Bechtel National, Inc. v. United States

United States Court of Appeals
for the Federal Circuit
______________________
BECHTEL NATIONAL, INC.,
Plaintiff-Appellant
v.
UNITED STATES,
Defendant-Appellee
______________________
2018-2055
______________________
Appeal from the United States Court of Federal Claims
in No. 1:17-cv-00657-EDK, Judge Elaine Kaplan.
______________________
Decided: July 16, 2019
______________________
STEPHEN KNIGHT, Smith, Pachter, McWhorter, PLC,
Tysons Corner, VA, argued for plaintiff-appellant. Also
represented by EDMUND MICHAEL AMOROSI.
GEOFFREY MARTIN LONG, Commercial Litigation
Branch, Civil Division, United States Department of Jus-
tice, Washington, DC, argued for defendant-appellee. Also
represented by JOSEPH H. HUNT, ROBERT EDWARD
KIRSCHMAN, JR., PATRICIA M. MCCARTHY.
______________________
Before NEWMAN, SCHALL, and DYK, Circuit Judges.
2 BECHTEL NATIONAL, INC. v. UNITED STATES
DYK, Circuit Judge.
Bechtel National, Inc. (“Bechtel”) appeals from a deci-
sion of the United States Court of Federal Claims (“Claims
Court”) granting summary judgment in favor of the govern-
ment. The Claims Court held that our decision in Geren v.
Tecom, Inc., 566 F.3d 1037 (Fed. Cir. 2009), precluded re-
imbursement of costs that Bechtel incurred in defending
two sexual and racial discrimination and retaliation suits
brought by former employees.
We hold that Tecom governs the allowability of
Bechtel’s defense costs and affirm the Claims Court’s deci-
sion.
BACKGROUND
Between 1943 and 1990, the government produced plu-
tonium for nuclear weapons at the Hanford Site in the state
of Washington, leaving behind “approximately 56 million
gallons of nuclear waste” stored in underground tanks.
Bechtel Nat’l, Inc. v. United States, 137 Fed. Cl. 423, 425
(2018). On December 11, 2000, Bechtel was awarded a
cost-plus-incentive fee contract by the Department of En-
ergy (“DOE”) “for the design, construction, and operation”
of a nuclear waste treatment plant at the Hanford Site in
Washington. Id. The contract incorporated by reference
provisions of the Federal Acquisition Regulation (“FAR”)
and the Department of Energy Acquisition Regulation
(“DEAR”).
During performance of the contract, two former Bechtel
employees at the Hanford Site separately sued Bechtel un-
der 42 U.S.C. § 1981 and state law, alleging sexual and ra-
cial discrimination and subsequent retaliation for raising
their complaints. Bechtel settled these lawsuits and then
sought $500,000 in reimbursement from the DOE for the
costs it incurred in defending the two suits. Bechtel did not
seek reimbursement for the settlement payments related
BECHTEL NATIONAL, INC. v. UNITED STATES 3
to the litigation, likely because the settlement amounts
were covered by insurance. The DOE provisionally ap-
proved Bechtel’s request and reimbursed Bechtel for the
full amount requested.
On May 11, 2016, the contracting officer issued a notice
of intent to disallow the costs. The contracting officer in-
formed Bechtel that “[he had] determined that the costs in-
curred by [Bechtel] in defending these matters [were]
unallowable under the standards set forth in Tecom.”
Bechtel, 137 Fed. Cl. at 427 (alterations in original).
Bechtel responded on July 13, 2016, arguing that
Tecom did not govern the allowability of the costs. Rather,
it contended that a provision of the contract, DEAR
970.5204-31 (1997), “alone dictates the treatment and re-
imbursability of legal costs.” J.A. 691. The DEAR provi-
sion, entitled “Insurance—litigation and claims,” provides:
(e) Except as provided in subparagraphs (g) and (h)
of this clause, or specifically disallowed elsewhere
in this contract, the contractor shall be reim-
bursed . . .
(2) For liabilities (and reasonable expenses
incidental to such liabilities, including liti-
gation costs) to third persons not compen-
sated by insurance or otherwise . . . .
(g) Notwithstanding any other provision of this
contract, the contractor shall not be reimbursed for
liabilities (and expenses incidental to such liabili-
ties, including litigation costs, counsel fees, judg-
ment and settlements)—
(1) Which are otherwise unallowable by law
or the provisions of this contract . . . .
(h) In addition to the cost reimbursement limita-
tions contained in DEAR 970.3101-3, and notwith-
standing any other provision of this contract, the
4 BECHTEL NATIONAL, INC. v. UNITED STATES
contractor’s liabilities to third persons, including
employees but excluding costs incidental to work-
ers’ compensation actions, (and any expenses inci-
dental to such liabilities, including litigation costs,
counsel fees, judgments and settlements) shall not
be reimbursed if such liabilities were caused by
contractor managerial personnel’s
(1) Willful misconduct,
(2) Lack of good faith, or
(3) Failure to exercise prudent business
judgment . . . .
