering 
development model at a fixed ceiling 
price of $3,510,253, and an additional 
option to acquire three production-
level models at a fixed ceiling price of 
$8,475,466. 
The 
contract 
was 
successfully 
performed by AT & T over a period of 
five years. With the price adjustments 
to which the Navy agreed during 
performance, the final fixed price 
was approximately $34.5 million. AT 
& T states that technical problems 
and 
unknowns arose 
throughout 
performance, and that its total cost was 
at least $91 million. The Navy rejected 
AT & T's requests for restructuring the 
contract and other relief, although AT 
& T directed attention to § 8118 of 
the Defense Appropriations Act and 
relevant Department of Defense policy 
directives concerning procurement of 
research and development for new 
technologies. 
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American Tel. 8 Tel. Co. v. U.S., 177 F.3d 1368 (1999) 
AT & T duly brought suit in the 
Court of Federal Claims under the 
Contract Disputes Act. On cross 
motions for summary judgment the 
issues arising from the enactment of 
§ 8118 were presented and argued. 
The Court of Federal Claims ruled 
that § 8118 applied to this contract, 
that it had not been complied with 
by the Department of Defense, and 
that the contract consequently was void 
ab initio. Responding to AT & T's 
proposal that the appropriate remedy 
was to reform the contract into the 
cost-reimbursement form favored by 
§ 8118, the Court of Federal Claims 
held that since there had never been a 
valid contract it could not be reformed. 
The court held, however, that AT & 
T was entitled to compensation for 
its work on the basis of quantum 
meruit, on a theory of implied-in-
fact contract. Before proceeding to 
determine quantum, the court certified 
for interlocutory appeal, in accordance 
with 28 U.S.C. § 1292(d)(2), the 
following questions: 
(i) whether a contract executed in 
violation of statutory restrictions on 
the obligation and expenditure of 
appropriated funds may be declared 
void from the start at the instance of 
the performing contractor, and, if so, 
(ii) 
whether 
compensation 
for 
benefits 
conferred 
upon 
the 
Government (pursuant to the voided 
contract) can be predicated on an 
implied-in-fact contract with the 
amount of recovery to be determined 
pursuant 
to 
unjust 
enrichment 
principles. 
A panel of the Federal Circuit, by split 
decision, affirmed the ruling that the 
contract was void ab initio. The court 
also held that no relief was available 
to AT & T on any theory, except 
perhaps to replevin the goods that had 
been delivered to the Navy. Upon the 
petitions of both sides we have reheard 
the matter en banc. I
Section 8118 of the Defense 
Appropriations Act of 1987 
Concern about the use of fixed price 
contracts for research and development 
*1371 
phases 
pervades 
defense 
procurement. In 1971 Department of 
Defense Directive (DODD) 5000.1 
stated that "[i]t is not possible to 
determine the precise production cost 
of a new complex defense system 
before it is developed," and established 
the policy of using cost-reimbursement 
price terms for procurement of research 
and 
development. 
The 
Directive 
stated: "Fixed price contracts are 
normally not appropriate for research 
and development phases." DODD 
5000.1 & D.9.g (as amended, Sept. 
1, 1987). The Federal Acquisitions 
Regulations 
governing 
R 
& 
D 
contracts also embodied this policy. 
See, e.g., 48 C.F.R. § 35.006(c) 
(1984-1998) ("Because the absence of 
precise specifications and difficulties 
in estimating costs with accuracy 
(resulting in a lack of confidence in cost 
estimates) normally precludes using 
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American Tel. & Tel. Co. v. U.S., 177 F.3d 1368 (1999) 
fixed-price contracting for R & D, the 
use of cost-reimbursement contracts is 
usually appropriate.") 
The record states that in the 1980s, 
despite these policy directives, the Navy 
returned to fixed price contracting 
for 
R 
& 
D as 
part 
of the 
Total Package Procurement concept. 
This in turn led to congressional 
investigations 
and 
hearings. 
An 
investigation conducted by the House 
Appropriations Committee concluded 
that for the development phases 
of new technologies, the Navy's 
use 
of 
fixed 
price 
contracting 
resulted in program delays, cost 
overruns, contractor claims, non-
participation, 
and 
litigation. 
See 
Surveys & Investigations Staff, Report 
to the Comm. on Appropriations, U.S. 
House of Representatives: Navy Fixed 
Price Contracting in the Research, 
Development, 
Test and Evaluation 
(RDT & E) Account, 100th Cong., 
1st Sess. (1987). The Report stated 
that: "Although Navy officials at 
the headquarters level have predicted 
immense success for the acquisition 
policy, the opinions expressed by Navy 
and other Service field procurement 
officials and technical experts indicated 
that [fixed price contracting] generally 
[has] proved unsuitable in an R 
& D environment." Id. at ii. The 
Report concluded that the nature 
of 
the 
work 
in 
research 
and 
exploratory development contracting 
"most frequently necessitates" use of 
the cost-reimbursement type contract. 
Id. at 11. 
At ensuing hearings on the 1988 
Defense budget, concern was expressed 
about the continuing use of fixed 
price contracts for high-cost, high-
risk development projects, as well 
as concern for meeting congressional 
oversight and allocation obligations 
under this form of procurement. 
