Legal Cost to Defend Against Third-Party Lawsuits

Bechtel National operates a nuclear waste treatment plant in the state of Washington. In 2010 and 2012, two former Bechtel employees filed lawsuit against the company, alleging, among other things, sexual and racial harassment and discrimination. Bechtel and the former employees settled the lawsuits out of court. Bechtel then sought reimbursement of its litigation costs under its contract with the Energy Department.

Are those costs allowable, or not?

The Energy Department didn't think so. Although the Department provisionally approved the reimbursement at first, after further consideration, it disallowed the costs. After the contracting officer issued a final decision upholding the disallowance, Bechtel appealed to the U.S. Court of Federal Claims alleging breach of contract.

In 2010, Bechtel notified Energy of potential litigation arising out of its work at the Hanford site. The Energy Department informed Bechtel in writing that it was authorized to proceed with defense of the case but that authorization was not a determination of the allowability of costs - that determination would be made at a later date pursuant to relevant statutes, regulations, terms of the contract and other considerations.

A few months later, a former employee filed a lawsuit against Bechtel arising out of her termination. The employee alleged that she had been subjected to a hostile work environment and racial and sexual harassment. Additionally, she alleged that Bechtel transferred and ultimately terminated her employment in retaliation for the actions she took to report and stop the alleged harassment. Finally, she asserted that Bechtel had engaged in disparate treatment and took adverse employment actions against her on the basis of her sex and race. Ultimately, the parties settled out of court.

A couple of years later, a second discrimination lawsuit was filed against Bechtel by another former employee. This employee alleged that Bechtel discriminated and retaliated  against him on the basis of race and disability.

Bechtel requested the Energy Department to reimburse it for defending those suits. It asked for $500 thousand and the Energy Department reimbursed those costs on a provisional basis.

The Energy Department moves slowly. Four years later, in 2016, the contracting officer disallowed the costs. The contracting officer determined that the costs incurred by Bechtel in defending the lawsuits were unallowable. He found that the plaintiff's claim had more than very little likelihood of success on the merits and therefore unallowable.

In short, the costs at issue which were incurred as a result of violations of the contract's anti-discrimination provision were not allowable under the terms of specific contract clauses. Accordingly the Court of Claims ruled that the Government is entitled to judgment as a matter of law as to Bechtel's claim that the Energy Department violated the contract by disallowing the costs it incurred to defend and pay for the settlement of the two discrimination complaints.

You can read the entire decision here.