[00:00:25] Speaker 04:
Our next case this morning is number 182371, Raytheon Company versus Secretary of Defense.

[00:00:48] Speaker 04:
Okay, Ms.

[00:00:48] Speaker 04:
Manos.

[00:00:52] Speaker 00:
They place the court.

[00:00:53] Speaker 00:
Karen Manos of Gibson Dun & Crutcher on behalf of the Appellant Raytheon Company.

[00:00:58] Speaker 00:
Your Honors, we seek the reversal of one aspect of the Armed Services Board of Contract Appeals decision below, and that is the portion of the decision that held that the applicable portion of the salary costs of Raytheon employees who participate in unallowable lobbying activities

[00:01:13] Speaker 00:
is expressly unallowable under a cost principle in the FAR or an agency supplement to the FAR that defines the allowability of specific selected costs and is therefore subject to penalties under Federal Acquisition Regulation 42709-1A1.

[00:01:27] Speaker 00:
This appeal presents a very straightforward question of regulatory and statutory interpretation.

[00:01:33] Speaker 02:
So, I mean, how could personnel time, which is what

[00:01:39] Speaker 02:
virtually all of lobbying is be something other than a cost associated with lobbying.

[00:01:47] Speaker 00:
Your Honor, the federal acquisition regulation cost principle covers both lobbying and political activity costs.

[00:01:53] Speaker 00:
And so if you read the different categories of the unallowable activities, many of them have nothing to do with what you would think of as lobbying.

[00:02:01] Speaker 00:
It's campaign finance.

[00:02:02] Speaker 00:
It could be things like

[00:02:04] Speaker 00:
paying money to a political action committee.

[00:02:06] Speaker 00:
It could be having paid advertisements on TV.

[00:02:10] Speaker 00:
And the actual employees who engaged in these activities, the record, the unallowable portion of their time was approximately 25% of their time.

[00:02:19] Speaker 00:
So the other 75% is allowable.

[00:02:22] Speaker 04:
And compensation costs under the Federal Acquisition Regulation are- Are you saying it would be different if they spent 100% of their time on lobbying?

[00:02:30] Speaker 00:
Your Honor, the costs would still be unallowable.

[00:02:33] Speaker 00:
They just would not be expressed as unallowable.

[00:02:35] Speaker 04:
Even if it was 100%?

[00:02:36] Speaker 00:
Even if it's 100%, Your Honor.

[00:02:38] Speaker 00:
And again, I think it's a very straightforward question of regulatory and statutory interpretation.

[00:02:45] Speaker 00:
And the government's brief conflates these two issues and suggests that maybe these costs are allowable.

[00:02:50] Speaker 00:
That's not the argument here.

[00:02:52] Speaker 00:
And the underlying statute actually draws this distinction very clearly at 10 U.S.C.

[00:02:57] Speaker 00:
23, 24.

[00:02:58] Speaker 00:
in paragraphs A and B. If you read those two statutes, costs that violate a cost principle are unallowable, just plain old unallowable.

[00:03:06] Speaker 00:
Paragraph B, then, talks about costs that are expressly unallowable under a subset of the cost principles that are referred to in paragraph A. In your view, what costs are expressly unallowable in connection with lobbying?

[00:03:20] Speaker 00:
Your Honor, there may not be any costs that are expressly unallowable under the cost principle.

[00:03:27] Speaker 00:
And that's the critical point in this case.

[00:03:31] Speaker 00:
Not every cost that violates a federal acquisition regulation cost principle is, quote, expressly unallowable.

[00:03:38] Speaker 00:
And that term is very specifically defined in 31001.

[00:03:41] Speaker 00:
And that is to be expressly unallowable, it needs to be a particular item or type of cost that is under which an express provision of the applicable law, regulation, or contract is specifically named and stated to be unallowable.

[00:03:56] Speaker 00:
And so for salary or compensation to be expressly unallowable, it would need to be specifically named or stated.

[00:04:04] Speaker 03:
So you're saying there's no lobbying activity is expressly unallowable?

[00:04:11] Speaker 00:
Your Honor, if you had something maybe in the campaign finance in that, if you go through 31205-22 where it specifically lists that,

[00:04:20] Speaker 00:
we would say that is a particular item or type of cost.

[00:04:23] Speaker 00:
If you make a campaign contribution, that is... Yeah, but I'm just talking about lobbying.

[00:04:28] Speaker 03:
Straightforward lobbying, where an employee sits in a senator's office and makes a pitch for something.

[00:04:37] Speaker 00:
Your Honor, to begin with, not every person who sits in a senator's office and makes a pitch is considered unallowable lobbying under that cost principle.

[00:04:44] Speaker 00:
The activities that are listed are very specific.

[00:04:47] Speaker 00:
And for example, there are

[00:04:49] Speaker 00:
it needs to be in furtherance of perspective legislation.

[00:04:52] Speaker 00:
So if it's one of the oversight parts of what Congress does, and you're in the senator's office talking about that, that's not even unallowable under the cost principle, let alone expressly unallowable.

[00:05:03] Speaker 00:
But I think the critical point here is that the federal acquisition regulation defines expressly unallowable.

[00:05:09] Speaker 00:
And then within the statute and within the 42

[00:05:14] Speaker 04:
So the bottom line is, you can't identify any lobbying costs which are expressly unallowable under the regulations.

[00:05:21] Speaker 00:
Your Honor, I could, but it would be something like campaign finance.

[00:05:24] Speaker 00:
It would not be an applicable, just the portion of an employee's salary cost that engages in both allowable and unallowable lobbying costs.

[00:05:32] Speaker 00:
That's not expressly unallowable, because costs associated with lobbying

[00:05:37] Speaker 00:
could be any number of different types of costs.

[00:05:40] Speaker 00:
And none of them are a particular item or type of cost that is specifically named and stated to be unallowable.

[00:05:46] Speaker 00:
And the board recognized that, too.

[00:05:48] Speaker 00:
And following its earlier decision by a different panel, the board recognized that FAR 31.205-22 does not specifically name or state salary or compensation.

[00:06:00] Speaker 00:
But then what the board did, and this is the error

[00:06:03] Speaker 00:
is that the board relied on a combination of FAR 31-201-6, which is accounting for unallowable costs, and the lobbying and political activity cost principle 31-205-22.

[00:06:15] Speaker 00:
And so based on that combination, the costs are expressly unallowable.

[00:06:21] Speaker 00:
But that's clear error for two independent reasons.

[00:06:24] Speaker 00:
First, the board is incorrectly treating directly associated costs as if they were expressly unallowable costs.

[00:06:31] Speaker 00:
And the terms directly associated cost and expressly unallowable cost are both specifically defined in the FAR and they're defined differently.

[00:06:42] Speaker 00:
A directly associated cost is one that is any cost that's generated solely as a result of the incurrence of another cost in which would not have been incurred had the other cost not been incurred.

[00:06:54] Speaker 00:
Both this court and the U.S.

[00:06:55] Speaker 00:
Supreme Court have held when a statute or regulation defines things differently, they each have to be given their own unique, different definition.

[00:07:03] Speaker 00:
The board didn't do that here.

[00:07:06] Speaker 00:
Directly associated costs are also different in kind from expressly unallowable costs.

[00:07:12] Speaker 00:
As the Cost Accounting Standards Board recognized, expressly unallowable costs are unallowable by nature, alcoholic beverages, for example.

[00:07:23] Speaker 00:
whereas directly associated costs are only unallowable by association.

[00:07:28] Speaker 00:
For example, salary costs are generally allowable, but there may be a portion of it that is unallowable.

[00:07:36] Speaker 02:
The other... You don't give any significance, do you, to the phrase that this whole, that the lobbying provision opens with, that is,

[00:07:48] Speaker 02:
costs associated with.

[00:07:49] Speaker 02:
It doesn't just say lobbying activities are unallowable.

[00:07:52] Speaker 02:
It says costs associated with them.

[00:07:55] Speaker 02:
So I guess back to my first question.

[00:07:59] Speaker 02:
How could personnel costs for essentially human activity of lobbying activities not be expressly included

[00:08:09] Speaker 02:
Even if it's not expressly included in lobbying activities, how is it not expressly included in costs associated with lobbying activities?

