Understanding Hughes Communications Galaxy Inc. v. United States (2001)

Hughes Communications Galaxy Inc. v. United States case of 2001 is one of the most important decisions of contract law within space activities law.

The Facts

In December 1985, Hughes Communications Galaxy (referred thereafter as “Hughes“) and NASA agreed to enter into a Launch Services Agreement (LSA). It can be defined as the contract by which a telecommunications company entrusts the launching of its satellites into orbit to NASA, an entity capable of carrying out launches. One of the main clauses of such contract is that it required NASA to use its “best efforts” to launch ten of Hughes’ HS-393 satellites on space shuttles. NASA was to continue its “best efforts” either until it launched the ten HS-393 satellites or until September 30, 1994, when the contract ended, whichever was earlier.

In addition to its own launches, NASA has entered into several LSA with different companies. Regularly NASA issued manifests of all shuttle and commercial payloads scheduled for launch on shuttles. It was basically to plan and organize all its launches and to be able to inform a company of the launching date of its satellites. So, after the conclusion of the LSA between Hughes and NASA, Hughes’ satellites were assigned specific slots on a manifest.

Unfortunately, on January 1986, the Space Shuttle Challenger exploded and as a consequence of the accident, NASA decided to suspend all operation of the shuttles until September 1988. On top of that, U.S. President Ronald Reagan announced that NASA would no longer launch commercial satellites on shuttles. However, right before President Reagan’s announcement, NASA issued a manifest that had planned the launch of eight Hughes’ HS-393 satellites on shuttle by September 1994, before the end of the contract.

Despite the manifest’s projections, the agency had to comply with the President’s announcement and therefore issued a new manifest which did not list any of Hughes’ satellites. Furthermore, NASA informed the company that the probability of launching Hughes’ satellites on shuttles was very low, if not non existent.

Hughes Communications Galaxy still had to place its satellites into orbit. In order to fulfil its aim, the company had to use Expendable Launch Vehicles (ELV) which is a single use launch vehicle. After use, its components are either destroyed during reentry or discarded in space. It is the most widely used launch method as of today, whether you send satellites or crews into space, although the market is starting to change with the arrival of reusable launch systems, developed by private companies like SpaceX. But the major defect of this system is its cost since at each launch it’s necessary to rebuild the launcher.

Hughes launched three of its HS-393 satellites on ELVs but also six HS-601 satellites as they were more powerful and better suited for ELV launches. As a result the company saw its costs increased by launching satellites on ELVs rather than on shuttle.

Hence Hughes Communications Galaxy sued the U.S. Government for breach of contract and for taking its property without providing just compensation.

After several twists and turns, the Court of Federal Claims granted summary judgement for Hughes for breach of contract and a damages trial was held before the Court of Federal Claims.

The Court of Federal Claims

At the damages trial, Hughes wanted to prove the damage it had suffered by demonstrating that the increased costs were linked to the launch of satellites on ELVs. For this demonstration, Hughes used two main methods of calculating the costs.

The first method was to compare the costs of launching ten HS-393 satellites on shuttles, as foreseen by the LSA, with the costs of launching ten HS-393 satellites on ELVs. And as Hughes already launched three satellites on ELVs, it could base its calculations on real costs and not just on a hypothesis.

The second one was called the Primary method which was to compare Hughes’ actual costs of launching ten satellites on ELVs with the costs that Hughes would have had by launching ten satellites under the LSA. The ten satellites in question included the three HS-393 and the six HS-601 already launched plus one HS-376.

In its judgement, the Court of Federal Claims used the first method but modified it.

First of all, as the Court held that even under its “best efforts“, NASA would only have been able to launch five satellites under the LSA and not ten, the increased costs should be estimated only based on five satellites rather than ten. This reasoning was justified by the July 1986 manifest and a report made by Barrington Consulting Group.

To support its arguments, Hughes explained that if NASA prioritized commercial satellites launches over NASA satellites launches, then NASA could have effectively launched ten HS-393 satellites. But it was rejected by the Court of Federal Claims as it considered that Hughes could not have reasonably expected NASA to prioritize commercial satellites over its own.

Secondly, the Court of Federal Claims averaged the costs of launching three satellites on shuttles by using the costs of the three satellites actually launched on ELVs. The Court used this average to establish the costs of the fourth and fifth satellites. On the contrary, Hughes’ experts calculated the cost of launching each satellite individually.

Then the Court of Federal Claims refused to grant Hughes prejudgement interest on its damages. Prejudgement interest can be defined as additional money that a court can award to the prevailing party in a lawsuit as a compensation for loss of the use of money from the time it is determined at trial to be due to the time final judgement is entered.

And finally, the Court of Federal Claims refused to award the company reflight insurance costs and increased launch insurance costs for the five satellites.

In the end, the Court of Federal Claims awarded Hughes a total of 102,680,625 dollars in damages for its increased launch costs.

As a result of this decision, both Hughes Communications Galaxy and the U.S. Government appealed.

The Court of Appeals of the Federal Circuit

The trial then went on to the Court of Appeals of the Federal Circuit. The Court had to review damages determinations by the Court of Federal Claims for an abuse of discretion which can be defined as an error of judgement by a trial court in its ruling.

In the Hughes Communications Galaxy Inc. v. United States, the Court of Appeals recalled the conditions to characterize an abuse of discretion. According to the Massie v. United States case of 2000, it was held that a Court shall consider a trial court to have abused its discretion when: “the court’s decision is clearly unreasonable, arbitrary or fanciful; the decision is based on an erroneous construction of the law; the trial court’s factual findings are clearly erroneous; the record contains no evidence upon which the court rationally could have based its decision“.

The Court of Appeals also recalled some principles established by previous cases. Thus in San Carlos Irrigation & Drainage Dist v. United States case of 1997, it was held that: “the general rule in common law breach of contract cases is to award damages sufficient to place the injured party in as good a position as he or she would have been had the breaching party fully performed.” And that a “plaintiff must show that but for the breach, the damages alleged would not have been suffered“.

One of the arguments of the U.S. Government was that Hughes should only be able to recover damages for the three HS-393 satellites that were actually launched and that the hypothetical fourth and fifth should be excluded from the compensation calculations. However this argument was rejected by the Court.

Another point made in the case was that the LSA stated that damages “shall be limited to direct damages only and shall not include any loss of revenue, profits or other indirect or consequential damages“. But in its reasoning the Court did consider that the increased costs represented direct damages incurred by Hughes in obtaining substitute launch services. Moreover the calculations of the damages did not include any lost revenues or profits but only increased costs. The Court also held that the damages were not consequential.

In conclusion, the Court of Appeals held that the Court of Federal Claims did not abuse its discretion by awarding Hughes damages for its increased costs incurred by obtaining substitute launch services for two HS–601s in addition to the three HS–393s. Besides the Court of Federal Claims did not abuse its discretion by refusing to award Hughes prejudgement interest as Hughes did not present sufficient evidence before the trial court. Similarly the Court of Federal Claims also did not abuse its discretion in holding that the increased launch insurance costs are not recoverable under the LSA.

And finally, the Court of Federal Claims did not abuse its discretion in determining Hughes’ damages for the government breach of the LSA.

In a decision of November 13, 2001, the Court of Appeals upheld the judgement rendered by the Court of Federal Claims and awarded Hughes compensation, as calculated by the Court of Federal Claims, for the damage it suffered as a result of the increased costs.