How Did this Contractor Improperly Charge the Government for M&A Costs?

The government claimed Raytheon had recovered unallowable corporate development costs — that is, costs incurred in researching and planning mergers and acquisitions. The ASBCA, however, found that Raytheon had properly segregated unallowable corporate development costs from allowable costs. The Federal Circuit reversed, holding that Raytheon’s internal policies didn’t properly separate allowable and unallowable M&A costs. In light of Raytheon’s flawed policies, the government necessarily paid for unallowable corporate development costs.

Secretary of Defense v. Raytheon Company, Raytheon Missile Systems, Fed. Cir. 2021-2304

Background

Raytheon had several cost-reimbursement contracts with the government. In 2007 and 2008, Raytheon charged the government for half the salaries of its Corporate Development and Government Relations departments.

The cost accounting standard prohibit time spent “planning . . . mergers and acquisitions.” Raytheon’s policy was to treat the time spent by Development staff on general research and strategy for business opportunities as allowable. But once staff made a decision to pursue a specific acquisition or divestiture, Raytheon would treat time spent on the specific transaction as unallowable.

Following an audit, the government determined that Raytheon had charged the government for unallowable time spent on lobbying activities and corporate reorganization. The government demanded reimbursement.

Raytheon appealed to the ASBCA. The board determined that Raytheon had not charged improper lobbying costs to the government. As to the corporate development costs, the board determined that Raytheon had adhered to a bright a line rule that appropriately separated the corporate staff’s general strategic work from unallowable work planning merger and acquisitions.

The government appealed the ASBCA decision to the Federal Circuit.

Holding

The court rejected the ASBCA’s reasoning on lobbying costs. (A summary of the court’s reasoning can be found here). The court also rejected the ASBCA’s finding with regard to corporate development staff. Costs incurred planning a merger and acquisition are unallowable. Raytheon claimed it did not seek merger and acquisition costs once it decided on a specific transaction. The court, however, reasoned that as a matter of both logic and common sense, a decision to go forward with a specific merger or acquisition still requires some planning. Raytheon had attempted draw the line between general work and specific transactions, but the court found this line was still arbitrary. There is still “planning” that goes into the decision to pursue a specific transaction. The court held, contrary to the ASBCA, that by drawing this arbitrary line between general and specific planning, Raytheon had recovered unallowable merger and acquisition costs.

The court reversed the ASBCA and remanded for a determination of the costs Raytheon must repay.

The government is represented by Daniel V. Volk, Michael Granston, and Patricia M. McCarthy of the Department of Justice as well as Alexander Martine Healy of the Defense Contract Management Agency. Raytheon is represented by John William Chesley. Lindsay Miriam Paulin, Amir C. Tayrani, and Dhananjay S. Manthripragada of the Gibson Dunn & Crutcher as well as Nicole Owren-Wiest, Erin Nicole Rankin of Crowell & Moring. Amici Curiae Aerospace Industries Association and the National Association of Manufacturers are represented by Douglas W. Baruch, William Barron Abruthnot Avery, Jennifer M. Wollenberg, Sheila A. Armstrong, and Catherine Lynn Eschbach of the Morgan, Lewis & Bockius, LLP as well as Matthew F. Hall of Dunway & Cross, PC.

–Case summary by Craig LaChance, Senior Editor