United States District Court, N.D. Indiana, Fort Wayne Division
OPINION AND ORDER
WILLIAM C. LEE, District Judge.
Plaintiff AM General. LLC ("AM General") brought this contract action against Defendant, Demmer Corporation ("Demmer"), seeking recovery of amounts it allegedly overpaid to the Defendant under their contract. [D.E. 1]. Demmer counterclaimed seeking payment of monies AM General withheld from it under the contract. [D.E. 11].
From June 16, 2014 through June 20, 2014, the undersigned presided over a non-jury trial in which the parties were afforded a full opportunity to be heard, examine and crossexamine witnesses, present evidence bearing on the issues, and argue the law and the evidence. After the trial, both parties submitted Revised Proposed Findings of Fact and Conclusions of Law [D.E. 202; D.E. 203], which the Court has thoroughly reviewed along with the citations to the trial transcript and other record evidence.
Having had the opportunity to observe the witnesses, evaluate their demeanor, qualifications, and credibility as well as to independently review hundreds of documentary exhibits and all deposition transcript excerpts submitted for review separate and apart from the excerpts read into the record at trial, the Court now, pursuant to Federal Rule of Civil Procedure 52(a), makes the following Findings of Fact and Conclusions of Law.
AM General is a Delaware limited liability company with its principal place of business in South Bend, Indiana. AMG's sole member is AM General Holdings LLC, a Delaware limited liability company with its principal place of business in South Bend, Indiana. AM General Holdings LLC has two members, MacAndrews AMG Holdings LLC and The Renco Group, Inc. MacAndrews AMG Holdings LLC is a Delaware limited liability company whose sole member is MacAndrews & Forbes Holdings, Inc., a Delaware corporation with its principal place of business in New York, New York. The Renco Group, Inc. is a New York corporation with its principal place of business in New York, New York.
Demmer Corporation ("Demmer") is a Michigan corporation with its principal place of business in Lansing, Michigan. This Court has jurisdiction of the underlying dispute based upon diversity of citizenship pursuant to 28 U.S.C. §1332. [D.E. 147 at p. 2].
FINDINGS OF FACT
1. AM General manufactures and sells the High Mobility Multipurpose Wheeled Vehicle ("HMMWV" or "HUMVEE") family of vehicles to, among others, the United States Government ("TACOM" or "Government"). Am. Pretrial Order (D.E. 147), Stipulations of Fact ("Stip.") ¶ 1.
2. Starting in 2007, Demmer manufactured and sold Bi-Metal Doors to AM General for integration into the HMMWVs that AM General manufactured for the Government. Bi-Metal Doors are a type of armored door. AM General purchased Bi-Metal Doors from Demmer pursuant to eight (8) separate purchase orders, which were called "blanket contracts." Stip. ¶ 6.
3. From time to time, AM General would modify a blanket contract to add a new line item. Sometimes, AM General would send the new line item only as a change blanket contract, and other times it would send the entire blanket contract, listing all line items of the blanket contract including the most recent line item containing the modification. Stip. ¶ 8.
4. In 2009, AM General began negotiating with the Government for a new contract to govern the Government's purchase of HMMWVs between 2010 and 2013. Stip. ¶ 10.
5. To support its negotiations with the Government, AM General issued various Requests for Quote ("RFQs") in June 2009 to its suppliers, including Demmer. Stip. ¶ 11.
6. AM General sent Demmer an RFQ requesting Demmer to propose new firm-fixed prices for 2010-2013 for parts included in the "Aluminum Program, " which included the Bi-Metal Doors (the "June RFQ"). Stip. ¶ 12. The June RFQ was an excel spreadsheet, PTX-2, the first tab of which was PTX-1. Stip. ¶ 13.
7. The June RFQ stated that any contract resulting from the RFQ process would be subject to AM General's standard noncommercial terms and conditions for government contracts, found at PTX-3. Stip. ¶ 14.
8. The terms and conditions contained in PTX-3 applied to AM General's purchase, in 2010 and 2011, of Bi-Metal Doors from Demmer. Stip. ¶ 15.
A. AM General Requests Demmer's Cost or Pricing Data in Writing. Roberts and requested that Demmer submit certified cost or pricing data to support its July 2009 proposal for 2010 shipments of Bi-Metal Doors. PTX-013-001; Tr. 196:10-197:6 (Mills). Demmer Executive Tim Dargitz received a copy of this request for certified cost or pricing data and understood its meaning. PTX-192 (Dargitz Dep.) 44:12-45:7, 47:16-48:19. (Based on internal questions, Mills conducted further research at AM General in August and September of 2009 and confirmed his understanding that Demmer was required to submit certified cost or pricing data. Tr. 206:21-208:8, 209:3-210:14 (Mills).) On multiple occasions, Mills explained that Demmer had the option either to provide the cost or pricing data to the Government or to supply it directly to AM General. PTX-013-001, PTX-014-001, PTX-015-001, PTX-019-001; Tr. 197:12-25 (Mills).
10. Demmer elected to provide the cost or pricing data directly to AM General and to allow AM General to audit Demmer's 2010 Bi-Metal Door proposal and the cost data supporting that proposal. Tr. 212:15-25 (Mills); PTX-024-001; PTX-030-001.
11. Both Demmer and AM General understood that Demmer would not certify its cost or pricing data for the 2010 price proposal until after final agreement on price. PTX-014-001; Tr. 198:15-23 (Mills); Tr. 260:9-10 (McConville); PTX-195 (Roberts Dep.) 54:13-55:1.
