John McHugh, Secretary of the Army v. Dlt Solutions, Inc.

United States Court of Appeals
for the Federal Circuit
__________________________
JOHN MCHUGH, SECRETARY OF THE ARMY,
Appellant,
v.
DLT SOLUTIONS, INC.,
Appellee.
__________________________
2009-1536
__________________________
Appeal from the Armed Services Board of Contract
Appeals in Case No. 54812, Administrative Judge David
W. James, Jr.
____________________________
Decided: September 23, 2010
____________________________
M ATTHEW H. SOLOMSON , Trial Attorney, Commercial
Litigation Branch, Civil Division, United States Depart-
ment of Justice, of Washington, DC, argued for appellant.
With him on the brief were TONY WEST, Assistant Attor-
ney General, JEANNE E. D AVIDSON , Director, BRIAN M.
SIMKIN , Assistant Director, and M EREDYTH COHEN
H AVASY, Attorney. Of counsel on the brief was ROBERT T.
WU , Trial Attorney, Contract and Fiscal Law Division,
United States Department of the Army, of Arlington,
Virginia.

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ARMY v. DLT SOLUTIONS 2
D AVID C. A ISENBERG , Looney, Cohen, Reagan & Aisen-
berg LLP, of Boston, Massachusetts, argued for appellee.
__________________________
Before LOURIE, FRIEDMAN , and MOORE, Circuit Judges.
LOURIE, Circuit Judge.
The Secretary of the Army appeals from the final de-
cision of the Armed Services Board of Contract Appeals
holding that the government breached a non-substitution
clause of a delivery order awarded to DLT Solutions, Inc.
(“DLT”). Appeal of DLT Solutions, Inc., ASBCA No.
54812, 09-1 BCA ¶ 34067 (“Board Opinion”). Because we
determine that under a proper interpretation of the
contract, the government did not replace the contracted-
for software following the termination of its contract with
DLT, and hence did not breach the contract, we reverse
the Board’s decision.
BACKGROUND
DLT is an authorized software reseller and licensor
under a blanket purchase agreement (“BPA”) between
Oracle Corporation and the Army’s Information Technol-
ogy E. Commerce and Commercial Contracting Center.
DLT is a reseller of Oracle software and software licenses
under the terms of the BPA. In February 2003, DLT was
awarded Delivery Order No. 29 (“the contract”) to deliver
certain Oracle software (“DO29 software”) to the Navy’s
Office of Civilian Human Resources (“OCHR”) on a “lease
to ownership” basis. The contract award was based on
OCHR’s October 2000 functionality assessment which
resulted in its plan to develop a system that would allow
access to a variety of data related to HR training, bene-
fits, resumes, organizations, and positions through a
single “portal” to the Navy-wide infrastructure of software
programs that interfaced with the Defense Civilian Per-

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ARMY v. DLT SOLUTIONS 3
sonnel Data System (“DCPDS”), the Department of De-
fense’s (“DoD’s”) department-wide system for managing
civilian HR functions and employee records for all DoD
civilian employees. The DCPDS is managed by DoD’s
Civil Personnel Management Service (“CPMS”).
The Army issued the contract on February 28, 2003.
The contract provided OCHR with lease-to-own licenses to
thirteen Oracle applications used for performing various
functions, including marketing and HR management.
Under the terms of the contract, DLT would receive a
down payment of $2,880,000 upon delivery of the con-
tracted software to OCHR, and $8,639,000 by the end of
2003 in return for ownership of the software. Following
the award, DLT assigned all remaining payments to
Citizens Leasing Corporation, its financing company. On
March 7, 2003, the contract was modified to include a
non-substitution clause that prevented OCHR from
replacing the leased Oracle software with functionally
similar software for a period of one year after the expira-
tion or termination of the contract. The clause reads:
If (i) an Order expires prior to the expiration of
the . . . full Lease Term . . . or (ii) the Government
terminates the Order pursuant to a Termination
for Convenience, the Government agrees not to
replace the equipment and/or Software leased un-
der this Order with functionally similar equip-
ment and/or software for a period of one (1) year
succeeding such expiration or termination.
J.A. 114 (emphasis added).
DLT delivered the Oracle software to OCHR on March
18, 2003. In July 2003, OCHR learned that it did not
have the authority to implement applications that it had
envisioned following its prior functionality assessment
because the DoD managed the HR platforms and CPMS

