Who's on first - do contracting officers decide the merits of employment discrimination cases filed against government contractors after Boeing v. Roche?

Army Lawyer, Oct, 2003 by Gregory R. Bockin

Costello: Have you got a contract with the first baseman ?

Abbott: Absolutely.

Costello: Who signs the contract?

Abbott: Well, Naturally!

Costello: When you pay the first baseman every month, who gets the money?

Abbott: Every dollar. Why not? The man's entitled to it. (2)

Imagine that you are in your office, when a contracting officer (CO) contacts you with a sexual harassment question. You remind the CO that you are a contracts attorney and offer to refer her to the labor counselor. She laughs, but insists that this is a contracts matter and begins telling you about a sexual harassment lawsuit against a government contractor. The CO tells you that on 18 November 1999, the Directorate of Contracting, Fort Bragg, North Carolina awarded Contract ABC123-45-99-C-0001 to XYZ, Inc. (3) (XYZ), a government and commercial contractor. Fort Bragg awarded XYZ a cost plus fixed-fee contract for labor, management, supervision, supplies, materials, equipment, tools, services supporting family housing maintenance and repair activities, and occupant self-help activities at Fort Bragg. (4)

The CO tells you that an XYZ employee, Ms. B, filed a lawsuit against XYZ alleging that she was fired as a reprisal for her complaints of sexual harassment. (5) That is all that the CO can tell you, because Ms. B has since settled the suit, and is now bound by the settlement's confidentiality agreement. (6) XYZ is requesting money for legal fees, and the CO wants to know if she should pay them.

This article provides an overview of the law regarding the cost allocability and allowability of a contractor's legal fees in the defense of civil suits filed by a contractor's employees. First, this article discusses the history of how the courts have dealt with the allocability and allowability of third-party legal fees. Second, it discusses the state of the law following the Court of Appeals for the Federal Circuit's (CAFC) 29 July 2002 decision in Boeing North American, Inc. v. Roche (Boeing II). (7) The discussion includes an application of the CAFC's Boeing II decision to a hypothetical set of facts. This analysis explains the issues, exposes the inherent weaknesses in the current standard, and reviews the CAFC's new "similarity test." (8) Third, this article explores the aftermath of unresolved contract issues regarding the scope of Boeing II. Finally, it concludes that the current standard creates a difficult situation that forces procurement professionals to evaluate the merits of complex civil actions, for which they have little training or experience.

The History of Cost Allocability and Allowability of Costs

One commentator has suggested that "unraveling the Federal Circuit's benefit concept begins by distinguishing allocability from allowability." (9) In the past, the concepts have been confusingly interchanged. (10) Under Federal Acquisition Regulation (FAR) section 31.201-1 (b), (11) the total cost of performing a contract includes all costs that are properly allocable to the contract. (12) Section 31.201-4 of the FAR further defines which costs are allocable. (13) In general, allocability refers to whether a cost can be charged to a particular contract, and allowability refers to whether a cost can be charged to a government contract. The government, however, does not pay a contractor the total allocable cost of contract performance. Rather, the government pays the contractor only allowable costs, which are a portion of the costs actually allocable to the contract. (14) The FAR specifies five factors to determine whether costs are allowable. (15)

The confusion between allocability and allowability began with Lockheed Aircraft Corp. v. United States. (16) In Lockheed, the court held that "the criterion ... for allocating indirect costs is 'benefit.'" (17) The court described the "benefit" requirement for indirect costs as the following:

   No one would quarrel with the general proposition
   that it is fair to allocate to government
   contracts the costs of services which facilitate
   performance of the particular contracts or are
   essential to the existence and continuance of
   the business entity. But the burden shall be on
   the contractor to show the benefit and a reasonable
   allocation among different government
   contracts and between government and
   commercial work generally. (18)

The "benefit theory" announced in Lockheed continued to develop in Caldera v. Northrop Worldwide Aircraft Services, Inc. (19) In Northrop, the contractor incurred legal fees in an Oklahoma state court during the unsuccessful defense of a wrongful employment termination claim by former employees. The employees claimed they were terminated because they refused to follow the contractor's "directions and participate in fraud against the Army in connection with the contract." (20) The jury agreed. Citing the language of FAR section 31.201-4, the court held that the attorneys' fees were not allocable to the contract because they did not "benefit" the government as follows: