Pete GEREN, Secretary of the Army, Appellant, v. TECOM, INC., Appellee.
No. 2008-1171.
United States Court of Appeals, Federal Circuit.
May 19, 2009.
566 F.3d 1037
Contrary to ERBE‘s argument, the patent does contemplate a movable optics installation. The specification describes optical means within an instrument channel, stating that the probe “can be seen well through a viewing lens at the distal end of the endoscope, which lens is associated with a viewing optics arranged in an instrument channel of the endoscope.” Id. col.2 11.41-45. The specification makes clear that an instrument channel is a channel in which surgical tools can be inserted during the procedure. Id. col.10 11.29-33. There was also uncontroverted testimony in the record that movable optics were well-known and widely used at the time of the patent application as an alternative to fixed optics. The way to reconcile claim 1 with the specification is thus to construe claim 1 as referring to movable optics. In short, fixed optics do not involve a “working channel.”
As noted above, the parties agree that infringement requires the accused devices to be used with an endoscope having at least two “working channels” and that the accused devices have only a single “working channel” if the fixed optics are not a “working channel.” Based on our claim construction, the ITC correctly concluded that ERBE presented no evidence that any accused device had been used with an endoscope that had at least two “working channels” and, therefore, that there was no evidence of direct infringement and thus no basis for finding induced or contributory infringement. In light of this holding, we need not address the other arguments raised on appeal. Accordingly, we affirm.
AFFIRMED
COSTS
No costs.
Domenique Kirchner, Senior Trial Attorney, Commercial Litigation Branch,
Jonathan M. Bailey, Bailey & Bailey, P.C., of San Antonio, TX, argued for appellee.
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
The Contractor shall not discriminate against any employee or applicant for employment because of race, color, religion, sex, or national origin.
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 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
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
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 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
The government timely appealed to this court. We have jurisdiction pursuant to
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.”
The fourth element of allowable costs requires that the “cost complies with [the] [t]erms of the contract.”
The fifth element of allowable costs requires that “the cost complies with [a]ny limitations set forth in this subpart.”
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 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
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
The parties agree that, in general, neither the statute nor the FAR explicitly
The FAR states specifically that costs are allowable only if the “cost complies with [the] [t]erms of the contract.”
Under the decision of our predecessor court in Dade Brothers, Inc. v. United States, 163 Ct.Cl. 485, 325 F.2d 239, 240 (1963), costs resulting from a breach of a contractual obligation are not allowable costs under the contract. 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 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.
[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.
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, 425 U.S. 662, 668 (1976) considered whether the Federal Power Commission (“FPC“) had authority to disallow the costs of unlawful discriminatory employment practices of regulatees in setting rates. The FPC had statutory authority to set “just and reasonable” rates for the 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.
NAACP v. Fed. Power Comm‘n, 520 F.2d 432, 444 (D.C. Cir. 1975), quoted in NAACP v. Federal Power Commission, 425 U.S. 662, 666-67 (1976) (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.
NAACP v. Federal Power Commission, 425 U.S. 662, 668 (1976) (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‘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.
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.
Boeing, 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
While Boeing involved only defense costs and not settlement payments, Boeing applies equally to settlement payments. Settlement payments are related to the 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 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.
Opinion for the court filed by Circuit Judge DYK.
Dissenting opinion filed by Circuit Judge LOURIE.
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 1274 (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 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
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
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
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 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.
Notes
- In a criminal proceeding, a conviction;
- 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;
- ***
- 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.
(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).