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ARMY v. DLT SOLUTIONS 4
did not approve the use of the DO29 software with
DCPDS. Moreover, OCHR believed that the hardware it
currently possessed was not adequate to run the DO29
software. Thus, the software was never deployed by
OCHR. On March 22, 2004, OCHR issued a notice to
DLT, terminating the contract for convenience, effective
March 31, 2004. On November 3, 2004, the contracting
officer returned all compact disks and software documen-
tation relating to the contract, along with a statement
that the DO29 “software was never installed.”
Prior to the contract award to DLT, OCHR had used a
software suite comprised of twenty-six software applica-
tions, including DCPDS, for all its personnel management
needs. It continued to use those applications between the
time that it awarded the contract and for the year follow-
ing the termination of the contract (the “non-substitution
period”). At the time that OCHR entered into the con-
tract, the DCPDS software suite employed version 10.7 of
the underlying Oracle Federal HR software, a customized
version of the Oracle software that supports federal
statutory and regulatory reporting requirements. Be-
tween July 18, 2003 and August 3, 2003, CPMS upgraded
the Oracle Federal HR software used by DCPDS from
version 10.7 to 11i, adding the capability to access DCPDS
applications through a web interface. This Oracle up-
grade was the only change made to OCHR’s existing
applications during the entire period between the award
of the contract and its termination.
In July 2004, DLT submitted a certified claim for
$8,167,328 to the contracting officer.1 The claim alleged
that the government had breached the non-substitution
clause of the contract by replacing the DO29 software
1 DLT later amended the claim, reducing the
claimed damages to $6,978,328.

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ARMY v. DLT SOLUTIONS 5
with functionally equivalent DCPDS software. On No-
vember 3, 2004, the contracting officer denied the claim,
stating that the government was not liable for any dam-
ages because it had taken no action that could be rea-
sonably construed as a substitution of the DO29 software.
DLT appealed the denial of that claim to the Board. The
parties did, however, enter into a settlement agreement
whereby the government was to pay DLT $1,283,075 for
all expenses associated with the termination for conven-
ience.
On appeal, the Board found that nine out of twenty-
six applications that OCHR continued to use during the
non-substitution period were “functionally similar” to the
DO29 software. Board Opinion at 15. The Board con-
cluded that OCHR’s continued use of these nine pre-
existing applications during the non-substitution period
constituted a software replacement that breached the
terms of the non-substitution clause. Id. Moreover, the
Board found that two of those nine applications had
received the Oracle Federal HR version 11i upgrade that
CPMS made in 2003, enabling web access capability for
those applications. Id. The Board held that the upgraded
software constituted a replacement of the DO29 software
as well. Id. The Board cited two prior decisions, one from
the United States Claims Court2 (“Claims Court”) and one
from the General Services Board of Contract Appeals
(“GSBCA”), for the proposition that continued use of pre-
existing software, both with or without an upgrade, could
constitute a violation of a non-replacement clause. See id.
(citing Municipal Leasing Corp. v. United States, 7 Cl. Ct.
43 (1984) and Northrop Grumman Computing Sys., Inc.,
GSBCA No. 16367, 06-02 BCA ¶33,324).
2 The name of the United States Claims Court was
changed to the United States Court of Federal Claims in
1992.

