[00:00:00] Speaker 02:
Our argument is 18-1945, Defense versus Northrop Grumman.

[00:00:54] Speaker 02:
Well, sorry to keep you all waiting.

[00:00:56] Speaker 02:
Hopefully, it was worth the wait.

[00:01:00] Speaker 02:
I think we're all ready.

[00:01:02] Speaker 03:
Please proceed.

[00:01:04] Speaker 03:
May it please the court.

[00:01:06] Speaker 03:
Everyone agrees that unallowable costs cannot be passed on to the government, but that's exactly what the board's quantum ruling does.

[00:01:16] Speaker 03:
Northrop says that the unallowable costs were eliminated by savings from an amendment to its plan that would reduce the benefits paid to retirees and therefore reduce future expenses.

[00:01:33] Speaker 03:
But those savings are supposed to flow to the government.

[00:01:36] Speaker 02:
Can I ask you a question about that?

[00:01:38] Speaker 02:
And I don't have it right in front of me.

[00:01:40] Speaker 02:
But on the quantum decision, it seems to me the board maybe was making a distinction between when they reduce the benefits for the plan.

[00:01:49] Speaker 02:
They talked about it was done before the transition versus after.

[00:01:55] Speaker 02:
Is that ringing any bells to you?

[00:01:57] Speaker 02:
Is it your reading of the board that somehow it mattered to them when

[00:02:03] Speaker 02:
the change was made to the benefit plan.

[00:02:06] Speaker 03:
My recollection, Your Honor, is that the board latched onto the idea that the negative, the savings, was subtracted before the transition obligation was calculated to the point that it was going to be granted.

[00:02:22] Speaker 03:
But the argument does not make sense.

[00:02:24] Speaker 03:
The unfunded cost, that $253,

[00:02:29] Speaker 03:
that does not disappear.

[00:02:30] Speaker 03:
It does not come out of the books.

[00:02:33] Speaker 01:
Well, it does disappear because it came about by readjusting the PRB, correct?

[00:02:40] Speaker 01:
I mean, now, as a result of what Northrop did, the workers are going to receive less benefits.

[00:02:49] Speaker 03:
On the 307, so the 253 is the unfunded, disputed cost here.

[00:02:54] Speaker 03:
The 307 million is the savings.

[00:02:57] Speaker 03:
The workers will receive less benefits under the plan, and that will generate savings.

[00:03:03] Speaker 01:
But the 253 million... The less benefits that they get, that's what comes out to 250 million.

[00:03:10] Speaker 03:
No, the 253 million, it's calculated in a DCA audit, so on appendix 168, you've got the calculation of that 253 million.

[00:03:22] Speaker 03:
That 253 million is the difference

[00:03:25] Speaker 03:
for certain years and contracts, the relevant ones here, that's the difference between the amounts that were recognized in Northrop's financial reporting under the GAAP rule, that's FAST 106 rule, and the amounts that were not measured or funded, and that's the key, funded

[00:03:49] Speaker 03:
in its government contracts accounting because it was using the lesser DEFRA amounts.

[00:03:56] Speaker 03:
So that $253 million has nothing to do with the benefits that the employees will ultimately get.

[00:04:05] Speaker 03:
And this is critical to remember we're talking about accrual accounting, not cash basis accounting.

[00:04:12] Speaker 02:
So your theory is that, okay,

[00:04:15] Speaker 02:
Yeah, that it's separate and distinct.

[00:04:17] Speaker 02:
So they owe, they had to come up with the $253 million to correspond to what went down before 2006, because there was a disparity between fast and defer.

[00:04:28] Speaker 02:
And that's done.

[00:04:30] Speaker 02:
So then your view is what?

[00:04:31] Speaker 02:
That when they made the negative plan amendment, any savings that inure,

[00:04:39] Speaker 02:
are separate and distinct to which the government is entitled.

[00:04:42] Speaker 02:
I'm just trying to understand what you're saying.

[00:04:44] Speaker 03:
That's right, Your Honor.

[00:04:44] Speaker 03:
There's no basis to link these two things up.

[00:04:47] Speaker 03:
You can't just grab some negative in the books and use it to offset a positive.

[00:04:53] Speaker 03:
They're both still there.

[00:04:55] Speaker 02:
So have they transferred the $250 million?

[00:05:01] Speaker 02:
Well, I know it's the government, and it's hard to talk about real money here.

[00:05:05] Speaker 02:
What happened?

[00:05:07] Speaker 03:
Because of DCMA's disallowance.

[00:05:10] Speaker 03:
Because DCMA said, you have to remove that from your statements to us.

[00:05:16] Speaker 03:
The government has not paid, is not paying right now, that amortized over 20 years, $253 million.

[00:05:24] Speaker 03:
The board's quantum ruling overturns that disallowance.

[00:05:29] Speaker 03:
So now,

[00:05:30] Speaker 03:
They don't have to remove those costs from their statements.

[00:05:35] Speaker 03:
Our position is those costs are in the calculation that they started presenting post-accounting transition under FAS106 because there's no way to avoid it.

[00:05:47] Speaker 03:
When you transition, when you say, I'm now going to calculate my accumulated obligation,

[00:05:55] Speaker 03:
under FAS 106.

[00:05:57] Speaker 03:
You can't leave out a component that FAS 106 requires, this escalation.

[00:06:03] Speaker 03:
That's the unfunded amount.

[00:06:05] Speaker 03:
That's the disputed cost.

[00:06:06] Speaker 03:
That's what wasn't included in the lesser death amounts.

[00:06:10] Speaker 03:
When you transition and say to the government,

[00:06:11] Speaker 03:
Now all of a sudden, I'm going to present my costs to you and I'm going to fund my plan based on FAST-106.

[00:06:21] Speaker 03:
You are unavoidably, necessarily including that amount.

[00:06:25] Speaker 03:
Northrop's position, the crux of this case is we

[00:06:29] Speaker 03:
negated that through this plan amendment.

[00:06:33] Speaker 03:
But you can't link the plan amendment.

[00:06:35] Speaker 03:
And the easiest place to see this is Northrop's own letters.

[00:06:38] Speaker 03:
They negated what?

[00:06:39] Speaker 02:
When you say they negated that, what is that?

[00:06:41] Speaker 03:
The $253 million in unallowable costs.

[00:06:44] Speaker 03:
Northrop says that the savings from reducing benefits, from amending the plan,

[00:06:51] Speaker 03:
that that eliminated, erased this unallowable transition.

[00:06:58] Speaker 02:
Just taking that at face value, yeah, the government is only, when they have a negative plan, the government doesn't have to pay for this number up here, it pays for this number down here.

[00:07:09] Speaker 02:
So the government is saving that money.

