Secretary of the Army v. Tecom, Inc.

United States Court of Appeals for the Federal Circuit
2008-1171
Pete Geren, SECRETARY OF THE ARMY,
Appellant,
v.
TECOM, INC.,
Appellee.
Domenique Kirschner, Senior Trial Attorney, Commercial Litigation Branch, Civil
Division, United States Department of Justice, of Washington, DC, argued for appellant.
With her on the brief were Jeanne E. Davidson, Director, and Bryant G. Snee, Trial
Attorney. Of counsel on the brief was Craig S. Clarke, Deputy Chief, Contract and Fiscal
Law Division, United States Army Legal Services Agency, United States Department of the
Army, of Arlington, Virginia.
Jonathan M. Bailey, Bailey & Bailey, P.C., of San Antonio, Texas, argued for
appellee.
Appealed from: Armed Services Board of Contract Appeals
Administrative Judge Rollin A. Van Broekhoven
United States Court of Appeals for the Federal Circuit
2008-1171
Pete Geren, SECRETARY OF THE ARMY,
Appellant,
v.
TECOM, INC.,
Appellee.
Appeal from the Armed Services Board of Contract Appeals in no. 53884.
___________________________
DECIDED: May 19, 2009
___________________________
Before LOURIE, DYK, and PROST, Circuit Judges.
Opinion for the court filed by Circuit Judge DYK. Dissenting opinion filed by Circuit
Judge LOURIE.
DYK, Circuit Judge.
The government appeals from the decision of the Armed Services Board of
Contract Appeals (“Board”) granting summary judgment in favor of Tecom, Inc., and
holding that defense costs and settlement payments associated with a Title VII sexual
harassment suit are allowable costs under the Federal Acquisition Regulations (“FAR”).
Tecom Inc., ASBCA No. 53884, 54461, 2007 WL 2899660 (Sept. 21, 2007) (“Board
Decision”). We hold that under the contract the costs associated with an adverse
judgment would not be allowable, and that under our decision in Boeing North
American, Inc. v. Roche, 298 F.3d 1274 (Fed. Cir. 2002), defense and settlement costs
are allowable only if the contractor can show that the plaintiff in the Title VII suit had
very little likelihood of success. Accordingly, we reverse and remand for further
proceedings.
BACKGROUND
The material facts are not in dispute. Tecom was awarded a negotiated cost
reimbursement contract for military housing maintenance at Fort Hood, Texas, on
December 13, 1995. The contract incorporated by reference numerous provisions of
the FAR, including FAR § 52.222-26 Equal Opportunity (Apr. 1984), which states, in
part:
The Contractor shall not discriminate against any employee
or applicant for employment because of race, color, religion,
sex, or national origin.
48 C.F.R. § 52.222-26. Sex discrimination in violation of Title VII of the Civil Rights Act
of 1964, 42 U.S.C. § 2000e-2(a) (“Title VII”), is clearly a breach of this provision of the
contract; the contractor makes no argument to the contrary.
During the performance of the contract, a former employee sued Tecom under
Title VII, alleging sexual harassment and firing in retaliation for filing a sexual
harassment charge. The conduct forming the basis of the allegation occurred while the
employee was working on the government contract. The allegations, if proved, would
violate Title VII.
In the course of defending this Title VII litigation, Tecom incurred legal fees
totaling $96,163.16. Tecom ultimately decided to settle the matter with the former
employee for $50,000. The terms of the settlement agreement stated that the
2008-1171 2
settlement did not include “back pay.” The settlement also stated that Tecom did not
admit to any wrongdoing.
On September 2, 1999, Tecom requested reimbursement from the government in
the amount of $146,163.16, representing defense costs and settlement payments
related to the Title VII litigation. Tecom sought to include its legal fees as an indirect
cost charged to its G&A expense pool. Tecom sought to bill its settlement cost as a
direct cost of the contract.
Tecom claimed that it did not violate the law and the allegations of the former
employee were false, but that the cost of trying the case would have been
approximately $300,000. Tecom argued that the defense and settlement costs were
allowable under the contract and the FAR, and were reasonable because the settlement
costs were less than the costs of going to trial, even if Tecom had prevailed.