B. Demmer's Experience with Cost or Pricing Data, Audits, and NTE Pricing
12. As of the summer of 2009, Demmer had experience submitting and certifying cost or pricing data. Tr. 198:24-199:11, 213:16-22 (Mills); PTX-192 (Dargitz Dep.) 24:4-18, 25:10-16, 28:20-29:6, 29:22-30:8; PTX-008-001 (5/21/08 certificate of current cost or pricing data signed by Demmer). Demmer also had experience with supplier and government audits. Tr. 641:17-18, 683:10-684:16 (Shawa-DeCook); PTX-192 (Dargitz Dep.) 77:18-22, 78:22-79:14. Demmer also had experience in being required to renegotiate its pricing downward after an audit of its certified cost or pricing data. Tr. 213:1-214:6 (Mills).
13. Demmer itself had previously issued purchase orders using not-to-exceed prices. Tr. 724:3-5 (Shawa-DeCook). Demmer's executives understood that a NTE or "not to exceed price" is an interim or placeholder price that is subject to revision downward based on further audit and/or negotiations. PTX-192 (Dargitz Dep.) 158:10-15; PTX-194 (McDonald Dep.) 206:4-7, 207:1-7; PTX-197 (Sjoberg Dep.) 178:1-10.
14. Demmer also received regular advice from a government contracting consultant. Tr. 725:1-13 (Shawa-DeCook); see, e.g., PTX-058-001 (1/6/10 email discussing DCAA audits and warning that "Demmer has to be prepared for significantly more oversight by the Government"). In January 2010, that consultant advised Demmer of the risks of accepting government contracts with not-to-exceed pricing. Tr. 725:20-726:2 (Shawa-DeCook); PTX-066-001. When a Demmer employee received that information, he forwarded it to Demmer's Chief Financial Officer as well as two Demmer executives (Koch and Dargitz) who attended an important meeting with AM General on February 4, 2010. PTX-066-001; Tr. 726:21-727:4 (Shawa-DeCook).
C. Demmer's First Two Price Proposals for 2010 Bi-Metal Door Pricing
15. In July 2009, Demmer submitted a proposal in response to the June RFQ. This was Demmer's first proposal for Bi-Metal Doors to be delivered in 2010 and future years. Tr. 870:6-15 (Tenlen). Using the prices Demmer proposed in July 2009 and the quantities contained in the June RFQ, the proposed contract was expected to exceed $650, 000 in value. PTX-2, Tab "REQUEST FOR QUOTE"; PTX-4; PTX-5; Stip. ¶ 16; see also PTX-12. Demmer submitted its proposal for 2010 pricing to AM General, Tenlen presented it to Demmer's executive team, including Dargitz, Matt Heppler, and Heather Shawa-DeCook. Tr. 870:13-871:3 (Tenlen).
17. The Bi-Metal Door was not a "commercial item" as defined expressly by the Federal Acquisition Regulation ("FAR") or as defined by reference in the Truth in Negotiations Act ("TINA"). Stip. ¶ 17; see also PTX-020-005, -008-009 (Demmer's "assertion of commerciality" over various parts other than the Bi-Metal Doors).
18. Demmer's contract with AM General for the Bi-Metal Door was sole sourced in 2009 and 2010. Tr. 107:8-13 (Peterson); Tr. 199:12-201:4, 202:3-203:5 (Mills); PTX-015-001. The Bi-Metal Door had been sole sourced to Demmer since at least 2007. Tr. 107:14-18, 152:3-6 (Peterson).
19. The June RFQ required Demmer to submit a "cost breakdown" with its proposal. PTX-001-003, ¶ 14; Tr. 110:3-9 (Peterson). A cost breakdown is a detailed description of the various elements that tells AM General "all the elements that make up th[e] price." Tr. 110:10-21 (Peterson); Tr. 269:7-11 (McConville) ("A cost breakdown is a description of the cost elements that are included in a cost, so it would be labor, material, overhead, and any other elements of cost."); PTX-192 (Dargitz Dep.) 33:4-34:11 (cost breakdown is "all the different cost elements that feed into a proposal or agreed upon price").
20. In generating price proposals, AM General expects suppliers to use actual costs as much as possible and build up the unit price using actual, reliable cost information plus a specified profit rate. See Tr. 110:22-111:9 (Peterson). 003, ¶ 14; Tr. 108:8-21, 111:2-9 (Peterson); Tr. 262:1-13 (McConville); Tr. 684:24-685:12 (Shawa-DeCook); Tr. 869:25-870:5 (Tenlen); PTX-192 (Dargitz Dep.) 75:9-17.
22. Demmer provided cost or pricing data in response to the June 2009 RFQ. See PTX-097-001 (9/8/10 email in which Demmer's chief accountant confirmed to DCAA that Demmer had provided cost or pricing data to AM General for Demmer's 2010 price proposal); PTX-192 (Dargitz Dep.) 71:7-72:4 (explaining that AM General's audit of Demmer's proposal for Bi-Metal Door pricing for 2010 was "to review cost-cost or pricing data, which we provided to them [AM General]"); PTX-194 (McDonald Dep.) 155:2-5 ("Q. Is it your understanding that Demmer had provided AM General with cost and pricing data to support the selling prices for 2010? A. Correct.").
23. Demmer knew in the fall of 2009 that only Demmer was being asked to quote the Bi-Metal Door in response to the June RFQ. PTX-015-001; Tr. 200:13-201:4, 202:10-203:5 (Mills); PTX-017-002 (handwritten notes of Demmer's COO dated 7/28/10, "10. Doors are in Gov. audit. Not competed."); PTX-032-001 (handwritten notes of Demmer's COO dated 9/21/10 that read under "AMG-Audit, " "1. Sole sourcing of alu. doors reasons for audit"); PTX-197 (Sjoberg Dep.) 91:14-92:2; PTX-192 (Dargitz Dep.) 55:25-56:3, 56:11-15.