[00:07:11] Speaker 03:
But that's what's at issue in the case.

[00:07:14] Speaker 03:
If the board's quantum ruling stands, the government is being deprived of most of those savings because they're going to offset costs that the government is not supposed to pay.

[00:07:24] Speaker 01:
But they're not going to offset the 253 million.

[00:07:27] Speaker 03:
They absolutely are, because both are in the number.

[00:07:32] Speaker 04:
So for example, if you look at- Let me see if I understand this whole transaction.

[00:07:38] Speaker 03:
Well, why don't you finish your answer, and then I'll get to my question.

[00:07:41] Speaker 03:
I wanted to point the court to page six of our reply brief, where we put in, we show a part of the financial reporting, a statement.

[00:07:51] Speaker 03:
I think it'll provide some tangible numbers to this.

[00:07:57] Speaker 03:
If you look at the excerpt, which comes out of- I'm sorry, you said you're in yellow page six.

[00:08:02] Speaker 03:
Yes, in yellow page six at the top.

[00:08:06] Speaker 03:
you'll see an excerpt of Northrop's financial reporting, all right?

[00:08:12] Speaker 03:
And so the plan amendment is its own line, all right?

[00:08:16] Speaker 03:
And that 464 included within that is the savings, the 307 that's applicable here, okay?

[00:08:21] Speaker 03:
That's a separate line item.

[00:08:23] Speaker 03:
And Northrop's position is that that eliminates prior service costs

[00:08:31] Speaker 03:
Service cost is shown on a separate line.

[00:08:34] Speaker 03:
These are separate items.

[00:08:36] Speaker 03:
The service cost is never going to come out.

[00:08:38] Speaker 03:
The service cost is never going to change.

[00:08:40] Speaker 03:
The prior service cost is in the books.

[00:08:42] Speaker 03:
It's historical.

[00:08:43] Speaker 03:
It can't change.

[00:08:45] Speaker 03:
In this, these financial reporting numbers, FAS 106, the GAAP rule, there was no transition relevant here.

[00:08:52] Speaker 03:
FAS 106, the GAAP accounting was used all along.

[00:08:57] Speaker 03:
So you have the savings in here.

[00:08:59] Speaker 03:
But then when you look at the other set of books, now you look at the same employees were doing the same work on the same contract, but you've got this separate government contracts book, and you look in those separate books, and you're still going to have the same amount of savings.

[00:09:17] Speaker 03:
But now, all of a sudden, instead of having recognized prior service costs to this extent over those previous years, you've recognized much less.

[00:09:28] Speaker 03:
That's shown on page 13 of our opening brief, the blue brief.

[00:09:31] Speaker 03:
We have a graph that shows two sets of bars.

[00:09:35] Speaker 03:
And so you're missing 253 million that have been reported all along in the gap books for financial reporting.

[00:09:44] Speaker 03:
But not in the government contracts books.

[00:09:46] Speaker 03:
When you make that transition and now you're under gap for both, that 253 does not disappear and it's not supposed to be paid under the rules that all contractors agree to as a basic part of the bargain.

[00:09:59] Speaker 04:
It's not supposed to be paid.

[00:10:01] Speaker 04:
Are you done with your answer to Judge Wren?

[00:10:03] Speaker 04:
At least I got it.

[00:10:06] Speaker 04:
I take it simplifying as best I can this transaction.

[00:10:11] Speaker 04:
Your position is that up until 2006, because of the difference between the Defra line and the Fast 106 line, there was an underclaiming of $253 million, which, because it was underclaimed, was unallowable because it was never claimed.

[00:10:30] Speaker 04:
And therefore, you're $253 million ahead, the government.

[00:10:36] Speaker 04:
Right?

[00:10:37] Speaker 03:
At that point.

[00:10:38] Speaker 03:
Not exactly, Your Honor.

[00:10:39] Speaker 03:
It's close.

[00:10:40] Speaker 03:
But we wouldn't agree that there was any underclaiming, because the only amounts they're entitled to recover... You are not claiming as much as you could have claimed, as they could have claimed.

[00:10:51] Speaker 04:
Alright, that's what I meant by underclaiming.

[00:10:53] Speaker 04:
Okay.

[00:10:54] Speaker 04:
And then, starting in 2006,

[00:10:56] Speaker 04:
after the plan amendment, suddenly $307 million comes out of the employee benefits package, right?

[00:11:09] Speaker 04:
It doesn't need to go to the trustee.

[00:11:12] Speaker 04:
Well, I understand, but whether it's going to the employees or it's in the transition obligation or it's in the

[00:11:18] Speaker 04:
in the benefit plan, it's coming out.

[00:11:22] Speaker 04:
It's a reduction in the total cost of the benefit package of $307 million, right?

[00:11:30] Speaker 03:
That's right, except it doesn't come out of anywhere.

[00:11:33] Speaker 03:
It just doesn't need to be contributed.

[00:11:36] Speaker 04:
I understand, but it's less than otherwise would have been paid had they stayed at the FAS 106 line.

[00:11:45] Speaker 04:
Yes.

[00:11:45] Speaker 04:
Yes.

[00:11:46] Speaker 04:
Yeah.

[00:11:47] Speaker 04:
OK.

[00:11:48] Speaker 04:
Now, your position, as I understand it, is that although there's a dispute about whether this was raised before the board or whether you argued it there or argued it here, which is in a footnote back and forth with you, you look quizzical.

[00:12:06] Speaker 04:
You understand that at page

[00:12:11] Speaker 04:
43 of the red brief, there's a point that the government has forfeited this argument.

[00:12:18] Speaker 04:
And you have a footnote in which you respond, oh, no, we didn't.

[00:12:21] Speaker 04:
We made this argument before the board.

[00:12:24] Speaker 04:
except we understand the argument they're saying we forfeited is one we're not arguing.

[00:12:28] Speaker 04:
No, but – and I have an issue with that, because it seems to me that the issue they say you're forfeiting was exactly the argument you're making earlier in your blue brief.

[00:12:38] Speaker 04:
But let's pass that for a minute, because I do want a question about that.

[00:12:41] Speaker 04:
But getting back to the numbers.

[00:12:43] Speaker 04:
Number one, you say we get to keep the $253 million because that's unallowable then, now, and forever.

[00:12:50] Speaker 04:
And you also say, if I understand your position correctly, that you get the either all of or the bulk of the reduction in the expense that comes with the plan amendment because it's a reimbursement contract and the government gets the benefit of any reduction in the cost, right?

[00:13:10] Speaker 03:
When your honor says that we get to keep the 253, what it means is that they can't present a choice.

[00:13:17] Speaker 04:
You say they cannot do it by offset or any other method, they can't recover the 253 that they could have had.