Department of Defense Appropriations 
for 
1988: 
Hearings 
Before 
the 
Defense Subcomm. of the Comm. on 
Appropriations, 100th Cong., 454-
55 (1987). Legislatively implementing 
these concerns, the House included in 
the Defense Appropriations Act of 1987 
the provision that became § 8118: 
§ 8118. None of the funds provided 
for the Department of Defense in this 
Act may be obligated or expended for 
fixed price-type contracts in excess of 
$10,000,000 for the development of 
a major system or subsystem unless 
the Under Secretary of Defense for 
Acquisition determines, in writing, 
that program risk has been reduced 
to the extent that realistic pricing 
can occur, and that the contract type 
permits an equitable and sensible 
allocation of program risk between 
the contracting parties: Provided, 
That the Under Secretary may 
not delegate this authority to any 
persons who hold a position in the 
Office of the Secretary of Defense 
below the level of Assistant Under 
Secretary of Defense: Provided 
further, That the Under Secretary 
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American Tel. & Tel. Co. v. U.S., 177 F.3d 1368 (1999) 
report 
to the Committees on 
Appropriations of the Senate and 
House of Representatives in writing, 
on a quarterly basis, *1372 the 
contracts which 
have obligated 
funds under such a fixed price-type 
developmental contract. 
Pub.L. No. 100-202, § 8118, 101 
Stat. 1329, 1329-84 (Dec. 22, 1987). 
The accompanying Conference Report 
reiterated congressional concern that 
the risks of failure and of cost 
uncertainties be allocated equitably 
between government and contractor, 
and stressed the desire to "maintain 
the government's credibility as a 
reliable business partner." H.R. Conf. 
Rep. No. 100-498 at 623 (Dec. 22, 
1987). Congress referred to the burden 
of a fixed price contract on the 
contractor when the miscalculation of 
development cost may have been that 
of the government agency as well as 
the contractor, and to the reluctance 
of some highly qualified firms to enter 
into such contracts. The Conference 
Report was unambiguous: "Fixed price 
contracts are normally not appropriate 
for research and development phases." 
Id. at 624. Thus Congress acted to 
adjust the risks of developing the 
advanced technologies needed in the 
service of national defense. 
Application of Section 8118 
[lj Section 8118 prohibited the award 
of certain fixed price-type contracts 
unless the program risk was evaluated 
at a high level within the Defense 
Department, and required quarterly 
reports of such awards to the House and 
Senate Appropriations Committees. 
The government argues first that '8118 
did not apply to the Reduced Diameter 
Array contract, thus eliminating any 
need for the Navy to have complied 
with the statute. The Court of Federal 
Claims correctly held otherwise. 
Section 8118 by its terms applies to 
"fixed price-type contracts in excess 
of $10,000,000 for the development of 
a major system or subsystem." The 
government argues that the Reduced 
Diameter Array is not a "major 
system," referring to a memorandum 
issued six weeks after enactment of § 
8118 wherein the Under Secretary of 
Defense defined "major system" for the 
purposes of § 8118 as a system having 
a contract cost of over $75,000,000. In 
a Memorandum for Service Acquisition 
Executives, Directors of the Defense 
Agencies issued February 11, 1988, 
Under Secretary of Defense for 
Acquisition Costello instructed that 
"[t]he definition of major system at 10 
U.S.C. § 2302(5) is the definition of 
that term for the purpose of [§ 8118]." 
This content was incorporated into 
SECNAV Instruction 4210.6A (April 
13, 1988). 
121 
Section 2302(5) is a provision 
of chapter 137 of Subtitle A—
General Military Law, which as then 
written defined "major system" as a 
system costing more than $75,000,000 
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American Tel. 8 Tel. Co. v. U.S., 177 F.3d 1368 (1999) 
for research, development, test, and 
evaluation: 
10 U.S.C. § 2302(5). The term "major 
system" means a combination of 
elements that will function together 
to produce the capabilities required 
to fulfill a mission need. The elements 
may include hardware, equipment, 
software or any combination thereof, 
but excludes construction or other 
improvements to real property. A 
system shall be considered a major 
system if (A) the Department of 
Defense is responsible for the 
system and the total expenditures 
for research, development, test, 
and evaluation for the system 
are estimated to be more than 
$75,000,000 (based on fiscal year 
1980 constant dollars) or the eventual 
total expenditure for procurement of 
more than $300,000,000 (based on 
fiscal year 1980 constant dollars).... 
The government argues that the agency 
had discretion to define the § 8118 
"major system" in accordance with 
'2302(5), and thereby to place a 
$75,000,000 floor on the systems to 
which § 8118 would apply. However, it 
was not within the agency's discretion 
to rewrite § 8118 to replace the statutory 
threshold of $10,000,000 with that 
of $75,000,000. Although an agency's 
*1373 interpretation of a statute 
it administers is indeed entitled to 
deference, agency discretion does not 
extend to changing a clearly stated 
dollar figure. See Chevron, U.S.A., Inc. 
v. Natural Resources Defense Council, 
Inc., 467 U.S. 837, 842-43, 104 S.Ct. 
2778, 81 L.Ed.2d 694 (1984) ("if the 
intent of Congress is clear, that is the 
end of the matter"). 