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ARMY v. DLT SOLUTIONS 6
The Board also found that the word “replace” in the
non-substitution clause did not require that OCHR actu-
ally use the DO29 software prior to replacing it. To the
extent that there was a use requirement in the contract,
the Board considered the fact that OCHR had analyzed
and evaluated the DO29 software to determine whether it
could install the software and interface it with DCPDS,
and concluded that that evaluation satisfied the require-
ment. Board Opinion at 14. Regardless whether the
government had used the software, the Board reasoned
that the non-substitution clause was bargained-for con-
sideration between the parties and was binding. Id. The
Board therefore sustained the appeal, holding that OCHR
had breached the non-substitution clause in the contract
and was liable for expectation damages. The government
timely appealed. We have jurisdiction under 28 U.S.C.
§ 1295(a)(10).
D ISCUSSION
Under the Contract Disputes Act, we uphold findings
of fact by the Board “unless the decision is fraudulent, or
arbitrary, or capricious, or so grossly erroneous as to
necessarily imply bad faith, or if such decision is not
supported by substantial evidence.” 41 U.S.C. § 609(b).
However, contract interpretation under the Act is a
question of law, which we review de novo with “no defer-
ence owing to the interpretation adopted by either the
agency or the Board.” Lockheed Martin IR Imaging Sys.,
Inc. v. West, 108 F.3d 319, 322 (Fed. Cir. 1997); see §
609(b) (“[T]he decision of the agency board on any ques-
tion of law shall not be final or conclusive”); Textron Def.
Sys. v. Widnall, 143 F.3d 1465, 1468 (Fed. Cir. 1998)
(“Contract interpretation is a question of law over which
we exercise complete and independent review.”).

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ARMY v. DLT SOLUTIONS 7
The government argues that the Board misinter-
preted the non-substitution clause by finding that the
software that had been in use by OCHR before, during,
and after the contract was a “replacement” of the DO29
software. It argues that the DO29 software was never
replaced, and the Board’s interpretation of the contract
term “replace” to include such continued use of pre-
existing software is simply contrary to the dictionary
definition of the word “replace” as being “substituted for.”
The government urges us not to adopt such an interpreta-
tion because that would require it to cease use of any and
all functionally similar software, including pre-existing
software, every time it terminates a contract with a
software provider for convenience, thereby severely im-
pacting the government’s mission. It argues that the
purpose of such a clause is to prevent the government
from terminating the contract at issue in order to take
advantage of better or less expensive software that may
later become available from a different vendor. Here, it
contends, OCHR’s termination of the contract was not
intended to allow use of better or cheaper software from a
different vendor. As a matter of fact, it notes that OCHR
never installed or used the DO29 software in the first
place.
The government further contends that the Board
erred in its reliance on non-binding precedent that is
easily distinguishable from the facts presented here.
According to the government, both Municipal Leasing and
Northrup Grumman involved fact situations where the
government performed repairs or upgrades to existing
equipment that were substantial enough to be regarded
as functionally new equipment that replaced the con-
tracted-for equipment. In contrast, the government
argues, the Oracle Federal HR version upgrade of DCPDS
did not fundamentally alter the pre-existing software; it

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ARMY v. DLT SOLUTIONS 8
merely changed it to a web-based one. Moreover, it notes,
the upgrade only affected a small portion—two out of
twenty-six applications—of the pre-existing software. In
addition, the government points to the fact that OCHR
had been using and would have continued to use DCPDS
regardless of the termination of the contract. The gov-
ernment also states that it was DLT’s financing company,
Citizens Leasing Corporation, that drafted the language
of the clause and insisted upon its inclusion, and therefore
argues that any ambiguity in the clause should be read
against DLT.
In response, DLT argues that the non-substitution
clause was bargained-for consideration, and was intended
to limit the government from adopting any alternative to
the DO29 software, even a pre-existing one. It argues
that the Board’s interpretation of the term “replace” is
correct because the term necessarily includes any alterna-
tive regardless whether it was available to the govern-
ment prior to the contract. All that is relevant is that a
set of HR software applications continued to be used in
place of the contracted-for software. It also contends that
nothing in the clause requires that the government use
the DO29 software. Regardless, it notes that the Board
made a factual finding that OCHR did in fact “use” the
leased software. It argues that the government had
previously considered using the DCPDS software suite for
the functionality that it aimed to achieve with the DO29
software, and had subsequently rejected that as an op-
tion. Alternatively, it argues that the Board properly
found that the software upgrade to two of the DCPDS
applications amounted to a replacement of the DO29
software.
We disagree with the Board’s interpretation of the
term “replace” in the non-substitution clause. That is a
question of contract interpretation that we review de novo

