Betty T. Yee, California State Controller v. United States

N OTE: This disposition is nonprecedential.
United States Court of Appeals
for the Federal Circuit
______________________
BETTY T. YEE, CALIFORNIA STATE
CONTROLLER,
Plaintiff-Appellant
v.
UNITED STATES,
Defendant-Appellee
______________________
2018-1555
______________________
Appeal from the United States Court of Federal Claims
in No. 1:17-cv-00206-MBH, Senior Judge Marian Blank
Horn.
______________________
Decided: June 12, 2019
______________________
MARTIN L OBEL , Lobel, Novins & Lamont, LLP, Wash-
ington, DC, argued for plaintiff-appellant.
ZACHARY J OHN SULLIVAN, Commercial Litigation
Branch, Civil Division, United States Department of Jus-
tice, Washington, DC, argued for defendant-appellee. Also
represented by ALLISON K IDD -MILLER, R OBERT E DWARD
K IRSCHMAN, J R., J OSEPH H. HUNT .
______________________

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YEE v. UNITED STATES 2
Before P ROST , Chief Judge, L OURIE and CLEVENGER ,
Circuit Judges.
P ROST , Chief Judge.
The State of California (“California” or “State”) appeals
a decision by the U.S. Court of Federal Claims granting
summary judgment in favor of the United States (“Govern-
ment”) regarding a cooperative agreement for audit ser-
vices related to oil and gas royalties. Because the Court of
Federal Claims’s interpretation of the cooperative agree-
ment was in error, we reverse.
I
In October 2010, the U.S. Department of the Interior
(“Interior”) and California entered into a cooperative agree-
ment for audit services involving royalty collection (“the
Agreement”). The Agreement was entered pursuant to the
Federal Oil and Gas Royalty Management Act of 1982
(FOGRMA), Pub. L. No. 97-451, 96 Stat. 2447 (codified as
amended at 30 U.S.C. §§ 1701–1759). The Agreement was
drafted by Interior and was extended each year until June
30, 2016.
The audits related to oil and gas royalties owed to the
Federal Government and shared with California. The
United States agreed to reimburse California for allowable
costs related to performing the audits. Specifically, Part 2
of the Agreement provides:
[Interior] will reimburse the State up to 100 per-
cent of allowable costs for audits and/or investiga-
tions of Federal oil, gas, and solid minerals leases
(when applicable) in accordance with the State’s re-
quest not to exceed the amount approved for each
fiscal year of this Agreement.
J.A. 220. Under the subheading “Payment of Reimbursa-
ble Costs,” Section 6.4.B of the Agreement further provides:

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YEE v. UNITED STATES 3
[Interior] will reimburse the State for approved
costs incurred under this Agreement in accordance
with 43 CFR 12(A) Administrative and Audit Re-
quirements and Cost Principles for Assistance Pro-
grams.
J.A. 228.
Finally, under the heading “Cost Understandings,” Sec-
tion 6.5 of the Agreement provides in relevant part:
B. Salaries and Wages - Compensation to personnel
which are charged as a direct cost under this
Agreement, like other costs, will be reimbursa-
ble subject to the following additional under-
standings:
(1) Salaries and wages may not exceed the
State’s established policy and practice in-
cluding the established pay scale for equiva-
lent classifications of employees whose
salaries are financed from non-Federal
sources, which will be certified by the State,
nor may any individual salary or wage exceed
the employee’s annual rate of compensation
for similar functions performed immediately
prior to employment hereunder . . . .
(2) Salaries and wages paid while in travel sta-
tus will not be reimbursed for a period
greater than the time required for travel by
the most cost effective means.
C. Fringe Benefits [-] Fringe benefits shall be al-
lowed in accordance with the State’s established
accounting system.
J.A. 229–30 (emphasis added).
In 2015, Interior sent a report alleging California had
overbilled for certain salary, fringe benefits, and indirect
costs under the Agreement. J.A. 130 (Draft Attestation