In addition, the AT & T contract 
itself, and the Space and Naval 
Warfare Systems Command's guide 
to the SURTASS, described the 
Reduced 
Diameter 
Array 
as 
a 
"subsystem." Subsystems were not 
defined in § 2305(5) and were not 
mentioned in the Memorandum of the 
Under Secretary. However, subsystems 
costing more than $10,000,000 were 
explicitly included in § 8118. Although 
the government now argues that the 
Under Secretary's Memorandum and 
SECNAV Instr. 4210.6A really covered 
a major system or a subsystem of 
a major system, this interpretation is 
contrary to the plain text of these 
documents. It is apparent that the 
Memorandum was contrary to the 
statute, and in all events that it did not 
include subsystems such as the Reduced 
Diameter Array. 
The government also argues that not 
all of the funds expended under 
the Reduced Diameter Array contract 
were appropriated in the corresponding 
Appropriations Act, and thus that 
the § 8118 prohibition on obligating 
or expending funds does not apply. 
Indeed, the contract was structured 
for multi-year incremental funding. 
However, it is undisputed that the 
starting research and development 
effort drew on several millions of 
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American Tel. 8 Tel. Co. v. U.S., 177 F.3d 1368 (1999) 
dollars of appropriated funds. The 
multi-year funding does not excuse the 
Defense Department from compliance 
with § 8118. 
Moreover, 
contrary 
to 
the 
government's argument, which is made 
but not strongly pressed, this case does 
not involve a funding deficiency or 
implicate the Anti—Deficiency Act, 31 
U.S.C. § 1341. See Hercules Inc. v. 
United States, 516 U.S. 417, 427, 116 
S.Ct. 981, 134 L.Ed.2d 47 (1996) ("The 
Anti-Deficiency Act bars a federal 
employee or agency from entering into 
a contract for future payment of money 
in advance of, or in excess of, an 
existing appropriation."); see generally 
Ferris v. 
United States, 27 Ct.CI. 
542, 546 (1892) ("An appropriation 
per se merely imposes limitations 
upon the Government's own agents ... 
its insufficiency does not pay the 
Government's debts, nor cancel its 
obligations, nor defeat the rights of 
other parties.") There is no issue in this 
case of lack of appropriated funds. 
We affirm the determination of the 
Court of Federal Claims that § 
8118 applies to this contract. The 
government does not dispute that 
the requirements of § 8118 were not 
met by the Department of Defense. 
There is no assertion that the Under 
Secretary of Defense for Acquisitions 
made or had made the program risk 
and pricing determinations required 
by § 8118, and no report of this 
contract is stated to have been made to 
the Senate and House Appropriations 
Committees. Although the government 
stresses that the contract was awarded 
only nine days after the enactment of § 
8118, this does not excuse the failure of 
all compliance. 
Consequences of Agency 
Noncompliance With § 8118 
PI We turn to the certified question 
of the consequences of this failure 
of compliance by the Department of 
Defense. AT & T states that § 8118 
was enacted at least in part for its 
protection, and that the agency, by 
failing to obey the law, can not deprive 
AT & T of the protection of the 
law. AT & T argues that § 8118 
is a "mandatory statute" restricting 
the agency's authority to obligate and 
expend funds, and that the Navy's 
direct contravention of § 8118 rendered 
the Reduced Diameter Array contract 
void ab initio. 
The 
government 
responds 
that 
Congress chose and intended to enforce 
§ 8118 *1374 through its oversight 
powers, and that AT & T can not 
benefit from whatever lapses may 
have occurred within the Department 
of Defense in its compliance with 
congressional oversight legislation. The 
government stresses that § 8118 did not 
provide that these fixed price contracts 
were prohibited, but only that the 
Defense Department must review the 
risk and its allocation at a specified 
executive level, and must report to 
Congress on a quarterly basis. 
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American Tel. 8 Tel. Co. v. U.S., 177 F.3d 1368 (1999) 
14] 
Legislative intent and precedent 
both lead to the conclusion that the 
AT & T contract was not void ab 
initio as a consequence of the agency's 
noncompliance. Invalidation of the 
contract is not a necessary consequence 
when a statute or regulation has been 
contravened, but must be considered 
in light of the statutory or regulatory 
purpose, with recognition of the strong 
policy of supporting the integrity of 
contracts made by and with the United 
States. In United States v. Mississippi 
Valley Generating Co., 364 U.S. 520, 
81 S.Ct. 294, 5 L.Ed.2d 268 (1961) the 
Court explained that when a statute 
"does not specifically provide for the 
invalidation of contracts which are 
made in violation of [its provisions]" 
the court shall inquire "whether 
the sanction of nonenforcement is 
consistent with and 
essential 
to 
effectuating the public policy embodied 
in [the statute]." Id. at 563, 81 
S.Ct. 294. Thus the policy underlying 
the enactment must be considered 
in determining the remedy for its 
violation, when the statute itself does 
not announce the sanction of contract 
invalidity. 
The policy embodied in § 8118 
is elucidated in the congressional 
response when § 8118 did not receive 
full compliance from the Department of 
Defense. See Alabama Rural Fire Ins. 