[00:08:17] Speaker 00:
Your Honor, because the definition of expressly unallowable says that the particular item or type of cost, costs associated with any activity, is a whole gamut of different types of costs.

[00:08:27] Speaker 00:
So it could easily be unallowable, but it's not expressly unallowable.

[00:08:32] Speaker 04:
Because it's too generic?

[00:08:33] Speaker 00:
Exactly, Your Honor.

[00:08:34] Speaker 00:
It's a category.

[00:08:35] Speaker 00:
It's not a particular item or type of cost that is specifically named.

[00:08:40] Speaker 00:
It's a category.

[00:08:41] Speaker 04:
How specific do they have to be?

[00:08:43] Speaker 00:
Your Honor, they're very specific in certain types of the other cost principles.

[00:08:48] Speaker 00:
For example, alcoholic beverages, specifically named and stated to be unallowable.

[00:08:52] Speaker 00:
Interest, specifically named and stated to be unallowable.

[00:08:55] Speaker 02:
But how do we know that alcoholic beverages includes beer and wine and hard liquor?

[00:09:00] Speaker 02:
Maybe it's alcoholic beverages.

[00:09:02] Speaker 02:
It's just not specific enough.

[00:09:04] Speaker 00:
Your honor, actually there's a board case that addresses that and they said that around the edges maybe you could, I don't know if you've ever lived in Colorado like I did as a college kid.

[00:09:13] Speaker 02:
Well then you'd go be on the bench.

[00:09:14] Speaker 00:
But they actually do say that you might have an argument about whether 3-2 beer, for example, is alcoholic.

[00:09:20] Speaker 00:
Beyond that, it was kind of the paradigmatic case of this being something that is specifically named and stated to be unallowable.

[00:09:28] Speaker 00:
And with lobbying costs, it's not.

[00:09:30] Speaker 00:
Again, there might be something like a campaign contribution that's specifically named and stated.

[00:09:35] Speaker 00:
The other mistake, the clear error of law, we believe, with the board's decision is not only did it treat directly associated costs as being the same thing as expressly unallowable costs, but it treats 31-201-6 as being a cost principle in the FAR that defines the allowability of specific selected costs.

[00:09:59] Speaker 00:
In this board, in the...

[00:10:05] Speaker 00:
Boeing North America versus Roche case actually recognize the way the organizational structure of FAR Part 31.

[00:10:12] Speaker 00:
There are five subsections in FAR Part 31.

[00:10:15] Speaker 00:
Two of them are important here.

[00:10:17] Speaker 00:
The first is 31.201, the section the board is relying on that's entitled General, and it contains general principles that govern all types of costs.

[00:10:26] Speaker 00:
And so a cost that violates one of those general principles may well be unallowable.

[00:10:30] Speaker 00:
And in fact, that's exactly what 10 USC 2324A is talking about.

[00:10:35] Speaker 00:
But then in the second part, 31-205, which is entitled Selected Costs, which contains 46 subsections that are commonly referred to as the cost principle, that define the allowability of specific selected costs.

[00:10:48] Speaker 00:
And that's exactly the subset that's being talked about.

[00:10:51] Speaker 02:
But why doesn't that way of viewing what's going on in 205

[00:10:57] Speaker 02:
answer for our purposes the question of relevant specificity.

[00:11:04] Speaker 02:
Each of those items is specific enough and you don't have to go so that the fact that one of them, 22, says costs associated with lobbying activities is specific enough.

[00:11:19] Speaker 00:
Your Honor, no court has ever held, and I think it would be a terribly bad decision for this court to hold,

[00:11:25] Speaker 00:
that every single one of those cost principles makes costs expressly unallowable.

[00:11:29] Speaker 00:
That was not ever the intent.

[00:11:31] Speaker 00:
That's not the way they've ever been interpreted.

[00:11:34] Speaker 00:
Within those 46 subsection, there are certain cost principles that make costs expressly unallowable.

[00:11:40] Speaker 00:
This is not one of them.

[00:11:42] Speaker 00:
And there are examples.

[00:11:44] Speaker 02:
But I guess how do we know that without making, how do we make a judgment about the required level of specificity or generality as its opposite,

[00:11:55] Speaker 00:
Your Honor, I think it would be by looking at the actual regulatory definition, a particular item or type of cost.