24. In August 2009, Demmer revised and resubmitted its proposal to account for new aluminum pricing provided by AM General. Stip. ¶ 18. This was Demmer's second proposal for 2010 pricing. Tr. 871:22-872:2 (Tenlen); PTX-026-001, PTX-27. The only change to the first proposal was to account for a change in the price of aluminum. Tr. 872:3-6 (Tenlen).
25. Tenlen, who prepared Demmer's price proposals, had not conducted any investigation of the labor costs associated with Bi-Metal Doors before he submitted the first two proposals. Tr. 871:19-872:10 (Tenlen). He had undertaken no such investigation between 2007 and 2009. Tr. 871:7-14 (Tenlen). The labor hours Demmer submitted in the first two proposals were 27.491 hours per door, which came from Demmer's original 2007 proposal. Tr. 872:15-24 (Tenlen). Tenlen had prepared the first two submissions without any expectation of having to show AM General his work. Tr. 873:18-21 (Tenlen).
26. On July 29, 2009, after Demmer submitted its first price proposal, Demmer learned that AM General had decided to purchase from another supplier certain armor parts that Demmer had previously supplied. PTX-018-001. AM General advised Demmer that it was changing suppliers for those parts because Demmer's prices for those parts were too high. PTX-192 (Dargitz Dep.) 68:9-15; PTX-017-002 (handwritten notes of Demmer's COO dated 7/29/09, "Highly likely we are losing the steel parts due to price."). Given this loss in business, Demmer was "concerned [it] could lose all parts, including the doors." PTX-197 (Sjoberg Dep.) 54:24-55:6.
27. Around this time period, Demmer learned that AM General expected that the Government would request an 8 percent reduction in the prices it was paying. AM General itself was not asking Demmer for a price reduction. Tr. 924:3-6 (Tenlen) ("Q. Okay. Now, did you want to do something to reduce the price because AM General was asking you for a price reduction? A. They were not asking for a price reduction, no.").
28. Given its concerns about losing parts to other suppliers and Demmer's understanding of the Government's likely negotiation position, Demmer adjusted its proposal to achieve an eight percent reduction in price. See infra ¶¶ 32-33. Demmer's December 2009 price proposal, Demmer did not provide AM General with accurate or complete data. See infra ¶¶ 32-33, 39-45; Tr. 551:2-5 (Bingham).
D. AM General's Audit Request and Demmer's Revised Price Proposal
30. On or about August 3, 2009, AM General informed Demmer that it intended to audit Demmer's proposal for 2010 prices. PTX-021-001, PTX-022-001, PTX-024-001.
31. When Demmer's CFO learned that AM General wanted to audit Demmer's proposal, she reviewed Demmer's previous submission and deemed the data that Demmer had supplied to AM General "inadequate." Tr. 638:4-8 (Shawa-DeCook).
32. Demmer began working on another revised price proposal. Demmer's change to its price proposal was not, however, the result of an objective analysis of its cost structure. See, e.g., PTX-032-001 (handwritten notes of Demmer's COO dated 9/21/10, under "AMG-Audit, " "Make strong cost assumptions" and "Give them what is advantageous to you"); PTX-197 (Sjoberg Dep.) 91:14-92:25. Rather, Demmer internally decided to establish the 8 percent reduction as an end-point, and re-work the data to back into that final number. See PTX-183-008 (identifying as a task to "make a target cost model (not for viewing) that maintains an 8% reduction"); PTX-185-001 (cost matrix for the rear left Bi-Metal Door captioned in handwriting, "TARGET"). The resulting cost breakdown that Demmer submitted to AM General therefore was incomplete and inaccurate.
32.1 Demmer's COO testified that Demmer targeted an 8 percent reduction in its price proposal. PTX-197 (Sjoberg Dep.) 55:8-20. Tenlen, Shawa-DeCook, Heppler, and Dargitz all reported, directly or indirectly, to the COO, Sjoberg. PTX-197 (Sjoberg Dep.) 28:9-24; Tr. 868:19-23 (Tenlen). Sjoberg testified that the size of the reduction Demmer offered to AM General was made with "team approval" that "went through the whole organization up to and including Bill Demmer." PTX-197 (Sjoberg Dep.) 36:3-9; see also id. at 35:6-25 (identifying as team members himself, Shawa-DeCook, Heppler, McDonald, Tenlen, and Dargitz).
32.2 Tenlen, a lower-level Demmer employee, claimed that he was not working towards a target, but acknowledged on cross-examination that "after we had already prepared our quote, there was some analysis" and "there was an analysis to compare, that it happened to come out to an eight percent [reduction]...." Tr. 877:6-25 (Tenlen).
32.3 Tenlen also conceded that "at one point during this activity, " he prepared a "target matrix, " which is "an analysis of changing variables to get a predicted result." Tr. 880:9-15 (Tenlen). He also made a "target cost model." Tr. 880:16-17 (Tenlen). Tenlen labeled that target cost model, "not for viewing." Tr. 881:4-7, 15-16 (Tenlen). The purpose of the target cost model "was to maintain an eight percent reduction." Tr. 881:12-14 (Tenlen). The target cost model was to see if the final price number stayed above 8 percent. Tr. 882:5-12 (Tenlen). His handwritten notes, from an "audit prep" meeting, also note, "Make a cost model using the 353 percent info. All else being equal, enter 300 percent and see if the number stays above 3550-This must be!" PTX-183-005; Tr. 882:18-24 (Tenlen). (The price in Demmer's third proposal was $3538 for front doors and $3579 for rear doors-an average price of $3, 558.50 per door. PTX-042-014, -016.)