Co. v. United States, 215 Ct.C1. 442, 572 
F.2d 727, 733 (1978) ("illegality may 
be proved with reference to legislative 
history"). Congress simply tightened 
the reporting provision, by moving 
from after-the-fact quarterly reports 
to before-award reports. Indeed, the 
House version of § 8118 had initially 
required before-award reports, but 
this was dropped in Conference in 
favor of the Senate version "to 
reduce the appearance of congressional 
micromanagement." H.R. Conf. Rep. 
No. 100-498 at 623 (Dec. 22, 1987). 
The Conference Report stated that if 
Defense Department policy did not 
become more uniform, "more severe 
restrictions" would be imposed. Id. This 
remark carries no hint of, and indeed 
belies, an interpretation that § 8118 was 
intended, upon enactment, to invalidate 
any contract made without meeting 
its internal review and reporting 
requirements, for such a "restriction" 
would already be extremely "severe." 
The statutory shift to before-award 
reports in succeeding years would be a 
trivial discipline indeed, if meanwhile 
all of the fixed price contracts within the 
statutory scope, although in the process 
of performance, or as in this case fully 
performed, were void ab initio. 
Only a few months after enactment 
of § 8118 the House Appropriations 
Committee 
reported 
that 
the 
"enforcement of existing policy in this 
area has not yet been demonstrated," 
H.R.Rep. No. 100-681 at 147 (June 10, 
1988), and recommended a pre-award 
reporting requirement (which was 
included in the enactment for the next 
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American Tel. & Tel. Co. v. U.S., 177 F.3d 1368 (1999) 
fiscal year). The Senate Armed Services 
Committee, considering this renewal, 
stated explicitly that noncompliance 
was not intended to be "the basis for 
litigating the propriety of an otherwise 
valid contract": 
The committee recognizes that there 
are circumstances in which fixed-
price development contracts are 
appropriate (e.g., when costs and 
foreseeable program risks can be 
reasonably anticipated), and the 
committee expects the Department to 
establish clear guidelines under this 
section for use of such contracts. 
*1375 It is the intent of the 
committee that this section be 
applied in a manner that best serves 
the government's interests in the long 
term health of the defense industry, 
and that this section not be used as 
the basis for litigating the propriety of 
an otherwise valid contract. Nothing 
in this section shall be construed 
to affect the requirements of section 
8118 of the Department of Defense 
Appropriations Act, 1988. 
(Emphasis added.) S.Rep. No. 100-
326, 100th Cong., 2d Sess. at 105 
(May 4, 1988). This explicit statement 
of intent weighs heavily against 
judicial invalidation of "an otherwise 
valid contract," for the clearly stated 
congressional purpose is contrary. 
These congressional responses, made 
with 
knowledge of the agency's 
imperfect compliance with § 8118, 
negate any reasonable inference that 
Congress intended simply to render 
void 
ab 
initio, 
even 
after 
full 
performance, any fixed price contract 
for which the Under Secretary's review 
of risk allocation and the report to 
the Committees were omitted. Congress 
can not have intended to charge 
the contracting partner with adverse 
consequences depending on whether 
the Defense Department carried out the 
internal responsibilities and filed the 
reports that Congress required. 
Nor 
is it 
the judicial role to 
discipline the agency's noncompliance 
with the supervisory and reporting 
instructions of congressional oversight. 
See 
Longshore 
v. 
United States, 
77 F.3d 440, 443 (Fed.Cir.1996) 
("Congress has undoubted capacity to 
oversee the performance of Executive 
Branch agencies, consistent with its 
constitutional authority. It is not for 
this court to instruct Congress on how 
to oversee and manage its creations."); 
E. Walters & Co. v. United States, 217 
Ct.CI. 254, 576 F.2d 362, 367 (1978) 
("The fact that a procurement practice 
is prohibited does not necessarily mean 
that it is therefore actionable. The 
discipline to be administered in such 
cases is a responsibility of the cognizant 
procurement officials within the agency 
[and not] by this court"); cf. National 
Treasury Employees Union v. Campbell, 
654 F.2d 784, 794 (D.C.Cir.1981) 
(by statutory requirement that the 
Comptroller General report on certain 
expenditures "Congress itself is in a 
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position to monitor and enforce its 
spending limitations. It is not for 
us to question the effectiveness of 
existing remedies and infer additional 
remedies.") 
Both the DoD administration of § 
8118, and the congressional response 
to this administration, make clear 
that Congress did not intend that 
this enactment would terminate fully 
performed contracts because of this 
flawed compliance. 
151 Precedent reinforces our conclusion 
that the Reduced Diameter Array 
contract is not void ab initio. The 
invalidation of a contract after it has 
been fully performed is not favored. 
Precedent shows that those contracts 
that have been nullified, based on a 
failure to meet a statutory or regulatory 
requirement, are contracts that have 
not been substantially performed. E.g., 
Alabama Rural Fire Ins. Co. v. United 
States, 215 Ct.CI. 442, 572 F.2d 727, 
733-34 (1978). In Prestex, Inc. v. 
United States, 162 Ct.CI. 620, 320 F.2d 
367, 374-75 (1963), the court held a 
contract invalid, and refused to allow 
any recovery because no performance 
had occurred. It is not surprising that 
much of the litigation raising issues of 
violation of statute or regulation at the 
inception of government contracts has 
arisen in the bid protest context, where 
the asserted illegality has been explored 
before substantial performance has 
occurred. E.g., CACI, Inc. v. Stone, 
990 F.2d 1233, 1235 (Fed.Cir.1993); 
Schoenbrod v. United States, 187 Ct.CI. 