[00:12:02] Speaker 00:
So that's particular to begin with.

[00:12:04] Speaker 00:
And then it has to be specifically named.

[00:12:06] Speaker 00:
So you have to be specifically naming that particular item or type of cost.

[00:12:10] Speaker 02:
But how do we decide whether lobbying activities is or is not specifically named, a specific type, to use your words?

[00:12:20] Speaker 00:
Your Honor, the type of cost at issue here is not

[00:12:23] Speaker 00:
quote, lobbying activities.

[00:12:25] Speaker 00:
The type of costs we're talking about is a portion of somebody, a salaried employee's portion of his or her time.

[00:12:31] Speaker 04:
Why isn't that a lobbying activity?

[00:12:33] Speaker 00:
Your Honor, what the cost principle is disallowing.

[00:12:37] Speaker 04:
The employee lobbied, you agree that it's an unallowable cost, but you say it's not specific enough to invoke the penalty.

[00:12:45] Speaker 00:
Your Honor, the costs associated with those lobbying activities, the costs associated that we're talking about is a portion of an employee's time, a salaried employees.

[00:12:57] Speaker 00:
It doesn't really even very well fit within the directly associated cost category because the salaries were not incurred only because these people performed some activities that were unallowable.

[00:13:07] Speaker 00:
And it would have been incurred anyway.

[00:13:09] Speaker 00:
They were salaried employees.

[00:13:11] Speaker 00:
So 25% of their time is spent doing something that's generating unallowable costs.

[00:13:17] Speaker 00:
And what the 31201-6E says is for salary costs, you look at the portion of the person's time that's spent doing the unallowable activities.

[00:13:28] Speaker 00:
And if that's material in amount, then it's considered directly associated.

[00:13:32] Speaker 00:
So it's not even all of these.

[00:13:34] Speaker 00:
If they had only spent 1% of their time doing something unallowable, that wouldn't even be a directly associated cost.

[00:13:39] Speaker 00:
It would not even be

[00:13:40] Speaker 00:
Unallowable period you would not have to disallow it and so that's the mistake that the board is making it's treating this first of all the board decides this is a directly associated cost and then the board says under this combination of something that's not a specific cost principle and It's not an expressly allowable cost combining them together, then it's subject to penalty So it's just a completely wrong interpretation of the regulation you want to save the rest of your time Yes

[00:14:15] Speaker 01:
May I please the court?

[00:14:17] Speaker 01:
Raytheon agrees that it had to purge the lobbying salary costs from its core school.

[00:14:22] Speaker 01:
Raytheon's lobbyists completed time sheets, and they indicated on the time sheets the number of hours, the number of man hours each day that were unallowable lobbying costs.

[00:14:35] Speaker 03:
There's not an issue here as to the time spent on lobbying was immaterial.

[00:14:41] Speaker 01:
That's correct.

[00:14:42] Speaker 03:
And there's no dispute that the time that was spent on the lobbying activity was an unallowed time.

[00:14:51] Speaker 01:
That's also correct.

[00:14:52] Speaker 03:
So the only question is whether it's expressly unallowed.

[00:14:56] Speaker 01:
That is correct, Your Honor.

[00:14:58] Speaker 01:
And that's why they use this ratio to drive out the lobbying salary costs.

[00:15:05] Speaker 04:
What do you understand expressly to me?

[00:15:10] Speaker 04:
How are we supposed to divide

[00:15:11] Speaker 04:
to determine which are express and which aren't.

[00:15:15] Speaker 01:
But what we have said is that the ultimate question is whether there's clear regulatory guidance, whether there is a reasonable difference of opinion as to whether the cost is unallowable.

[00:15:27] Speaker 01:
And that's brought out in the general dynamics opinion of the board and also followed in this case.

[00:15:33] Speaker 01:
And the board found in this case that there was no reasonable difference of opinion, and it cited

[00:15:40] Speaker 01:
the evidence and the record of this case.

[00:15:43] Speaker 01:
For example, the policies of Raytheon stated that the unallowable activity costs, quote, include the applicable portion of salaries of employees and fees of individuals engaged in lobbying activity on behalf of Raytheon.