The government denied that these expenses were allowable, and, on June 22,
2001, Tecom converted its request for payment to a formal claim and requested a
contracting officer’s final decision. After the statutory period elapsed without a final
decision, the claim was deemed denied by the Contracting Officer pursuant to
41 U.S.C. § 605(c)(5), and Tecom filed a notice of appeal to the Board.
On cross-motions for summary judgment, the government argued that the
attorney’s fees and damages associated with a judgment of liability under a Title VII
claim were not allowable costs, and that, under Boeing, 298 F.3d at 1288-89, the cost of
settling such claims would also be unallowable unless the contractor proved that the suit
had very little likelihood of success on the merits. The contractor argued that the cost of
2008-1171 3
settling a Title VII suit (except for an explicit backpay award) 1 is always allowable,
notwithstanding Boeing, because Boeing was limited to suits that involved allegations of
fraud or similar misconduct.
The Board granted the contractor’s motion, and held that Boeing did not apply
where there were no charges that the contractor had engaged in criminal conduct,
fraud, or violations of the Major Fraud Act of 1988. The Board remanded to the
contracting officer for the limited purpose of a “determination of the reasonable amounts
to be reimbursed appellant consistent with this decision and the Allowable Cost and
Payment clause.” Board Decision, slip op. at 29. The parties agree that the decision of
the Board was a final decision subject to appeal under 41 U.S.C. § 607(g)(1). 2
The government timely appealed to this court. We have jurisdiction pursuant to
28 U.S.C. § 1295(a)(10). We review the Board’s grant of summary judgment de novo.
Lear Siegler Servs., Inc. v. Rumsfeld, 457 F.3d 1262, 1266 (Fed. Cir. 2006). Legal
determinations of the Board, including interpretation of statutes, regulations, and
contracts are reviewed without deference. 41 U.S.C. § 609(b).
1
FAR § 31.205-6(h) addresses backpay, and states that “[b]ackpay is
unallowable” with certain exceptions, including that backpay “resulting from underpaid
work actually performed [is] allowable, if required by a negotiated settlement, order, or
court decree.”
2
We agree that the Board’s decision is final within the meaning of 28
U.S.C. § 1295(a)(10) because the contracting officer’s “decision” that was on review
before the Board was a claim deemed denied under 41 U.S.C. § 605(c)(5). Dewey
Elecs. Corp. v. United States, 803 F.2d 650, 653-58 (Fed. Cir. 1986). As such, the only
issue decided by the contracting officer was allowability, and, in deciding this issue, the
Board therefore decided the only issue that was before it on review, remanding for a
determination only of the amount to be allowed (an issue not previously decided by the
contracting officer). Id.2008-1171 4
DISCUSSION
The issue on appeal is whether the costs of defending and settling a Title VII
suit are allowable costs under this government contract. Under the FAR, the costs
incurred by the contractor are “allowable only when the cost complies with all of the
following requirements: (1) Reasonableness. (2) Allocability. (3) [The CAS accounting
principles]. (4) Terms of the contract. (5) Any limitations set forth in this subpart.” FAR
§ 31.201-2. We have previously held that the regulations distinguish between
allocability, which “is an accounting concept involving the relationship between incurred
costs and the . . . [contracts] to which those costs are charged,” and allowability, which
“concerns whether a particular cost can be recovered from the government in whole or
in part.” Boeing, 298 F.3d at 1280. Only the fourth and fifth elements are at issue in
this appeal. Both relate to the allowability of costs.
The fourth element of allowable costs requires that the “cost complies with [the]
. . . [t]erms of the contract.” FAR § 31.201-2. This condition on allowable costs can be
found in regulatory provisions governing government contracts going back decades,
including the former Armed Services Procurement Regulations. 32 C.F.R. § 7.203-4(Cum. Sup. 1960) (stating that costs must “be allowable in accordance with . . . [t]he
terms of this contract”); see 23 Fed. Reg. 6345, 6347 (Aug. 19, 1958).
