ASBCA: Sexual Harassment Legal Fees and Settlement Costs Are Recoverable

By John N. Ford, Cherry, Bekaert & Holland, L.L.P. (CB&H)
Email: jford@cbh.com

In Tecom, Inc., ASBCA No. 53,884 and 54461 (September 21, 2007), the Armed Services Board of Contract Appeals held that legal fees and settlement costs incurred by Tecom in regard to a sexual harassment lawsuit were allowable cost on Tecom’s government contracts.

While this decision is consistent with earlier ASBCA decisions regarding such costs, it is significant in that it clarifies the “very little likelihood of success on the merits” test that the Court of Appeals for the Federal Circuit adopted for certain litigation costs in Boeing North American, Inc. v. Roche, 298 F.3d 1274 (Fed. Cir. 2002). Moreover, this decision should go a long way in deterring the DCAA from questioning litigation costs incurred in other types of litigation, particularly where there has been a settlement.

During the performance of a family housing maintenance contract at Fort Hood in Texas, a former Tecom employee, who had worked on the contract, filed a sexual harassment suit against Tecom pursuant to Title VII of the Civil Rights Act of 1964. Ultimately, this lawsuit was settled with Tecom incurring over $96,000 in legal fees and agreeing to pay the former employee a settlement of $50,000, no part of which included back pay, which would have been unallowable under FAR 31.205-6(h)(1). Tecom did not admit to any wrongdoing in the settlement agreement or the lawsuit.

After the settlement was approved by the U.S. District Court, Tecom submitted a request for reimbursement for its legal fees and settlement costs. In this letter, Tecom asserted that the harassment complaints were untrue, and that it would have cost at least twice as much to try the case as to settle it. Therefore, Tecom made a prudent business decision to settle the case without any admission of culpability.

After a number of letters were exchanged over several months regarding these costs, Tecom converted its request for payment into a claim. A year later, Tecom filed its appeal with the ASBCA after the contracting officer had not taken action on its claim.

On appeal, relying on the Boeing case mentioned above, the government took the position that for Tecom to prevail, the company had to demonstrate that the former employee had very little likelihood of succeeding had the lawsuit gone to trial. This argument was based on FAR 31.205-47(c)(2) and 31.204. Additionally, the government argued that the settlement costs were not allowable in any event as they were “related” to penalties which are expressly unallowable under FAR 31.205-15.

The Board rejected both these arguments. In regard to the “little likelihood of success” argument the Board stated:
"In the instant appeal, the parties in their cross-motions for summary judgment merely seek our determination as to whether the Boeing standard for allowability applies to the costs in question, and whether appellant must show that the former employee/plaintiff in the sexual harassment lawsuit against appellant had “very little likelihood of success on the merits” as asserted by the government. We hold that it does not. The litigation in question did not involve a criminal prosecution; did not require a finding, absent a settlement, of contractor liability based on fraud or similar misconduct or imposition of a monetary penalty where the proceeding did not involve an allegation of fraud or similar misconduct; or did not require a final decision by an appropriate official of an executive agency to disbar or suspend appellant, or to rescind or void the contract, or to terminate the contract for default by reason of the contractor’s violation or failure to comply with a law or regulation. Accordingly, we hold that FAR 31.205-47 does not present an allowability bar to appellant’s recovery of its legal costs, as part of its reimbursement of G&A, in defending the lawsuit filed by its former employee." Thus, the Board interpreted the Boeing standard of “little likelihood of success” as applying only to litigation related to the types of proceedings specifically identified in FAR 31.205-47.

Turning to the question of whether the settlement costs were related to the “penalties” aspect of FAR 31.205-15, the Board looked to Ingalls Shipbuilding, Inc. v. Dalton, 119 F.3d 972 (Fed. Cir. 1997) to determine the essential characteristics of a penalty. In doing so, it noted that a cost should be considered a penalty if:
(1) the costs imposed are unrelated to the amount of actual harm suffered and are related more to the penalized party’s conduct; (2) the proceeds from the infractions are collected by the state, rather than paid to the individual harmed; and (3) the statute is meant to address a harm to the public, as opposed to remedying a harm to an individual. Applying this test, the Board determined that the settlement costs were not “penalties.”

Taking the lessons learned from Tecom, the allowability of attorney fees and related litigation costs will generally be governed by FAR 31.205-33. Under this provision, legal fees are generally allowable if they are adequately supported by billing information from the attorney. In this regard, paragraph (f) of the cost principles states that “[f]ees for services rendered are allowable only when supported by evidence of the nature and scope of the service furnished." It goes on to require contractors to produce the details of all agreements, such as engagement letters, with the attorney, showing the work requirements, rate of compensation, and the nature and amount of other expenses to be covered by the agreement.

The provision also requires that invoices or billings submitted by the attorney include “sufficient detail as to time expended and nature of the actual services provided.” This latter point is significant as legal bills often will contain items that merely state such things as “telephone call client” with no identification of the matter to which the call related. This type of entry makes it almost impossible for the government, particularly a DCAA auditor, to determine if the time charged for that item is allowable. Accordingly, you should request all outside professionals who are covered by FAR 31.205-33 to provide fairly detailed information in their bills or invoices if you hope to recover those costs on government contracts.

One exception to the general allowability of attorney fees is found in FAR 31.205-30, Patent costs. The costs of general patent counseling are allowable. However, other patent costs, including the cost of patent litigation, except that undertaken at the direction or request of the government or in fulfillment of the requirements of a government contract are unallowable.

John is a Senior Government Contracting Consultant with CB&H and a member of the Firm's Government Contractor Services Group.