Cases Settled Out of Court - How to Support Allowability of Costs

As we reported yesterday, there is a significant risk to settling legal matters before trial in that the legal costs and whatever is paid the plaintiff as settlement costs, may be unallowable. In a 2009 CFC decision, Army v. Tecom, the court set a new standard for allowability - the cost of litigation are allowable only if plaintiff's claims had very little likelihood of success on the merits. Who decides whether the claim has very little likelihood of success? The contracting officer does. And where does the contracting officer get the information necessary to make that decision? From the contractor. And how does the contracting officer convey his decision? In writing. So you see, the contractor has the opportunity to persuade the contracting officer that a plaintiff's case was fallacious, unworthy, without merit, and unlikely to succeed. That is really a tall order as the contracting officer will be naturally skeptical. A lot of contracting officers adhere to that old adage "where's there's smoke, there's fire".

So here's what contractors should do.

1. The contractor must provide a written rationale for asserting that the plaintiff had very little likelihood of success on the merits, including specific supporting information.
2. The rationale should include 
• a description of all claims and procedural actions in the case
• a copy of the Complaint and Answers
• title and docket numbers, 
• any pre- or post-Complaint demand letters from plaintiff's counsel
• the settlement agreement or proposed settlement agreement, and 
• any other information that the contracting officer should consider.

Beyond these items, contractors must be prepared to ensure that it submits, in a timely manner, all information that the Contracting Officer requests.

The Federal Circuit in Tecom was concerned about the government reimbursing contractors for conduct
where there was significant proof of discriminatory conduct; in other words, the court was focused on
the actual, objective conduct of the contractor. Some settlements are appropriate and prudent because,
as a matter of fact, it is unlikely that the plaintiff’s allegations are true but, for reasons other than the
actual, factual merits of the case, there is a risk that a jury might reach a verdict in the plaintiff’s favor.
While exogenous circumstances not related to the actual facts of a claim or the actual conduct of the
contractor may support a decision to settle a claim, such circumstances are not relevant to determining
whether the contractor engaged in discriminatory conduct and should not be considered in the objective
review of the merits of a claim under this guidance.