Like any commercial business, government contractors routinely must defend against third-party lawsuits. Such proceedings can include, for example, actions initiated by employees and former employees or suppliers, as well as private citizens that allege company conduct has caused them harm in some fashion. Not infrequently, following an analysis of a plaintiff’s claims, the contractor will opt to settle the matter. Settlement is an economically efficient option that all prudent businesses consider. Settlement can provide immediate certainty regarding the liability the company will incur, avoid continued defense costs, and enable the company to ensure its personnel are focused on productive, forward-looking work. Settlement decisions result from the contractor’s necessary exercise of business judgment and the amount that the company agrees to pay will be, in part, based on an assessment of the merits of a particular claim.
Historically, the federal government recognized that contractors would incur these costs in the ordinary course of business and permitted, as a matter of public policy, contractors to be reimbursed for costs associated with defending and settling most private actions. Since 2009, however, government contractors have had to wrestle with a new paradigm where defense and settlement costs relating to certain types of actions would be unallowable unless the contractor established the plaintiff had “very little likelihood of success on the merits.” This new reality for contractors was created by the United States Court of Appeals for the Federal Circuit (“Federal Circuit”) as a result of its decision in Geren v. Tecom, Inc.1
Recently, contractors had some reason to hope that the Federal Circuit’s decision in Tecom would be construed more narrowly. Specifically, the United States Court of Federal Claims (COFC) decision in Bechtel National Inc. v. United States, 2 while unsuccessful for the contractor in that case, articulated a narrower application of the Tecom decision as only applying in the employment discrimination context. Following Bechtel’s appeal, the Federal Circuit affirmed the COFC decision. In doing so, the Federal Circuit did not analyze, in any meaningful way, the COFC’s narrower application of the Tecom decision.
This article provides a brief background on the Tecom decision and the test it established governing the allowability of defense and settlement costs for certain types of actions, then discusses the Bechtel decisions at both the COFC and Federal Circuit. Based on the current state of the law following these decisions, we then provide some practical guidance regarding what contractor practitioners should consider as they explore the prospect of settling private lawsuits and the lens through which government practitioners should review such contractor settlement decisions.