627, 410 F.2d 400, 403-04 (1969). We 
take incidental note that the case at 
bar also involved a disappointed bidder 
raising post-award objections, *1376 
and that none of the objections were 
based on § 8118. 
In 
Harbor 
Gateway 
Commercial 
Property Owners' Ass'n v. United States 
Environmental Protection Agency, 167 
F.3d 602 (D.C.Cir.1999), a case stressed 
in the dissenting opinion hereto, the 
court voided an EPA action because the 
Governor had not signed the request 
as the statute required. However, 
there was no issue of performance, 
or reliance, or any other contractual 
element. It is not before us to decide 
whether either party to the Reduced 
Diameter Array contract could have 
voided the contract early in its life 
and without penalty; the contract was 
performed for over five years, with no 
record suggestion from either party that 
because of § 8118 there was no contract. 
Judicial reluctance to annul performed 
contracts when the government did not 
comply with a statutory or regulatory 
requirement was explained by the Court 
of Claims in John Reiner & Co. v. 
United States, 163 Ct.CI. 381, 325 F.2d 
438, 440 (1963), stating that "the court 
should ordinarily impose the binding 
stamp of nullity only when the illegality 
is plain." In Reiner the court recognized 
the "dilemma" of a contractor who 
becomes aware, while deep in the 
performance of a contract, of a possible 
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procurement illegality he did not cause: 
the contractor must either continue 
to perform a contract of uncertain 
validity, or discontinue performance 
and risk severe penalties if a court later 
disagrees with his assessment of the 
illegality. 
When a contract or a provision 
thereof is in violation of law but 
has been fully performed, the courts 
have variously sustained the contract, 
reformed it to correct the illegal 
term, or allowed recovery under an 
implied contract theory; the courts 
have not, however, simply declared the 
contract void ab initio. For example, 
in LaBarge Products v. 
West, 46 
F.3d 1547, 1552-53 (Fed.Cir.1995) 
there was an illegal disclosure by 
the government during bidding; this 
court noted that the contract had 
been substantially performed and held 
that a valid contract existed despite 
the violation. In Beta Systems, Inc. v. 
United States, 838 F.2d 1179, 1185-
86 (Fed.Cir.1988) the court allowed 
reformation of the contract price term 
to correct a regulatory violation, stating 
that "[t]he risk of unintentional failure 
of a contract term to comply with a 
legal requirement does not fall solely 
on the contractor." In Urban Data 
Systems, Inc. v. United States, 699 F.2d 
1147, 1154 (Fed.Cir.1983) the court 
held that a contract price term that 
was contrary to law did not invalidate 
the fully performed contract. In Trilon 
Educational Corp. v. United States, 
217 Ct.C1. 266, 578 F.2d 1356, 1360 
(1978) the court sustained a contract 
that was awarded after the contracting 
officer had negligently failed to meet 
a regulatory responsibility; the court 
held that the non-compliance with 
regulation was "a matter for internal 
resolution" and "did not render the 
resultant contract a nullity." In Clark 
v. United States, 95 U.S. 539, 542, 24 
L.Ed. 518 (1877) the Court held a parol 
contract void for violation of the statute 
of frauds, but allowed recovery on an 
implied contract theory. 
The entirety of precedent strongly 
supports our conclusion that the 
Reduced Diameter Array contract 
is not void ab initio. 
Precedent 
does not favor the invalidation, 
based on governmental noncompliance 
with internal review and reporting 
procedures, of a contract that has been 
fully performed by either contracting 
party. 2 
*1377 Although the parties discuss 
possible remedies, the issue of what 
relief may be available to AT & T 
is not before us, for the Court of 
Federal Claims did not consider AT 
& T's claims on the premise that the 
underlying contract was not void. We 
have not considered this issue, and 
express no view thereon. 
Answers to the Certified Questions 
For the reasons we have discussed, we 
conclude that the agency's failure to 
comply with the obligations of § 8118 
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did not render the Reduced Diameter 
Array contract void ab initio. Any 
failure by the Department of Defense in 
its internal compliance with § 8118 can 
not be invoked, particularly after full 
contract performance, either to strip the 
Navy of authority to have entered into 
the contract or to bar AT & T from 
presenting such claims, if any, that it 
may have. 
The second certified question relates to 
remedy, but is based on the premise that 
the contract was void ab initio. Since 
that premise is incorrect, we do not 
reach the second certified question. 
Costs 
Each party shall bear its costs. 
QUESTIONS ANSWERED; CASE 
REMANDED. 
RADER, Circuit Judge, concurring in 
the result, in which MAYER, Chief 
Judge, and LOURIE, Circuit Judge, 
join. 
Because § 8118 of the Defense 
Appropriations Act does not apply to 
this contract, I concur. Section 8118 
provides in relevant part: 
None 
of 
the 
funds provided for 
the Department of 
Defense in this Act 
may be obligated or 
expended for fixed-
price-type contracts in 
excess of $10,000,000 
for the development 
of a major system or 
subsystem.... 
(emphasis added). This particular 
section of the U.S.Code does not 
supply a definition of "major system." 