[00:13:25] Speaker 04:
That's correct.

[00:13:27] Speaker 04:
That's what I mean by keep.

[00:13:28] Speaker 04:
Okay, so you're 253 ahead at that point.

[00:13:31] Speaker 04:
Then the 307, as I understand it, you're saying we were entitled to share in that,

[00:13:38] Speaker 03:
presumably to get all of it, right?

[00:13:41] Speaker 03:
And we don't agree that we're ahead 250.

[00:13:43] Speaker 03:
We don't think in these terms.

[00:13:45] Speaker 04:
I know you don't think in these terms, but I do, because the net result, it seems to me, is that you're going to come out $560 million ahead

[00:13:58] Speaker 04:
of where we would have been if they had been at the Fast 106 line all along.

[00:14:03] Speaker 04:
Isn't that true?

[00:14:04] Speaker 04:
No, Your Honor.

[00:14:05] Speaker 03:
Okay.

[00:14:06] Speaker 04:
Why is that not true?

[00:14:07] Speaker 04:
If they had been at the Fast 106 line all along... They would have claimed the extra 253 at the beginning.

[00:14:15] Speaker 04:
They would have gotten it.

[00:14:17] Speaker 04:
And they wouldn't have changed their plan on it.

[00:14:19] Speaker 04:
They wouldn't have had the plan amended if they'd have stayed at Fast 106.

[00:14:22] Speaker 04:
And so you wouldn't have gotten the 307.

[00:14:24] Speaker 03:
Oh, I'm sorry.

[00:14:25] Speaker 03:
That's the part that I don't agree.

[00:14:27] Speaker 03:
We wouldn't get the 307.

[00:14:28] Speaker 03:
We only don't get the 307 if they don't amend the plan.

[00:14:32] Speaker 04:
I said that.

[00:14:32] Speaker 03:
I said they're not amending the plan under Fast 106 all the way along.

[00:14:37] Speaker 03:
OK?

[00:14:38] Speaker 03:
Are you with me?

[00:14:39] Speaker 03:
The only thing I want to make sure we're on the same page on.

[00:14:42] Speaker 03:
is we don't agree that there's a connection between the change of benefits.

[00:14:45] Speaker 04:
I know, I know.

[00:14:47] Speaker 04:
Stay with me here.

[00:14:48] Speaker 02:
You have to stop, because it's disrupting the flow and it's informative, so you have to hold your comments to later.

[00:14:58] Speaker 04:
I don't see why it's not the case that you are asking to be $560 million better off than you would have been if they had been at the Fast 106 line all along.

[00:15:13] Speaker 04:
Is that not true?

[00:15:14] Speaker 04:
It is not true.

[00:15:15] Speaker 03:
Okay, why?

[00:15:19] Speaker 03:
If they were at the Fast 106 line all along,

[00:15:23] Speaker 03:
and they had funded and claimed, and we paid out the 253, we would have paid 253 million more.

[00:15:32] Speaker 03:
That's true.

[00:15:35] Speaker 03:
The part that I am not connecting with, Your Honor, is on the 307.

[00:15:40] Speaker 04:
OK.

[00:15:41] Speaker 03:
So at the point we get to 2006, if they had been at the fast line,

[00:15:47] Speaker 04:
you would be, at that point, you would be $253 million worse off than you claim that you're entitled to be under the facts as they are in this case.

[00:16:01] Speaker 04:
All right.

[00:16:03] Speaker 04:
And then if they reduced, at that point, if they adopted a plan amendment and reduced their payments by $307 million, you would say you get the benefit of that $307 million reduction as well.

[00:16:16] Speaker 04:
So you get to save an additional $307, right?

[00:16:22] Speaker 03:
We definitely save the money if they save the money.

[00:16:24] Speaker 03:
That's just how it works with us reimbursing contracts.

[00:16:27] Speaker 04:
But you're a total of $516 million better off, right?

[00:16:33] Speaker 03:
I don't think we see it that way, Your Honor.

[00:16:38] Speaker 03:
And I think part of the major disconnect here is that this isn't just a question of what's most fair, what's the best rule.

[00:16:45] Speaker 03:
It's did DCMA apply the rule to Northrop's decisions correctly?

[00:16:50] Speaker 03:
Northrop takes the view, well, we're not double recovering.

[00:16:53] Speaker 03:
We're not getting anything that we're not spending.

[00:16:57] Speaker 03:
But that's not the question.

[00:16:59] Speaker 03:
These cost allowability rules apply to all the contractors.

[00:17:03] Speaker 03:
Everybody's got to follow the same rules.

[00:17:06] Speaker 03:
Northrop's arguments are not grounded in the text of the regulation, the rule that is there.

[00:17:13] Speaker 03:
If you read the FAS106 rule,

[00:17:16] Speaker 03:
It couldn't be clear, this idea, that the costs arise as the obligation arise as the employees work.

[00:17:25] Speaker 03:
That's totally contrary to the board's conclusion that the costs were never incurred.

[00:17:31] Speaker 03:
It's just wrong to say that they were never incurred.

[00:17:34] Speaker 03:
Well, the term incurred, you equate, I think, with the term accrued.

[00:17:42] Speaker 03:
That's right, except for when the term is used to say what the contractor did.

[00:17:47] Speaker 03:
But yes, the costs are accruing.

[00:17:49] Speaker 03:
They are being incurred whether or not they're written down in this separate government contracts book.

[00:17:54] Speaker 03:
I mean, we know they're there because we see them in the financial reporting box.

[00:17:57] Speaker 04:
And where do you find that, at least in this context, the term incurred is being used to mean the same thing as accrued?

[00:18:07] Speaker 04:
I mean, there's no doubt that the costs are accruing in the pre-2006 period, but I don't see why they're being incurred.

[00:18:19] Speaker 04:
Because if incurred is used as it's usually used, in my experience at least, that would be what they're actually having to pay out.

[00:18:27] Speaker 04:
And they're paying out at the

[00:18:29] Speaker 04:
Defra line, not at the FAS 106 line.

[00:18:32] Speaker 03:
That's the part that's incorrect, Your Honor.

[00:18:33] Speaker 03:
That's a cash basis approach, not an accrual approach.

[00:18:36] Speaker 03:
So if you read just the second paragraph of the accrual gap rule, FAS 106, it's in Appendix E at FAS 106-2, the employer's obligation for that compensation is incurred.

[00:18:50] Speaker 03:
Where is this that you're reading?

[00:18:52] Speaker 03:
I'm on Appendix E of the blue brief.

[00:18:55] Speaker 03:
I'm at FAS 106-2.

