Settlement Costs for Sexual Harassment Case are Disallowed

(Editor’s Note. The following case has generated much controversy where commentators have stated it basically amends the FAR and makes the common practice of avoiding long, expensive litigation by settling a case less attractive.)

Teton had a cost reimbursement contract for military housing maintenance where during performance a former employee sued them under Title VII of the 1964 Civil Rights Act alleging sexual harassment and retaliation. Teton settled the case without admitting wrongdoing and requested from the government the defense and settlement costs as an indirect contract cost. The government disallowed the expenses and the Board of Appeals ruled in favor of Teton stating since they had not engaged in criminal conduct, fraud or violations of the Major Fraud Act they were entitled to reimbursement for the expenses. The Federal Court reversed the decision stating that under the prior Boeing case, the damages, costs and attorney’s fees associated with a violation of Title VII would not be allowable under the contract.

Though neither the False Claims Act nor the FAR explicitly address allowability of costs related to Title VII cases, the Court ruled that an adverse judgment in this case would make the costs unallowable because a contractor in violation of Title VII would have breached the contract and costs related to such a breach would be not be allowable. The Court stated the FAR states costs are allowable only if they comply with the terms of the contract where here the contract specifically required Tecom not to discriminate on the basis of sex. The Court held that if damages and penalties resulting from an adverse judgment are disallowed so settlement costs are also unallowable unless the contractor can prove the private plaintiff was highly unlikely to succeed on the merits. To rule otherwise, the Court concluded, would allow a contactor who engaged in conduct prohibited by the contract to nonetheless recover defense and settlement costs (Geren V Tecom, Inc., 2009WL 1378149).

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