The fifth element of allowable costs requires that “the cost complies with . . . [a]ny
limitations set forth in this subpart.” FAR § 31.201-2. This refers to costs made
unallowable in FAR subpart 31.2. The FAR specifically provides that a number of costs
are either allowable or not allowable. However, as FAR § 31.204 makes clear, the FAR
“does not cover every element of cost. Failure to include any item of cost does not
2008-1171 5
imply that it is either allowable or unallowable.” As we discussed in Boeing, where
neither the contract nor the FAR dictates the treatment of specific costs, we must
determine how those costs are to be treated by looking to “the principles and standards
in this subpart and the treatment of similar or related selected items.” 298 F.3d at 1285(emphasis omitted) (quoting FAR § 31.204(c)).
As described in Boeing, even though costs of professional services and costs of
settling litigation are generally allowable, this is not always the case. Where the claimed
costs are associated with a settlement agreement we conduct a two-step inquiry in
addressing the allowability of such costs: (1) we ask whether, if an adverse judgment
were reached, the damages, costs, and attorney’s fees would be allowable; (2) if not,
we ask whether the costs of settlement would be allowable. Boeing, 298 F.3d at 1285-
89.
I
As to the first step—the judgment costs—the contractor at oral argument first
conceded that the costs associated with an adverse judgment in a Title VII suit would
not be allowable, and later in oral argument sought to retract that concession. Oral
Arg., Jan. 6, 2009, 16:12-30; 20:44-21:32, available at http://oralarguments.cafc.
uscourts.gov/mp3/2008-1171.mp3. We conclude that the initial concession was well
taken because the damages, costs, and attorney’s fees associated with a violation of
Title VII would not be allowable under this contract.
Like the present case, Boeing involved a claim for the cost of settling a private
lawsuit. In Boeing the underlying private suit was a shareholder suit against, inter alia,
fourteen directors of the company. 298 F.3d at 1276. Prior to the underlying
2008-1171 6
shareholder suit at issue in Boeing, the contractor had been convicted by the
government of, inter alia, fraud against the government. Id. at 1277. After this
conviction and the resulting fines and penalties, the shareholder suit was brought. The
shareholder suit was based largely on the criminal convictions that were allegedly
incurred because the directors of the company “fail[ed] to establish internal controls
sufficient” to prevent fraud. Id.We noted that FAR § 31.205-47 specifically dealt with the criminal convictions
and fraud against the government. See Boeing, 298 F.3d at 1287 n.14. 3 However, the
3
FAR § 31.205-47 addresses certain costs related to legal proceedings:
(b) Costs incurred in connection with any proceeding brought
by a Federal, State, local, or foreign government for violation
of . . . law or regulation by the contractor . . . , costs incurred
in connection with any proceeding brought by a third party in
the name of the United States under the False Claims Act,
31 U.S.C. § 3730, are unallowable if the result is—
(1) In a criminal proceeding, a conviction;
(2) In a civil or administrative proceeding, either a finding
of contractor liability where the proceeding involves an
allegation of fraud or similar misconduct or imposition of
a monetary penalty where the proceeding does not
involve an allegation of fraud or similar misconduct;
***
(4) Disposition of the matter by consent or compromise if
the proceeding could have led to any of the outcomes
listed in subparagraphs (b)(1) through (3) of this
subsection (but see paragraphs (c) and (d) of this
subsection);
(c) (1) To the extent they are not otherwise unallowable,
costs incurred in connection with any proceeding under
paragraph (b) of this subsection commenced by the
United States that is resolved by consent or compromise
pursuant to an agreement entered into between the
contractor and the United States, and which are
unallowable solely because of paragraph (b) of this
subsection, may be allowed to the extent specifically
provided in such agreement.