However, § 2302(5) of title 10 of 
the United States Code, which relates 
to government procurement contracts 
generally, defines "major system:" 
The 
term 
"major 
system" 
means 
a 
combination 
of 
elements 
that 
will 
function 
together 
to 
produce 
the 
capabilities 
required 
to fulfill a mission 
need.... 
A 
system 
shall be considered a 
major system if (A) 
the Department of 
Defense is responsible 
for the system and the 
total expenditures for 
research, 
development, test and 
evaluation 
for 
the 
system are estimated 
to 
be more than 
$75,000,000 
... 
or 
(C) the system 
is 
designated a "major 
system" by the head of 
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the agency responsible 
for the system. 
Therefore, the term "major system" 
refers to systems either with estimated 
costs above $75,000,000 or systems 
"designated a `major system' by the 
head of the agency responsible for the 
system." See 10 U.S.C. § 2302(5) (1986). 
Shortly after enactment of § 8118, 
both the Department of Defense and 
the Navy incorporated this statutory 
definition into their interpretation of 
that section. As the agency charged with 
interpretation and application of the 
statute, the Department of Defense's 
reasonable interpretation of § 8118 
deserves deference. See Chevron U.S.A., 
Inc. 
v. Natural Resources Defense 
Council, Inc., 467 U.S. 837, 844, 104 
S.Ct. 2778, 81 L.Ed.2d 694 (1984). 
The Department of Defense and Navy's 
interpretation alone gives meaning 
to all of the words in the statute. 
Both the Court *1378 of Federal 
Claims' interpretation and this court's 
interpretation in this opinion would 
render the "major system or subsystem" 
language superfluous and would invoke 
§ 8118 for any fixed-price contract 
in excess of $10,000,000. This court 
chooses that course on the reasoning 
that the agency's interpretation "rewrite 
[s] § 8118 to replace the statutory 
threshold of $10,000,000 with that of 
$75,000,000." This reasoning, however, 
discounts the statute's alternative 
method of categorizing a project as a 
"major system," namely, designation 
by the head of the agency. Thus, 
a project beneath the $75,000,000 
threshold of 10 U.S.C. § 2302(5) could 
nonetheless qualify as a "major system" 
upon designation by the head of the 
agency. 
This 
court's 
opinion 
discounts 
the 
reasonable 
reconciliations 
of 
the $10,000,000 contract amount 
requirement with the "major system" 
classification requirement. Under the 
agency's 
reasonable 
interpretation, 
the $10,000,000 contract amount 
requirement serves as a floor for 
invoking § 8118 in contracts involving 
a project designated as a "major 
system" by the department head. 
Furthermore, the $10,000,000 contract 
amount requirement does not lose 
its 
meaning 
for 
systems 
whose 
estimated costs exceed $75,000,000. 
Development of a major system 
typically requires multiple contracts 
with multiple developers. In these cases, 
the $10,000,000 requirement serves as a 
floor for application of § 8118 to each 
contract involved in the development 
of that "major system." Similarly, the 
$10,000,000 trigger amount excludes 
from § 8118 any subsystem contracts 
within a major system which do not 
satisfy this threshold amount. For these 
reasons, the $10,000,000 threshold 
continues to govern in conjunction 
with the $75,000,000 threshold for a 
"major system." In sum, these dual 
thresholds work together and provide a 
reasonable explanation for the agency's 
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interpretation of these statutes. Because 
reasonable, the agency's interpretation 
deserves deference. 
Even 
without 
deference 
to 
the 
Departments of Defense and Navy, 
their proposed interpretation of § 8118 
alone gives meaning to all the statute's 
terms and should therefore govern this 
court's resolution. As noted above, this 
is the only interpretation which supplies 
meaning to all of the terms of the 
statute. Specifically, this is the only 
interpretation which gives meaning 
to the term "major system" as well 
as the $10,000,000 contract amount 
requirement. 
Finally, I read the term "subsystem" in 
§ 8118 as linked to "major system" by 
its context within the statute. Although 
neither 10 U.S.C. § 2302(5), nor the 
interpretations of § 8118 proffered 
by the Department of the Defense 
or the Navy address the definition 
of "subsystem," the statute itself ties 
the definition of this term to the 
term "major system." In essence, this 
interpretation would apply § 8118 
to "major systems and subsystems 
of major systems." This reading 
preserves the statute's "major system 
or subsystem" requirement rather than 
expanding application of § 8118 to 
all fixed-price-type contracts exceeding 
$10,000,000. 
Furthermore, to my eyes, this appeal 
does not present the question of 
whether this Reduced Diameter Array 
is a "subsystem" of a "major system." 
Although AT & T asserted below 
that the Reduced Diameter Array 
subsystem was a part of SURTASS, 
and that SURTASS was a major system 
according to the requirements of 10 
U.S.C. § 2302(5), by consent of the 
parties before the Court of Federal 
Claims, that issue is not a subject of 
the certified appeal. For these reasons, I 
would not apply § 8118 to the Reduced 
Diameter Array contract at issue in this 
appeal. 
PLAGER, Circuit Judge, dissenting-in-
part and concurring-in-part. 
I 
must 
respectfully dissent. The 
court refuses to honor an explicit 
mandate of an *1379 unequivocal 
Congressional enactment. "Legislative 
history" cannot justify that refusal.' 