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ARMY v. DLT SOLUTIONS 9
on appeal. Contract interpretation begins with the plain
language of the written agreement. McAbee Constr., Inc.
v. United States, 97 F.3d 1431, 1435 (Fed. Cir. 1996). A
reading of the non-substitution clause to prohibit the
government from continuing to use software, unmodified
in any manner, and one that it was already using prior to
the contract award to DLT is not reasonable. Hercules,
Inc. v. United States, 292 F.3d 1378, 1381 (Fed. Cir. 2002)
(“The contract must be construed to effectuate its spirit
and purpose giving reasonable meaning to all parts of the
contract.”). Contrary to DLT’s arguments, the clause does
not impose such a requirement against continued use of
pre-existing software. Rather, it only states that the
government will not “replace the equipment and/or soft-
ware leased under this Order with functionally similar
equipment and/or software.” The plain meaning of the
word “replace” would require at the very least some action
by the government following the termination of the con-
tract. Craft Mach. Works, Inc. v. United States, 926 F.2d
1110, 1113 (Fed. Cir. 1991) (“In contract interpretation,
the plain and unambiguous meaning of a written agree-
ment controls.”). The dictionary definition of the word
“replace” requires substitution of one by another. See
Metro. Area Transit, Inc. v. Nicholson, 463 F.3d 1256,
1259 (Fed. Cir. 2006) (using dictionary definitions in
contract interpretation). As used in the contract before
us, the proper definition of the word “replace” is “to put
something new in the place of.” Merriam-Webster’s Online
Dictionary, http://www.merriam-webster.com/dictionary/replace (last
visited September 21, 2010). Here, OCHR took no action with
regard to 24 of 26 of the pre-existing applications. It did
not replace them.
We are also not persuaded by the Board’s conclusion
that the software upgrade to the underlying Oracle soft-
ware constituted a replacement of the DO29 software.

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ARMY v. DLT SOLUTIONS 10
The Board found that the Oracle Federal HR software
upgrade from version 10.7 to version 11i changed its
functionality. In doing so, it relied on DLT’s expert’s
opinion that the Oracle 11i upgrade made major im-
provements with regard to internet usability and self-
service functionality. The Board held that this functional-
ity upgrade was analogous to repair and reuse of existing
computer equipment that the Claims Court held could
constitute replacement.
Once again, we disagree with the Board on its broad
interpretation of the contract term “replace.” As a pre-
liminary matter, the non-substitution clause here prohib-
its replacement of the DO29 software “for a period of one
(1) year succeeding . . . termination.” The upgrade at
issue occurred between July and August 2003, well before
OCHR had terminated the contract for convenience in
March 2004. More importantly, the upgrade did not
impact any core functionality of the pre-existing software.
It merely changed two of the applications being used by
OCHR from desktop-based to web-based. We do not agree
that, under a proper interpretation of the contract, that
change is substantial enough to be considered a replace-
ment of the DO29 software suite.
In sum, in this case, the non-replacement clause was
intended to preclude or discourage the government from
cancelling the contract for its convenience, in order to
substitute another product that functioned substantially
the same way but appeared more advantageous or desir-
able to the government—perhaps because it would be
cheaper. The government made no such replacement
here, but instead simply continued using the DCPDS
software it had already been using.
As the Board noted, the case law that it relied upon
was not binding on it, nor is it binding on this court. To