[00:16:01] Speaker 01:
And then the board also cited the testimony from Raytheon's senior manager.

[00:16:07] Speaker 01:
And he was asked, what are the costs associated with the employees performing the unallowable activities?

[00:16:17] Speaker 04:
Suppose there had been a reasonable debate about the percentage of time that a particular employee had spent lobbying.

[00:16:28] Speaker 04:
Would that mean that it wasn't actually expressly identified?

[00:16:35] Speaker 01:
No.

[00:16:37] Speaker 01:
Because it is very clear when you look at 31.205-22, all of those activities are specified in the standard.

[00:16:50] Speaker 01:
And then the standard, the language is very clear.

[00:16:53] Speaker 04:
So when you say reasonably subject to dispute, you mean legally rather than factually?

[00:17:00] Speaker 01:
I think it's a mixed question.

[00:17:03] Speaker 04:
In my example, why isn't that, since as a factual matter it's reasonably subject to dispute, let's say that the particular employee spent time on lobbying, why doesn't that mean that you can't impose a penalty?

[00:17:24] Speaker 01:
I think it's a mixed question because one always looks at the record in a case.

[00:17:28] Speaker 01:
But here, the record is very, very- I'm trying to figure out what our standard should be.

[00:17:34] Speaker 04:
In terms of whether a- For us to say it's a mixed question doesn't provide a lot of guidance, what- I understand, Your Honor.

[00:17:41] Speaker 01:
The standard should be, first of all, whether there's a reasonable difference of opinion as to whether a cost is unallowable.

[00:17:49] Speaker 01:
whether the regulatory guidance is clear.

[00:17:52] Speaker 01:
And we differ with Raytheon, who is contending that the word salary or the word compensation has to be included in this cost principle in order for the lobbying salary cost, the labor cost, to be expressly unallowable.

[00:18:10] Speaker 01:
It's our contention that the Court should use an ordinary understanding, an ordinary meaning of the word

[00:18:16] Speaker 01:
name, that it's enough if the cost principle fixes the meaning of the cost as being unallowable.

[00:18:25] Speaker 01:
And we would contend that in this case, the very simplicity of this regulation, the fact that it sets out all of these activities as being unallowable activities and it says that all of the costs associated with those activities are unallowable,

[00:18:45] Speaker 01:
And then in paragraph C, it says that all of these costs have to be set out separately and purged from the cost pool.

[00:18:54] Speaker 01:
It's not whether they're material or not.

[00:18:57] Speaker 01:
It's whether they are those type of costs.

[00:18:59] Speaker 01:
And if there are those type of costs, all of them have to be purged out of the cost pool.

[00:19:05] Speaker 01:
And the very simplicity of this regulation makes it very, very clear that the lobbying salary costs are

[00:19:14] Speaker 01:
As Your Honor pointed out, these are activities.

[00:19:21] Speaker 01:
And these activities are performed by the Raytheon employees.

[00:19:27] Speaker 01:
And they're paid to perform these activities.

[00:19:30] Speaker 01:
There's a labor cost of these activities.

[00:19:34] Speaker 01:
And what is the labor cost?

[00:19:35] Speaker 01:
They're not working for free.

[00:19:37] Speaker 01:
They're paid a salary.

[00:19:39] Speaker 01:
And some portion of that salary is for those unallowable

[00:19:43] Speaker 01:
lobbying man hours that they're tracking in their time sheets.

[00:19:50] Speaker 01:
So we think that the standard here that the court should use the ordinary meaning of the verb to mean that is the cost on allowability fixed by the language of the cost principle.

[00:20:04] Speaker 01:
And in this case, it is incredibly clear.

[00:20:08] Speaker 01:
And they knew it.

[00:20:09] Speaker 01:
And they were trying to drive out

[00:20:11] Speaker 01:
these unallowable salary costs, they just did it in a negligent manner without the exercise of due care.

[00:20:20] Speaker 01:
Now, alternatively, the court could sidestep the question because it's very clear that the word salary is contained in another cost principle, which the board read together with 31.205-22.

[00:20:42] Speaker 01:
It read together that provision with also 31.201-6E2, which contains the word salary, salary of employees.