32.4 In a document dated October 15, 2009-four days before the meeting with AM General when Demmer unveiled its third price proposal-Tenlen generated a cost model on which he wrote "TARGET" in all caps at the top. PTX-185-001; Tr. 883:10-21, 884:2-7 (Tenlen). The model that is shown in the document is, "Bi-Metal Doors 09-0708 Quote Matrix 10-15-09 with 355 Burden." PTX-185-001. This coincides with the burden rate in Tenlen's other notes around the same time period. See PTX-183. (The "burden" or overhead rate is part of the overall cost that is included in the price proposal. See, e.g., Tr. 814:2-10 (Tenlen); PTX-194 (McDonald Dep.) 59:19-60:3.)
32.5 This targeted price reduction, unrelated to Demmer's actual cost structure, was consistent with an idea from Demmer's CEO, Bill Demmer, who suggested to Shawa-DeCook, Sjoberg, and Dargitz in late August 2009 that Demmer "offer to negotiate a price reduction for all of our AMG armor prior to audit, a price that we would find MORE acceptable than a price negotiated from an audit[.]" PTX-028-001. Shawa-DeCook agreed that "a pre-negotiation would be beneficial" but did not think it would be possible if DCAA were involved. PTX-029-001. The price reduction likewise was based on Demmer's concern about losing additional business from AM General. See supra ¶ 27.
32.6 Tenlen claimed that the 8 percent reduction in price reflected in the cost breakdown that he generated was not a target, but instead the result of an analysis that just "happened to come out to an eight percent [reduction]" that Demmer executives had targeted. Tr. 876:18-878:7 (Tenlen). This claim is not supported by the persuasive record evidence.
33. When it submitted revised price proposals to AM General, Demmer did not disclose the fact that it was backing into an 8 percent price reduction.
E. Demmer's Revised Price Proposal Unveiled at the October 19, 2009 Meeting
34. On October 19, 2009, AMG representatives Stephen Hodge, Todd Lentych, and Dean Fiess traveled to Demmer to begin auditing Demmer's proposal for 2010 prices for Bi-Metal Doors. Stip. ¶ 19.
35. At the October 19, 2009 meeting, Demmer presented changes to the cost breakdown supporting Demmer's 2010 Bi-Metal Door proposal. The changes resulted in a reduction to the price Demmer had proposed in August 2009. Stip. ¶ 20.
36. The price changes that Demmer identified at the October 19, 2009 meeting were a surprise to AM General. Tr. 640:2-5 (Shawa-DeCook); Tr. 876:3-10 (Tenlen); PTX-194 (McDonald Dep.) 31:15-32:2. Demmer had continued to work on its revised price proposal up until the night before or morning of the meeting. Tr. 639:11-13 (Shawa-DeCook); Tr. 832:10-15 (Tenlen). This last-minute work coincided with Demmer's effort to make its price proposal come out to an 8 percent price reduction. See supra ¶¶ 32-33.
37. After the October 19, 2009 meeting, Demmer re-submitted its 2010 Bi-Metal Door proposal with lower pricing reflecting cost breakdown changes that Demmer described at the October 19, 2009 meeting. Stip. ¶ 21. This was Demmer's third proposal for 2010 pricing. Tr. 875:13-20 (Tenlen). After the meeting, Demmer submitted the third proposal with a revised cost breakdown to AM General in spreadsheet form. PTX-041-001 & PTX-042-014, -016, -020.
F. Demmer's December 2009 Price Proposal and the Data Demmer Provided in Response to AM General's Audit Requests
38. In December 2009, Demmer revised and submitted its 2010 Bi-Metal Door proposal to account for new aluminum pricing provided by AM General. Stip. ¶ 22. The only change between Demmer's October 2009 proposal (sometimes referred to as Submission Number 3) and Demmer's December 2009 proposal (sometimes referred to as Submission Number 4) was the change in the aluminum price. Tr. 386:22-387:11 (Lentych); Tr. 640:8-16 (Shawa-DeCook).
39. Demmer's October and December 2009 proposals were based in part on Demmer's projection that it would take 14.59 hours of direct labor to make each Bi-Metal Door assuming that in 2010, Demmer manufactured the number of Bi-Metal Doors projected in the June 2009 RFQ. Stip. ¶ 23.
40. Demmer's own cost data revealed that it typically took Demmer between only 4 and 6 hours to make each Bi-Metal Door. PTX-047-005; Tr. 688:24-689:8 (Shawa-DeCook).
41. When AM General asked for additional information to substantiate Demmer's 14.59 labor hours projection in the fall of 2009, Demmer recognized the discrepancy. See PTX-048-001 (McDonald email to Tenlen providing the actual labor hours data and noting that it was "not what you wanted the totals to come out to") & PTX-049-005.
42. Demmer nevertheless did not correct the inaccurate labor hours projection it used to support its 2010 price proposal. Instead, Demmer, without disclosing the fact to AM General, aggregated the Bi-Metal Door labor hour data with data from a different, more labor-intensive door. See Tr. 392:18-393:2 (Lentych); 554:1-14, 555:19-556:3 (Bingham).
42.1 In early December 2009, Demmer representatives Tenlen, Shawa-DeCook, Dargitz, Koch, and Angell discussed "[t]he concern  that the cost breakdown that Dean [Fiess] has been presented shows 14.59 hours per door." PTX-050-001; Tr. 691:9-14 (Shawa-DeCook); Tr. 890:13-23, 891:6-13 (Tenlen).
