              ARMED SERVICES BOARD OF CONTRACT APPEALS

Appeal of--                                   )
                                              )
K2 Solutions, Inc.                            )      ASBCA No. 60907
                                              )
Under Contract No. M67854-1l-C-3015           )

APPEARANCES FOR THE APPELLANT:                       Paul W. Bowen, Esq.
                                                      K&L Gates LLP
                                                      Seattle, WA

                                                     Amy M. Conant, Esq.
                                                      K&L Gates LLP
                                                      Washington, DC

APPEARANCES FOR THE GOVERNMENT:                      Ronald J. Borro, Esq.
                                                      Navy Chief Trial Attorney
                                                     Matthew S. Hawkins, Esq.
                                                     Stephanie Cates-Harman, Esq.
                                                      Trial Attorneys

             OPINION BY ADMINISTRATIVE JUDGE SWEET
      ON THE GOVERNMENT'S MOTION TO DISMISS AND/OR STRIKE

        This is an appeal of a contracting officer's denial of a claim by K2 Solutions, Inc.
(K2), alleging that the government breached a contract, and the duty of good faith and
fair dealing, by reducing a contract's scope of work. The government has moved to
dismiss portions of the complaint-namely counts two, three, and six-for failure to state
a claim. 1 The motion is granted as to counts two and three, and denied as to count six.

       STATEMENT OF FACTS (SOF) FOR PURPOSES OF THE MOTION2

       1. On 29 September 2011, the government awarded K2 Contract
No. M67854-l l-C-3015, which was a contract to provide improvised explosive device
detector dogs and related services (comp I. irir 4-5).



1
  The complaint does not number the counts. The government assigns such numbers
       in its motion to dismiss. For ease of reference, we adopt the government's
       numbering convention.
2
  For purposes of this motion only, we accept the allegations in the complaint as true.
      2. The contract was for one base year, and two option years (comp I. ~ 8).
Option year one, if exercised, would commence on 29 September 2012 (id.).

       3. K2 alleges that the government failed to exercise delivery of the full quantity
of dogs and services during the base year (com pl. ~~ 25-34 ).

       4. On 22 June 2012, the government sent K2 a notice of intent to exercise
option year one (compl. ~ 37, ex. J). The notice contemplated a reduction in the
requirements from the original contract (id.).

       5. On 31July2012, the government sent K2 Modification No. POOOlO
(Mod. 10) (comp I. ~ 39). Mod. 10 "was a unilateral Modification purporting to
exercise Option Year 1 on terms different than those agreed to by the parties in the
Contract" (id.). In particular, Mod. 10 "reduced requirements, changed terms within
certain [contract line item numbers (CLINs)], and issued new SubCLINs for reduced
amounts" (compl. ~ 40, see also ex. K).

         6. K2 continued to perform subsequent to the issuance of Mod. 10 (compl.      ~   45).

        7. K2 alleges that, even relative to the reduced quantities ordered in Mod. 10,
the government decreased the amount of work (compl. ~ 50). In particular, K2 alleges
that the government only paid 63 percent of the original amount awarded in the contract
for option year one, and 86 percent of the amount as reduced by Mod. 10 (compl. ~ 51).

      8. K2 submitted a certified claim to the contracting officer (CO) on 22 April 2016
(compl. ~ 58). The CO denied that claim (id.~ 78). 3

         9. This timely appeal followed.

       10. Count one of the complaint alleges that the government breached the
contract by failing to exercise delivery of all the ordered goods and services during the
base year (compl. ~~ 80-93 ).

       11. Count two alleges that the government breached the contract by using the
exercise of the first option year to reduce the scope of work (compl. ~~ 95, 100-01). In
particular, count two alleges that the government "attempt[ed] to unilaterally exercise
only parts of the Option Year One CLINs by exercising Option Year 1 and then
immediately deleting portions of the work" (compl. ~ 99).

        12. Count three alleges that the government improperly exercised option year
one, in violation of the contract, by decreasing the amount of work without providing
K2 the opportunity to renegotiate the option (compl. ~~ 104-05, 107-08).


3   The certified claim asserted the same claims raised in the complaint (comp I., ex. T).

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       13. Count four alleges that the government breached Mod. 10 by refusing to
allow for the delivery of all the services ordered under Mod. 10 (comp I. ~ 115).

        14. Count five alleges that the government breached the duty of good faith and
fair dealing with respect to the base year (compl. ~~ 121-28).