2008-1171 7
FAR did not specifically address shareholder suits alleging a failure to prevent criminal
wrongdoing. To determine whether the cost of defending the shareholder suit in this
case would be allowable, we asked whether the shareholder suit was “similar or related”
to the costs of the underlying convictions as described in FAR § 31.204(c). Boeing, 298
F.3d at 1285-86. We first held that costs of shareholder suits are not similar to costs
incurred in connection with criminal convictions or any other disallowed cost in the FAR.
Id. at 1286. However, we held that this particular shareholder suit was “related” to the
convictions. Id. at 1287. Judgment against the contractor in the suit would require “a
judicial determination that the [contractor’s] directors had failed to maintain adequate
controls to prevent the occurrence of the wrongdoing against the government.” Id.This, we held, established a sufficiently direct relationship to the disallowed costs of the
criminal convictions, that the cost of defending against an adverse judgment in the
shareholder suit would also be disallowed. Id. at 1288-89.
The Ninth Circuit followed this aspect of our Boeing decision in Southwest
Marine, Inc. v. United States, 535 F.3d 1012 (9th Cir. 2008). Southwest Marine
involved an adjudication of liability for civil penalties under the Clean Water Act in a
citizen suit pursuant to 33 U.S.C. § 1365(a). Id. at 1014-15. Under the FAR, “costs
(2) In the event of a settlement of any proceeding brought
by a third party under the False Claims Act in which the
United States did not intervene, reasonable costs
incurred by the contractor in connection with such a
proceeding, that are not otherwise unallowable by
regulation or by separate agreement with the United
States, may be allowed if the contracting officer, in
consultation with his or her legal advisor, determines that
there was very little likelihood that the third party would
have been successful on the merits.
(emphases added).
2008-1171 8
incurred in connection with any proceeding brought by a third party in the name of the
United States under the False Claims Act, 31 U.S.C. § 3730, are unallowable if the
result is . . . imposition of a monetary penalty.” FAR § 31.205-47(b). The court held
citizen suits under the Clean Water Act that resulted in civil penalties were “similar” to
these costs disallowed in the FAR in False Claims Act proceedings. Sw. Marine, 535
F.3d at 1017. As a result, the costs in Southwest Marine were not allowable. Id.The parties agree that, in general, neither the statute nor the FAR explicitly
discusses the allowability of costs associated with adjudicated Title VII violations. The
government argues that, under FAR § 31.205-47 and our decision in Boeing, any costs
associated with a judgment of contractor violation of Federal law would not be
allowable. Alternatively, the government argues that, because punitive damages are
recoverable under Title VII, a violation of Title VII would be similar or related to
disallowed monetary penalties under FAR § 31.205-15. 4 However, we need not go so
far to resolve this case. We find that the cost of an adverse judgment in this case would
be unallowable in any event, because a contractor violation of Title VII would breach
this contract, and costs related to such a breach would not be allowable.
The FAR states specifically that costs are allowable only if the “cost complies
with [the] . . . [t]erms of the contract.” FAR § 31.201-2. As the government points out,
the contract specifically required the contractor not to discriminate on the basis of sex:
“During perform[ance of] this contract, the Contractor agrees . . . [t]he Contractor shall
4
FAR § 31.205-15 addresses fines and penalties, and states that “[c]osts of
fines and penalties resulting from violations of . . . Federal, State, local, or foreign laws
and regulations, are unallowable except when incurred as a result of compliance with
specific terms and conditions of the contract.”
2008-1171 9
not discriminate against any employee or applicant for employment because of race,
color, religion, sex, or national origin.” J.A. 4; FAR § 52.222-26; see 42 U.S.C. § 2000e-
2(a). Sexual harassment is a form of sex discrimination. Meritor Sav. Bank, FSB v.
Vinson, 477 U.S. 57, 66-67 (1986). The violation of Title VII by sex discrimination or
retaliation is a textbook breach of this contractual provision. Thus, if sexual harassment
and retaliation were established at trial, the costs of the defense and the judgment
would certainly result from a breach of the contract.
