GAO-04-148R Contractor Litigation Costs

United States General Accounting Office 

Washington, DC 20548 

November 26, 2003 

The Honorable Edward J. Markey 

House of Representatives 

Subject: Department of Energy: Reimbursement of Contractor Litigation Costs 

Dear Mr. Markey: 

The Department of Energy (DOE) contracts with not-for-profit universities and 

private companies to operate its facilities. As part of the cost of operating these 

facilities, DOE can reimburse its contractors for the litigation costs associated with 

cases brought against them. Each year the department spends millions of dollars in 

such reimbursements. For the most part, litigation expenses involve the costs of 

outside counsel and resulting judgments and settlements for a variety of types of 

cases, such as equal employment opportunity, radiation and/or toxic exposure, 

personal injury, wrongful termination of employment, and whistleblower protections. 

You asked us to study the extent to which DOE reimburses its contractors’ litigation 

costs and the process for doing so. As agreed with your staff, we obtained 

information on (1) how much DOE spends to reimburse litigation costs for its 

contractors, (2) what major criteria DOE uses to reimburse its contractors for 

litigation costs and how it implements these criteria, (3) what major criteria the 

Department of Defense and the National Aeronautics and Space Administration use 

to reimburse their contractors for litigation costs, (4) the extent to which a state 

university that is a DOE contractor has a valid immunity defense to a lawsuit, and (5) 

the extent to which state universities that are DOE contractors have invoked 

immunity as a defense. We provided your staff with a formal briefing on our findings 

on October 16, 2003. (See encl. I.) This report presents the results of that briefing. 

In summary, we found the following: 

• DOE reimbursed contractors for $330.5 million in litigation costs associated 

with 1,895 cases from fiscal year 1998 through March 2003, including $249.4 

million for litigation costs and $81.1 million for judgments and settlements. 

During the same period, DOE estimates that contractors spent about $12 

million without being reimbursed. 
Page 2 GAO-04-148R Contractor Litigation Costs 

• The major criteria DOE uses to reimburse contractors depend on the nature of 

a case.1

 DOE pays all reasonable litigation costs in most cases. DOE does not 

pay litigation costs when the contractor’s actions involved either willful 

misconduct; lack of good faith; or failure to exercise prudent business 

judgment by the contractor’s managerial personnel; nor does DOE pay in 

certain other circumstances, such as when the contractor is liable under the 

False Claims Act.2

 When a contractor prevails in a False Claims Act case or 

prevails in other cases where a government entity has sued the contractor, 

DOE pays a maximum of 80 percent of reasonable litigation costs. 

• The major criteria the Department of Defense and the National Aeronautics 

and Space Administration use to reimburse contractors for litigation costs are 

similar to DOE’s. The only important difference we identified was that the 

Department of Defense and the National Aeronautics and Space 

Administration do not have specific criteria prohibiting payment to a 

contractor involving the contractor’s managerial personnel’s willful 

misconduct, lack of good faith, or failure to exercise prudent business 

judgment. 

• A state university that is sued in the course of its operation of a DOE facility 

may be entitled to assert immunity under the Eleventh Amendment and other 

immunity-related defenses, such as being exempt from punitive damages 

under state law.3

 Whether a particular state university is entitled to assert 

such defenses depends on whether it qualifies as a state entity, which in turn 

depends on a variety of factors, such as whether the state is liable for 

judgments against the university, the nature of the functions the university is 

performing, and whether the university is a separate incorporated entity. 

• The University of California is the only DOE contractor to use immunity as a 

defense. Officials at the university, which operates three DOE facilities—Los 

Alamos National Laboratory, Lawrence Livermore National Laboratory, and 

Lawrence Berkely National Laboratory—estimated that the university used 

Eleventh Amendment immunity in 8 of about 35 federal cases in 5-1/2 years. 

Also, officials at the University of California estimated that the university, in 

its role as a DOE contractor, has asserted other immunity-related defenses in 

at least 62 of about 137 cases, predominantly to defend against punitive 

damages. 

We met with DOE’s Deputy General Counsel for Litigation and other DOE attorneys 

in the General Counsel’s Office to discuss the facts in this report. They generally 

agreed with the information in our report and provided some clarifying comments 

that we incorporated as appropriate. Our methodology is discussed in enclosure II. 

We performed our work from March through October 2003 in accordance with 

generally accepted government auditing standards. 

 

1

See 48 C.F.R. §§ 31.205-47 and 970.5228-1 for the criteria. 2

The False Claims Act, 31 U.S.C. §§ 3729 to 3733, provides for civil monetary penalties and damages for 

anyone who knowingly submits false claims to the United States. 

3

The Eleventh Amendment to the Constitution provides the states with immunity from lawsuit by a 

private party in federal court. 
Page 3 GAO-04-148R Contractor Litigation Costs 

- - - - - - 

As arranged with your office, unless you release its contents earlier, we plan no 

further distribution of this report until 30 days after its issuance date. At that time, 

we will send copies to interested parties. In addition, this report will be available at 

no charge on the GAO Web site at http://www.gao.gov.