42.2 After this meeting, Demmer included in its labor hours calculation the amount of time it took to make the Bi-Metal Door and the Frag 5 Door. Tr. 638:13-17 (Shawa-DeCook); Tr. 845:1-4 (Tenlen). The Frag 5 Door was a separate, and more labor-intensive door. Tr. 392:18-393:2 (Lentych); 554:1-14, 555:19-556:3 (Bingham).
42.3 Demmer's CFO believed that AM General would question the averaging of labor hours from two different doors. Tr. 693:2-6 (Shawa-DeCook). She believed that, if Demmer did average the labor hours for Bi-Metal Doors and Frag 5 doors, Demmer would need to explain the logic behind doing so and demonstrate to AM General why averaging the labor hours for the two doors made sense. Tr. 693:7-16 (Shawa-DeCook).
42.4 Demmer, however, did not disclose to AM General that it was aggregating the labor hours for two different products in the data supporting Demmer's 2010 price proposal. Tr. 482:14-18, 500:5-8 (Fiess); Tr. 551:6-25 (Bingham). To the contrary, Demmer furnished information designed to mask the fact that the labor hours projection combined labor hours for making two different products. See PTX-53-001 ("I'll have to run the mandates for both doors and make sure that they tie out and try to do something that will combine them that will look system generated."); PTX-054-001 (Shawa-DeCook confirms that she had already asked Tenlen to generate a "system generated" report).
42.4.1 Demmer contends that it disclosed the blending of the labor hours to AM General, or that AM General should have realized that Demmer had done so. The persuasive and credible evidence adduced at trial weighs against this position.
42.4.2 Shawa-DeCook could not recall telling anyone at AM General that Demmer was averaging hours for Bi-Metal Doors and Frag 5 doors. Tr. 694:3-6 (Shawa-DeCook). Nor could she point to anyone else at Demmer who did so. Tr. 694:7-9 (Shawa-DeCook).
42.4.3 The documents that Demmer provided to AM General did not disclose that data from two different doors had been aggregated (even if Demmer did not send the "system generated" report in PTX-53 to AM General). See PTX-051-001 (12/9/09 Tenlen email to Fiess providing three months of "Charged Labor Hours" without referencing the source of the information or even a project code); Tr. 846:19-22 (Tenlen) ("I do not indicate that in this e-mail, no."); see also PTX-056-001 (12/17/09 Tenlen email to Fiess referencing "two project codes" but not disclosing that the two different codes come from two different doors); Tr. 897:19-898:6 (Tenlen) (agreeing that he did not identify anywhere in PTX-56 that one of the project codes was for Bi-Metal Doors and one was for Frag 5 doors). PTX-56 includes handwritten identification of two project codes-without any explanation of what those project codes mean.
42.4.4 Tenlen chose from a six-month menu of labor hour information and chose to provide Fiess with three months of labor hour information that reflected the higher value, rather than the lower value. Tr. 896:8-10 (Tenlen); PTX-55-001; see also PTX-046-001 (12/1/09 Tenlen email to Koch, "I will get you a selection of weeks to choose from. With that, maybe we can find some numbers that fall in our favor.").
42.4.5 Fiess credibly and persuasively testified that he does not believe he knew that Demmer was combining the information from the two doors in 2009. Tr. 482:14-18 (Fiess). Fiess typically kept information received from suppliers in written form, usually through email correspondence to maintain "a good record to establish... what we were talking about." Tr. 475:14-20 (Fiess). If that information had been disclosed to him orally at the time, he would have written it down, as was his practice. Tr. 475:21-476:4, 482:23-483:11, 485:5-13 (Fiess); see also Tr. 498:22-25 (Fiess); Tr. 500:5-8 ("Q. Mr. Fiess, you understood, December '09, numbers of doors shipped there, included both FRAG 5 and Bi-Metal Doors, right? A. I don't believe that was the case."). There is no evidence of any written disclosure.
42.5 Lentych, who scrutinized Fiess's analysis of the labor hours, had no reason to believe from Fiess's written reports or conversations with Fiess that the Bi-Metal Door labor hour data that Fiess had received from Demmer also included labor hour data for the Frag 5 door. Tr. 391:16-392:7 (Lentych). If the data that Fiess reviewed included Frag 5 door data, Lentych would have wanted to know and expected to know that-from both Fiess and Demmer. Tr. 392:8-20 (Lentych). Based on Lentych's knowledge at the time, there are significant differences in cycle times between the two doors that would have impacted his review of the information. Tr. 392:18-393:2 (Lentych).
42.6 Tenlen's testimony does not support the conclusion that he told Fiess about the blending of the data for the two doors; rather, consistent with Fiess's recollection and the contemporaneous document, Tenlen advised Fiess that Demmer was supplying two project codes, but did not explain that the two codes corresponded to two different doors. See Tr. 850:22-851:6 (Tenlen) (referring to combining different project codes, but not mentioning Frag 5 doors); Tr. 851:17-852:7 (Tenlen) (talking about Tenlen sending PTX-56, which did not disclose anything about Frag 5 doors); Tr. 852:24-853:3 (Tenlen) ("Q. Did you have such a discussion about the information that you sent in PTX 56? A. Well, the discussion was in advance of that, not after the fact, and, as I told you, I told him that it was two different projects"-but again not mentioning Frag 5 Doors); Tr. 925:12-22 (Tenlen) (testifying, on redirect, that he "believe[s]" he told Fiess that "he was going to be getting a break-out of two different reports, which would have been FRAG 5 and Bi-Metal, " but not testifying that he advised Fiess what the two codes meant).