Under the decision of our predecessor court in Dade Brothers, Inc. v. United
States, costs resulting from a breach of a contractual obligation are not allowable costs
under the contract. 325 F.2d 239, 240 (Ct. Cl. 1963). The contract in Dade preceded
the modern system of uniform procurement regulations; nonetheless, the contract in
Dade was very explicit that the cost of defending third party suits was generally
allowable. The court noted that:
[T]he contractor would be entitled to reimbursement of “the
cost and expense of such litigation, including judgments and
court costs, allowances rendered or awarded in connection
with suits for wages, overtime or salaries, and reasonable
attorney’s fees for private counsel.”
Id. at 239-40 (quoting the contract).
However, in Dade the cost-plus-fixed-fee government contract also contained a
provision specifically stating that “[t]he Contractor will abide by all the terms and
conditions of the Union Agreement with [the relevant union].” Dade Def.’s Br. 6 (filed
Feb. 28, 1963). Fifty-four employees who were members of the union sued the
contractor and certain union officials in state court, alleging that the employees were
denied seniority rights they were entitled to under the union contract as a result of a
2008-1171 10
conspiracy among the employer and these certain union officials. The contractor was
found liable by a jury, and the verdict was upheld on appeal to the highest level of the
state court system. Dade, 325 F.2d at 239.
The contractor sought to treat the cost of defending the suit in state court and the
cost of satisfying the adverse judgment as allowable costs under the contract. The
Court of Claims held that these costs were not allowable costs:
[T]here is no ground for recovery against the Government.
Neither the wording nor the policy of the litigation-
reimbursement article of the government contract authorizes
reimbursement of expenses incurred because the contractor
breached its agreement with the Government or failed to
perform that contract faithfully.
Id. at 240 (emphasis added). After the date of the contract in Dade, the
government regulations were amended to include this principle, which has been
explicitly articulated in uniform government contract regulations since 1958. 32 C.F.R.
§ 7.203-4 (Cum. Supp. 1960) (stating that costs must be “allowable in accordance with
. . . [t]he terms of this contract”); see 23 Fed. Reg. 6345, 6347 (Aug. 19, 1958). The
modern FAR as well explicitly articulates this principle, stating that a cost is allowable
only if the “cost complies with . . . [t]he terms of this contract.” FAR § 31.201-2.
In this case, the alleged discrimination would clearly violate the contract, and
thus costs associated with an adverse judgment on the merits would not be allowable.
This conclusion is underscored by the clear public policy of Title VII. For example, the
Supreme Court in NAACP v. Federal Power Commission considered whether the
Federal Power Commission (“FPC”) had authority to disallow the costs of unlawful
discriminatory employment practices of regulatees in setting rates. 425 U.S. 662, 668
(1976). The FPC had statutory authority to set “just and reasonable” rates for the
2008-1171 11
transmission and sale of electricity. Id. at 666. The Court of Appeals had held that this
authority included the power to prevent the cost of the regulatees’ discriminatory
employment practices from being reflected in the rate charged and thus passed on to
consumers:
The Commission’s task in protecting the consumer against
exploitation can be alternatively described as the task of
seeing that no unnecessary or illegitimate costs are passed
along to that consumer. Costs incurred by reason of a
regulatee’s choosing to practice racial discrimination are
within the reach of that responsibility. . . . [For example,]
duplicative labor costs incurred in the form of back pay
recoveries . . . [and] the costs of legal proceedings.
Id. at 666-67 (quoting NAACP v. Fed. Power Comm’n, 520 F.2d 432, 444) (emphasis
added). The Supreme Court agreed, and held that costs resulting from violations of
Title VII were unreasonable and should not be part of the rate passed on to consumers:
To the extent that such costs are demonstrably the product
of a regulatee’s discriminatory employment practices, the
Commission should disallow them. For example, when a
company complies with a backpay award resulting from a
finding of employment discrimination in violation of Title VII
of the Civil Rights Act of 1964, 42 U.S.C. § 2000e et seq., it
pays twice for work that was performed only once.
Id. at 668 (emphases added). This case clearly demonstrates the expansive scope of
the public policy preventing the government from being complicit in paying for
discriminatory employment practices. Just as it is not “just and reasonable” for a
company to pass the costs of Title VII violations on to consumers, similarly it is
unreasonable to pass such costs on to the government in a contract context.