[00:19:03] Speaker 03:
And I'm in the second paragraph on the last sentence.

[00:19:10] Speaker 03:
And so that last sentence of the second paragraph in Appendix E... I see.

[00:19:14] Speaker 03:
Okay.

[00:19:15] Speaker 03:
Employers' obligation for that compensation is incurred as employees render the services necessary to earn their post-retirement benefits.

[00:19:23] Speaker 03:
That word incurred is... Obligation is incurred, right?

[00:19:26] Speaker 03:
Right.

[00:19:29] Speaker 03:
It's just throughout the rule, at page 35, paragraph 146, the employer's obligation for that compensation is incurred when the services exchanged for that benefit are rendered not

[00:19:44] Speaker 03:
when an employee terminates or when a retiree receives the benefits.

[00:19:48] Speaker 03:
Under the cash basis accounting, the costs don't hit the books until the benefits are paid.

[00:19:53] Speaker 03:
But under accrual accounting, when the benefits get paid, what happens later does not matter.

[00:20:00] Speaker 03:
What matters for your accruals in your accounting books, which aren't going to change based on later events,

[00:20:06] Speaker 03:
is what employee employer exchange you have as those contracts are being performed as the employees are earning these benefits.

[00:20:17] Speaker 03:
The best place to look and see that they're separate events is in Northrop's own letters.

[00:20:21] Speaker 03:
When they tell us they're making the change, they don't try to link them together.

[00:20:25] Speaker 03:
They say, government, we've changed the plan amendment.

[00:20:27] Speaker 03:
You're going to realize about $15 million in savings per year.

[00:20:33] Speaker 03:
That's on Appendix 125, those calculations.

[00:20:37] Speaker 03:
In that letter at Appendix 124, they make clear this has nothing to do with the accounting.

[00:20:43] Speaker 03:
They're not linking them together there.

[00:20:45] Speaker 03:
There's no question that if only the amendment was made and no change in accounting, the government would have saved $307 million.

[00:20:54] Speaker 03:
If only the change in accounting, but no change in the benefits to the employees, the government would not pay under the rules that everybody's got to follow.

[00:21:04] Speaker 03:
The only question for the court is, what's the correct interpretation of the rule?

[00:21:08] Speaker 03:
The government would have saved or not paid the $253 million because it was unallowable at that point.

[00:21:15] Speaker 03:
Linking these together is incorrect.

[00:21:18] Speaker 02:
Can you – before you sit down, I think Judge Bryson had referenced the waiver kind of issue that came up in the debate over the brief.

[00:21:26] Speaker 02:
So you are going to differentiate between what argument you didn't make and how that's different.

[00:21:32] Speaker 02:
You know what I'm talking about?

[00:21:32] Speaker 03:
MR KIRBY I do, Your Honor.

[00:21:33] Speaker 03:
I just have to find it again.

[00:21:34] Speaker 04:
I believe the reference was to – The Red Brief at page 42 and 43 characterizes an argument

[00:21:44] Speaker 04:
that you're now making that according to the red brief you didn't make to the board, which is that when North amended the plan to reduce its total PRB obligation by $307 million, the government was entitled to be paid the entirety of that cost reduction.

[00:22:02] Speaker 04:
And you respond at page 20 of the yellow brief by saying you

[00:22:10] Speaker 04:
This is an argument we have never made, but when I turn to page 4, I think it is, of the

[00:22:22] Speaker 04:
I find it looks to me like that's exactly the argument you're making when you talk about the government was kept from realizing its share of the PRB plan cost savings.

[00:22:41] Speaker 04:
I'm sorry, at the top of the page.

[00:22:44] Speaker 04:
When Northrop elected to reduce the PRB plan benefits, the government was entitled to realize all 370 million in resulting cost savings.

[00:22:52] Speaker 04:
That's the argument that they say you didn't raise before the board, and you say we have never made that argument.

[00:22:59] Speaker 04:
Here's the difference, Your Honor.

[00:23:01] Speaker 04:
I understand what you're asking.

[00:23:02] Speaker 04:
That looks to me like it's almost exactly the same words that they characterized you as not having

[00:23:08] Speaker 04:
argued to the board.

[00:23:10] Speaker 03:
We're not arguing, and never have, that we are entitled to have them write us a check or take the money out, in some way give us the money back.

[00:23:19] Speaker 03:
The argument, I understand it's nuanced, but here's the difference.

[00:23:23] Speaker 03:
The money goes into this plan.

[00:23:25] Speaker 03:
It goes up, it goes down, money goes in.

[00:23:27] Speaker 03:
The only way in which we're entitled to receive a refund of what we've previously put in

[00:23:34] Speaker 03:
is if that money leaves the trustee and goes back to Northrop.

[00:23:38] Speaker 02:
I'm not saying that.

[00:23:40] Speaker 02:
So the quibble here is over the word paid?

[00:23:44] Speaker 02:
Like, because Red has characterized this as the government appears to contend the government was entitled to be paid the entirety of the cost reduction.

[00:23:54] Speaker 02:
So when you say you've never made that argument, are you referring to the paid part of that?

[00:23:59] Speaker 04:
That's exactly right.

[00:24:00] Speaker 04:
We're not saying that we have to be paid any money.

[00:24:03] Speaker 04:
Did you make the argument to the board that you were entitled to the benefit?

[00:24:08] Speaker 04:
the three hundred and seven million dollars because the citations that you I've read all the citations that appear in footnote six of your yellow brief and I didn't see any such argument made in any of those citations so where did you make that argument

[00:24:24] Speaker 03:
We certainly think we made the argument by saying that they're not connected.

[00:24:29] Speaker 03:
In other words, the savings, here's, I think, where it's getting confusing.

[00:24:33] Speaker 04:
Show me somewhere where you came as close as you think you needed to come to making that argument.

[00:24:43] Speaker 03:
I think the example in there about, and it's a bit of hyperbole, but the example about the credit card may be the closest one that I have.

[00:24:54] Speaker 03:
I have to check here.

[00:24:56] Speaker 03:
It's in the 1500s of the appendix.

[00:24:58] Speaker 03:
Bear with me one moment.

[00:25:05] Speaker 03:
So on appendix 1549.

[00:25:08] Speaker 03:
Yeah.

[00:25:13] Speaker 03:
The example given is that there's a credit card bill.

[00:25:20] Speaker 02:
What document is this, by the way?

[00:25:22] Speaker 03:
This is in the appendix.

[00:25:23] Speaker 04:
This is your brief to the board?

[00:25:25] Speaker 03:
This is a brief book from below, yes.

[00:25:31] Speaker 03:
So the analogy is made that there won't be further costs incurred in the future.

[00:25:41] Speaker 03:
And so as a result, previous charges aren't there anymore, not due.

