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BAE Systems Technology Solution & Services, Inc. v. Republic of Korea's Defense Acquisition Program Administration

United States Court of Appeals, Fourth Circuit

March 6, 2018

BAE SYSTEMS TECHNOLOGY SOLUTION & SERVICES, INC., Plaintiff - Appellee,
v.
REPUBLIC OF KOREA'S DEFENSE ACQUISITION PROGRAM ADMINISTRATION; REPUBLIC OF KOREA, Defendants – Appellants. UNITED STATES OF AMERICA, Amicus Curiae. BAE SYSTEMS TECHNOLOGY SOLUTION & SERVICES, INC., Plaintiff - Appellant,
v.
REPUBLIC OF KOREA'S DEFENSE ACQUISITION PROGRAM ADMINISTRATION; REPUBLIC OF KOREA, Defendants – Appellees. UNITED STATES OF AMERICA, Amicus Curiae.

          Argued: October 24, 2017

         Appeals from the United States District Court for the District of Maryland, at Greenbelt. Paul W. Grimm, District Judge. (8:14-cv-03551-PWG)

         ARGUED:

          Danny Christopher Onorato, SCHERTLER & ONORATO, LLP, Washington, D.C., for Appellants/Cross-Appellees.

          Gregory Michael Williams, WILEY REIN LLP, Washington, D.C., for Appellee/Cross-Appellant.

         ON BRIEF:

          Robert J. Spagnoletti, SCHERTLER & ONORATO, LLP, Washington, D.C.; Jason D. Wallach, BLANK ROME LLP, Washington, D.C., for Appellants/Cross-Appellees.

          Richard W. Smith, Ari S. Meltzer, Katherine C. Campbell, Scott A. Felder, WILEY REIN LLP, Washington, D.C., for Appellee/Cross-Appellant.

          Chad A. Readler, Acting Assistant Attorney General, Sharon Swingle, Benjamin M. Shultz, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C.; Stephen M. Schenning, Acting United States Attorney, OFFICE OF THE UNITED STATES ATTORNEY, Baltimore, Maryland, for Amicus Curiae.

          Before MOTZ, KEENAN, and THACKER, Circuit Judges.

          DIANA GRIBBON MOTZ, CIRCUIT JUDGE

         These appeals arise from a contract dispute between a United States defense contractor, BAE Systems Technology Solutions & Services, Inc. (BAE), and the Republic of Korea and its Defense Acquisition Program Administration (collectively Korea). BAE sought a declaratory judgment that it had not breached any contractual obligation to Korea and a permanent injunction barring Korea from prosecuting its suit against BAE in Korean courts. The district court granted BAE the requested declaration but refused to issue a permanent anti-suit injunction. Korea appeals, and BAE cross-appeals. For the reasons that follow, we affirm.

         I.

         A.

         The Arms Export Control Act (AECA), 22 U.S.C. §§ 2751 et seq., authorizes the Executive Branch to engage in Foreign Military Sales (FMS) transactions when selling certain U.S. military goods or services to a foreign government. This dispute centers on such a transaction between the United States and Korea.[1]

         In an FMS transaction, the foreign sovereign contracts with the U.S. government through a Letter of Offer and Acceptance. The U.S. government then contracts with a U.S. contractor for the goods or services that the U.S. government will eventually resell to the foreign sovereign. See 28 U.S.C. § 2762. Under the FMS structure, the U.S. contractor is "directly obligated" to the U.S. government and "has no direct contractual relationship" with the foreign government. Def. Inst. of Sec. Cooperation Studies, The Management of Security Cooperation (Green Book) 9-3 (37.1 ed. May 2017).[2] For that reason, this dual-contract structure precludes the foreign sovereign from directly suing the U.S. contractor for its performance on an FMS contract. See Sec'y of State for Defence v. Trimble Nav. Ltd., 484 F.3d 700, 707 (4th Cir. 2007).

         The FMS structure also permits the U.S. government to exercise significant control over the transaction. Once the two sovereigns agree on the terms of sale, the foreign sovereign must "trust[]" the U.S. government "to negotiate a contract [with a U.S. contractor] that will meet [the foreign government's] needs." Green Book at 15-8. The U.S. government "determines the contract type, selects the contract source, and negotiates prices and contract terms with individual contractors." Id. Importantly here, in an FMS transaction, the U.S. government retains control over price. Although the sovereign-to-sovereign agreement contains an initial price estimate, the foreign government must pay whatever the U.S. government contends the transaction costs - even if that amount exceeds the previous estimate. See Def. Sec. Cooperation Agency, U.S. Dep't of Def., Security Assistance Management Manual (SAMM), Fig. C5.F4 § 4.4.1, http://www.samm.dsca.mil (last visited February 9, 2018). In sum, the FMS structure provides advantages and disadvantages for a foreign purchaser. One potential advantage is that, in an FMS transaction, the foreign purchaser benefits from the U.S. government's procurement expertise. See Green Book at 15-7, 15-8. One disadvantage, however, is the loss of control over several aspects of the transaction.