Tecom provides no reason why the violation of Title VII alleged in this case, if
established, would not also establish a breach of contract. Instead, Tecom would have
us limit Dade, without any principled basis, to the specific contractual facts of that case.
2008-1171 12
In support of limiting Dade to its facts, Tecom argues that if private lawsuits establishing
a violation of the contract are unallowable that will mean virtually any lawsuit will result
in unallowable costs because the Permits and Responsibilities Clause, FAR § 52.236-7,
incorporated in construction contracts by FAR § 36.507, makes it a violation of the
contract to violate any law.
Tecom’s policy concerns are founded on an incorrect premise. The Permits and
Responsibilities Clause does not broadly make failure to comply with the law a violation
of the contract. Rather, the Permits and Responsibilities Clause simply states that the
contractor is “responsible for obtaining any necessary licenses and permits, and for
complying with any Federal, State, and municipal laws, codes, and regulations
applicable to the performance of the work” so that the contractor’s failure to perform is
not excused if impeded by the contractor’s failure to comply with legal obligations. FAR
§ 52.236-7 (emphasis added).
II
The second step of this inquiry—how to treat a settlement agreement when an
adverse adjudication would not be allowable—need only be discussed briefly, as the
issue is squarely addressed by our decision in Boeing. We first noted that costs of
settling suits brought by the federal government would be unallowable if the costs of
satisfying a judgment would be unallowable:
This policy judgment appears to be based on the assumption
that suits brought by government entities are in most
situations likely to be meritorious, thus justifying a bright line
rule that does not look behind the settlement. Where a suit is
brought by a private party and the suit is settled, however,
such a blanket assumption is not appropriate.
2008-1171 13
298 F.3d at 1288. Thus, the policy of the FAR was to disallow the cost of settling suits
that were likely to have been meritorious and therefore would have been disallowed if
not settled. But we also concluded that no blanket assumption that the suit was
meritorious applied to private suits. Rather, where an adverse judgment would be
unallowable in a private suit, the settlement of the private suit is similar to the FAR
provisions concerning private suits under the False Claims Act:
The regulations suggest that where a private suit is involved
an inquiry is necessary to determine whether the plaintiff
was likely to prevail. This approach is most clearly reflected
in the FAR regulations’ treatment of settlements of private
suits brought under the False Claims Act where the
government does not intervene. FAR § 31.205-47(c)(2)
(2000). Such costs may be allowable if the contracting officer
determines that there was “very little likelihood that the third
party [plaintiffs] would have been successful on the merits.”
Id.
Id. (emphases added, footnotes omitted, and alteration in original). As this quotation
clearly shows, in private suits “an inquiry is necessary to determine whether the plaintiff
was likely to prevail.” Id. We found this approach “most clearly reflected” in regulations
relating to fraud but did not limit our holding to that situation. 5 Id. We held that, under
the principles and standards of the FAR, whenever the costs of a judgment would be
unallowable, the cost of a settlement would also be unallowable unless the contractor
could prove that the private suit had very little likelihood of success on the merits. Id.
While Boeing involved only defense costs and not settlement payments, Boeing
applies equally to settlement payments. Settlement payments are related to the
5
Although subsection (c)(2) was added in 1996 and the contract was
signed in 1995, as discussed in Boeing, (c)(2) was added to clarify the application of
cost principles, and applies retroactively. Boeing, 298 F.3d at 1288 n.17. To the extent
that the Board suggested otherwise, the Board erred.
2008-1171 14
damages or penalties that would have been associated with an adverse judgment.
Indeed, Tecom does not argue otherwise. Where the damages or penalties paid in the
event of an adverse judgment are disallowed, the settlement cost is also unallowable
unless the contractor can establish that the private Title VII plaintiff had very little
likelihood of success on the merits.