A court has a responsibility to arrive 
at the right result in a case; it also 
has the obligation to explain itself in a 
manner that does no harm to the fabric 
of the law. Though the right result may 
eventually emerge, the route the court 
takes to get there has the potential 
for causing considerable harm to legal 
principles that I deem important. 
In the first part of its opinion, the court 
describes the Government's efforts over 
time to adjust the risks that are inherent 
in cutting-edge R & D contracts so that 
they are fair both to the Government 
and the contractor. See slip op. at 1369-
70. These efforts begin at least in 1971 
with DODD 5000.1, and culminate, 
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American Tel. & Tel. Co. v. U.S., 177 F.3d 1368 (1999) 
for purposes of this case, with the 
enactment in 1987 of § 8118 as part 
of that year's Department of Defense 
("DoD") Appropriations Act. See id. at 
1370-72. As the court explains, § 8118 
prohibited using Government funds for 
fixed price-type R & D contracts except 
under certain conditions. 
The court then sets out the history of the 
R & D contract at issue in this case, and 
concludes, correctly, that Section 8118 
applies to this DoD fixed price-type 
alleged contract. See id. at 1372-73. The 
court concludes, again correctly, that 
the exception provided in the statute, 
permitting a fixed price-type R & D 
contract under certain conditions, is not 
applicable since the DoD did not take 
the steps necessary to qualify for an 
exception. See id. 
This is the same conclusion on the 
point reached by the Court of Federal 
Claims, which this court now affirms. 
The court rejects the Government's 
various arguments to the contrary, and 
finally concludes this part of its analysis 
with the statement that: "Although the 
government stresses that the contract 
was awarded only nine days after the 
enactment of § 8118, this does not 
excuse the failure of all compliance." Id 
Given that the court recognizes the 
language of the Act to expressly 
prohibit the use of Government funds 
for such a contract, the obvious and 
ineluctable conclusion would appear to 
be that there was no contract, since 
as a matter of law such contracts 
were prohibited, and since there could 
be no consideration offered for the 
contractor's promised performance. 
Remarkably, the court reaches exactly 
the opposite conclusion, and finds 
the contract valid, and presumably 
enforceable. For the reasons I shall 
explain, I cannot join the court in this. 
1. 
Omitting the inapplicable exception 
language and its related provisos, 
the operative words of the statute 
are clear and to the point: "None 
of the funds provided for the PoDI 
in this [Appropriations' Act may be 
obligated or expended for fixed price-
type contracts...." It is a rule of 
constitutional law that, in absence of 
an express appropriation, agencies may 
not spend, and a fortiori cannot validly 
contract to spend, any federal dollars. 
See U.S. Const. art. I, § 9, cl. 7 
("No Money shall be drawn from 
the Treasury, but in Consequence of 
Appropriations made by Law."). The 
Supreme Court earlier reversed us when 
in another context we failed to properly 
apply that principle. See Office of 
Personnel Management v. Richmond, 
496 U.S. 414, 110 S.Ct. 2465, 110 
L.Ed.2d 387 (1990). 
Here, we do not have simply an 
omission of authorization to expend; 
we have an outright prohibition: 
"None of the funds *1380 [otherwise 
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American Tel. 8 Tel. Co. v. U.S., 177 F.3d 1368 (1999) 
appropriated] may be expended ..." for 
the precise purpose for which the DoD 
contracted. Surely it should not be 
necessary for Congress to have added: 
"and we mean it," or perhaps, "and we 
mean it, and if you try, it won't be any 
good, so don't even bother." 
It is not uncommon for Congress to 
put prohibitions such as that contained 
in § 8118 in Acts appropriating funds 
to executive branch agencies.' A 
recent case in point: Congress, in an 
Appropriations Act which included 
the U.S. Environmental Protection 
Agency, 3 specified that "none of 
the funds made available under 
this heading may be used by the 
Environmental Protection Agency ... 
[for certain described activities affecting 
states] 
unless 
the 
Administrator 
receives a written request ... from the 
Governor of the State...." The EPA, 
on the basis of an authorizing letter 
from a state official, not the Governor, 
undertook such activity with regard to 
certain property in California. Affected 
interests appealed. 
Judge Sentelle, writing for the Court of 
Appeals for the District of Columbia 
Circuit, found that the state official's 
letter did not meet the terms of the 
statute, and readily concluded that, 
in the absence of a letter from the 
Governor himself, the EPA action was 
"null and void," and "was necessarily 
invalid." Harbor Gateway Commercial 
Property Owners' Ass'n v. United States 
Envtl. Protection Agency, 167 F.3d 602, 
607 (D.C.Cir.1999). 4
In response to the Government's 
argument that EPA officials considered 
themselves to be in compliance, and 
in any event an invalidation of the 
action would require that the action 
be done again and would just cost the 
Government more money, the District 
of Columbia Circuit answered: 
We refuse to ignore 
the plain 
language 
of the Act in order 
to 
avoid 
potential 
costs which would 
not 
have 
arisen 
had EPA complied 
with 
the 
statute's 
language in the first 
instance. Indeed, when 
a statute's meaning 
is 
clear, 
and 
the 
enactment is within 
the 
constitutional 
authority of Congress, 
the "sole function of 
the courts is to enforce 
it according to its 
terms." 