If you have any questions about this report or need additional information, please 

contact me at (202) 512-3841. Key contributors to this report were Robert G. Crystal, 

William F. Fenzel, and Daniel J. Semick. 

Sincerely yours, 

Robin M. Nazzaro 

Director, Natural Resources 

 and Environment 

Enclosures - 2 
Page 4 GAO-04-148R Contractor Litigation Costs 

Enclosure I 

DOE Reimbursement of 

Contractor Litigation Costs

Briefing for

Representative Edward J. Markey

October 16, 2003 
Page 5 GAO-04-148R Contractor Litigation Costs 

Enclosure I 

2

Objectives

• How much does DOE spend to reimburse litigation costs for its 

contractors?

• What major criteria does DOE use to reimburse its contractors for 

litigation costs and how does it implement these criteria?

• What major criteria do DOD and NASA use to reimburse their 

contactors for litigation costs?

• To what extent does a state university that is a DOE contractor have a 

valid immunity defense to a lawsuit?

• To what extent have DOE contractors invoked Eleventh Amendment 

immunity or other immunity-related defenses?
Page 6 GAO-04-148R Contractor Litigation Costs 

Enclosure I 

3

Objective 1: Litigation Costs

DOE reimbursed contractors for about $330.5 million from FY 1998 through 

March 20031

•$196.5 million in litigation costs for ongoing cases

• $52.9 million for litigation costs on closed cases

• $81.1 million for judgment and settlement costs

For the same period, DOE estimates that unreimbursed contractor costs 

were about $12 million, or about

•$7 million in litigation costs for ongoing cases2

•$1 million for litigation costs on closed cases

•$4 million for judgment and settlement costs

1In general, DOE contractors retain outside counsel for handling their litigation cases. The $330.5 million reflects those costs. 

2DOE officials said there might be several million dollars in additional litigation costs for ongoing cases that contractors have not reported to DOE. Contractors 

may eventually seek reimbursement for some of these costs.
Page 7 GAO-04-148R Contractor Litigation Costs 

Enclosure I 

4

Objective 2: Major DOE Criteria and 

Implementation

Major Criteria

• DOE pays reasonable litigation costs unless the contractor’s actions 

involved 

• willful misconduct, lack of good faith, or failure to exercise prudent 

business judgment by the contractor’s managerial personnel in 

M&O contracts;

• certain other circumstances, such as when the contractor is liable 

under the Major Fraud Act or False Claims Act.

• DOE pays a maximum of 80 percent for a case where the contractor

prevails in a case that was 

• brought by a government entity alleging a contractor’s violation or 

failure to comply with law or regulation or

• brought by a third party under the False Claims Act
Page 8 GAO-04-148R Contractor Litigation Costs 

Enclosure I 

5

Objective 2: Major DOE Criteria and 

Implementation (continued)

Implementation

• When a contractor is sued, the contractor alerts DOE’s lawyers in the 

appropriate field office.

• If DOE attorneys initially determine the contractor’s actions appear 

proper, DOE conditionally pays litigation costs.

• DOE attorneys continually reevaluate whether the case meets the 

payment criteria as they get more information. They base their 

judgment on the facts and contract case law.

• If at any time DOE attorneys determine the contractor should not be 

reimbursed they can recommend that DOE stop reimbursements and 

seek the return of funds paid to the contractor. 
Page 9 GAO-04-148R Contractor Litigation Costs 

Enclosure I 

6

Objective 2: Major DOE Criteria and 

Implementation (continued)

• We identified only one case where a contractor paid all costs because of managerial personnel’s willful misconduct, lack of 

good faith, or failure to use prudent business judgment. 

• Managerial personnel were defined and limited from 10 to 41 individuals in the contracts we reviewed.

• DOE lawyers can help shape the legal defense strategies in individual cases (e.g., by encouraging early settlements or deciding whether to appeal).

• DOE lawyers also review the contractor’s litigation costs against established allowable cost guidelines.
Page 10 GAO-04-148R Contractor Litigation Costs 

Enclosure I 

7

Objective 3: Major DOD and NASA Criteria

• DOD and NASA pay reasonable litigation costs, but do not have 

written overall criteria similar to DOE’s in which they specify that they 

will not pay a contractor’s litigation costs resulting from willful 

misconduct, lack of good faith, or failure to exercise prudent business 

judgment by the contractor’s managerial personnel in M&O contracts.

• DOD and NASA pay a maximum of 80 percent for a case where the 

contractor prevails in a case that was 

• brought by a government entity alleging a contractor’s violation or 

failure to comply with law or regulation or

• brought by a third party under the False Claims Act.
Page 11 GAO-04-148R Contractor Litigation Costs 

Enclosure I 

8

Objective 4: Potential State University 

Immunity

Eleventh Amendment immunity

• Eleventh Amendment provides for state immunity from lawsuit by a

private party in federal court.

• In some areas, such as employment discrimination, Congress has 

abolished states’ immunity.