[00:20:55] Speaker 01:
So there, if the noun, if you have to identify a cost item by a noun, it's there.

[00:21:03] Speaker 01:
You can't miss it.

[00:21:04] Speaker 01:
We think you couldn't miss it in the first place because

[00:21:10] Speaker 01:
The language was very, very simple and very, very clear in 31.205-22.

[00:21:17] Speaker 01:
But alternatively, the court can affirm based on the ruling of the board, the rationale of the board.

[00:21:25] Speaker 01:
No error has been demonstrated in Raytheon's arguments.

[00:21:31] Speaker 01:
First of all, in terms of their arguments, where they try to distinguish a directly associated cost

[00:21:39] Speaker 01:
from a expressly unallowable cost.

[00:21:44] Speaker 01:
I would point out that in their opening brief at pages 16 to 7, they concede that directly associated costs can also be expressly unallowable costs.

[00:22:01] Speaker 01:
And they offer three examples, the three examples they point to being FAR 31.205-3, 31.205-14, and 31.205-47F5.

[00:22:13] Speaker 01:
And what Raytheon says there is because the words directly associated, directly associated costs are in that cost principle itself.

[00:22:28] Speaker 01:
then the directly associated costs are expressly unallowable.

[00:22:33] Speaker 01:
We would submit that that argument undercuts their lead argument, that the word salary or the word compensation had to be in 31.205-22.

[00:22:45] Speaker 01:
It didn't have to be there.

[00:22:47] Speaker 01:
And because if the language directly associated is sufficient to make a cost expressly unallowable, we agree with Raytheon.

[00:22:58] Speaker 01:
That language is sufficient.

[00:23:00] Speaker 01:
And similarly, the language cost associated is also sufficient to make a cost item expressly unallowable under 31.205-22A.

[00:23:23] Speaker 01:
The other argument that Raytheon is making is based on 42.7091A1.

[00:23:34] Speaker 01:
And what it's saying there is that in order for us to be able to impose a penalty, the cost principle has to be located in section

[00:23:44] Speaker 01:
31.205 now what the board pointed out was that the regulation doesn't say that what the board also pointed out is that under the far the way you interpret the far is you read the cost principles together and this is stated in 31.204 a and it says that the allowability is determined by the cost principles contained in

[00:24:14] Speaker 01:
31.201 31 point 202 31 point 203 and 31 point 205 so so to the Question as to whether a cost is expressly unallowable also has to be made reading the cost principles together I just like to

[00:24:43] Speaker 01:
point out that there's a misstatement of a holding in the reply brief.

[00:24:51] Speaker 01:
There's a misstatement of a holding in the General Dynamics case.

[00:24:58] Speaker 01:
In the General Dynamics case, which is stated in the reply brief, it stated Raytheon's making the argument in that case the board found

[00:25:07] Speaker 01:
if there was an expressly unallowable cost, but it wasn't subject to a penalty.

[00:25:12] Speaker 01:
That's not actually the holding of the General Dynamics case on that point.

[00:25:17] Speaker 01:
In the General Dynamics case, it addressed the frigid temp costs.

[00:25:21] Speaker 01:
And what the board said there was that it appeared that those frigid temp costs were expressly unallowable.

[00:25:29] Speaker 01:
But then it said, quote, the 3% exclusion had the effect

[00:25:34] Speaker 01:
of removing the frigid temp costs from the cost proposal.

[00:25:38] Speaker 01:
So the costs that were at issue were not even in the proposal.

[00:25:43] Speaker 01:
The government never paid them.

[00:25:45] Speaker 01:
You couldn't charge them with a penalty.

[00:25:49] Speaker 01:
We would also close by stating that this case is exactly why the penalties were adopted.

[00:25:58] Speaker 01:
Congress was concerned that

[00:26:02] Speaker 01:
Contractors were not purging out the expressly unallowable costs from their cost pool that the DCA auditors then had to pour through the accounting records and try to ferret out these unallowable costs.

[00:26:19] Speaker 01:
A lobbying salary cost could masquerade as a consultant's cost and not be purged from a cost pool.