DEAR 970.5204-31 (emphases added).
On September 13, 2016, the contracting officer issued
a final decision disallowing the costs. Because the govern-
ment had already reimbursed Bechtel, the decision stated
that “the government would offset the amount it had pro-
visionally reimbursed Bechtel from future amounts the
government owed to it as a result.” Bechtel, 137 Fed. Cl. at
427.
On May 18, 2017, Bechtel brought suit in the Claims
Court challenging the contracting officer’s final decision
and seeking reimbursement of the defense costs. See 41
U.S.C. § 7104(b)(1); 28 U.S.C. § 1491(a)(2). The parties
filed cross-motions for summary judgment. The Claims
Court granted the government’s motion for summary judg-
ment, concluding that Tecom provided the proper standard
for determining whether the defense costs were allowable
under the contract and holding that the costs were not al-
lowable.
Bechtel timely appealed to this court. We have juris-
diction pursuant to 28 U.S.C. § 1295(a)(3). We review a
grant of summary judgment by the Claims Court de novo.
Northrop Grumman Computing Sys., Inc. v. United States,
823 F.3d 1364, 1367 (Fed. Cir. 2016).
BECHTEL NATIONAL, INC. v. UNITED STATES 5
DISCUSSION
I
Tecom involved a dispute over whether costs associated
with settling an employment discrimination lawsuit were
allowable costs under a government contract that incorpo-
rated provisions of the FAR. 566 F.3d at 1040. “[A] former
employee [had] sued Tecom under Title VII, alleging sexual
harassment and firing in retaliation for filing a sexual har-
assment charge.” Id. at 1039. The alleged conduct, if
proven, would have violated Title VII. Id. After settling
the suit, the contractor sought reimbursement from the
government for defense costs and settlement payments as-
sociated with the lawsuit. Id.
The contract incorporated FAR 31.201-2, which states
that costs incurred by the contractor are “allowable only
when the cost complies with . . . [t]erms of the contract.”
Id. at 1040 (quoting FAR 31.201-2). One of the terms of the
contract at issue was FAR 52.222-26 (1984), which pro-
vided that “[t]he Contractor shall not discriminate against
any employee or applicant for employment because of race,
color, religion, sex, or national origin.” Id. at 1039 (quoting
FAR 52.222-26).
We articulated a standard for determining when costs
incurred by a contractor in defending and settling third
party claims are allowable under a government contract:
“(1) we ask whether, if an adverse judgment [had been]
reached, the damages, costs, and attorney’s fees would be
allowable; (2) if not, we ask whether the costs of settlement
would be allowable.” Id. at 1041 (citing Boeing N. Am., Inc.
v. Roche, 298 F.3d 1274, 1285–89 (Fed. Cir. 2002)).
As to the first step, we concluded that “the damages,
costs, and attorney’s fees associated with a violation of Ti-
tle VII would not be allowable under this contract.” Id. Be-
cause “[s]exual harassment is a form of sex
6 BECHTEL NATIONAL, INC. v. UNITED STATES
discrimination,” we determined that “the alleged discrimi-
nation would [have] clearly violate[d] the contract.” Id. at
1043–44. Thus, we held that “costs associated with an ad-
verse judgment on the merits would not be allowable” un-
der FAR 31.201-2. Id. at 1044. Our conclusion was
“underscored by the clear public policy of Title VII,” which
“prevent[s] the government from being complicit in paying
for discriminatory employment practices.” Id. at 1044.
As to the second step—i.e., whether the costs are none-
theless allowable when the contractor settles before an ad-
verse judgment—we determined that our decision in
Boeing “squarely addressed” that issue. Id. at 1045. We
held that, under Boeing, “[w]here the damages or penalties
paid in the event of an adverse judgment are disallowed,”
settlement costs are also unallowable unless the contractor
can establish that the plaintiff in the discrimination suit
“had very little likelihood of success on the merits.” Id. at
1046.