[00:25:46] Speaker 03:
Don't need to be paid.

[00:25:48] Speaker 03:
And that's just not correct.

[00:25:50] Speaker 03:
Nothing disappears.

[00:25:52] Speaker 03:
Because you can't just grab some negative out of the books and say that the positive charge is gone.

[00:25:58] Speaker 03:
It's still there.

[00:25:58] Speaker 03:
They're both in the books.

[00:25:59] Speaker 03:
We can see that in the financial reporting, for example.

[00:26:02] Speaker 03:
And so the point is, certainly savings means savings.

[00:26:05] Speaker 03:
No one's saying that that has to come back to the government.

[00:26:09] Speaker 03:
That's not the argument.

[00:26:10] Speaker 03:
The argument is that what's meant by the savings, and so this is explained, it's explained by the Northrop's expert at, for example, 1419, how that was calculated.

[00:26:23] Speaker 04:
And did the government actually get the benefit of the $307 million reduction?

[00:26:28] Speaker 04:
We're only getting the benefit right now.

[00:26:30] Speaker 04:
But set aside the 253.

[00:26:31] Speaker 03:
Set aside the question of whether that's allowable.

[00:26:36] Speaker 03:
We're getting that benefit because of the disallowance.

[00:26:38] Speaker 03:
If not for the disallowance, we wouldn't get the benefit.

[00:26:47] Speaker 04:
All right.

[00:26:47] Speaker 04:
So at the end of the day, you're saying that the, well, go ahead.

[00:26:54] Speaker 04:
Yeah, I understand your position.

[00:26:56] Speaker 04:
Let's hear from the other side.

[00:27:02] Speaker 00:
May I please the court?

[00:27:04] Speaker 00:
This case may seem complicated, but one straightforward point resolves it.

[00:27:10] Speaker 00:
Northrop did not charge the government anything in excess of what Northrop was entitled to charge under Fast 106.

[00:27:17] Speaker 00:
It didn't charge the $253 million at issue before 2006.

[00:27:22] Speaker 00:
We agree about that.

[00:27:24] Speaker 00:
And it didn't charge the $253 million at issue in the transition obligation either.

[00:27:29] Speaker 00:
Now, my friends on the other side disagree with that, but that was the exact question put before the board at the quantum hearing.

[00:27:38] Speaker 00:
That was the exact issue adjudicated whether the $253 million that was the difference between the DEFRA and the FASS during the 95 to 2006 period was incorporated into the transition obligation or not.

[00:27:52] Speaker 00:
and what the board found.

[00:27:54] Speaker 01:
It seems to me that the foreign board established that there was zero liability on behalf of – or zero damages.

[00:28:04] Speaker 01:
And the government seems to be arguing that under the applicable accounting procedures, we're owed $253 million.

[00:28:14] Speaker 01:
And so the question, the way I see it, is that

[00:28:18] Speaker 01:
Who do we follow here?

[00:28:21] Speaker 01:
I mean, there was a regulation in place that required certain accounting procedures to take place.

[00:28:26] Speaker 01:
And under that, at 2006, then there was an amount of the $315 million that normally would have been paid.

[00:28:38] Speaker 01:
But because of Northup's accounting transition, then that amount came to zero.

[00:28:45] Speaker 01:
And the Quorum Board says there's zero damages involved.

[00:28:49] Speaker 01:
Yet, under the regulation, it does seem to me that Northrop was required to have been paying into the system.

[00:28:56] Speaker 01:
We're expecting a debt of the $253 million we're talking about.

[00:29:01] Speaker 00:
I understand your Honor's point, and I think there's a way to clarify so that there's not any inconsistency between the two, and it's this.

[00:29:08] Speaker 00:
And I think this is a key point.

[00:29:10] Speaker 00:
There is a difference between saying a cost is unallowable

[00:29:14] Speaker 00:
and the disallowance of that cost.

[00:29:16] Speaker 00:
A cost may be unallowable, but it only becomes disallowed if the contractor actually puts it in its incurred cost submission and seeks to charge the government that amount.

[00:29:27] Speaker 00:
At that point, an unallowable cost can be disallowed.

[00:29:31] Speaker 00:
So even if the costs for the difference between DEFRA and FAST-106 from 95 to 2006 was an unallowable cost,

[00:29:41] Speaker 00:
That doesn't prove the government's case.

[00:29:43] Speaker 00:
What the government has to show is that we included that in our incurred cost submission for the transition plan, and then they could disallow it.

[00:29:51] Speaker 00:
And that is exactly what the quantum board adjudicated.

[00:29:54] Speaker 00:
They didn't just adjudicate the question of whether there was damage or harm.

[00:29:58] Speaker 00:
What they found, and this you can see at pages 41 and 42 of the appendix, and if you bear with me while I quote it, the government has failed to sustain its burden of proving.

[00:30:07] Speaker 00:
that any of the disallowed amount was or will be amortized as part of the transition obligation and claim during post-transition years.

[00:30:14] Speaker 00:
So never claimed.

[00:30:15] Speaker 00:
Unallowable?

[00:30:16] Speaker 00:
Maybe, maybe not, but never claimed, therefore no basis for disallowance.

[00:30:21] Speaker 00:
That was based on a factual finding, and you can see this at page 35 of the appendix.

[00:30:26] Speaker 00:
the board found that the same cost, and those are the board's words, the same costs that were eliminated by the plan amendment in 2006 were the costs that constituted the unfunded amount due to the use of DEFRA rather than FAS106.

[00:30:45] Speaker 00:
And that was in turn based on

[00:30:47] Speaker 00:
expert testimony from our expert Mr. McQuade and you can see that testimony at pages 821 to 830 of the appendix is expert report and the key pages there 1292 to 99 of the appendix and the person who oversaw the calculation of the transition obligation Ms.

[00:31:05] Speaker 00:
Ma who the board at page 35 of the appendix said was highly credible testified and this is at pages

[00:31:13] Speaker 00:
1023 and 1024 of the appendix that we backed out that delta when we calculated the transition obligation.

[00:31:20] Speaker 01:
So in 2006, what was the transition obligation for the plan?

[00:31:25] Speaker 00:
So I think it would be helpful, too, if I could just kind of walk through how you calculate a transition obligation, because I think it will further clarify why the government's position is just wrong.

[00:31:33] Speaker 01:
The way this works, and this is in FAS 106- Well, hopefully that calculation will result in zero, right?

[00:31:40] Speaker 00:
No, it won't, but that's what I need to explain, because the way you calculate this, and you can see this, it's in FAS 106, it's at page FAS 106-27 in the appendix of the government's brief.