The dissent does not dispute that a Title VII judgment against the contractor
would not have been allowable in this case. However, the dissent suggests that (apart
from fraud situations) settlement costs should be allowable, regardless of how clearly
meritorious the claim, and urges that Boeing adopted a rule limited to fraud settlements.
We think that Boeing clearly adopted a broader rule applicable to private settlements
generally where the defense and judgment costs would be disallowed in the case of a
final adjudication. Indeed, that was the whole point of Boeing—to determine the
applicable rule for similar or related cases not covered by the regulations. Boeing
concluded that “[f]or the costs to be allowable in a settlement situation (where the costs
of an unsuccessful defense would be disallowed), Boeing must show that the
allegations in the [underlying] action had ‘very little likelihood of success on the merits.’”
Id. at 1288-89.
The dissent suggests that applying the likelihood of success test to private
settlements generally would be unwise. Dissent at 4-5. But the rule urged by the
dissent would allow a contractor who engaged in conduct prohibited by the contract—
where defense and judgment costs would be disallowed if it were tried to judgment—to
nonetheless recover the defense and settlement costs if it resolved the case before
judgment. It cannot be the policy of the FAR to permit a contractor who is certain to
2008-1171 15
lose on the merits to defeat disallowance by the simple expedient of settling before the
litigation is concluded. The Boeing rule prevents such an outcome by applying a very
little likelihood of success standard to all private settlements where defense and
judgment costs would be disallowed if the case went to final judgment against the
contractor.
CONCLUSION
We find that the Board erred in refusing to apply our decision in Boeing to the
costs at issue in this case. To the extent that other decisions of the Board are
inconsistent with this decision, they are no longer good law. We therefore reverse and
remand for further proceedings consistent with this opinion.
REVERSED and REMANDED
COSTS
No costs.
2008-1171 16
United States Court of Appeals for the Federal Circuit
2008-1171
Pete Geren, SECRETARY OF THE ARMY,
Appellant,
v.
TECOM, INC.,
Appellee.
Appeal from the Armed Services Board of Contract Appeals in no. 53884.
LOURIE, Circuit Judge, dissenting.
I respectfully dissent from the majority opinion, which reverses the decision of the
Armed Services Board of Contract Appeals (the “Board”) and extends Boeing North
American, Inc. v. Roche, 298 F.3d 1272 (Fed. Cir. 2002), to reach the facts of this case.
I believe that such an extension is unwarranted given the different factual background of
the instant action.
In Boeing, this court faced the question of which standard should apply for
determining the allowability of settlement costs of a shareholder derivative suit. That
derivative suit, referred to as the Citron suit, was brought by private parties and alleged
a breach of fiduciary duty by directors and officers of a corporation for “failing to
establish internal controls sufficient to insure that the [c]orporation’s business was
carried on in a lawful manner.” 298 F.3d at 1277 (quoting the complaint, alteration in
original). Specifically, the parties agreed that “five instances of underlying misconduct”
were involved in the Citron suit: (1) a civil suit brought by the government under the
False Claims Act; (2) criminal charges brought by the government for making false
statements; (3) government allegations of defective pricing that resulted in indictments
for fraud, mail fraud, and willfully making false statements and that, ultimately, led to a
guilty plea to two counts of the indictment; (4) a civil qui tam suit, brought on behalf of
the government under the False Claims Act; and (5) allegations of hazardous waste
dumping and other environmental law violations. Id. Thus, although the lawsuit brought
by private parties that resulted in settlement was on its face based on breach of
fiduciary duty, four of the five instances of underlying misconduct involved false
statements or fraud.
After determining that no regulation specifically addressed whether the defense
costs of the Citron lawsuit were or were not allowable, the Boeing court concluded that
the costs were not “similar” to costs specifically disallowed under the Federal
Acquisition Regulations (“FAR”) but were “related to” disallowed defense costs for a suit
that resulted in criminal convictions of the directors. Id. at 1286-87. But, given that
there was no judicial determination of wrongdoing because the parties settled, the
Boeing court then had to determine whether the settlement costs of the Citron suit were
allowable.
