By: Marko W. Kipa
The United States Court of Federal Claims recently reaffirmed the applicability of two exceptions to the Anti-Assignment Act (the “Act”). Liberty Ammunition, Inc. v. United States, 2011 WL 5150221 (Fed. Cl. Oct. 31, 2011). Specifically, the Court acknowledged that (1) the Government may prospectively waive the Act, and (2) the Act does not prohibit the transfer of an agreement where the transfer occurs by operation of law. Id. at *6-8. Notably, the Court’s decision provides further guidance for contractors undertaking corporate reorganizations and/or examining whether a particular acquisition transaction requires the execution of a novation agreement. We previously discussed the novation requirements here.
In Liberty Ammunition, the plaintiff argued, in pertinent part, that the Government infringed upon its patent for an environmentally friendly bullet and violated several non-disclosure agreements (“NDAs” or “Agreements”). Id. at *1. The NDAs in question contained the following anti-assignment provision:
Neither party may sell, transfer, or assign this Agreement except to entities completely controlling or controlled by that Party or to entities acquiring all or substantially all of its assets, without the prior consent of the other.
Id. at *2. The plaintiff’s company had undergone a series of transformations/reorganizations since the time the plaintiff initially entered into the NDAs. Id. The Government moved to dismiss the plaintiff’s Complaint, in part, because it alleged that the Act barred the transfer of the Agreements. Id. at *4. As such, the Government argued, the plaintiff lacked privity of contract with the Government, which deprived the Court of subject matter jurisdiction. Id.
The Court denied the Government’s motion to dismiss because the plaintiff presented a prima facie case that it may qualify for two exceptions to the Act. Id. at *6.
First, the Court explained that the Government may waive the Act’s proscriptions. Id. The Court relied on the anti-assignment provision in the NDAs allowing for sale, transfer or assignment without the counterparty’s consent in certain circumstances. Id. The Court rejected the Government’s position that the Act may be waived only “after the fact.” Id. After analyzing the applicable case law, the Court concluded that the Government may prospectively waive the requirements of the Act. Id. at *6-7.
Second, the Court relied on another exception to the Anti-Assignment Act – i.e., where the transfer occurs “by operation of law.” Id. at *7. The plaintiff in Liberty Ammunition alleged that the transfers did not require Government consent since the transactions at issue involved all of the Company’s assets or were the result of corporate reorganizations. Id. The Court noted that, in certain acquisition transactions, “the contract with the [g]overnment continues with essentially the same entity, which has undergone a change in its corporate form or ownership.” Id. (quoting L-3 Commc’ns Integrated Sys., L.P. v. United States, 84 Fed. Cl. 768, 777 (2008)). The Court, thus, concluded that these allegations were sufficient to defeat the Government’s motion to dismiss. Id.
While these counts survived the Government’s motion to dismiss, it remains to be seen whether the plaintiff can meet its burden of proof on the merits. Id. at *8. Nevertheless, the Court’s holding reaffirms the validity of two exceptions to the Act and is consistent with the principle that the Government may waive the Act’s proscriptions since the Act is intended to benefit the Government. It also may prove useful for contractors undertaking a corporate reorganization and/or determining whether a novation agreement is required in connection with a particular acquisition transaction. However, as we have said before, a contractor’s best bet is to engage the Contracting Officer early in the process and to get his/her opinion about whether a novation agreement is required. After all, an executed novation agreement provides the contractor with the Government’s “stamp of approval” for the transfer in the event a question should arise further down the road.
Marko W. Kipa