Complaint that the agency breached its contract when it denied the plaintiff’s request for reimbursement of litigation costs is denied, where the costs were incurred due to the plaintiff’s alleged violation of the contract’s anti-discrimination provisions and where the plaintiffs in those cases had more than a very little likelihood of success on the merits. The court also rejected the plaintiff’s argument that the agency had previously indicated such costs would be reimbursed, because the agency was required to revisit its interpretation of the contract language in light of the Federal Circuit’s decision in Geren v. Tecom, Inc.
Bechtel National Inc. sued the Department of Energy for breach of contract, after the agency denied Bechtel’s claim seeking reimbursement of its costs defending itself against litigation alleging sexual and racial harassment and discrimination. DOE had provisionally approved Bechtel’s request, but after further consideration, the department disallowed the costs, relying, at least in part, on the Federal Circuit’s decision in Geren v. Tecom, Inc., 566 F.3d 1037 (Fed. Cir. 2009).
Bechtel’s contract for the design, construction, and operation of the Hanford waste treatment plant incorporated FAR 52.222-26, which provides that the contractor must agree not to discriminate against any employee or applicant for employment because of race, color, religion, sex, or national origin.” The contract also incorporated DOE Acquisition Regulation language providing that the contractor would be reimbursed certain litigation costs, as well as language requiring notice to the contacting officer of any legal proceeding arising out of contract performance and the CO’s authorization to proceed with such litigation.
When Bechtel notified DOE of the potential litigation, the agency informed Bechtel that it was authorized to proceed with defense of the case, but cautioned that the authorization was not a determination of the allowability of costs. DOE also authorized to provisionally charge outside and in-house costs to the contract, while noting that the costs could be disallowed at a later date. DOE later reimbursed Bechtel $250,000 in costs for each of two separate lawsuits, for a total of $500,000. The payments were made on a provisional basis.
However, after reviewing the cases, the CO determined that the costs were unallowable. The CO concluded that in each case, the plaintiff’s claim had more than very little likelihood of success on the merits. Therefore, under Tecom, the defense costs related to the claims were not allowable. Bechtel responded to the CO’s letter and the CO then issued a final decision affirming his conclusion. This complaint followed.
In the complaint, Bechtel alleged that DOE breached its contract when it disallowed the costs Bechtel incurred in connection with its settlement of the two discrimination complaints. Bechtel urged the court to conclude that the allowability of costs for third party litigation and claims is governed by its contract, not Tecom, and to reverse the CO’s final decision.
Bechtel argued that Tecom had no bearing on the allowability of these costs. In Tecom, the contract was silent on the issue, but Bechtel argued its contract explicitly allocated to the government the risk of third party claims. Bechtel maintained that its interpretation of the contract is supported by DOE’s prior course of performance in reimbursing Bechtel and others for liabilities incurred in discrimination cases.
COFC found this argument without merit. The court explained that the issue raised in Tecom whether a contractor’s costs of defending against and settling a Title VII sexual harassment lawsuit were allowable under the FAR where the contract incorporated FAR 52.222-26, which prohibits contractors from discriminating against any employee because of race, color, religion, sex, or national origin. The court in Tecom reasoned that to be allowable under FAR 31.201-2, costs must meet five requirements, one of which is compliance with the terms of the contract, and therefore the costs of an adverse judgment in the sexual harassment case would be unallowable because a violation of Title VII would breach the contract. The court further held that the costs of settling a discrimination case before judgment would be allowable only if the contractor can show that the plaintiff had very little likelihood of success.
COFC noted that Bechtel did not dispute that its costs would not be allowable if Tecom applies. Bechtel also did not dispute the CO’s determination that the plaintiffs in the discrimination cases had more than very little likelihood of prevailing on their claims. Instead, Bechtel argued that its case is distinguishable from Tecom because its contract provided that costs incurred to defend and settle third party claims are allowable.
However, COFC found that Bechtel ignored language providing exceptions to the reimbursement clause, in situations where costs were unallowable by law or the provisions of the contract. According to COFC, the “provisions of the contract” rendered Bechtel’s costs of defending against and settling the discrimination complaints unallowable. As the court of appeals held in Tecom, costs do not comply with the terms of a contract where they are incurred as a result of a breach of the contract’s non-discrimination provision.
Bechtel also argued that DOE’s interpretation of the contractual language is inconsistent with the parties’ course of performance and with certain regulatory history surrounding a 1997 amendment to the DEAR that established a prudent business judgment test as a measure of the allowability of the costs of third-party liability.
However, the court found this argument unavailing, noting that DOE had already conceded that before Tecom it did not treat the costs of liability incurred by contractors in discrimination cases categorically as otherwise unallowable by the provisions of the contract. In light of Tecom, DOE was required to revisit the application of the clause to discrimination cases. DOE began to disallow these costs after Tecom was decided because the relevant DEAR clauses similarly provide that third-party liability costs are not reimbursable where they are made otherwise unallowable by the provisions of the contract.
COFC also rejected Bechtel’s argument that DOE’s revised application of the clauses in the discrimination context resulted in a “rewrite” or unilateral change in the contract that violated the parties’ original understanding of DOE’s obligations and Bechtel’s rights. The court found this argument conflated a change in a contractual standard with a change in how the standard is applied as mandated by an intervening change in (or clarification of) the law.
The contract did not provide specifically provide that Bechtel would be reimbursed for third-party liabilities incurred in discrimination cases. Rather, it reflected a more general intent that Bechtel would be reimbursed for third-party liabilities except where they were otherwise unallowable by the provisions of the contract or were the product of willful misconduct, lack of good faith, or a failure to exercise prudent business judgment. As a matter of law, Tecom established that costs resulting from a breach of the FAR’s non-discrimination provision are “otherwise unallowable” under a contract that contains such a provision.
Because Bechtel’s costs were incurred as a direct result of violations of the contract’s anti-discrimination provision, the court held they were not allowable.
Bechtel National Inc. is represented by Stephen D. Knight, Edmund M. Amorosi and Laura A. Semple of Smith Pachter McWhorter PLC, and by Leslie Droubay Killoran, Bechtel National Inc. The government is represented by Geoffrey M. Long, Trial Attorney, Commercial Litigation Branch, Civil Division, Department of Justice, with whom were Patricia M. McCarthy, Assistant Director, Robert E. Kirschman, Jr., Director, and Chad A. Readler, Acting Assistant Attorney General.