[00:31:51] Speaker 00:
You want to look at it, paragraph 110.

[00:31:53] Speaker 00:
The way you do it is you start by calculating the accumulated post-retirement benefit obligations.

[00:31:58] Speaker 00:
So as of 2006,

[00:32:00] Speaker 00:
How much will Northrop owe in the future to pay the benefits that it's already committed to provide?

[00:32:08] Speaker 04:
Which is $253 million.

[00:32:10] Speaker 00:
No, it's well more than that.

[00:32:12] Speaker 00:
It was well, well more than that.

[00:32:15] Speaker 00:
And I'll explain why that is.

[00:32:17] Speaker 04:
That was the amount that attributed to the increase in health costs

[00:32:22] Speaker 04:
But they had other obligations as well.

[00:32:24] Speaker 00:
So if I may, Your Honor, it's more complicated than that.

[00:32:28] Speaker 00:
All right.

[00:32:30] Speaker 00:
What you do, it's not a bottom-up calculation.

[00:32:33] Speaker 00:
It's called the APBO, Accumulated Post-Method Obligation.

[00:32:37] Speaker 00:
You do an actuarial projection.

[00:32:39] Speaker 00:
How much is this going to cost for us to pay out?

[00:32:44] Speaker 00:
Then you look at how much you have in the way of plan assets.

[00:32:48] Speaker 00:
And that's the amount that you've put in so far.

[00:32:50] Speaker 00:
And the difference is the transition obligation.

[00:32:53] Speaker 00:
And what happened here was Northrop, through the negative plan amendment, eliminated $307 million of future costs from the previously provided benefits, which it had the authority to do under the plan and under the Cass Board's interpretation, which we've talked about.

[00:33:14] Speaker 00:
And what that does, just as a matter of logic,

[00:33:17] Speaker 00:
is it reduces the amount of the accumulated post-benefit obligation, the amount you've got to pay in the future, by that amount.

[00:33:23] Speaker 00:
So of course, it goes right into the transition obligation.

[00:33:26] Speaker 00:
The expert testimony and the late testimony was that the 253 was encompassed in that 307.

[00:33:31] Speaker 00:
Now, what's the rest?

[00:33:32] Speaker 00:
Your honor's asked that question.

[00:33:34] Speaker 00:
Here's the rest.

[00:33:36] Speaker 00:
There's still a transition obligation remaining.

[00:33:38] Speaker 00:
And the government doesn't contest that there's still going to be some, because they're paying out part of it.

[00:33:42] Speaker 00:
They're just contesting this 253.

[00:33:44] Speaker 00:
The rest is this.

[00:33:46] Speaker 00:
For one thing, we were allowed to use DEFRA for contracts entered into before 1995.

[00:33:51] Speaker 00:
You apply the FAR from before 1995, we're allowed to use DEFRA there, so there's going to be a gap from that.

[00:33:58] Speaker 00:
That's part of what's remaining.

[00:33:59] Speaker 00:
The other part of what's remaining is this, that if you had been using FAS106 instead of DEFRA, you would have been projecting future increases in healthcare costs all along, so you would have been funding at a higher level.

[00:34:12] Speaker 00:
But healthcare costs actually accelerated at a pace far, far faster than even the Fast 106 predictions had it accelerating.

[00:34:22] Speaker 00:
So by the time you got to 2006, when you actually did your top-down, not your bottom-up, actuarial projection of how much these benefits are going to cost, it was a huge number.

[00:34:31] Speaker 00:
It was before the negative plan amendment backed out the 307.

[00:34:35] Speaker 00:
It was, I think, over a billion dollars.

[00:34:37] Speaker 00:
And if you think about that, that makes sense.

[00:34:39] Speaker 00:
There were 33,000 employees in this plan as of 1995 and certainly more after.

[00:34:46] Speaker 00:
And the caps of 7,000 pre-Medicare, 4,000 post-Medicare were annual caps, not lifetime caps.

[00:34:52] Speaker 00:
So if you just do the math, you can see you can get to a billion dollars pretty quickly in terms of what the projection would be.

[00:34:58] Speaker 04:
And so the projection as of 1996

[00:35:01] Speaker 04:
was woefully low.

[00:35:03] Speaker 04:
And that was only 200.

[00:35:06] Speaker 04:
That's where the 253 million came, the difference between the DEFRA and the 106 line, as I gather, that would have been

[00:35:17] Speaker 04:
But if the projection had turned out to be correct, that would have been the amount that would have been collected under DEFRA if the DEFRA line had continued, except that you're not allowed to charge at that level.

[00:35:29] Speaker 00:
Right.

[00:35:29] Speaker 00:
But then to get back, Your Honor was having a colloquy with my friend on the other side about how does this work out for the government here.

[00:35:36] Speaker 00:
I do think it'd be worth kind of going through that, because I would make one amendment to the discussion.

[00:35:42] Speaker 00:
I think the way to think about it is this.

[00:35:47] Speaker 00:
If we had paid in, if we had been using FAST 106, we would have been charging the government that $253 million, they would have paid it.

[00:35:56] Speaker 00:
And so they would have been out $253 million, they would have paid it, it would be funded, it would be in the plan.

[00:36:01] Speaker 00:
And then if we execute the negative plan amendment and we reduce the amount

[00:36:10] Speaker 00:
going forward by however many million we reduce it, they wouldn't have to pay that either.

[00:36:15] Speaker 04:
That's the 307.

[00:36:17] Speaker 00:
Yes, that's the 307 which incorporates the 253.

[00:36:22] Speaker 00:
But I think that the government, on the government's theory, they're not 500 and some million better off, they're 200 and

[00:36:29] Speaker 00:
$253 million better off because if that $253 million is already in there because they paid it under FAST-106, then there'll be less of a charge in the future because the transition obligation will go up.

[00:36:44] Speaker 00:
Right.

[00:36:45] Speaker 00:
They still come out $253 million ahead and that's why they're wrong about this.

[00:36:50] Speaker 00:
If you adopt our approach to it and the board's approach to it and why the board I think found what it did in quantum was that they didn't pay the $253 million in

[00:36:59] Speaker 00:
And now they want a deduction of $253 million as though they paid the $253 million in.

[00:37:05] Speaker 00:
So they end up $253 million better off than if we had done what they said we should have done all along.

[00:37:12] Speaker 00:
And that just can't be right.

[00:37:17] Speaker 02:
Let me preface this by acknowledging that I may not understand this, but just on simple logic.

[00:37:23] Speaker 02:
The reason you have to pay, I think the government would say, when you messed up was because of the regulations.

[00:37:29] Speaker 02:
You get sort of a penalty.