II
The contract at issue here incorporated FAR 31.201-2
(2000) and FAR 52.222-26 (1999)—the very same provi-
sions of the FAR that we held barred reimbursement in
Tecom. 1 Further, although the former employees brought
1 Both the Tecom contract and the contract here in-
corporated the pre-2004 version of FAR 31.201-2, and in
Tecom, we treated the pre-2004 version as equivalent to the
post-2004 version. See 566 F.3d at 1039–40. The prefatory
language of that section was revised in 2004 from “[t]he
factors to be considered in determining whether a cost is
allowable include the following” to “[a] cost is allowable
only when the cost complies with all of the following re-
quirements,” compare FAR 31.201-2 (2000) with
FAR 31.201-2 (2004), but the amendment was not a sub-
stantive change. In both instances “Terms of the contract”
BECHTEL NATIONAL, INC. v. UNITED STATES 7
their discrimination claims against Bechtel under § 1981
and state law, rather than under Title VII (as was the case
in Tecom), sexual and racial discrimination in violation of
§ 1981 and state anti-discrimination law would be a text-
book breach of FAR 52.222-26. Bechtel makes no argument
to the contrary.
Tecom recognized that the analysis for determining
whether the costs are allowable could change if there was
a contract provision “dictat[ing] the treatment of specific
costs.” 566 F.3d at 1041. Bechtel argues that Tecom does
not govern allowability of the costs here because the con-
tract incorporated such a provision dictating the treatment
of specific costs, namely DEAR 970.5204-31. That provi-
sion was not incorporated in the Tecom contract. According
to Bechtel, that provision “makes costs incurred in defense
of third party claims, including employment discrimination
claims, presumptively allowable.” Bechtel Op. Br. 21. We
conclude that DEAR 970.5204-31 is not a specific provision
making allowable the defense costs.
The DEAR provision generally provides for reimburse-
ment of contractor liabilities to third parties and “litigation
costs.” DEAR 970.5204-31(e). This allowability provision
is subject to certain exceptions. The provision makes clear
in two separate places that costs disallowed by other
was listed. In promulgating the final rule, the agency made
clear that the revision did not “constitute[] a major change
in determining allowability” and merely made the lan-
guage of the provision “consistent with established case
law, i.e., a cost must meet all five factors to be allowable.”
Federal Acquisition Regulation; General Provisions of the
Cost Principles, 69 Fed. Reg. 17,764, 17,765 (Apr. 5, 2004).
Bechtel does not argue there is a substantive difference be-
tween the pre-2004 and post-2004 versions.
8 BECHTEL NATIONAL, INC. v. UNITED STATES
provisions of the contract are not allowable. First, the
DEAR provision states that
[e]xcept as provided in subparagraphs (g) and (h) of
the clause, or specifically disallowed elsewhere in
this contract, the contractor shall be reim-
bursed . . . [f]or liabilities (and reasonable expenses
incidental to such liabilities, including litigation
costs) to third persons not compensated by insur-
ance or otherwise.
Id. (emphasis added). Subparagraph (g), in turn, specifies
that costs “[w]hich are otherwise unallowable by . . . the
provisions of this contract” “shall not be reimbursed.” Id.
970.5204-31(g). Subparagraph (h) provides additional ex-
ceptions to reimbursement, further specifying that costs
otherwise allowable under the contract are not allowable if
“caused by contractor managerial personnel’s (1) [w]illful
misconduct, (2) [l]lack of good faith, or (3) [f]ailure to exer-
cise prudent business judgment.” Id. 970.5204-31(h).
To be sure, subparagraph (h) imposes narrower re-
strictions on allowability of costs incurred in defending
third party claims than the FAR, but DEAR 970.5204-31
does not override the FAR provisions that we interpreted
in Tecom as disallowing those costs. Although DEAR
970.5204-31 specifically identifies a number of exceptions
to reimbursement of costs arising from third party claims,
it does not follow that all other defense costs are allowable.
Rather, the DEAR provision merely imposes cumulative re-
quirements on allowability and expressly makes the allow-
ability of defense costs subject to both subparagraphs (g)
and (h) and to other provisions of the contract.
Indeed, Bechtel admits that under its interpretation of
the contract, the DEAR provision makes the amount of an
adverse judgment and costs spent in unsuccessfully de-
fending a discrimination suit allowable. But as we have
explained, “pass[ing] such costs on to the government in a
BECHTEL NATIONAL, INC. v. UNITED STATES 9
contract context” would be contrary to public policy under
the Supreme Court’s decision in NAACP v. Fed. Power
Comm’n, 425 U.S. 662 (1976). Tecom, 566 F.3d at 1044.
Bechtel relies on Abraham v. Rockwell International
Corp., 326 F.3d 1242 (Fed. Cir. 2003), to suggest that the
DEAR provision should control over the FAR provisions. In
Abraham, we held that a contract clause “particularly di-
rected toward providing for the allowability of the very cat-
egory of costs at issue” controlled over “a more general
exclusionary clause.” Id. at 1254. Thus, we concluded that
the contractor’s legal fees and other costs incurred in suc-
cessfully defending against environmental criminal
charges were recoverable under the contract. Id. But we
recognized in that case that “there [wa]s a clear conflict [in
the contract] between a clause that expressly provide[d] for
the reimbursement of specific costs . . . and another
clause . . . that purportedly require[d] the opposite result,”
and we had to “determine which of the conflicting terms
control[led].” Id. at 1253–54. There is no such conflict be-
tween the DEAR and FAR provisions at issue here. Signif-
icantly, Abraham specifically recognized that the existence
of carve outs in a general allowability provision that make
the provision “subject to the express disallowance provi-
sions of the contract” prevents there from being a conflict.