43. Demmer's decision to aggregate Frag 5 and Bi-Metal Door labor hours rendered the results that AM General received inaccurate and incomplete. It takes longer to make a Frag 5 Door than a Bi-Metal Door. Tr. 554:1-14, 555:19-556:3 (Bingham). The Court takes special note that Demmer's retained witness, Jimmy Jackson, did not consider this question. Tr. 1041:17-23 (Jackson). Moreover, Jackson's analysis of the aggregating of the Bi-Metal and Frag 5 door data assumed, at the threshold, the central issue: that the greater the number of Bi-Metal Doors produced in a month, then the more time spent on Bi-Metal Doors would be improperly reflected in the Frag 5 labor hour data. Tr. 1040:12-18 (Jackson). Jackson's claim that it was appropriate to aggregate the data, therefore, is circular. See also Tr. 1041:24-1042:11 (Jackson) (confirming that he did not evaluate any correlation between the percentage of doors that were Bi-Metal relative to the combined hours per door or whether, as the percentage of combined doors that are Bi-Metal goes up, the combined labor hours per door go up or down).
44. Additionally, Demmer did not support its projection that the amount of time it would take to make a Bi-Metal Door would nearly double if the volume of doors produced dropped. Based on a reliable analysis of the data, the inverse correlation between hours-per-door and door volume is weak and does not support the 14.59 hour projection that Demmer proposed. Tr. 556:8-557:3, 557:25-558:8 (Bingham).
45. The evidence convincingly established that Demmer's personnel intentionally provided data that would inflate the projected costs in the 2010 price proposal. See, e.g., PTX-198 (Tenlen Dep.) 223:14-224:6. For instance, when DCAA sought to audit Demmer's price proposal in the fall of 2010, Demmer personnel recognized that its "obvious exposure is in direct labor hours." PTX-102-001. Likewise, when AM General announced that it wanted to continue its audit on November 2, 2010, Demmer's CFO advised the Demmer personnel involved in defending Demmer's costs, "there will be a big story to prepare between now and when they [AM General] arrive." PTX-108-001. Also, On November 10, 2010, Tenlen directed two Demmer employees to "work outside' of mandate and simply look at the personnel roster and list names of associates that touch' AMG door parts." PTX-112-002. "Frankly, I want the numbers to be on the aggressive or high side." Id. He told them to use a "generalized head count process, " rather than Demmer's electronic time tracking system, to generate a labor hours number. He advised them, "We want the higher number." Id.
46. Tenlen generated a cost matrix, named "CURRENT STAFFING SUMMARY, " with an hours-per-door figure of 14.68 hours per door at a quantity of 40, 000 doors. Tr. 919:12-920:10 (Tenlen); PTX-111-015. Tenlen came to this projection even though actual labor hours in 2010 were less than 7.5 hours per door. Tr. 920:11-13 (Tenlen).
G. Dean Fiess's December 2009 Report
47. On December 18, 2009, Dean Fiess circulated within AM General a report on the analysis he had completed as of that date of Demmer's proposal for 2010 prices. DTX-AA. His report analyzed the information that AM General had received from Demmer as of that time. Tr. 509:10-12 (Fiess). In circulating his report internally, Fiess noted that Demmer's proposed labor hours of 14.59 "can be improved or possibly negated provided Demmer/Karl can back up their 14.59 hours with more data points, etc." DTX-AB-001. The internal circulation of a report by Fiess did not mean that AM General's audit of Demmer was complete or finished. Tr. 493:22-494:2 (Fiess); Tr. 112:10-12 (Peterson); Tr. 393:3-16 (Lentych).
48. Fiess worked in the Finance Department. Tr. 114:18-20 (Peterson); Tr. 473:20-24 (Fiess). He supported the Supply Chain Management department with supplier audits from time to time. Tr. 114:18-23 (Peterson); Tr. 400:11-20 (Lentych); Tr. 474:4-14 (Fiess).
49. Although AM General sent the report to TACOM, no one advised Demmer of that fact. Tr. 734:23-25 (Shawa-DeCook); Tr. 854:3-10 (Tenlen). There is no record evidence that anyone at TACOM reviewed, commented on, or even read the document. There is no record evidence that Demmer ever learned about Fiess's report or that AM General provided a copy of the report to Demmer before discovery in this litigation. Accordingly, regardless of the substance of Fiess's report, Demmer could not have relied upon it in December 2009 or January 2010 to conclude that AM General had completed its audit of Demmer.
50. Contemporaneous documents further confirm that Demmer believed that AM General's audit of Demmer was ongoing during December 2009-January 2010. For example, on January 13, 2010-nearly a month after Fiess had circulated his report internally-Demmer's Dargitz advised AM General that "DCAA is requesting an audit on the bi-metal doors[.]" DTX-AF-003. Dargitz was surprised at the request because, as he advised AM General's Plude, "I thought that's what your guys were doing." Id. After discussing the issue internally at AM General, Plude reported back to Dargitz "that AMG is ok with the DCAA audit and that Demmer needs to support it [the DCAA audit] along with our effort. " DTX-AF-002 (emphasis added). There is no record evidence that AM General advised Demmer that the AM General audit of Demmer was over as of the date of this email, January 14, 2010. with all of Fiess's conclusions in the report. Tr. 116:1-117:4 (Peterson); Tr. 390:2-10 (Lentych). In particular, both Peterson and Lentych had questions about the number of labor hours Demmer had projected to build a door. Tr. 116:6-18, 184:9-185:11 (Peterson); Tr. 390:11-391:6 (Lentych). Disagreement with information in a report generated by Fiess was not controversial or unusual. Tr. 117:5-14 (Peterson).