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YEE v. UNITED STATES 4
Engagement Report). Interior claimed it overpaid Califor-
nia by $296,459.94 from FY 2011 to FY 2014. See id. It
withheld payments to recoup the allegedly overbilled
amount. California opposed the withholding, but Interior
issued a final report denying California’s protest. Califor-
nia then filed an appeal with Interior on the grounds it
used the State’s established accounting system to properly
calculate the relevant costs. The appeal was denied.
Following transfer from district court, California pro-
ceeded with its complaint before the Court of Federal
Claims in March 2017. California alleged breach of con-
tract. See J.A. 37–41. California sought a declaration that
Interior breached the Agreement “by unilaterally adopting
and imposing a different method of accounting for allowa-
ble costs rather [than] calculating them under California’s
[State Administrative Manual (SAM)] method as specifi-
cally allowed under the Agreement.” J.A. 40. The parties
filed cross-motions for summary judgment on the contract
interpretation issue. The Court of Federal Claims agreed
with Interior’s interpretation.
California now appeals. We have jurisdiction pursuant
to 28 U.S.C. § 1295(a)(3).
II
We review the grant of summary judgment by the
Court of Federal Claims de novo. TEG-Paradigm Envtl.,
Inc. v. United States, 465 F.3d 1329, 1336 (Fed. Cir. 2006).
Contract interpretation is a question of law, which we also
review de novo. Id.
This case presents a single issue of contract interpreta-
tion. Below, the Government argued that the method Cal-
ifornia used to bill for certain costs under the Agreement
was improper. California used the SAM formula, which re-
lies on accrual accounting for calculating fringe benefits
and overhead. In other words, the SAM formula accounts
for certain accrued benefits before they are paid out to

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YEE v. UNITED STATES 5
employees. In the Government’s view, California was re-
quired to use OMB’s method. According to the Govern-
ment, the OMB method only recognizes actual cash
expenditures (e.g., actual payments to employees). The
Court of Federal Claims agreed with the Government, con-
cluding that the contract is “unambiguous” and required
California to bill only for cash expenditures. J.A. 20. On
appeal, California argues that the plain language of the
contract expressly allowed it to use the SAM method of ac-
counting for the disputed benefits. We agree with Califor-
nia that the Court of Federal Claims erred.
We begin with the plain language of the contract. See
Hercules Inc. v. United States, 292 F.3d 1378, 1380 (Fed.
Cir. 2002). Section 6.5.C of the Agreement unambiguously
provides: “Fringe Benefits [-] Fringe benefits shall be al-
lowed in accordance with the State’s established account-
ing system.” J.A. 230.
The Government does not meaningfully dispute that
the method California applied—the SAM formula—is re-
cited in the State Administrative Manual for calculating
fringe benefits. Nor does it dispute that this has been Cal-
ifornia’s established accounting practice for the last thirty
years. See J.A. 4. Furthermore, the Government concedes
that “California multiplied the [SAM] rate by actual hours
worked on this cooperative agreement.” Appellee’s Br. 7.
Instead, the Government only takes issue with the
SAM formula itself because it uses accrued costs rather
than actual cash payments. But nothing in the contract
requires actual cash payments for reimbursement. In-
stead, the plain language of the contract explicitly permits
California to use the SAM formula, which is part of “the
State’s established accounting system” under Section
6.5.C. When the contractual language “is unambiguous on
its face, our inquiry ends and the plain language of the
Agreement controls.” Coast Fed. Bank, FSB v. United
States, 323 F.3d 1035, 1040–41 (Fed. Cir. 2003).

