                     NOTE: This disposition is nonprecedential.

United States Court of Appeals for the Federal Circuit

                                    2009-5053


                         TEKNOWLEDGE CORPORATION,

                                                       Plaintiff-Appellant,

                                         v.

                                 UNITED STATES,

                                                       Defendant-Appellee.


        Benedict O’Mahoney, Teknowledge Corporation, of Palo Alto, California, for
plaintiff-appellant.

       David M. Hibey, Trial Attorney, Commercial Litigation Branch, Civil Division,
United States Department of Justice, of Washington, DC, for defendant-appellee. With
him on the brief were Tony West, Assistant Attorney General, Jeanne E. Davidson,
Director, and Todd M. Hughes, Assistant Director.

Appealed from: United States Court of Federal Claims

Judge Thomas C. Wheeler
                         NOTE: This disposition is nonprecedential.

United States Court of Appeals for the Federal Circuit

                                       2009-5053


                            TEKNOWLEDGE CORPORATION

                                                             Plaintiff-Appellant,

                                            v.

                                    UNITED STATES,

                                                             Defendant-Appellee.

      Appeal from the United States Court of Federal Claims in Case No.
      06-CV-310, Judge Thomas C. Wheeler.
                        ____________________________

                             DECIDED: November 3, 2009
                           ____________________________


Before MAYER, LOURIE, and RADER, Circuit Judges.

LOURIE, Circuit Judge.

      Teknowledge Corporation (“Teknowledge”) appeals from the decision of the

United States Court of Federal Claims (“Claims Court”) granting summary judgment in

favor of the United States in Teknowledge’s suit for disallowed software amortization

costs that Teknowledge sought to allocate to its government overhead pool.

Teknowledge v. United States, 85 Fed. Cl. 235 (2009).          Because we agree that

Teknowledge’s software costs are not allocable to the government, and therefore not

allowable, we affirm.
                                   BACKGROUND

      Teknowledge is an internet transaction company that provides service solutions

to allow processing of secure transactions over the Internet. In 1999, Teknowledge

began developing the TekPortal software, a customer information aggregation tool for

the finance service industry. The software was developed for use by both commercial

and governmental customers.      However, the government has never purchased the

TekPortal software.    The development of the software was done by a unit of

Teknowledge’s commercial segment.

      In 2001, Teknowledge amortized costs related to the development of the

TekPortal software in the amount of $885,430. Teknowledge allocated 31 percent of

those costs, $273,776, to government contracts it had on other projects by charging that

amount of money to its overhead pool of indirect costs. On July 25, 2005, the Defense

Contract Management Agency (“DCMA”) issued a notice of intent to disallow the

amortized software costs claimed by Teknowledge for the development of TekPortal.

On January 19, 2006, the DCMA issued a final decision disallowing the costs. On April

24, 2006, Teknowledge filed a complaint in the Claims Court seeking disallowed

amortized software costs in the amount of $285,656. Both parties then filed cross-

motions for summary judgment. On January 7, 2009, the Claims Court granted the

government’s summary judgment motion and denied Teknowledge’s motion.               The

Claims Court found that no genuine issue of material fact existed as to whether

Teknowledge’s development costs for the TekPortal product were allocable to the

government.   The court concluded that the developmental costs were not allocable

under subpart 31.201-4 of the Federal Acquisition Regulation (“FAR”). The court found



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the costs were not incurred specifically for a contract and they did not benefit a contract

or other government work to which the costs could be distributed in reasonable

proportion to the benefit received. The court also found that the TekPortal development

costs were not necessary to the overall operation of Teknowledge’s business.

Therefore, the court concluded that these costs could not be allowable under FAR §

31.201-2.

       Teknowledge timely appealed to this court. We have jurisdiction pursuant to 28

U.S.C. § 1295(a)(3).

                                      DISCUSSION

       We review a grant of summary judgment by the Claims Court de novo. Cienega

Gardens v. United States, 194 F.3d 1231, 1238 (Fed. Cir. 1998). Summary judgment is

properly granted when, viewing the evidence in the light most favorable to the non-

movant, the record indicates that there is “no genuine issue as to any material fact and

that the moving party is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c);

Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).

       Under the FAR, a contractor is allowed to charge to a government contract only

“those allocable costs which are allowable pursuant to Part 31 [of the FAR] and

applicable agency supplements.”       48 C.F.R. 31.201-1 (b).      That part of the FAR

provides that:

               A cost is allocable if it is assignable or chargeable to one or more
       cost objectives on the basis of relative benefits received or other equitable
       relationship. Subject to the foregoing, a cost is allocable to a Government
       contract if it:
               (a)     Is incurred specifically for the contract;
               (b)     Benefits both the contract and other work, and can be
                       distributed to them in reasonable proportion to the benefits
                       received; or

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             (c)    Is necessary to the overall operation of the business,
                    although a direct relationship to any particular cost objective
                    cannot be shown.

48 C.F.R. 31.201-4. Under another provision of the FAR, a cost is allowable only if it is:

(1) reasonable; (2) allocable; (3) complies with the Cost Accounting Standards (“CAS”)

or generally-accepted accounting principles and practices; (4) complies with the terms

of the contract; and (5) complies with any limitation in FAR subpart 31.2. 48 C.F.R.

31.201-2.