52. After reviewing the Fiess report, Peterson directed the Supply Chain Management team (lead by Lentych) to get additional information from Demmer. Tr. 117:15-25 (Peterson). This was consistent with Peterson's usual practice of reading Fiess's comments and then discussing those comments with the Supply Chain Management team under his direction and directing those personnel, rather than Fiess, to follow up with any additional work. Tr. 185:13-24 (Peterson); see also Tr. 937:4-14 (Castelluccio) (explaining that the audit report was sent to TACOM but that subsequent activities "could cause additional information to be obtained"); Tr. 976:12-976:20 (Plude) (even with Fiess's December Report in hand, Supply Chain Management still needed to conduct additional audit work, which could be done as the parties began to negotiate prices).
53. AM General's Supply Chain Management department had final responsibility over supplier audits, for reviewing the information received during supplier audits, for determining if a supplier's price is fair and reasonable, and for determining if the information provided by the supplier during an audit is adequate. Tr. 112:25-113:14 (Peterson); Tr. 436:10-15 (Lentych).
54. After reading the Fiess Report, on January 25, 2010, Lentych sent a detailed email to Demmer identifying "a number of points that AMG would like to discuss with Demmer before this audit can be closed." PTX-065-001; Tr. 393:3-394:1 (Lentych). Lentych identified questions about Demmer's proposed profit rate, overhead, labor hours, and volumes. Id. When Lentych sent this email on January 25, 2010, both AM General and Demmer understood that AM General's audit of Demmer was open. Tr. 266:18-20 (McConville); Tr. 393:3-5, 394:2-21 (Lentych); Tr. 485:14-486:10 (Fiess); Tr. 696:22-25 (Shawa-DeCook) ("Q. And so you understood that, as of the date of this e-mail, January 25th, 2010, AM General's audit was still open, correct? A. Yes."); Tr. 899:3-5 (Tenlen) ("As of January 25th, you understood that AM General's audit was still open, correct? A. I did, yes."); PTX-194 (McDonald Dep.) 145:23-146:4, 149:19-21 (same).
55. The overwhelming and supported evidence was that as of January 25, 2010, Demmer and AM General had not agreed to settled pricing for Bi-Metal Doors to be shipped in 2010. Tr. 267:12-19 (McConville); Tr. 486:3-10 (Fiess).
H. In February 2010, Demmer Invokes the DCAA Audit To Put AM General's Audit on Hold.
56. In early January 2010, the Defense Contract Audit Agency ("DCAA") initiated its own audit of Demmer's 2010 Bi-Metal Door price proposal. PTX-059-001.
57. Demmer attempted to persuade DCAA not to conduct the audit. See generally PTX-69, PTX-71. Shawa-DeCook corresponded with DCAA multiple times, questioning the need for a DCAA audit. Id.
58. Shawa-DeCook had substantial financial incentives for minimizing Demmer's "audit givebacks, " which are "any reduced proposal pricing that came from a negotiation of a proposal." Tr. 706:6-707:4 (Shawa-DeCook); PTX-088-006 (Shawa-DeCook's scorecard, listing as the "Goal" for audit givebacks in 2010 "0%" and identifying the AM General audit as one of the audits being measured); PTX-144 (listing "0%" as the goal for audit givebacks). Shawa-DeCook receives a discretionary management bonus based, in part, on audit givebacks-that is, reduced proposal pricing that came from audits and negotiations. In 2008, her bonus was $1.5 million. Tr. 706:3-707:17 (Shawa-DeCook).
59. By February 12, 2010, Shawa-DeCook had successfully persuaded DCAA to put its audit of Demmer's 2010 price proposal on hold. PTX-077-001; Tr. 650:3-9, 701:12-16 (Shawa-DeCook); PTX-192 (Dargitz Dep.) 141:7-9.
60. Demmer did not advise AM General that DCAA had put its audit of Demmer's 2010 price proposal on hold. See infra ¶¶ 94-97.
I. The February 4, 2010 AM General-Demmer Meeting
61. On February 4, 2010, AM General representatives Stephen Hodge, Todd Lentych, and Dean Fiess traveled to Demmer. Stip. ¶ 24.
62. The purpose of the February 4, 2010 meeting was "a continuation of the audit." Tr. 486:1-2 (Fiess); accord Tr. 400:5-10 (Lentych).
63. At the outset of the meeting, Demmer's Dargitz "approached Todd Lentych and asked him if AM General was going to finalize prices, and Todd said, No, that's not what we're doing here.'" Tr. 486:5-10 (Fiess).
64. At the February 4, 2010 meeting, Dean Fiess requested Demmer to provide 12 months of 2009 labor hour data. Stip. ¶ 25.
65. Demmer did not provide the data that Fiess requested. Tr. 400:21-23, 401:12-25, 402:3-403:1 (Lentych); PTX-83-001 (3/4/10 email from Demmer's Tenlen to AM General's Lentych advising, "I owe... some supporting information regarding our labor hours calculation on the door assembly quotes. At this time, we are holding off on sending any further information until the DCAA audit is closed.).