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YEE v. UNITED STATES 6
Accordingly, the Court of Federal Claims erred in conclud-
ing the State’s use of the SAM formula to calculate fringe
benefits was improper under the Agreement.
III
The Government mounts three main arguments as to
why California’s SAM method remains improper. None are
persuasive. First, it argues that OMB provisions incorpo-
rated by reference in Section 6.4.B control, overriding Sec-
tion 6.5.C. Second, it avers that the contract’s language
about “costs incurred” and “reimbursement” limit the scope
of state accounting practice authorized under Section 6.5.C
to cash outlays. Third, it argues California’s SAM method
results in overcompensation.
The Government’s first argument relies on the general
provision in Section 6.4.B, which provides that “costs in-
curred under this Agreement must be in accordance with
43 C.F.R. 12(A) Administrative and Audit Requirements
and Cost Principles for Assistance Programs.” J.A. 228. It
then claims California’s billing “runs afoul” of OMB circu-
lars incorporated by reference into the Agreement under 43
C.F.R. Part 12(A). Appellee’s Br. 14. In particular, the
Government claims “OMB Circular A-87 contains many
cost principles and standards, including principles and
standards related to the costs at issue in this case, and fac-
tors affecting allowability of costs, such as reasonableness
and allocability.” Id. at 15.
As an initial matter, the Government fails to substan-
tively discuss any provision in the OMB Circular A-87 that
purports to clearly support its claim that California’s SAM
formula offends OMB practice. See generally id. Indeed,
the Government appeared to concede at oral argument that
no provision expressly precludes accrual accounting.
Oral Argument at 26:18–27:35, No. 2018-1555,
http://www.cafc.uscourts.gov/oral-argument-recordings.

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YEE v. UNITED STATES 7
Regardless, even if OMB practice could be read to ex-
clude accrual accounting, the reference to OMB practice in
the more general provision of Section 6.4.B does not con-
trol. Section 6.4.B recites a general provision about allow-
able costs, while Section 6.5.C recites a specific provision
authorizing the use of the State’s accounting method for a
particular type of allowable cost—i.e., fringe benefits. It “is
settled law that where an agreement contains general and
specific provisions that conflict, ‘the provision directed to a
particular matter controls over the provision which is gen-
eral in its terms.’” L.W. Matteston, Inc. v. United States, 61
Fed. Cl. 296, 307 (Fed. Cl. 2004) (quoting Hol-Gar Mfg.
Corp. v. United States, 351 F.2d 972, 980 (Ct. Cl. 1965)); see
also Hills Materials Co. v. Rice, 982 F.2d 514, 517 (Fed. Cir.
1992) (“Where specific and general terms in a contract are
in conflict, those which relate to a particular matter control
over the more general language.”).
The Government also takes the view that fringe bene-
fits could be allowed using California’s established account-
ing system, but only if they are also in accordance with
OMB methods. The Court of Federal Claims implicitly
adopted this reading, treating “the State’s established ac-
counting system” in Section 6.5.C as adequate grounds to
award fringe benefits only to the extent the practice com-
plies with OMB practice incorporated in Section 6.4.B.
J.A. 19 (finding “the administrative regulations and cost
principles prescribed in OMB Circular A-87, however, still
applied to the [State]’s requests for reimbursement, even if
the [State] chose to bill utilizing California’s State Admin-
istrative Manual”).
Such an interpretation would, however, require rewrit-
ing Section 6.5.C. As discussed above, Section 6.5.C ex-
pressly states fringe benefits “shall be allowed” in
accordance with the State’s established accounting system.
“[S]hall be allowed” is a sufficient condition. Contrary to
the Government’s view, the Agreement does not recite a
necessary criterion for recovering fringe benefits. The

