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Computer Sciences Corp. v. Federal Home Loan Mortgage Corp.

United States District Court, E.D. Virginia, Alexandria Division

January 23, 2017

Computer Sciences Corporation, Plaintiff,
v.
Federal Home Loan Mortgage Corporation d/b/a Freddie Mac, Defendant.

          MEMORANDUM OPINION

          Liam O'Grady United States District Judge

         This matter comes before the Court on a Partial Motion for Summary Judgment filed by Defendant Federal Home Loan Mortgage Corporation d/b/a Freddie Mac ("Freddie Mac"). Dkt. No. 167. The Second Amended Complaint in this matter alleges that Freddie Mac breached and wrongfully terminated a contract it had with Plaintiff Computer Sciences Corporation ("CSC"). The Complaint sets forth two causes of action: Count A, Breach of Contract; and Count B, Breach of Duty of Good Faith and Fair Dealing (under New York law). Freddie Mac has counterclaimed alleging three causes of action: Count I, Breach of Contract; Count II, Fraudulent Inducement; Count III, Recission and Restitution. By the present Motion, Freddie Mac seeks judgment in its favor with respect to certain of CSC s claimed damages on the breach of contract claim and judgment in its favor on CSC's claim for breach of the implied covenant of good faith and fair dealing. Freddie Mac also seeks judgment on its counterclaim for breach of contract to the extent necessary to compel CSC to transfer certain equipment to Freddie Mac at terms set forth in the Contract. CSC contends that because Freddie Mac cannot satisfy its burden to show the absence of a genuine dispute as to any material fact, the Partial Motion for Summary Judgment should be denied in full.

         For the reasons outlined below, the Court GRANTS IN PART and DENIES IN PART the Motion.

         I. Background

         CSC is an IT service provider. Freddie Mac is a public, government-sponsored enterprise operating in the secondary mortgage market. It is currently operating under the conservatorship of the Federal Housing Finance Agency. On March 31, 2014, Freddie Mac issued a request for proposal seeking to improve its IT services. CSC submitted its initial response on May 19, 2014 and a Best and Final Offer on July 23, 2016. The parties negotiated the agreement over the following three and a half months. On November 6, 2014, CSC and Freddie Mac entered into a Master Services Agreement, under which CSC agreed to provide IT services to Freddie Mac with the goal of unifying Freddie Mac's data network and voice services into a common platform. On November 6, 2014, the parties also entered into Work Order #1, under which CSC agreed to modernize Freddie Mac's voice network, which included replacing Freddie Mac's phones (altogether "the Contract").

         Though the Contract is hundreds of pages long, the following features of the contract bear on the present Motion:

• The agreement set forth numerous Milestone achievements, which upon their completion entitled CSC to invoice for the services rendered with respect to that Milestone. Work Order # 1, Ex. A-3, C-2-A, Table II.
• Milestone completion was subject to approval by Freddie Mac who could requ* CSC to revise and resubmit if Freddie Mac identified deficiencies. Work Orde #l, Sched.A, §4.
• Before CSC implemented any changes to the scope of the work under the Contract it was required to obtain a signed Change Order from Freddie Mac. MSA, Attachment 7, § 10.
• CSC was required to invoice Freddie Mac for all amounts due under the Contract within thirty days after the end of the month in which the services were performed. MSA, § 6.1(a).
• Freddie Mac could terminate with or without cause and in either case was obliged to pay Balance Sheet Amounts as defined by the Contract. Termination without cause (for convenience) also obliged Freddie Mac to pay an early termination fee and wind down expenses. MSA, Attachment 9, § 1; Work Order # 1, Sched. C, § 6.1.
• Upon termination, Freddie Mac was entitled to purchase equipment owned by CSC or its subcontractors for the lesser of the corresponding Balance Sheet Amounts and the actual amount capitalized by CSC or its subcontractors for assets or costs incurred, less depreciation. MSA, Attachment 8, §§ 7.1 & 7.2.

         By agreement of the parties, the first phase of work performed under Work Order # 1 focused on the transition to CSC of Freddie Mac's voice services. The parties quickly ran into difficulties including a phone outage for Freddie Mac traders on April 1, 2015. That outage occurred, according to a CSC Root Cause Analysis, when "[a] dial peer entry associated to the trader range was removed by human error." The most significant outage occurred from July 4-6, 2015 when a fiber optic cable was cut-through no fault of either party-and the phone system failed to fall back to a working service as intended by the parties. As a result, phone service was mostly disabled through the weekend and partially disabled through Monday, July 6, 2015.

         Believing that the July 4-6 outage constituted grounds for termination with cause, the parties stipulated that, by letter dated August 3, 2015, Freddie Mac terminated the Contract, effective February 3, 2016. The effective date of termination was later extended by agreement to December 3, 2016.

