Secretary of the Army v. Tecom, Inc.

Opinion

United States Court of Appeals for the Federal Circuit * Corrected: May 29, 2009

2008-1171

Pete Geren, SECRETARY OF THE ARMY,

Appellant,

v.

TECOM, INC.,

Appellee.

Domenique Kirchner, 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

* Correction in spelling of Senior Trial Attorney’s name. 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

2008-1171 3 § 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

2008-1171 4 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.

2008-1171 5