The FAR Councils recently revised the cost principle at FAR 31.205-47, Legal Costs, to address the allowability of legal costs related to employee whistleblowers.
Employee whistleblowers seems like a new growth industry - especially when the whistleblowing is attached to a Qui Tam action under the False Claims Act. Many times, the employee has nothing to lose - they find an attorney to take the case on commission and if the Government steps in (enjoins) the suit, most of the legal costs from then on are borne by the Government. If the relator/Government wins, the relator gets a cut of the action - 10 or 20 percent, or so.
Regardless of whether the Government enjoins, contractors are going to incur legal costs to defend themselves. Are these costs to defend themselves allowable, or not? It depends.
The revised rule implements a statutory requirement. Costs incurred in connection with any proceeding brought by a contractor or subcontractor employee submitting a whistleblower complaint of reprisal are now treated exactly the same as the pre-existing cost principle's treatment of costs incurred in connection with any proceeding brought by a Federal, State, local, or foreign government for violation of, or a failure to comply with, law or regulation by the contractor, or costs incurred in connection with any proceeding brought by a third party in the name of the United States under the False Claims Act.
Such legal costs are unallowable if the result is, in a civil or administrative proceeding, either (i) a finding of contractor liability where the proceeding involves an allegation of fraud or similar misconduct; or (ii) imposition of a monetary penalty, or (iii) an order issued by the agency head to the contractor or subcontractor to take corrective action, where the proceeding does not involve an allegation of fraud or similar misconduct.
Therefore - caution to contractors - be careful how you word any settlements with whistleblowers. Recovery of legal costs may be dependent upon how settlements are worded.