[00:37:31] Speaker 02:
Because you're flipping, and you could have, under the old regulation, you could have claimed that on an annual basis or whatever it is, and you didn't.

[00:37:40] Speaker 02:
So yes, it's a penalty.

[00:37:42] Speaker 02:
Maybe it looks like you can make it sound like unjust enrichment for the government, but you're going to be penalized for that $253 million.

[00:37:50] Speaker 02:
And wasn't that the determination?

[00:37:53] Speaker 02:
You're liable for that $253 million, right?

[00:37:56] Speaker 00:
No, Your Honor, I disagree at a few places there, if I could.

[00:38:02] Speaker 00:
First, the government is running as fast as it can from the argument that this is a penalty.

[00:38:07] Speaker 00:
And the reason for that, I think, is because there isn't any lawful authority to impose anything approximating a penalty.

[00:38:14] Speaker 02:
The operative... Well, an amount you're obligated to impose.

[00:38:18] Speaker 00:
to cover.

[00:38:18] Speaker 00:
Right, but I guess here's the problem with this.

[00:38:21] Speaker 00:
There is no legal basis, whether you call it a penalty or call it something else, there's no legal basis for sticking it to us.

[00:38:28] Speaker 00:
The only thing that the government has the authority to do, and this you would look at FAR 312012C,

[00:38:36] Speaker 00:
And what that provision says, we cited it on page six of our brief.

[00:38:41] Speaker 00:
What that provision says is when contractor accounting practices are inconsistent with the cost allow voting rules here, FAS106, costs resulting from such inconsistent practices in excess of the amount that would have resulted from using practices inconsistent with it are unallowable.

[00:39:01] Speaker 00:
Unallowable.

[00:39:02] Speaker 00:
That means we can't ask for it.

[00:39:04] Speaker 00:
That's what it means.

[00:39:05] Speaker 00:
We can't ask for it.

[00:39:06] Speaker 00:
Then the next provision, subsection 2D, says contractors responsible for accounting costs appropriately, etc., etc., adequate to demonstrate that costs claimed, in other words, the costs that we ask the government for,

[00:39:21] Speaker 00:
have been incurred, are allocable to the contract, and comply with the applicable cost principles, i.e.

[00:39:26] Speaker 00:
FAS 106.

[00:39:28] Speaker 00:
The contracting officer may disallow all or part of a claimed cost, i.e.

[00:39:32] Speaker 00:
a cost we ask the government for.

[00:39:35] Speaker 00:
So the fight in this case with respect to the quantum hearing is not about whether this is an allowable cost or an unallowable cost, whether we should have,

[00:39:44] Speaker 00:
incurred it and charged it in the years 95 to 206 or not.

[00:39:48] Speaker 00:
The question is whether the government has the authority to disallow it.

[00:39:52] Speaker 00:
And the only thing the government has the authority to disallow is the cost we actually claim, that we actually put in our incurred cost statements and say to the government, pay this cost.

[00:40:01] Speaker 00:
And the point is, we never did that.

[00:40:04] Speaker 00:
That's exactly what the Quantum Board adjudicated that very question.

[00:40:07] Speaker 01:
And you promised not to do it in the future, as far as I understand, right?

[00:40:10] Speaker 00:
Correct.

[00:40:10] Speaker 00:
We didn't do it before 2006.

[00:40:12] Speaker 00:
The Negative Plan Amendment extinguished what the Quantum Board found was, in its words, the same costs that constituted that delta.

[00:40:22] Speaker 00:
And that's why I think it's critical, if you don't mind me just repeating what I do think is the key sentence.

[00:40:29] Speaker 01:
Just hypothetically, if you were to claim those costs in the future, the $253 million, then wouldn't it seem like that would unravel the entire accounting procedures adopted by Northrop, and you would be on the hook for not only that, but for the additional $253 million?

[00:40:50] Speaker 00:
So I think if we did, the government would argue that we couldn't do that because we were trying to allocate to subsequent years something that we should have allocated to earlier years.

[00:41:00] Speaker 00:
throw the whole thing in disarray.

[00:41:02] Speaker 00:
Your Honor's right about that.

[00:41:03] Speaker 00:
But we haven't done it.

[00:41:03] Speaker 00:
We've been very clear that, as I said, this is what the quantum hearing was about.

[00:41:09] Speaker 00:
This was the issue we litigated.

[00:41:10] Speaker 00:
The government had a full and fair opportunity to prove that that $253 million was in the transition obligation.

[00:41:16] Speaker 00:
And the specific thing that the quantum board held was that the government failed to sustain its burden of proving that any of the disallowed amount was or will be amortized as part of the transition obligation.

[00:41:28] Speaker 00:
The government board held it isn't in there.

[00:41:30] Speaker 00:
And the board also noted, of course, that the government didn't put on any expert actuarial testimony or any factual actuarial testimony.

[00:41:37] Speaker 00:
This is, again, in the paragraph on page 35 of the appendix, to rebut our position on this.

[00:41:43] Speaker 00:
And so that's why, getting back to Judge Bryson's colloquy,

[00:41:46] Speaker 00:
That's why the government will end up getting a windfall here.

[00:41:50] Speaker 00:
It's because we never charge them this.

[00:41:52] Speaker 00:
It's one thing to say you can disallow a cost that wasn't calculated in conformity with the accounting rules that apply if you go to the government and say, pay this cost.

[00:42:05] Speaker 01:
And this was all made possible because Northrop lowered the benefits provided to the workers, right, at the start of the transition plan?

[00:42:13] Speaker 00:
It did.

[00:42:13] Speaker 00:
It did.

[00:42:15] Speaker 01:
So the government's not bearing the brunt of this.

[00:42:18] Speaker 01:
Northrop's not bearing the brunt, but the workers' place.

[00:42:21] Speaker 01:
You know, I understand that.

[00:42:22] Speaker 01:
They're the ones being stuck to, as you say.

[00:42:24] Speaker 00:
I understand the point there, Your Honor, but if I could, a few responses.

[00:42:29] Speaker 00:
First, if the government had allowed us to stay with DEFRA, then the problem wouldn't have arisen.

[00:42:37] Speaker 00:
And that's not a crazy suggestion.

[00:42:39] Speaker 00:
In 2009, a few years after this all transpired, the government changed the FAR again to make DEFRA a lawful way to do this, because they realized what they did earlier was a mistake.

[00:42:50] Speaker 04:
Well, it wouldn't have arisen unless you had decided in 2006 that things were skyrocketing, and therefore you would have tracked the land down.

[00:42:58] Speaker 04:
In which case, once again, the employees would be the ones that would.

[00:43:01] Speaker 00:
Well, that's right.