The court found that the regulations did not provide a blanket rule that stated that
settlement costs for a private litigation should be disallowed if the costs for an
unsuccessful defense of such a suit would have been disallowed. Boeing, 298 F.3d at
1287-88. The court presumed, however, that meritorious suits should be treated
2008-1171 2
differently from those that lacked merit and looked to the FAR for guidance as to
whether the settlement costs of the Citron suit were allowable:
The regulations suggest that where a private suit is involved an inquiry is
necessary to determine whether the plaintiff was likely to prevail. This
approach is most clearly reflected in the FAR regulations’ treatment of
settlements of private suits brought under the False Claims Act where the
government does not intervene. Such costs may be allowable if the
contracting officer determines that there was “very little likelihood that the
third party [plaintiffs] would have been successful on the merits.”
Id. at 1288 (quoting FAR § 31.205-47(c)(2), 48 C.F.R. § 31.205-47(c)(2)) (other citations
omitted, alteration in original). The Boeing court concluded that the very little likelihood
of success standard from FAR § 31.205-47(c)(2) was “an appropriate standard for
private suits in the present context.” Id. The Boeing court held, quoting the exact
language of FAR § 31.205-47(c)(2), that “[f]or the costs to be allowable in a settlement
situation (where the costs of an unsuccessful defense would be disallowed), Boeing
must show that the allegations in the Citron action had ‘very little likelihood of success
on the merits.’” Id. at 1288-89.
It is clear to me from the analysis in Boeing that the very little likelihood of
success standard, which is found in the FAR only in § 31.205-47(c)(2), was a far more
“appropriate standard” for the facts of that case than for the present situation. FAR
§ 31.205-47(c)(2) specifically applies to “settlement of any proceeding brought by a third
party under the False Claims Act in which the United States did not intervene.” It does
not apply to any and all settlements of lawsuits brought by private parties involving any
and all types of allegations. As discussed above, the private suit that settled in Boeing
involved several instances of fraudulent behavior and the making of false statements,
including a qui tam suit brought under the False Claims Act. Clearly, the fact that FAR
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§ 31.205-47(c)(2) specifically addresses a private suit under the False Claims Act lends
support to the Boeing court’s decision to utilize the very little likelihood of success
language from that regulation as the standard of allowability of the settlement costs of
the Citron suit.
Unlike Boeing, however, the case at hand does not present the same opportunity
for analogizing to qui tam cases brought under the False Claims Act. There is no nexus
between the facts of the private suit in this case, a sexual harassment suit filed by a
former employee, and a lawsuit brought by a third party on behalf of the government
that alleges fraud or similar misconduct. To apply Boeing here would be extending the
reach of that decision, which looked to the very little likelihood of success language in a
far more similar set of circumstances to what FAR § 31.205-47(c)(2) actually covers, to
apply to any settlement of a lawsuit brought by a private party when the costs of an
unsuccessful defense would be disallowed. Such an extension, in my opinion, is
unwarranted given the specific applicability of FAR § 31.205-47(c)(2) to private suits
brought under the False Claims Act in which the government does not intervene, and I
believe the Board was correct in refusing to apply the Boeing standard in this case.
A final thought: Determining the likelihood of success in a law suit is not so
easily done. If it were, we would not have so many suits, appeals, and reversals of
decisions in our legal system generally. It is one thing to have that standard be a
criterion for allowability of costs in defending a suit when fraud against the government
is alleged. It is quite another to have that standard be the criterion in a suit involving
two private parties, even when the subject matter relates to a government contract. The
government has an interest in setting a higher barrier for the allowability of settlement
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costs when it is the party allegedly being defrauded, and may in fact be suing for that
fraud, than when it is two private parties who are contending. I therefore recoil from
judicially extending that difficult-to-apply likelihood of success rule beyond its current
borders. Finally, the whole point of a settlement generally is that neither party is
assured of success and the law favors settlement of such disputes. Thus, I do not
believe we as a court should extend the Boeing application of a regulation to
settlements beyond fraud cases, where the government’s interest is especially
compelling.
For the foregoing reasons, I respectfully dissent.
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