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Gnatman

Allowability of Litigation Expenses

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The allowability of costs relating to a lawsuit with a private party that results in settlement was restricted significantly May 19, 2009 when the U.S. Court of Appeals for the Federal Circuit issued its decision in Geren v. Tecom Inc., 566 F.3d 1037 (Fed. Cir. 2009) (Tecom II) (motion for rehearing en banc denied Oct. 2, 2009). Tecom II addressed whether contractor costs associated with defending against, and eventually settling, a private lawsuit are allowable costs under Federal Acquisition Regulation ? 31.201-2. Historically, courts and boards have found these types of costs allowable. In Tecom II, however, the court subjected these costs to a high standard for allowability.

I am assisting a CO in determining if a contractor's legal fees are allowable cost for government contracts. The suit in question, to which the legal expenses pertain is between the company we administer and other than a federal, state, foreign govt entity. The usual prohibited expense in the FAR 31.205-47 are for defense and associated costs pertaining to fraud, allegations of fraud, the major fraud act, or false claims. This case brings in new criteria to test beyond the landmark BOEING case, Boeing North America Inc. v. Roche,

298 F.3d 1274 (Fed. Cir. 2002).

We should examine the allegations in the complaint or other documents providing notice of the issue and determine whether the plaintiffs allege any cause of action that, if successful, would result in litigation costs being prohibited by the FAR Cost Principles or other cost principles contained in the contract. After Boeing and Tecom II, in addition to causes of action that would result in costs specifically prohibited by the Cost Principles, at least two other causes of action may result in unallowable defense and settlement costs:

? Causes of action that involve conduct ?similar or related? to fraud; and

? Causes of action that might result in a finding that a contractor did not comply with the terms of the contract.

The later is the new twist from TECOM.

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The allowability of costs relating to a lawsuit with a private party that results in settlement was restricted significantly May 19, 2009 when the U.S. Court of Appeals for the Federal Circuit issued its decision in Geren v. Tecom Inc., 566 F.3d 1037 (Fed. Cir. 2009) (Tecom II) (motion for rehearing en banc denied Oct. 2, 2009). Tecom II addressed whether contractor costs associated with defending against, and eventually settling, a private lawsuit are allowable costs under Federal Acquisition Regulation ? 31.201-2. Historically, courts and boards have found these types of costs allowable. In Tecom II, however, the court subjected these costs to a high standard for allowability.

I am assisting a CO in determining if a contractor's legal fees are allowable cost for government contracts. The suit in question, to which the legal expenses pertain is between the company we administer and other than a federal, state, foreign govt entity. The usual prohibited expense in the FAR 31.205-47 are for defense and associated costs pertaining to fraud, allegations of fraud, the major fraud act, or false claims. This case brings in new criteria to test beyond the landmark BOEING case, Boeing North America Inc. v. Roche,

298 F.3d 1274 (Fed. Cir. 2002).

We should examine the allegations in the complaint or other documents providing notice of the issue and determine whether the plaintiffs allege any cause of action that, if successful, would result in litigation costs being prohibited by the FAR Cost Principles or other cost principles contained in the contract. After Boeing and Tecom II, in addition to causes of action that would result in costs specifically prohibited by the Cost Principles, at least two other causes of action may result in unallowable defense and settlement costs:

? Causes of action that involve conduct ?similar or related? to fraud; and

? Causes of action that might result in a finding that a contractor did not comply with the terms of the contract.

The later is the new twist from TECOM.

Gnatman,

Do you have a question?

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The matter raised by Gnatman is a complex issue of cost allowability. The issue and the two decisions cited by Gnatman, Geren v. Tecom and Boeing North American, Inc. v. Roche, are comprehensively analyzed by Steven Briggerman in "Allowability of Legal Costs," The Nash & Cibinic Report, September 2009, 23 N&CR ? 50. See also Johnson, et al., "Geren v. Tecom, Inc.: The Federal Circuit Creates A New FAR Cost Principle," Government Contract Costs, Pricing, and Accounting Report, July 2009, 4 GCCPAR ? 27.

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