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ARMY v. DLT SOLUTIONS 11
the extent the two cited cases can be considered persua-
sive, we find them not applicable to the facts presented
here. In Municipal Leasing, the Claims Court held that
the Air Force had breached a non-substitution clause in a
contract to lease computer terminals by refusing to renew
the lease on the contracted-for equipment and instead
repairing the computer terminals that it had used prior to
the contract. The court found that the Air Force had
considered the repair as an alternative prior to contract-
ing with Municipal, and held that repairing the older
malfunctioning terminals essentially replaced the con-
tracted-for terminals. Id. Similarly, in Northrop Grum-
man, the GSBCA, relying on the Claims Court’s
Municipal Leasing decision, held that the General Ser-
vices Administration (“GSA”) violated a non-replacement
clause in a lease for computer storage area network
(“SAN”) equipment by upgrading existing SAN equipment
and not exercising its option to renew the lease with
Northrop.
Unlike in Municipal Leasing, here, OCHR never
stopped using its original software, never replaced it with
the DO29 software, and never returned to using its origi-
nal software following the contract termination. Nor was
the original software a valid alternative that OCHR had
previously considered for reaching the goal for which it
leased the DO29 software. Even if the software upgrade
were to be considered analogous to repair of malfunction-
ing equipment, the upgrade here was not carried out with
an eye toward replacing the DO29 software. It is undis-
puted that OCHR had no control over the Oracle upgrades
performed by the DoD. Furthermore, the upgrade was
fairly insubstantial in comparison with the scope of the
DO29 software. The Board found that only two of twenty-
six applications received the upgrade. We agree with the
government that such an insubstantial upgrade cannot

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ARMY v. DLT SOLUTIONS 12
reasonably constitute a replacement of the contracted-for
software. Moreover, it is undisputed that the contracted-
for software was never intended to replace the DCPDS,
merely to work with it. In other words, the two software
suites, at least to some extent, provided functionality that
may coexist with, rather than replace, each other.
As an alternate ground to uphold the Board’s decision,
DLT argues that the government also breached the con-
tract by terminating for convenience when there was no
change in circumstances that permitted such a termina-
tion under the terms of contract. According to DLT, given
that OCHR still had the same needs as before, shifting
the loss to DLT by terminating the contract for conven-
ience was unjustified.
The government notes that DLT raised this argument
before the Board, but the Board failed to address the issue
directly. It suggests that by rejecting DLT’s argument
that the government in effect terminated the contract in
bad faith, the Board in effect held that there were
changed circumstances sufficient to support the termina-
tion for convenience. Therefore, the government contends
that DLT, having lost the argument below and having
failed to cross-appeal the Board’s holding, cannot now
raise that argument. According to the government, a
holding by this court that there existed no change in
circumstances to support a termination for convenience
would be an expansion of the relief granted below. More-
over, it argues that the Board actually made multiple
factual findings of changed circumstances that led OCHR
to terminate the contract, including the fact that DoD
declined to allow OCHR to interface the DO29 software
with DCPDS. Finally, it contends that the issue of termi-
nation for convenience was settled by the parties and
cannot be challenged further.

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ARMY v. DLT SOLUTIONS 13
We agree with the government that it was entitled to
terminate the contract for convenience. The Board spe-
cifically found that OCHR terminated the contract be-
cause, among other reasons, “it had an inadequate
hardware platform on which to install and implement the
DO29 software, [and] CPMS declined to authorize OCHR
to interface the DO29 software with DCPDS.” Board
Opinion at 9. We find no error in the Board’s factual
findings, and, in light of those findings of changed circum-
stances, we conclude that the government was justified in
utilizing the termination for convenience clause in termi-
nating the contract, even if OCHR had prior knowledge
that it might not be successful in deploying the con-
tracted-for software. See Caldwell & Santmyer, Inc. v.
Glickman, 55 F.3d 1578, 1583 (Fed. Cir. 1995) (refusing to
disallow a termination for convenience in a “situation in
which the government contracts in good faith but, at the
same time, has knowledge of facts supposedly putting it
on notice that, at some future date, it may be appropriate
to terminate the contract for convenience”).
CONCLUSION
We have considered DLT’s remaining arguments and
do not find them persuasive. Accordingly, the judgment of
the Board is
REVERSED

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