Can a Subcontract Dispute Issued Against a Government Contract Confer Federal Question Jurisdiction?
In short, likely no. A dispute arising between a prime and sub over a matter related to a federal procurement contract is not enough in and of itself to establish federal question jurisdiction. The dispute must 1) implicate a uniquely federal interest and 2) the application of state law to the dispute would conflict with a federal interest or frustrate the application of federal law.
Most prime contractors work with subcontractors to satisfy performance requirements under federal procurement contracts. Given the regulatory and project complexities as well as oftentimes the multiple parties involved, disputes arise frequently that unfortunately turn into litigation. Since the prime/sub relationship is commercial, the claims typically forming the basis of these suits are breach of contract, fraud, and statutory violations. Claimants in such situations have two forum choices in which to litigate, both with their pros and cons. Most suits are filed in state courts; however, federal courts may be more appropriate in certain circumstances.
Given federal courts are courts of limited jurisdiction, though, it can be more difficult to establish jurisdiction there. Diversity jurisdiction is easy: meet the basic threshold requirements and jurisdiction attaches. However, when the parties are not diverse or the amount in controversy is insufficient, a litigant is left with having to establish that a federal question exists.
If a statute is implicated as a result of the government contract (for example, the Miller Act), it often confers exclusive jurisdiction on federal district courts. A claimant will then likely be able to litigate its state law claims in the federal court as well via pendant jurisdiction. But, what if the dispute between the subcontractor and prime is purely based on a state law claim like a breach of contract or fraud? Federal courts have mostly determined that those cases are for state courts. Simply because the dispute arose from a commercial contract that derived from a federal procurement contract does not make it a matter of federal common law sufficient to confer federal question jurisdiction.
A decision out of the United States District Court, Northern District of Texas, Fort Worth Division provides an excellent example of a subcontractor on a federal project with only state common law claims attempting to litigate in federal court. In EFW, Inc. v. Smiths Aerospace, L.L.C., 4:07-CV-733-Y, 2008 WL 11349748, (N.D. Tex. Nov. 21, 2008), a lower-tier subcontractor, EFW, working on a prime contract between Boeing Company and the United States Air Force sued the subcontractor with whom it had entered into a lower-tier subcontract agreement for breach of contract in state court. The subcontractor, Smiths Aerospace, then moved to remove the case to federal court based on federal question jurisdiction, contending that the prime contract related to national security and that the prime contractor, Boeing, was under the direction of a federal officer. In essence, it claimed the fact that the dispute related to the performance of work on a government project made the dispute accordingly of importance to the U.S. government and the matter should be determined by the federal district court.
Smiths’ argument failed to persuade the Court. In its reasoning, the Court pointed out, in relevant part, that while 28 U.S.C. § 1331 will support claims of federal common law, those claims are limited to instances in which a federal decision is necessary to protect uniquely federal interests. It further, and critically, pointed out that the involvement of a uniquely federal interest alone is not sufficient to confer jurisdiction. A conflict between federal policy and the state law claims between the parties must also exist, or the application of the state law would frustrate the objectives of federal legislation.
In its decision, the Court relies on three points. First, it notes that the United States had neither any responsibility in nor potential liability as a result of the dispute between EFW and Smiths. It was a commercial dispute. Second, because the suit was between a subcontractor and its lower-tier subcontractor (as opposed to a prime and a sub), it was too far removed from the project at large to consider any national security implications or uniquely federal interests. And third, Smiths, the party seeking removal, did not provide any instances of conflict between federal policy and the state law that would govern in the case.
Certainly, instances arise in prime/sub disputes that may, per the legal standard outlined in EFW, Inc., invoke federal common law and therefore confer federal question jurisdiction. New SD, Inc. v. Rockwell Intern. Corp., 79 F.3d 953 (9th Cir. 1996) is one such example. There, in a breach of contract dispute between a prime contractor and its subcontractor, the Court ruled that federal interest in uniformity of laws about national security justified displacement of state law with federal law and held that subject matter jurisdiction based on federal question attached. Nevertheless, the standard for invoking federal question jurisdiction in a dispute between private parties working on a federal project is difficult to meet. And, in a procurement contracting setting, it is likely only to be met when a clear national security interest is present. Importantly, too, as EFW, Inc. demonstrates, the further the dispute is down the subcontracting chain the less likely a court is going to rule favorably that federal question jurisdiction exists simply because the dispute arose in the context of a federal contract.
Forum selection is a key strategic decision in litigation. State courts likely have a better grasp of the applicable law and may move cases to resolution more quickly. Federal courts, however, offer procedural mechanisms like early motions to dismiss, heightened pleading standards, and mandatory initial disclosures, which are effective at quickly developing the merits of claims and defenses. Given the law on federal question jurisdiction, in matters between private contracting parties working on government contracts filing in (or not attempting removal from), the state court is likely to be the most efficient route. Unless there are legitimately sound federal interests involved, particularly as relates to national security or strong overriding reasons for being in federal court, attempting to litigate commercial claims is not worth the expenses associated with preparing and defending a motion to dismiss (or risk a sua sponte ruling) for lack of subject matter jurisdiction.