Demmer invoked a competing DCAA audit as the reason not to provide additional information to AM General. Tr. 400:21-401:7 (Lentych); Tr. 856:18-857:13 (Tenlen); Tr. 858:13-24 (Tenlen) ("[W]e [Demmer] brought up the fact that we cannot be audited by both of you at the same time, one has to take precedence over the other, and it was agreed that, right at that point, any future labor information or questions being answered, that DCAA would take precedence."); see also Tr. 643:12-15 (Shawa-DeCook); 647:23-648:4 (Shawa-DeCook) ("I suggested that we do not supply any additional information to AM General while the DCAA audit was underway."); PTX-067-001 (2/3/10 internal Demmer email, "Given that DCAA is proceeding, we need to continue and complete the audit with them therefore I strongly recommend AMG not coming [sic] tomorrow. We will complete the DCAA audit and then resume negotiations with AMG once the audit report is complete."); PTX-068-001 (2/3/10 internal Demmer email, "Is this after my email to Tim stating that I strongly disagree with them [AM General] still coming? DCAA states [sic] audit proceeds given yesterday's announcement and we really should be dealing with them now. Resume AMG negotiations once DCAA is complete.").
J. At Demmer's Request, AM General Puts Its Audit on Hold
67. At Demmer's request, AM General agreed to put its audit on hold pending the resolution of the DCAA Audit. Tr. 118:16-22 (Peterson); Tr. 400:9-10, 400:21-401:4 (Lentych); Tr. 697:9-11 (Shawa-DeCook), Tr. 698:5-8 (Shawa-DeCook) ("Q. And so you wanted the AM General audit to be put on hold, right? A. I wanted to deal with DCAA, yes, so, yes, it would put AMG on hold to DCAA."); Tr. 856:18-857:13 (Tenlen); see also Tr. 903:9-14 (Tenlen) (confirming that, at the end of the February 4, 2010 meeting, AM General did not say that its audit of Demmer was complete); PTX-194 (McDonald Dep.) 55:3-25; see also id. at 55:22-25 ("Q. So you understood from talking to Ms. Shawa-DeCook that the AM General audit would be put on hold until the DCAA audit was finished. A. Correct.").
68. As of March 4, 2010, both AM General and Demmer understood that AM General's audit of Demmer was on hold and therefore remained open. PTX-083-001 (3/4/10 Tenlen email to AM General: "At this time, we are holding off on sending any further information until the DCAA audit is closed."); Tr. 703:19-23 (Shawa-DeCook); see also PTX-083-001; Tr. 906:24-907:11, 908:18-909:8 (Tenlen); PTX-194 (McDonald Dep.) 63:13-22 (testifying about PTX-84, dated 3/5/10, and agreeing that it was her understanding that, as of that time, the AM General audit remained open). As of March 4, 2010, Demmer also knew that AM General understood that it was "not going to get any more information from Demmer until the DCAA audit was closed[.]" Tr. 700:20-23 (Shawa-DeCook); PTX-073-001 (2/10/10 internal Demmer email advising "we are not going to send AMG any labor information unless they become very demanding"); Tr. 905:12-24 (Tenlen).
K. The February 2010 Change Blanket Contracts and the Additional Note
69. At the February 4, 2010 meeting, Lentych advised Demmer that AM General wanted to put purchase orders in place to achieve the cost savings that were shown in Demmer's December 2009 price proposal. Tr. 856:18-857:1 (Tenlen). Lentych further advised the Demmer representatives that because "finalization wouldn't be achieved" given the pending DCAA audit, "they [AM General] were going to put some note in the contract indicating that this audit was still ongoing for that reason." Tr. 856:18-857:13 (Tenlen). "It was just a brief statement, but it was enough that I [Tenlen] understood what he [Lentych] was saying, that we were here, we were looking-we were at the final innings of finishing up this contract, but there was this DCAA stuff coming in here that seemed to be standing in the way of everybody coming to an agreement[.]" Tr. 857:18-25 (Tenlen).
70. Lentych advised Tenlen that AM General was "going to indicate a note on the PO indicating that this financial audit was still on going." Tr. 858:25-859:5 (Tenlen); see also 926:15-19 (Tenlen) ("Q. All right. Did they give you any impression as to whether the AMG folks wanted to keep their audit open as long as the DCAA was on the place? A. I believe that the DCAA involvement did create a factor in keeping the audit open."). Tenlen and the other Demmer personnel in attendance at the meeting reported to Demmer's CFO on the discussion of the purchase order change that AM General planned to issue. Tr. 719:5-9 (Shawa-DeCook).
71. On or about February 12, 2010, AM General issued a Change Blanket Contract for each of the Bi-Metal Doors to Demmer (the "February 2010 Change Blanket Contracts"). The blanket contracts relating to the sale of the eight Bi-Metal Doors, with revisions through July 1, 2011, are contained in PTX-5. Stip. ¶ 9. Demmer's most recent price proposal included proposed Bi-Metal Door prices for 2010 that were significantly lower than the price AM General had been paying in 2009. PTX-78. The February 2010 Change Blanket Contracts also included language making them retroactive back to January 1, 2010: "Effective 1/01/2010... Demmer Accounting Dept must contact AMG Accounting Dept to balance delivery payments from 1/01/2010." PTX-78-001; PTX-151; PTX-153; Stip. ¶27. In response to the retroactivity language in February 2010 Change Blanket Contracts, Demmer credited AM General for payments AM General made earlier in 2010 for Bi-Metal Doors that exceeded the prices included in the February 10, 2010 Change Blanket Contracts as modified by subsequent purchase order changes in 2010. PTX-151; PTX-153.
72. Demmer retrieved the Change Blanket Contracts on February 15, 2010 by accessing them on AM General's web portal. Stip. ¶ 26.
73. Demmer received the February 2010 Change Blanket Contracts, reviewed them, and accepted them in its ...