[00:26:29] Speaker 01:
If the court were to find in this case that,

[00:26:32] Speaker 01:
lobbying salary costs, which are exactly the cost, the labor cost of these activities, that they are not an expressly allowable cost and that they are not subject to penalties, then Congress's purpose is entirely undercut.

[00:26:50] Speaker 01:
And I just want to make a minor point because of all the emphasis on campaign finance and making donations.

[00:26:58] Speaker 01:
If you look at the provision for campaign finance, which is

[00:27:03] Speaker 01:
31.205-22A1.

[00:27:09] Speaker 01:
It doesn't just cover donations.

[00:27:13] Speaker 01:
It covers in-kind contributions.

[00:27:17] Speaker 01:
So if Raytheon's lobbyists give their services, their time, their man hours to political campaigns trying to affect elections, that's all expressly unallowable under the standard, if the court has.

[00:27:37] Speaker 04:
Thank you.

[00:27:38] Speaker 01:
Thank you, Your Honor.

[00:27:43] Speaker 00:
Your Honor, the difference between the expressly unallowable cost and the directly associated cost is the difference in the accounting treatment.

[00:27:50] Speaker 00:
And I think that actually answers the question and points up the flaw in the government's argument.

[00:27:55] Speaker 00:
The expressly unallowable costs, regardless of the dollar amount, have to be specifically identified and excluded.

[00:28:01] Speaker 00:
So if you make a campaign contribution, if you pay a paid lobbyist, that cost has to be specifically identified and excluded.

[00:28:09] Speaker 00:
That's not what happened here with these salary costs.

[00:28:12] Speaker 00:
They didn't specifically identify any particular salary costs.

[00:28:16] Speaker 00:
They used the good faith estimates that they used under the Lobbying Disclosure Act.

[00:28:20] Speaker 00:
They came up with a fraction that they applied to the entire cost of this department.

[00:28:25] Speaker 00:
So there's no single dollar applied to any one of these individuals that's been specifically identified.

[00:28:31] Speaker 00:
Instead, they were treated as directly associated costs.

[00:28:35] Speaker 00:
So that's the difference between the two types of costs.

[00:28:38] Speaker 00:
And that's the mistake that the board made.

[00:28:40] Speaker 00:
The government's argument based on the legislative history is the old statute when the standard used to be clear and convincing evidence.

[00:28:48] Speaker 00:
That was changed.

[00:28:49] Speaker 00:
And what's in 10 U.S.C.

[00:28:51] Speaker 00:
2324 is different.

[00:28:53] Speaker 00:
And in fact, if you read the law review articles in effect at the time, it was a kinder, gentler version of the penalty statute.

[00:29:00] Speaker 00:
And that is that it had to be expressly unallowable under one of these cost principles that describes specific selected items of cost.

[00:29:10] Speaker 00:
The only cost principles that do that are the ones in 31.205.

[00:29:13] Speaker 00:
The other point is that the cost principle itself used to include the language, the applicable portion of salary.

[00:29:22] Speaker 00:
That was specifically taken out of the cost principle in 1984.

[00:29:26] Speaker 00:
So if you look at the 1983 version.

[00:29:28] Speaker 04:
And you can hardly contend that salaries are allowable if they were for lobbying.

[00:29:32] Speaker 00:
Your Honor, the argument is not whether they're allowable and unallowable.

[00:29:35] Speaker 00:
That's exactly the argument that the government's making that's just wrong.

[00:29:39] Speaker 00:
The difference is whether they are unallowable versus expressly unallowable.

[00:29:43] Speaker 00:
The statute itself clearly makes that distinction between paragraph A, which says if it violates a cost principle, it's unallowable.

[00:29:50] Speaker 00:
That's fine.

[00:29:51] Speaker 00:
Paragraph B says if it's expressly unallowable under one of these cost principles that defines specific selected items of cost, then it's subject to penalties.

[00:30:01] Speaker 00:
That's a critical difference.

[00:30:03] Speaker 04:
I think we're out of time.

[00:30:04] Speaker 00:
All right.

[00:30:04] Speaker 00:
Thank you.

[00:30:04] Speaker 04:
Thank you, Ms.

[00:30:05] Speaker 04:
Manna.

[00:30:05] Speaker 04:
Thank both counsel.

[00:30:05] Speaker 04:
The case is submitted.