In January, the U.S. Court of Appeals for the Federal Circuit ruled in Slattery v. United States that non-appropriated fund instrumentalities of the U.S. government (NAFIs) are not immune from lawsuits at the U.S. Court of Federal Claims, unless Congress expressly withholds or withdraws jurisdiction. Assuming the Supreme Court does not overrule the decision, private parties now have a more predictable path to enforce contracts with NAFIs.

NAFIs are government-sponsored or government-controlled entities that do not receive regular appropriated funds, and are a vehicle by which the federal government contracts with private vendors, including as part of public-private partnerships. The military exchanges, such as the Army and Air Force Exchange Service, are the most prominent, and occasionally serve as the “public” contracting party in public-private military housing deals. The Army’s Morale, Welfare and Recreation NAFIs, for example, allow public-private ventures for, among other things, aquatic centers, bowling alleys and recreational lodging in cabins, cottages, hotels or motels on base. See Army Regulation 215-1, § 15-12.

Dilemmas Created by the NAFI Doctrine

About 60 years ago, the federal courts adopted the “NAFI doctrine,” which established that NAFIs were immune from lawsuits—they could not be held accountable for breach. The doctrine granted to NAFIs all the immunity of the federal government, generally allowing NAFIs to avoid all contract liability resulting from their actions or inactions (with the exception of the military and NASA exchanges, which Congress made amenable to suit in 1970).

Private parties who were aware of an entity’s NAFI status could, at least, plan for the possibility that they might have no ability to hold the entity accountable. However, it often was unclear both to private parties and government entities whether a particular entity was a NAFI—and not subject to suit—until a court later declared it so.

No Pizza Purchases by Marines; No Money in Suing the Mint

The immunity provided by the doctrine, together with the inability, in some cases, to forecast whether an entity was a NAFI, wreaked havoc on transactions and complicated the government contracting process. For example, in 1998, a pizza company agreement was terminated for default by a “Morale, Welfare and Recreation” NAFI established at the Marine Corps’ base in Iwakuni, Japan. The contract between the NAFI and the pizza company included several clauses that appeared to make the NAFI amenable to suit. In particular, the contract stated that the NAFI’s contracts “are United States contracts” and incorporated the standard Disputes Clause required by the Contract Disputes Act, stating appeal or suit would be available at the Court of Federal Claims or a Board of Contract Appeals. The pizza company appealed its termination to the Armed Services Board of Contract Appeals, which ruled against the company on the merits.

The pizza company appealed further to the Federal Circuit, which never reached the merits, ruling that despite the clauses that stated the NAFI could be sued, the Morale, Welfare and Recreation NAFIs did not qualify as “exchanges” (which would have provided a basis for jurisdiction), even though they provided the same functions and operated similarly to the exchanges. Thus, the pizza company learned only after several years of litigation that it had no legal remedy to challenge the NAFI’s termination of its contract. See generally Pacrim Pizza Co. v. Pirie, 304 F.3d 1291 (Fed. Cir. 2004).

As another example, the Federal Circuit concluded that the U.S. Mint—the federal government agency that coins the nation’s money—was a NAFI, and thus entitled to rely on the doctrine. Notably, a prior decision in another case by a different trial judge had concluded that the Mint was not a NAFI. After wading into this muddle, the Federal Circuit disagreed with the prior trial decision (which was never appealed), reasoning that the Mint was run using a congressionally approved revolving fund that did not require the Mint to rely on annual appropriations from Congress. So, based on the Federal Circuit’s ruling, the private contractor could not even pursue a claim for more than $1.7 million. See AINS, Inc. v. United States, 365 F.3d 1333, 1344 (Fed. Cir. 2004).

Demise of the Doctrine

Slattery effectively eliminates immunity for NAFIs, providing that jurisdiction at the Court of Federal Claims (and presumably at the Boards of Contract Appeals) turns not on the appropriation status of the agency’s funds, but on whether the entity is acting on behalf of the government. Slattery v. United States, 635 F.3d 1298, 1300 (Fed. Cir. 2011) (en banc). The court held that “when a government agency is asserted to have breached an express or implied contract that it entered on behalf of the United States,” the court has jurisdiction unless Congress explicitly withholds or withdraws jurisdiction by statute. Id. at 1321.

Private parties entering public-private agreements with a NAFI will still need to confirm Congress has not exempted the NAFI from court review. But now, private parties can at least demand that the NAFI provide a statute to justify its conclusion. And, because of Slattery, there now should be fewer circumstances where a NAFI is exempt from court review, which should make contracting with a NAFI more predictable.

This article derives from a previous article published in The Government Contractor and appears courtesy of Thomson Reuters.