         CSC filed a Complaint alleging breach of contract and other injuries on January 5, 2016. Dkt. No. 1. Freddie Mac moved to dismiss on March 10, 2016. Dkt. No. 6. CSC filed a First Amended Complaint ("FAC") mooting the motion. Dkt. No. 24. Freddie Mac again moved to dismiss in part the FAC for failure to state a claim. Dkt. No. 29. The Court granted in part and denied in part the Motion. Dkt. No. 40. CSC filed a Second Amended Complaint ("SAC") on June 2, 2016. Dkt. No. 43. Freddie Mac moved to dismiss in part the SAC. Dkt. No. 46. The Motion was denied. Dkt. No. 54. Freddie Mac filed an answer and asserted counterclaims. Discovery ensued and at its close, Freddie Mac filed the present Partial Motion for Summary Judgment. Dkt. No. 167. The matter has been fully briefed by the parties.

         II. Legal Standard

         Under Rule 56(c) of the Federal Rules of Civil Procedure, summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). As the Supreme Court has explained, "this standard provides that the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). A dispute over an issue of material fact is "genuine" if "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id. at 248. In making a summary judgment determination, the Court must bear in mind that "[a] complete failure of proof concerning an essential element of the non-moving party's case necessarily renders all other facts immaterial." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). "Although the court must draw all justifiable inferences in favor of the nonmoving party, the nonmoving party must rely on more than conclusory allegations, mere speculation, the building of one inference upon another, or the mere existence of a scintilla of evidence." Dash v. Mayweather, 731 F.3d 303, 311 (4th Cir. 2013).

         Section 22.3 of the MSA provides that "all aspects of the parties' relationship" will be interpreted and construed according to New York law. Applying Virginia's choice of law rules, the Court will honor the choice of law clause contained in the MSA and will apply New York law to its analysis of the contract. "Virginia law looks favorably upon choice of law clauses in a contract, giving them full effect except in unusual circumstances." Colgan Air, Inc. v. Raytheon Aircraft Co., 507 F.3d 270, 275 (4th Cir. 2007) (citing Hitachi Credit Amer. Corp. v. Signet Bank, 166 F.3d 614, 624 (4th Cir. 1999)).

         Under New York Law, "when parties set down their agreement in a clear, complete document, their writing should.. .be enforced according to its terms." Vermont Teddy Bear Co., Inc. v. 538 Madison Realty Co., 1 N.Y.3d 470, 475 (2004).

         III. Discussion

         The present Motion concerns three issues. First, whether CSC can recover as a matter of law on certain of its claimed elements of damages for breach of contract. Second, whether CSC has stated a claim for breach of the covenant of good faith and fair dealing and gross negligence or willful misconduct. Third, whether Freddie Mac is entitled to summary judgment on its counterclaim for the transfer of certain equipment from CSC at the price to which it believes it is entitled. The memorandum deals with each of these issues in turn.

         A. Whether CSC Can Recover Certain of Its Claimed Elements of Damages as a Matter of Law

         Freddie Mac contends that CSC is not entitled to obtain damages on many of its claims arising out of the Contract or CSC's performance in support of the Contract. Specifically, Freddie Mac states that as a matter of law, CSC is not entitled to: certain allegedly untimely invoice payments; payments for work not authorized by change orders; the amount of CSC's balance sheet, above a cap of $693, 488.07; and early termination fees and wind down expenses. With the exception of three invoices discussed in detail below, the Court agrees that Freddie Mac is not otherwise obligated to pay the disputed invoices. The Court further finds that the balance sheet recovery is capped at $693, 488.07 and that CSC is not entitled to early termination fees or wind down expenses.

         1. Invoice Payments

         The parties disagree on whether Freddie Mac is obligated to pay invoices submitted for services rendered by CSC under the Contract. Specifically, Freddie Mac contends that as a matter of law it should not be required to pay invoices 1-4, 34-48, and 53 on the CSC Invoices Exhibit supplied by Freddie Mac. See Oakes Decl. 3.

         The contract provides that "CSC shall invoice Freddie Mac for all amounts due under this Agreement on a calendar monthly basis within thirty (30) days after the end of the month in which the Services were performed." MSA § 6.1(a). If an invoice is not provided to Freddie Mac by that date, "Freddie Mac will have no obligation to pay for such Services." MSA § 6.1(d). However, § 3.2 to Schedule C to Work Order #1 prohibits CSC from invoicing "for the component of the Base Charge prior to CSC's achievement of the applicable Acceptance Criteria for the Payment Milestone related to the Base Charges." If CSC believes it is entitled to payment but is not able to precisely invoice for the amount owed, it is permitted to list the entry on the invoice for the relevant month and subsequently bill for the exact amount when calculable. MSA § 6.1(d). But in no case is Freddie Mac obligated to pay for services invoiced in this manner more than ninety (90) days after the service was provided. Id. If Freddie Mac refuses to pay a properly filed invoice which exceeds a certain amount, CSC is entitled to demand that any subsequently disputed amounts be held in escrow until the dispute is resolved. MSA § 6.7.

         As noted above, Freddie Mac has provided a list of all invoices it received from CSC with corresponding "reasons for nonpayment" where relevant. See Oakes Decl. 3. Of the 54 invoices, 18 are identified as "Base Fees/Consumption"; six are identified as "Transition Milestones"; four are identified as "Change Orders"; five are identified as "Electronic Fax"; two are identified as "1GB Circuit"; and ...


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