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Allowability of Settlement Costs Depended on Merits of Suit

The Court of Appeals for the Federal Circuit reversed and remanded the Armed Services Board of Contract Appeals' summary judgment ruling on the allowability of defense costs associated with a settled Title VII sexual harassment suit because the standard for determining allowability enunciated in Boeing North American, Inc. v. Roche (46 CCF 77,930) applied to all private settlements where costs would be disallowed if a final judgment went against the contractor. In Boeing, the Federal Circuit held a contractor's costs incurred in settling a lawsuit were similar to settlement costs covered by FAR 31.205-47 and thus were allowable only if the contractor could show the lawsuit had "very little likelihood of success on the merits." The board limited Boeing to the types of litigation described in FAR 31.205-47(b), which included criminal proceedings and proceedings involving charges of fraud, and concluded the contractor's costs were allowable without assessing the merits of the Title VII suit (07-2 BCA 33,674).
Likelihood of Success

The Federal Circuit based its holding on a more fundamental requirement for allowability of costs under FAR 31.201-2, namely that the cost comply with the terms of the contract. An adverse judgment in a Title VII suit would not be allowable under the contract, which specifically prohibited discrimination on the basis of sex. In the case of settlement, Boeing allowed related costs only if the contractor demonstrated the suit had very little likelihood of success on the merits. According to the Federal Circuit, Boeing applied broadly to all private settlements, and although it involved defense costs, applied equally to settlement payments because settlement payments are related to the damages or penalties that would have been associated with an adverse judgement. In terms of policy, a broader application of Boeing prevented a contractor certain to lose on the merits from "defeat[ing] disallowance by the simple expedient of settling before the litigation is concluded." Thus, the very little likelihood of success standard applied in determining the allowability of the contractor's defense and settlement costs.

In a dissenting opinion, Judge Lourie noted the shareholder derivative suit in Boeing, which involved fraudulent behavior and false statements, including a qui tam suit under the False Claims Act, presented circumstances much closer to FAR 31.205-47(c)(2), which applies the likelihood of success standard to settlements of FCA qui tam suits in which the government did not intervene. Given the specific applicability of FAR 31.205-47(c)(2) --and the difficulty of determining the likelihood of success in a law suit --the dissent concluded the majority's extension of the likelihood of success standard was unwarranted. (Geren v. Tecom, Inc., CA-FC, 53 CCF 79,109



(The news featured above is a selection from the news covered in the Government Contracts Report Letter, which is published weekly and distributed to subscribers of the Government Contracts Reporter. )


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