         In most instances, a foreign sovereign may choose whether to procure goods and services through the FMS structure or whether to purchase them directly from the U.S. contractor through a Direct Commercial Sales (DCS) transaction. For military sales it deems particularly sensitive, however, the U.S. government requires the use of the FMS structure. See Trimble, 484 F.3d at 710 (noting the President has discretion to designate which military items must be sold exclusively through FMS channels); SAMM at § C4.3.5 ("The AECA gives the President discretion to designate which military end-items must be sold exclusively through FMS channels. This discretion is delegated under statutory authority to the Secretary of State. Generally, as a matter of policy, this discretion is exercised upon the recommendation of DoD.").[3]

         Although in an FMS transaction the foreign government and U.S. contractor do not contract directly, the foreign sovereign and U.S. contractor may coordinate in advance of the government-to-government talks in an attempt to pre-determine the contents of the eventual government-to-government agreement. Before submitting its FMS purchase request to the U.S. government, for instance, a foreign sovereign may negotiate proposed pricing and technical specifications with a favored U.S. contractor and then urge the U.S. government to provide a sole source award to that contractor under the pre-negotiated terms. But the U.S. government need not agree to do so.

         The dual-contract structure of an FMS transaction has important implications for resolving legal disputes. The foreign sovereign cannot directly sue the U.S. contractor for its performance on an FMS contract. Nor can the two sovereigns sue each other for failure to perform on the government-to-government contract: their only recourse is to hold bilateral consultations. SAMM at Fig. C5.F4 § 7.2.

         B.

         In 2011, Korea announced its intention to upgrade its fighter planes. Because this upgrade program required Korea to obtain sensitive military technology, the U.S. government barred Korea from purchasing directly from U.S. contractors through a direct purchase DCS transaction and instead required Korea to procure the desired goods and services through an FMS transaction.

         In preparation for this FMS transaction, Korea solicited bids from U.S. defense contractors, including BAE, as to the cost of providing the desired upgrades. BAE responded and issued successive Letters of Guarantee to Korea. In those letters, BAE agreed to pay Korea $43.25 million if BAE failed to "respond timely to the evaluation formalities of the bidder's qualification," assuming BAE was "designated as an eligible bidder," or if BAE failed to execute a contract with Korea after Korea awarded its bid to BAE. BAE issued the first Letter of Guarantee in late 2011; soon thereafter, Korea selected BAE as its favored contractor for the upgrade program. In the ensuing years, BAE renewed its Letter of Guarantee several times, including in 2013 and 2014.

         Given the dual-contract structure in an FMS transaction, Korea and BAE attempted to pre-negotiate key aspects of the inter-governmental talks. They agreed on what Korea would request from the U.S. government and at what price. BAE promised to "put forth its best effort" to convince the U.S. government to agree to those terms. In exchange, Korea promised to recommend BAE as its favored contractor to supply the requested goods and services to the U.S. government.

         On August 1, 2012, BAE and Korea memorialized their understandings in a Memorandum of Agreement. That BAE-Korea agreement authorized Korea to demand payment of the $43.25 million promised in the Letters of Guarantee if (1) BAE failed to use its "best effort" to secure the terms specified in the BAE-Korea agreement in the separate agreement between the U.S. and Korean governments, and (2) BAE's failure to use its "best effort" delayed conclusion of the government-to-government negotiations. The BAE-Korea agreement also contains a forum selection clause, which provides that any dispute between BAE and Korea "shall be resolved through litigation and the Seoul Central Court shall hold jurisdiction." Finally, the BAE-Korea agreement provides that it "automatically terminate[s]" upon execution of an FMS agreement between the U.S. and Korean governments.

         Korea then sent its formal purchase request to the U.S. government, initiating the FMS government-to-government negotiations. In December 2013, the two sovereigns signed an initial FMS agreement that covered preliminary issues and anticipated a "follow-on amendment" to execute the core of the FMS transaction. With respect to the anticipated follow-on amendment, the U.S. government initially signaled it could meet Korea's budget but later informed Korea that the price tag of the FMS transaction would greatly exceed initial estimates. BAE, as the contractor chosen to provide the requested goods and services, had participated in inter-governmental discussions related to price. After the U.S. government raised its overall price estimate, Korea charged that BAE had breached the BAE-Korea agreement by failing to use its best efforts to ensure the U.S. government agreed to the price that Korea and BAE had worked out in advance. BAE steadfastly denied this, explaining that the U.S. government increased its price for reasons having nothing to do with BAE and despite its best efforts. Nonetheless, Korea demanded that BAE pay $43.25 million pursuant to the BAE-Korea agreement.

         BAE then filed this action in federal court, seeking a declaration that it had not breached any obligations to Korea. After the court denied Korea's motion to dismiss, Korea answered the complaint and asserted a number of cross-claims against BAE. Korea also initiated a suit in a Korean court to litigate essentially the same issues. The district court issued the requested declaratory judgment to BAE but refused to enjoin the litigation in Korea. This timely appeal followed.

         II.

         Korea initially grounds its appeal in the forum selection clause contained in the BAE-Korea agreement. That forum selection clause provides that any dispute arising from or relating to the BAE-Korea agreement "shall be resolved through a litigation and the Seoul Central District Court shall hold jurisdiction." Korea claims this is a mandatory forum selection clause, requiring all litigation to occur in Korea, and thus requires dismissal of BAE's suit. BAE maintains that it is permissive, providing that Seoul, Korea is an appropriate forum for litigation, but not barring litigation elsewhere.

         A.

         Although the parties agree that we consider this question de novo, and we traditionally have done so, the more deferential, abuse-of-discretion standard of review may be appropriate in light of Atlantic Marine Construction Co. v. U.S. District Court, 134 S.Ct. 568 (2013).[4] We need not resolve the correct ...


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