        15. Count six alleges that the government breached the duty of good faith and
fair dealing with respect to option year one (compl. ~~ 129-38). Count six alleges two
legal theories. The first theory is that the government breached the contract's implied
duty by using Mod. 10 to reduce the contract's scope of work, instead of negotiating a
bilateral modification and price adjustment (id.~~ 130-33). The second legal theory is
that the government breached Mod. lO's implied duty by failing to exercise delivery of
Mod. lO's full quantity (id.~~ 134-36).

                                      DECISION

I. Legal Standard

        Dismissal for failure to state a claim upon which relief can be granted is
appropriate where the facts asserted in the complaint do not entitle the claimant to a
legal remedy. Matcon Diamond, Inc., ASBCA No. 59637, 15-1BCA~36,144 at
176,407. "To survive a motion to dismiss, a complaint must contain sufficient factual
matters, accepted as true, to state a claim to relief that is plausible on its face."
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citation and internal quotations omitted).
We must accept all factual pleadings as true. Id.; Matcon Diamond, 15-1 BCA
~ 36, 144 at 176,407. However, we do not accept as true the legal conclusions in the
complaint. Iqbal, 556 U.S. at 678. A pleading that offers labels and conclusions, or a
formulaic recitation of the elements of a cause of action will not do. Id. Nor does a
complaint suffice if it tenders naked assertions devoid of further factual enhancement.
Id. Moreover, we draw all reasonable inferences in favor of the appellant. Id. While
the inferences need not be probable, they must be plausible. Id. Thus, the ultimate
inquiry is whether the complaint alleges sufficient facts to nudge a claim across the
line from conceivable to plausible. Id. at 680.

II. Counts Two and Three Fail to State a Claim

       As the government contends, counts two and three alleging that the exercise of
the option violated the contract by reducing the scope of work fail to state a claim
because the attempted option exercise was ineffective, so there was no option exercise
that could have violated the contract (gov't br. at 4-5). "[T]he notice by which the
power of an option holder is exercised must be unconditional and in exact accord with
the terms of the option." Holly Corp., ASBCA No. 24975, 83-1BCA~16,327 at
81, 164 (quoting CORBIN ON CONTRACTS § 264 ( 1963)). This is so because an option


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is a contract to keep an offer open for a prescribed period of time, which confers upon
the option holder (optionee) the right to accept or reject the offer in accordance with its
terms within the time and in the manner specified in the option. Id.

        Therefore, principles governing acceptance of offers ordinarily apply to the
exercise of options. Holly Corp., 83-1BCA~16,327 at 81,164. "A notice of
acceptance that is in any respect conditional or that reserves to the party giving it a
power of withdrawal is not an operative notice of acceptance." Id. (citation omitted).
"Thus, we have held that any attempt by the Government to alter the conditions of the
contractor's obligation ... will render ineffective the purported exercise of an option."
Id. at 81,165.

       Here, the gravamen of counts two and three is that the exercise of the option
violated the contract by reducing the scope of work (SOF ~~ 11-12). In support of that
theory, the complaint alleges that Mod. 10 "reduced requirements, changed terms
within certain CLINs, and issued new SubCLINs for reduced amounts" (SOF ~ 5).
Assuming that factual allegation is true, the alteration of the conditions ofK2's
obligations renders ineffective the attempted exercise of the option. Holly Corp., 83-1
BCA ~ 16,327 at 81,165. Because the government's attempt to exercise the option
was ineffective, there was no option exercise that could have violated the contract.
Nor could K2 challenge the non-exercise of the option. Statistica, Inc., ASBCA
No. 44116, 92-3 BCA ~ 25,095 at 125,126; Pemco Aeroplex, Inc., ASBCA No. 47402,
95-2 BCA ~ 27,853 at 138,889.

        In an apparent attempt to avoid the conclusion that the attempt to exercise the
option was ineffective, K2 argues that Mod. 10 initially effectively exercised the option,
and then immediately modified the contract by reducing the scope of work (app. br. at 4). 4
However, in order to determine whether Mod. 10 initially effectively exercised the option,
we must look at Mod. 10 as a whole and decide whether it sought to modify the terms of
the option. Holly Corp., 83-1 BCA ~ 16,327 at 81, 164. As we have stated, "the notice by
which the power of an option holder is exercised must be unconditional and in exact
accord with the terms of the option." Id. (emphasis added). Therefore, a document cannot
both exercise and modify an option because any modification to the terms of an option
constitutes a rejection of the option. Id. Here, because Mod. 10 allegedly was not in exact
accord with the terms of the option, it is not reasonable to infer that Mod. 10 initially
effectively exercised the option (SOF ~ 5).

