Fed Circuit Narrows Circumstances Which a Contractor recovers Legal Costs

[Robbien]

In Rumsfeld v. General Dynamics Corporation, 365 F.3d 1380 (Fed. Cir. 2004), the United States Court of Appeals for the Federal Circuit continues to narrow the circumstances under which a contractor may recover legal costs. Specifically, the Federal Circuit held that a contractor may not apportion its defense costs between unsuccessful and successful (or settled) claims brought by the government in the one proceeding.

As background, General Dynamics incurred substantial costs in defending against government-initiated civil fraud claims based upon General Dynamics’ alleged submission of inflated and fraudulent cost estimates to the government and allegations of subcontractor kickbacks. 365 F.3d at 1382. The federal district court dismissed all of the counts against General Dynamics. Id. On appeal, the United States Court of Appeals for the Second Circuit affirmed the district court’s decision except for the dismissal of the subcontractor kickback claims, which the court reversed and remanded for further proceedings. Id. The government and General Dynamics subsequently entered into a settlement agreement in which General Dynamics agreed to pay $3.3 million to dispose of all claims in the case. Id. at 1383. The settlement agreement provided that the law suit shall be dismissed "without costs or attorney’s fees to either party," but did not address whether the contractor’s legal defense costs were unallowable for government contract and cost accounting purposes. Id. Thus, no court found General Dynamics guilty of any wrongdoing.

General Dynamics included the costs of the fraud/anti-kickback case as overhead costs for which it sought payment by the government.

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In sum, based upon its reading of the Major Fraud Act and its legislative history, the Federal Circuit concluded that defense costs incurred in defending against unsuccessful claims brought by the government are tainted as unallowable if other claims brought by the government in the same proceeding are successful or settled without an express provision in the settlement agreement allowing the costs.

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