Government Contracts Monitor

Allowability of Contractor Litigation Defense and Settlement Costs Under FAR 31.205-47

January 21, 2014

It’s taken a long time but, on January 6, 2014, the Department of Energy (DOE) finally issued DOE Acquisition Letter 2014-03 implementing the Federal Circuit’s holding in Secretary of the Army v. Tecom, 566 F.3d 1037 (Fed. Cir. 2009). Tecom addressed the allowability of contractor costs incurred in defending and settling legal claims brought by a third party.

Tecom, Inc. had a contract containing FAR Clause 52.222.26 (Equal Opportunity). A former employee sued Tecom under Title VII of the Civil Rights Act alleging sexual harassment and retaliation for filing a harassment charge. Tecom incurred significant legal fees defending the case and sought reimbursement from the Army for its defense and settlement costs (as a direct cost under its contract), contending the former employee’s allegations were false.

The Contracting Officer (CO) found Tecom’s costs unallowable, Tecom appealed to the Armed Services Board of Contract Appeals, the Board found for Tecom. Then, the Army appealed to the United States Court of Appeals for the Federal Circuit. The Federal Circuit reversed, in an opinion containing significant rulings regarding allowability.

First, because costs are allowable only when they comply with the terms of a government contract, the Federal Circuit held that where a contractor violates FAR clause 52.222-26’s prohibition on discrimination, and the clause is a term of the contract, any costs associated with a Title VII violation (including defense costs and any damages awarded by the court) are unallowable.

Second, the Federal Circuit held that the rule against reimbursing contractors for discriminatory conduct is not limited to trial verdicts; it can also apply to settlements. A contractor that violates Title VII cannot avoid application of the rule against allowability simply by settling the matter before a verdict in the plaintiff’s favor. Thus, where a contractor settles a Title VII case, the costs of litigation are allowable only if the plaintiff’s claims had “very little likelihood of success on the merits.”

DOE’s recently issued Acquisition Letter makes clear that the Federal Circuit’s allowability limitations apply to all DOE contracts that provide for reimbursement of legal costs. Where a contractor requests reimbursement associated with a settlement agreement, the CO must determine whether the plaintiff’s claims had more than “very little likelihood of success on the merits.” DOE’s Acquisition Letter also provides guidance on how COs can make this determination.

Lindsay Simmons is the attorney responsible for the content of this article.

Attorneys

Lindsay Simmons