      Teknowledge challenges the criteria used by the Claims Court to evaluate

allocability of Teknowledge’s developmental costs under FAR § 31.201-4. Teknowledge

argues that the Claims Court erred in requiring Teknowledge to demonstrate a certain

benefit to the government from the development of the TekPortal software.

Teknowledge contends that allocability of the developmental costs may be determined

simply by the potential future benefits to be conferred upon the government by the

software. Teknowledge concedes that in 2001, the government had not purchased the

TekPortal software and there was no nexus between the software and an existing

government contract. Therefore, it argues, the Claims Court improperly looked for such

a nexus and concluded that any benefit to the government from the software would be

too remote and insubstantial to deem the costs allocable. Teknowledge argues that

under this Court’s precedent, FAR § 31.201-4 is an allowability provision that reflects

the allocability provision of the Cost Accounting Standards. Because the developmental

costs of the TekPortal software are “indirect” rather than “direct” costs, Teknowledge

argues, they are allocable under the CAS provisions and are not subject to disallowance

under the provisions of FAR § 31.201-4. Alternatively, Teknowledge argues that it has



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proven allocability under the requirements of FAR §§ 31.201-4 (b), (c). It argues that

the costs indirectly benefit the government and are necessary to Teknowledge’s overall

business. Under FAR § 31.201-4(b), Teknowledge argues it has satisfied the allocation

requirement by its distribution of the developmental costs to various government

contracts based upon potential future sales. According to Teknowledge, the fact that

such sales never came to fruition is not relevant to the allocation.          Similarly,

Teknowledge argues that potential benefits to the government from the TekPortal

software are sufficient to satisfy FAR § 31.201-4(c).      The potential benefits that

Teknowledge points to include its ability to execute its business plan and remain viable

by performing government contracts and developing software.

       The government responds that this case presents a straightforward application

of FAR § 31.201-4. It argues that the amortized TekPortal development costs do not

meet any of the allocability requirements listed in the FAR. The government further

argues that these costs did not benefit a contract or any other governmental work,

directly or indirectly, and are not necessary to the overall operation of Teknowledge.

The government asserts that none of the material facts are in dispute and therefore the

Claims Court properly granted judgment as a matter of law.          To the extent that

Teknowledge suggests that the FAR does not apply to the evaluation of its software

development costs, the government contends that Teknowledge has failed to show any

relationship under any standard between the costs and any government cost objectives.

      We agree with the government that the Claims Court correctly held that the

developmental costs of the TekPortal software are not allowable as a matter of law. We

are not persuaded by Teknowledge’s argument that, following our decision in Boeing, it



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does not need to demonstrate any benefit arising from the developmental costs to any

government contract. See Boeing N. Am., Inc. v. Roche, 298 F.3d 1274 (Fed. Cir.

2002). In Boeing, we faced the question of which standard should apply for determining

the allocability of the settlement costs of a shareholder derivative suit. Id. at 1281-84.

In reaching the question whether such legal expenses are allocable, we noted “that CAS

does not require that a cost directly benefit the government’s interests for the cost to be

allocable.” Id. at 1284. Instead, the court emphasized that “benefit,” as required by the

FAR provisions, was a concept necessitating a contractor to show a nexus between the

contractor’s cost and the contractor’s government work in order to allocate the cost to a

government contract. Id. We agree with the Claims Court that Teknowledge has failed

to demonstrate a nexus between its software development costs and any government

work that it has contracted to do.

       Regardless of the fact that the government never contracted with Teknowledge

to develop or use the TekPortal software, Teknowledge argues that these costs should

be allocable to its government contracts because of potential benefits that the software

provides. We find Teknowledge’s argument unpersuasive. As we have held previously,

where benefits to the government contract are remote and insubstantial, the

requirement of a “benefit” is not met. FMC Corp. v. United States, 853 F.2d 882, 886

(Fed. Cir. 1988).     Given that Teknowledge’s costs resulted from work done in

anticipation of acquiring government purchase orders and contracts, the Claims Court

properly found that any benefit from the development of the TekPortal software to any

government work would be remote and insubstantial. Cf. KMS Fusion, Inc. v. United

States, 24 Cl. Ct. 582, 591-92 (Cl. Ct. 1991.) (holding that the cost of paying



2009-5053
                                        -6-
government affairs consultants was allocable to a government contract where there

were specific direct benefits to an existing contract).

       We also reject Teknowledge’s argument that a sufficient nexus exists between

the costs and its government work because its software development costs are indirect,

not pertaining to a specific contract, but are allocable under various CAS provisions to

the different contracts that it has with the government. As the government points out,

there are no underlying government contracts that are in any way related to the

TekPortal software that would allow Teknowledge to properly allocate these indirect

costs under any accounting standard.           Moreover, the Claims Court found that

Teknowledge has proffered no evidence to show how TekPortal keeps Teknowledge

afloat or will bring in new business in the future. The Claims Court therefore did not err

in concluding that Teknowledge had failed to show any nexus between the TekPortal

development costs and any government contract. Our decision in Boeing does not

mandate a different result.

       We have considered Teknowledge’s remaining arguments and find them

unpersuasive. For the foregoing reasons, the Claims Court properly granted summary

judgment on the government’s motion. Accordingly, we affirm.




2009-5053
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