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YEE v. UNITED STATES 8
specific provision in Section 6.5.C states that fringe bene-
fits are allowed as long as they comport with California’s
established practice. The Government fails to explain why
Section 6.5.C deserves less force and effect than any other
provision in the Agreement.
The Government’s second argument is that the con-
tract was only designed to reimburse California for actual
costs “incurred.” Appellee’s Br. 6, 12. In the Government’s
view, “incurred” means costs that are accounted for when
they are paid out (i.e., according to OMB’s method of ac-
counting), rather than “incurred” under California’s
method of accounting. As such, it treats OMB’s accounting
method as if it is unambiguously written into the contract.
The Government’s position is unavailing.
To support its construction, the Government primarily
relies on the phrase “incurred costs” in Section 6.4.B. How-
ever, the Government fails to mention that the full phrase
refers to “costs incurred under this Agreement.” J.A. 228.
Thus, the use of the word “incurred” does not resolve the
inquiry at hand. We must still analyze whether these costs
“incurred” under the contract are limited to costs actually
incurred by California per employee—i.e., costs that Cali-
fornia already paid each employee—or whether a formula
accounting for accrued costs per employee is acceptable.
Turning to that question, the Government’s position is
unsupported. First, there is no language in the Agreement
defining “incurred” costs as actual cash payments only.1
Second, nothing in the contract excludes accrued costs for
“fringe benefits” as a category of costs that can be “in-
curred” under the Agreement. Indeed, the plain language
1 The Agreement mentions “actual” costs in two
places, with respect to travel reimbursement and records
maintenance. J.A. 229 (Section 6.5.A(2)); J.A. 231 (Section
7.1.D).

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YEE v. UNITED STATES 9
of the contract compels the opposite conclusion: accrued
costs for fringe benefits are “incurred” under the Agree-
ment. Section 6.5.C expressly authorizes the State to use
its own established accounting method to calculate such
costs for fringe benefits. Therefore, we reject the Govern-
ment’s attempt to redefine the term “costs incurred” to map
directly onto its view that the contract requires cash basis
forms of accounting.2
Finally, the Government’s third argument appears to
be that the SAM formula inherently leads to overcompen-
sation. The Government’s arguments about overcompen-
sation essentially restate its view that California was
permitted to only bill for cash outlays rather than use the
accrual methods inherent to the SAM formula. For the rea-
sons already stated above, these arguments fail.
Even if there were some lingering doubt about whether
the foregoing issues—OMB rules, costs incurred, or alleged
overcompensation—might somehow condition or limit the
State’s ability to use its own practices as authorized under
Section 6.5.C, there is no explanation in the Agreement as
to how the State’s practices must be modified. At best, the
contract would be ambiguous. Any such ambiguity “should
2 Essentially repackaging its argument about “in-
curred” costs, the Government argues California was only
entitled to “reimbursement” for work actually done on the
contract, which it insists means that California’s fringe
benefit costs are capped at the hours of leave it actually
paid to its employees. See Appellee’s Br. 11–12. Like in-
curred costs, “reimbursement” is not defined. The contract
could have specified, as the Government urges, that “reim-
bursement” requires California to account for every dollar
that it actually paid out in a given time period or it cannot
be compensated. But the contract used a different mecha-
nism for compensating the State, which allowed the State
to use its own accounting practices.

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YEE v. UNITED STATES 10
be construed most strongly against the drafter, which in
this case was the United States.” United States v. Seck-
inger, 397 U.S. 203, 210 (1970).
We have considered the Government’s remaining argu-
ments and find them unpersuasive.3
In sum, Interior and the State of California contracted
for use of state employee labor. In exchange for use of that
labor, Interior agreed to reimburse the State for allowable
costs. The contract allowed certain costs to be calculated
and billed using the State’s practice. The State did so.
Thus, the Court of Federal Claims erred.
IV
For the foregoing reasons, we reverse the Court of Fed-
eral Claims’s decision.
REVERSED
3 Based on the way the SAM formula is calculated,
California contends the entire sum Interior withheld
($296,459.94) implicates fringe benefits. In California’s
view, its ability to recover the sum therefore turns on the
dispute over whether accrual accounting for fringe benefits
is allowed under the Agreement. California argues that
while Interior’s original justification for its withholding
purported to break out this disputed sum into salary, fringe
benefits, and indirect costs, see J.A. 147, its breakdown was
inaccurate or arbitrary. See Oral Arg. at 9:05–10:10. On
appeal, the Government did not provide independent rea-
sons why breaking out the withheld portions in this man-
ner was appropriate. Even if the Government had
adequately explained how the SAM formula can be reliably
parsed into distinct categories (e.g., “salary”), it does not
separately explain why it was justified in withholding
these sums in view of the contract’s language about costs.

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