[00:43:01] Speaker 00:
But I do think that's sort of the second of the three points I wanted to make was that

[00:43:05] Speaker 00:
You know, this was an era in which I think in 2006, the medical and drug costs went up 36% in one year.

[00:43:13] Speaker 00:
I mean, this was a time when costs were going crazy.

[00:43:16] Speaker 00:
And what the Cass Board had decided in 2003 was that unless contractors are given the flexibility to make admittedly retroactive adjustments here, they're just not going to provide these post-retirement benefits at all because they won't be able to control the costs.

[00:43:31] Speaker 00:
And this is not something that we only did.

[00:43:34] Speaker 00:
Virtually every contractor did this.

[00:43:35] Speaker 00:
We cited a study at page 17 of our brief that when contractors made the transition from DEFRA to FAS106, they all did this because of the massive cost problem that arose.

[00:43:46] Speaker 00:
And then the third point I'd like to make, of course, the government's position doesn't solve that problem either.

[00:43:51] Speaker 00:
This money doesn't go to the workers.

[00:43:52] Speaker 00:
If the government prevails here, it goes to the government.

[00:43:55] Speaker 00:
So I'm not sure it's an argument that

[00:43:58] Speaker 00:
that the government can really make with any force.

[00:44:01] Speaker 00:
And then again, I will say, this was a situation in which, year over year, it's not like it was a surprise to the government that we were using DEFRA during this time period.

[00:44:11] Speaker 00:
We get audited every year.

[00:44:12] Speaker 00:
We submit our papers to the government.

[00:44:14] Speaker 00:
They look at it.

[00:44:15] Speaker 00:
And every year, they told us, no problem.

[00:44:17] Speaker 00:
Several years they said, we approve.

[00:44:19] Speaker 00:
This is compliant.

[00:44:20] Speaker 00:
So the idea that we were, you know, there's something less than above board here, which the government insinuates from time to time,

[00:44:27] Speaker 00:
uh... it's just not right and if i just uh... i see my i'm over my time but i'd like to make one point responding to the point my friend on the other side made about the

[00:44:36] Speaker 00:
the financial reporting versus government contract reporting, and that's the screenshot of our papers.

[00:44:43] Speaker 00:
You know, they make a big deal of, well, there's a service cost line, and there's this other line that shows $407 million, and they're separate, and this shows it's all separate.

[00:44:53] Speaker 00:
Well, you know, in our brief, which preceded the reply brief, which has us in it,

[00:44:59] Speaker 00:
We explain the situation.

[00:45:01] Speaker 00:
We cited to the expert testimony in the record from Mr. McQuade, and this is at page 1419 of the appendix, that actually that 407, whatever that number is on the sheet, includes the 307, which includes the 253, and that all of that is spelled out in detail in Northrop's work papers accompanying

[00:45:22] Speaker 00:
the accompanying the financial statements and so they come back in their reply brief and they go through all this stuff about the service cost line but they didn't address the evidence in the record that refused it so it's just it has no merit whatsoever.

[00:45:39] Speaker 00:
Thank you.

[00:45:48] Speaker 03:
Suppose, Your Honor, that tomorrow, four and five years, Northrop makes another plan amendment.

[00:45:55] Speaker 03:
And they put all the costs right back in.

[00:46:00] Speaker 03:
Do you think that somehow this would be unwound in any way?

[00:46:04] Speaker 03:
No.

[00:46:05] Speaker 03:
Each change has its own effect.

[00:46:09] Speaker 03:
These are separate events.

[00:46:12] Speaker 03:
And you have to ask, why is the outcome different

[00:46:18] Speaker 03:
to the tune of $253 million if you combine them together.

[00:46:23] Speaker 03:
What is the real legitimate connection between changing the benefits of your plan and changing the scorebook, changing which set of books you use, a set of accounting books?

[00:46:36] Speaker 03:
What's the connection there that enables you to combine these events and have a $253 million difference?

[00:46:44] Speaker 03:
And there is none.

[00:46:45] Speaker 03:
It's not correct to look at this differently.

[00:46:48] Speaker 03:
The reason we're here is because the board did not interpret and apply the regulation and the accounting rule correctly.

[00:46:58] Speaker 03:
That's it.

[00:46:59] Speaker 03:
If this case turns into what's most fair, are we out so much?

[00:47:04] Speaker 03:
Are they getting something they're not supposed to get?

[00:47:07] Speaker 03:
That's not what the case is about.

[00:47:09] Speaker 03:
The rules have to be followed by everybody because they're the rules.

[00:47:14] Speaker 03:
They're a basic part of the bargain, no less than a term in the contract.

[00:47:18] Speaker 03:
And the board completely lost sight of the fundamental cornerstone of this accounting rule, FAS 106, that says those costs were incurred.

[00:47:29] Speaker 03:
They did accrue, regardless of whether you wrote them down in your government contracts cost ledger.

[00:47:36] Speaker 03:
There's no getting rid of them later.

[00:47:39] Speaker 03:
The accounting is complicated, but the principle is not.

[00:47:42] Speaker 03:
Nothing changed in the Fast 106 books.

[00:47:45] Speaker 01:
What did the government tell Northrop that, over that 11 years, from 1995 to 2006, when Northrop was informing you, here's a situation that's developing down the future, and this is what we're proposing to do.

[00:47:59] Speaker 01:
Let's get together, and let's have an agreement.

[00:48:01] Speaker 01:
And yet, the government never answered to that.

[00:48:03] Speaker 03:
Your Honor, we don't see it that way at all.

[00:48:05] Speaker 03:
Northrop's made clear they did look at this back then.

[00:48:08] Speaker 03:
The government had no reason to look at it because nothing in excess was claimed at that time.

[00:48:13] Speaker 03:
It's all about what happened in those post-transitions.

[00:48:17] Speaker 01:
But you were aware of the type of accounting procedures that they were using.

[00:48:21] Speaker 01:
Procedures that they were using.

[00:48:23] Speaker 01:
That you were aware of.

[00:48:24] Speaker 01:
We absolutely knew they were.

[00:48:26] Speaker 01:
So at the end of the day, and correct me if I'm wrong, everything that Northrop did, they're entitled to change

[00:48:31] Speaker 01:
and CAP, or even the limiting altogether, all benefits to the workers, if that's what they chose to do.

[00:48:38] Speaker 01:
So they haven't done anything improper or illegal here.

[00:48:42] Speaker 03:
We're not saying anything like that.

[00:48:44] Speaker 03:
The only question, Your Honor, is what is the effect on which costs they can recover from the government under the rule?

[00:48:55] Speaker 03:
Thank you.

[00:48:55] Speaker 02:
We thank both sides of the cases submitted.

[00:48:58] Speaker 02:
That finally concludes our proceedings.