Id. at 606 (emphasis added). That seems 
to be the law on the subject; I know of 
no cases to the contrary, and the court 
here cites none. 
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In this case, AT & T, after due 
negotiation with the Navy, offered 
to make and sell to the Navy for 
an agreed fixed price a submarine-
detecting piece of equipment. The Navy 
accepted the offer, and proposed to pay 
for the work using funds from the 1987 
Appropriations Act that contained the 
express prohibition set out above. As 
the Harbor Gateway court explained, 
the Navy's action was "null and void," 
and "necessarily invalid." 
Furthermore, the Navy's action in 
this case was taken for the purpose 
of entering into a contract. But 
the Navy was legally incapable of 
using Government funds unless it told 
Congress what it was up to in the 
manner required by the statute, which 
the Navy chose not to do. (It is 
difficult *1381 not to believe that 
both parties were fully aware of the 
statute and simply chose to ignore 
it, though that is of no moment 
to the issue before us. 5 ) Thus, 
not only was the act of contracting 
prohibited by statute, but as a matter 
of basic contract law no legally-
binding contract could be created: 
offer, acceptance, and consideration 
remain a fundamental requirement for 
a legally-binding contract, whether 
between private parties or between a 
private party and the Government. 
See, e.g., Harbert/Lummus Agrifuels 
Projects v. United States, 142 F.3d 
1429, 1434 (Fed.Cir.1998); Trauma 
Serv. Group v. United States, 104 F.3d 
1321, 1325 (Fed.Cir.1997). Here, the 
Government could neither offer or 
pay consideration; no consideration, no 
contract, end of discussion, at least with 
respect to contract validity under basic 
contract principles. 
2. 
I cannot agree with the court that 
the "purpose" of the statute overrides 
its express terms. The court tells us 
that this statute "must be considered 
in light of the statutory or regulatory 
purpose, with recognition of the strong 
policy of supporting the integrity of 
contracts made by and with the United 
States." Slip op. at 1374. Clearly, 
however, the purpose of this statute, 
expressed in no uncertain language, is 
exactly the opposite-it is intended to 
prevent contracts with the United States 
in contravention of its terms, not to 
support them. 
It has been some years since a 
court-invented "purpose" so blatantly 
repealed a Congressional enactment. 
Last century, in Rector, etc. of Holy 
Trinity Church v. United States, 143 
U.S. 457, 471, 12 S.Ct. 511, 36 
L.Ed. 226 (1892), the Supreme Court 
announced that this is a "Christian 
nation," and on that basis concluded 
that the purpose of a statute that 
banned immigration of foreign workers 
could not possibly be to prevent 
an English clergyman from coming 
to work in the United States. In 
this century, and certainly in recent 
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American Tel. & Tel. Co. v. U.S., 177 F.3d 1368 (1999) 
times, purpose-inventing by judges has 
received the opprobrium it deserves 
when used as an excuse for ignoring the 
law. 
Professor Dickerson, one of the early 
writers on statutory interpretation, 
described the process of purpose-
inventing as if he had this case in mind: 
As with 
legislative 
intent, the danger in 
presuming an actual 
legislative 
purpose 
beyond 
what 
is 
expressly or impliedly 
revealed is that the 
interpreter will either 
attribute to the statute 
a purpose of his own 
contriving or search 
for actual purpose so 
relentlessly that he 
goes beyond the limits 
of the appropriate 
available evidence. 
Reed Dickerson, The Interpretation and 
Application of Statutes 92 (1975). 
Writing more formally for the Court a 
half-century ago, Justice Jackson said, 
"we take the Act as Congress gave it 
to us, without attempting to conform it 
to any notions of what Congress would 
have done if the circumstances of this 
case had been put before it." Western 
Union TeL Co. v. Lenroot, 323 U.S. 490, 
501, 65 S.Ct. 335, 89 L.Ed. 414 (1945). 
In the same vein, and more recently, the 
Supreme Court, Justice Scalia writing, 
said, "Courts may not create their own 
limitations on legislation, no matter 
how alluring the policy arguments for 
doing so,...." Brogan v. United States, 
522 U.S. 398, 118 S.Ct. 805, 811-12,139 
L.Ed.2d 830 (1998). 
In support of its position, the court 
cites various pieces of what it describes 
as legislative history. However, a 
prerequisite to judicial use of legislative 
history, 
even 
relevant 
legislative 
history, is a finding that *1382 the 
statute at issue is ambiguous. "Our 
first step in interpreting a statute is to 
determine whether the language at issue 
has a plain and unambiguous meaning 
with regard to the particular dispute 
in the case. Our inquiry must cease if 
the statutory language is unambiguous 
and `the statutory scheme is coherent 
and consistent.' " Robinson v. Shell 
Oil Co., 519 U.S. 337, 117 S.Ct. 
843, 136 L.Ed.2d 808 (1997) (Justice 
Thomas, writing for a unanimous 
Court) (quoting United States v. Ron 
Pair Enters., Inc., 489 U.S. 235, 240, 109 
S.Ct. 1026, 103 L.Ed.2d 290 (1989)). To 
the court's credit here, the majority does 
not pretend to find in this unequivocal 
statute any ambiguity. Rather, it 
simply concludes that committee report 
language, nowhere addressed to the 
specific problem before us, trumps 
statutory clarity. 6
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