Secretary of the Army v. Tecom, Inc.
2009 U.S. App. LEXIS 10633, 566 F.3d 1037, 92 Empl. Prac. Dec. (CCH) 43,612 (2009)
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Rule of Law:
Where a government contractor's alleged conduct in a private lawsuit would also constitute a breach of its government contract, the costs of defending and settling that lawsuit are allowable only if the contractor can prove the private plaintiff had very little likelihood of success on the merits.
Facts:
- Tecom, Inc. was awarded a cost-reimbursement contract for military housing maintenance at Fort Hood, Texas.
- The contract incorporated a Federal Acquisition Regulation (FAR) clause explicitly prohibiting discrimination on the basis of sex.
- During the contract's performance, a former Tecom employee who had worked on the government contract sued Tecom under Title VII.
- The lawsuit alleged that the employee suffered sexual harassment and was fired in retaliation for filing a sexual harassment charge.
- Tecom incurred $96,163.16 in legal fees defending against the lawsuit.
- Tecom settled the matter with the former employee for $50,000.
- The settlement agreement stated that Tecom did not admit to any wrongdoing and that the payment was not for 'back pay'.
- Tecom subsequently sought reimbursement from the government for the combined defense and settlement costs of $146,163.16.
Procedural Posture:
- Tecom, Inc. submitted a request for reimbursement of its defense and settlement costs to the government contracting officer.
- The government denied the request for payment.
- Tecom converted its request to a formal claim, which was deemed denied after the statutory period for a final decision elapsed.
- Tecom appealed the deemed denial to the Armed Services Board of Contract Appeals (ASBCA), an administrative tribunal.
- On cross-motions for summary judgment, the ASBCA granted summary judgment in favor of Tecom, holding the costs were allowable.
- The government (appellant) appealed the ASBCA's decision to the U.S. Court of Appeals for the Federal Circuit, with Tecom as the appellee.
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Issue:
Are a government contractor's defense and settlement costs for a private Title VII sexual harassment lawsuit allowable costs under a government contract that contains an anti-discrimination clause, which would be breached by an adverse judgment in the lawsuit?
Opinions:
Majority - Dyk, Circuit Judge
No. A government contractor's costs for defending and settling a private Title VII lawsuit are not allowable where an adverse judgment would breach the contract, unless the contractor can show that the plaintiff had very little likelihood of success on the merits. The court applied a two-step inquiry derived from its precedent in Boeing North American, Inc. v. Roche. First, the court determined that costs from an adverse judgment would be unallowable because a finding of Title VII liability for sexual harassment would constitute a 'textbook breach' of the contract's explicit anti-discrimination clause, and costs resulting from a breach of contract are not allowable, citing Dade Brothers, Inc. v. United States. Second, since judgment costs would be unallowable, the court extended the Boeing standard to determine the allowability of settlement costs. It held that to recover settlement and defense costs, the contractor bears the burden of proving that the private plaintiff's suit had 'very little likelihood of success on the merits.' The court reasoned that this standard prevents a contractor who is likely to lose on the merits from avoiding the disallowance of costs by simply settling the case before a final judgment.
Dissenting - Lourie, Circuit Judge
Yes, the costs should be allowable without applying the stringent 'very little likelihood of success' test. The majority's extension of the Boeing standard is unwarranted. The Boeing case involved underlying allegations of fraud against the government, and the 'very little likelihood of success' standard was appropriately borrowed from a FAR provision specifically dealing with private suits under the False Claims Act. The present case, involving a private sexual harassment claim, has no nexus to fraud against the government. Applying a standard designed for fraud cases to all private lawsuits where a contract breach is alleged is an inappropriate expansion of precedent. Furthermore, this difficult-to-apply standard discourages settlements, which public policy generally favors, and imposes a high barrier for cost recovery in disputes between private parties that do not involve the government's core interest in preventing fraud.
Analysis:
This decision significantly expands the applicability of the Boeing 'very little likelihood of success' test beyond its origins in fraud-related litigation. By applying the test to a breach of contract stemming from a Title VII claim, the court establishes a broad principle that affects a wide range of private lawsuits against government contractors, including those involving employment, environmental, or other regulatory violations that may also be incorporated as terms in a government contract. This ruling places a substantial burden on contractors, forcing them to essentially re-litigate the merits of a settled case against the government to prove the original plaintiff's claim was weak. This complicates the decision to settle and increases financial risk for contractors facing private litigation related to their performance on government contracts.