       Nor does TigerSwan, Inc. v. United States, 110 Fed. Cl. 336 (2013)-upon which
K2 relies (app. br. at 4-5)-help K2. TigerSwan did not hold that the same document
can both exercise and modify an option. Id. at 346-4 7. Indeed, TigerSwan did not even

4
    Contrary to the government's argument, the complaint articulates the theory that
         Mod. 10 effectively exercised the option, and then immediately reduced the
         scope of work (SOF ~ 11).

                                             4
deal with the exercise of an option, let alone address the issue of whether such an
exercise was valid. Id. Rather, in TigerSwan, there was a valid agreement-Le., there
had been mutual assent to the same terms-and then the government terminated that
agreement for convenience almost two months later through a separate document. Id. at
340. Therefore, TigerSwan (which is not binding upon us in any event) is not on point.

        Alternatively, K2 argues that the legal effect of the government's attempt to use
Mod. 10 to reduce the scope of work for option year one was that Mod. 10 constituted a
rejection of the offer embodied in the option, and a counter-offer, which K2 accepted
through performance. DeMarco Durzo Development Co. v. United States, 69 Fed. Cl.
262, 275 (2005) (citing RESTATEMENT (SECOND) OF CONTRACTS§ 59). All that proves
is that K2 may have a claim for any breach of the new agreement embodied in Mod. 10.
Id. 5 However, K2 asserts that claim in count four, which is not the subject of the motion
to dismiss or this opinion (SOF ii 13).

III. Count Six States a Claim

       Count six states a claim for a breach of the duty of good faith and fair dealing.
Every contract imposes upon each party a duty of good faith and fair dealing in its
performance and enforcement. Metcalf Constr. Co. v. United States, 742 F.3d 984,
990 (Fed. Cir. 2014). The duty includes a duty not to interfere with the other party's
performance, and not to act so as to destroy the reasonable expectations of the other
party regarding the fruits of the contract. Id.

       In particular, a "bait and switch" breaches the duty of good faith and fair
dealing. Teresa A. Mc Vicker, P.C., ASBCA Nos. 57487, 57653, 12-2 BCA ii 35,127
at 172,463. A bait and switch occurs when the government awards a significant
contract benefit to a contractor, only to improperly eliminate that benefit soon
thereafter. Id.

        Here, the government moves to dismiss count six insofar as it alleges that the
government breached the option's implied duty before the government ineffectively
exercised the option (gov't br. at 6). Neither of the two legal theories asserted by count
six alleges that the government breached the option's implied duty before the
government ineffectively exercised the option (SOF ii 15). The first theory alleges that
the government breached the contract's implied duty (id.). The second legal theory
alleges that the government breached Mod. lO's implied duty when it reduced Mod. lO's
scope of work (id.).



5
    Alternatively, K2 may have a claim under count four for cost plus profit for the work
         it performed during option year one. Holly Corp., 83-1 BCA ii 16,327 at
         81,165; Lockheed Martin Corp., ASBCA No. 45719, 00-2 BCA ii 31,025.

                                             5
        While Mod. 10 was an ineffective exercise of the option, it plausibly also
constituted a new offer that K2 accepted through performance. DeMarco, 60 Fed. Cl.
at 275. As with all agreements, any new agreement would impose a duty of good faith
and fair dealing after it became effective. Metcalf, 742 F.3d at 990. Count six alleges
that the government breached that duty after Mod. 10 became effective by reducing
Mod. lO's scope of work (SOF ~ 15). Because count six does not allege that the
government breached the option's implied duty before the government ineffectively
exercised the option, the government's motion to dismiss count six is denied.

                                   CONCLUSION

       The partial motion to dismiss is granted in part, and denied in part. Counts two
and three-which correspond to paragraphs 94 through 109 of the complaint-are
dismissed for failure to state a claim.

      Dated: 13 July 2017




                                                  JAMES R. SWEET
                                                  Administrative Judge
                                                  Armed Services Board
                                                  of Contract Appeals


                                                  I concur



RICHARD SHACKLEFORD
Administrative Judge
Acting Chairman
Armed Services Board
of Contract Appeals




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       I certify that the foregoing is a true copy of the Opinion and Decision of the
.A.nned Services Board of Contract .A.ppeals in .A.SBC.A. No. 60907, .A.ppeal ofK2
Solutions, Inc., rendered in confonnance with the Board's Charter.

       Dated:




                                                   JEFFREY D. GARDIN
                                                   R.ecorder,.A.nned Services
                                                   Board of Contract .A.ppeals




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