Id. at 1250–51.
Bechtel also points to the regulatory history of the
DEAR provision in support of its interpretation. See Ac-
quisition Regulations; Department of Energy Management
and Operating Contracts, 62 Fed. Reg. 34,842, 34,844–45
(June 27, 1997). In promulgating the final rule, the DOE
“illustrate[d] how [the ‘prudent business judgment’ stand-
ard of DEAR 970.5204-31(h)] will operate in a typical third-
party action” using “[a] sexual harassment suit . . . brought
by an employee against the contractor” as an example in
response to commenters who expressed concern over how
the standard would be interpreted in practice. Id. at
10 BECHTEL NATIONAL, INC. v. UNITED STATES
34,844. However, this regulatory history does not suggest
that defense costs associated with such a harassment suit
would be allowed, nor does it state that other provisions of
the FAR should be disregarded in determining whether the
costs under the DEAR provision should be allowed. 2 Fail-
ure by the contractor to exercise “prudent business judg-
ment” in incurring costs associated with third party claims
is just one way that the costs may be disallowed.
We conclude that the standard articulated in Tecom
applies to the costs at issue here. Thus, Bechtel’s defense
costs related to the discrimination suits are only allowable
if Bechtel can show that the former employees “had very
little likelihood of success.” Tecom, 566 F.3d at 1039. Be-
fore the contracting officer, Bechtel argued that the former
employees’ claims had little likelihood of success on the
merits. However, Bechtel abandoned that argument on ap-
peal to the Claims Court. Therefore, we hold that the costs
are not allowable under the contract.
Bechtel’s remaining arguments do not require a con-
trary result. First, Bechtel contends that the DOE had re-
imbursed Bechtel for costs incurred in discrimination cases
before Tecom and that the DOE’s prior conduct supports
interpreting the contract to allow such costs. But the
DEAR provision is clear on its face. The parties’ prior con-
duct is only relevant if the contract language is ambiguous.
2 Bechtel relies on a statement of the DOE in the
Federal Register, which states: “The Department acknowl-
edges that third-party actions, including employee discrim-
ination complaints, are normal business risks, and is not
seeking to shift all such risk to the contractor.” Acquisition
Regulations; Department of Energy Management and Op-
erating Contracts, 62 Fed. Reg. at 34,845. But this regula-
tory history does not suggest that the costs here would
necessarily be allowable.
BECHTEL NATIONAL, INC. v. UNITED STATES 11
Topliff v. Topliff, 122 U.S. 121, 131 (1887); see also Agility
Logistics Servs. Co. KSC v. Mattis, 887 F.3d 1143, 1149
(Fed. Cir. 2018); Banknote Corp. of Am., Inc. v. United
States, 365 F.3d 1345, 1353 n.4, 1354–55 (Fed. Cir. 2004).
Here, there is no ambiguity in the contract.
Second, Bechtel argues that if Tecom governs the costs
here, then Tecom’s standard could be applied more broadly
to disallow costs associated with “any and all alleged con-
tract breaches,” and that such a reading would be contrary
to the contract. Bechtel Op. Br. 31. However, that issue is
not presented, and we need not address it.
Third, Bechtel further contends that it is unfair to im-
pose these burdens and risks on a contractor in Bechtel’s
position because “the long-standing foundation of DOE
cost-type contracting is that [the] DOE assumes virtually
all operational and financial risk, given the nature of the
work being performed,” and “contractors . . . might other-
wise decline the work given the extreme risks associated
with attempting to immobilize 56 million gallons of highly
radioactive liquid waste.” Id. at 29–30. But that is an ar-
gument for amending the contract requirements or the
FAR provisions. It does not justify our reading the contract
contrary to its express terms.
Finally, Bechtel argues that Tecom should be over-
ruled. As a panel, we are bound by Tecom, and, in any
event, Bechtel has not demonstrated that Tecom is in any
way unsound such that the panel should recommend en
banc review pursuant to Federal Circuit Rule 35.
CONCLUSION
The Claims Court correctly applied the standard in
Tecom in determining whether Bechtel’s defense costs were
allowable under the contract. Because Bechtel did not
challenge the contracting officer’s determination that the
12 BECHTEL NATIONAL, INC. v. UNITED STATES
former employees’ claims had more than a very little like-
lihood of success, we affirm.
AFFIRMED