• States may waive immunity (state waiver would preclude state 

university from invoking immunity). Congress may be able to 

preclude states from invoking immunity by requiring them to waive 

immunity as a condition of receiving federal benefits or protections 

—e.g., H.R. 2344; S. 1191.
Page 12 GAO-04-148R Contractor Litigation Costs 

Enclosure I 

9

Objective 4: Potential State University 

Immunity (continued)

Other immunity-related defenses

• Sovereign immunity in state court—depends on nature of action and 

varies from state to state (conditions and waivers are set by states).

• Statutes that apply to “persons” or specific types of entities may not 

apply to states—e.g., the False Claims Act.

• Punitive damages generally do not apply to states—e.g., California. 

• State employees in some states have limited rights in suing states—

e.g., California employees may not sue for breach of contract.
Page 13 GAO-04-148R Contractor Litigation Costs 

Enclosure I 

10

Objective 4: Potential State University 

Immunity (continued)

• Liability of state for judgments against the university [DOE 

reimbursement for judgments does not divest university of Eleventh 

Amendment immunity—Regents of the University of California v. John 

Doe, 519 U.S. 425 (1997)]

• Nature of the functions the university is performing

• Ability of the university to sue and be sued

• Right of the university to hold property in its own name 

• Corporate status of the university—e.g., University of California (UC) is 

a corporation

Whether a state university is an arm of the state and thus may have a 

valid immunity claim depends on a variety of factors
Page 14 GAO-04-148R Contractor Litigation Costs 

Enclosure I 

11

Objective 4: Potential State 

University Immunity (continued)

Past and current litigation regarding the issue of UC as a state entity

• The U.S. Court of Appeals for the Ninth Circuit relied on the state’s 

potential liability for judgment against UC in holding that UC is a state entity 

in its operation of a DOE facility and may assert Eleventh Amendment 

immunity—John Doe v. Lawrence Livermore National Laboratory, 131 F.3d 

836,839 (9th Cir. 1997).

• The issue of whether UC is a state entity when acting as a DOE contractor 

is in litigation again in United States ex rel. Adrian v. Regents of the 

University of California in the U.S. Court of Appeals for the Fifth Circuit. 

The plaintiff is relying on factors such as UC’s corporate status and its 

authority to sue and be sued to show that UC is not a state entity, but is a 

“person” subject to qui tam liability under the False Claims Act. Under the 

California Constitution, Art. IX, §9, UC is a “corporation” with the “power to 

sue and to be sued.”
Page 15 GAO-04-148R Contractor Litigation Costs 

Enclosure I 

12

Objective 4: Potential State 

University Immunity (continued)

The plaintiff’s arguments in the Adrian case include:

• The Supreme Court has held that a municipal corporation is a “person”

under the False Claims Act—Cook County v. United States ex rel. 

Chandler, 538 US 119 (2003).

• The Supreme Court has said that when Congress gives an agency 

authority to sue and be sued, unless it is clear that such language is to 

be narrowly construed, that agency should be treated like a private 

enterprise when sued—Federal Housing Administration v. Burr, 309 

U.S. 242, 245 (1940).
Page 16 GAO-04-148R Contractor Litigation Costs 

Enclosure I 

13

Objective 5: Use of Immunity as a Defense

Only two of DOE’s current major contractors, UC and Iowa State, are state 

universities that may be able to claim Eleventh Amendment immunity or 

other immunity-related defenses. UC operates three DOE facilities (Los 

Alamos National Laboratory, Lawrence Livermore National Laboratory, and 

Lawrence Berkeley National Laboratory) and Iowa State operates one 

facility (Ames Research Laboratory).

Eleventh Amendment immunity

UC identified 8 out of about 35 federal cases where it invoked 

immunity under the Eleventh Amendment in 5-1/2 years; 2 were 

dismissed without further litigation because of this argument; 2

were resolved in federal or state court on other grounds; 2 were

settled; and 2 are pending. DOE said Iowa State has not used the 

argument.
Page 17 GAO-04-148R Contractor Litigation Costs 

Enclosure I 

14

Objective 5: Use of Immunity as a 

Defense (continued)

Other immunity-related defenses

• UC officials estimated that the university used immunity-related 

defenses in at least 62 of about 137 cases from October 1998 

through March 2003. 

• Often these defenses are successful in obtaining a dismissal for

at least part of the cases. UC officials estimated that in at least 42 

cases where an immunity-related defense was used at least that 

part of the case was dismissed.

• The predominant immunity-related argument used by UC at Los 

Alamos and Lawrence Livermore was to defend against punitive 

damages; at Lawrence Berkeley it was to defend against 

employee breach of contract arguments. 
Page 18 GAO-04-148R Contractor Litigation Costs 

Enclosure I 

15

Appendix 1: Number and Types of Cases

Number and Type of Closed and Ongoing Cases (FY 1998 through March 2003)

Total 284 286 261 211 199 91 563 1,895

Othera 78 93 67 69 63 8 146 524

Worker 99 86 101 68 99 71 290 814

compensation

Whistle 18 16 23 17 9 3 14 100

blower

Wrongful 10 10 8 10 0 2 10 50

termination of 

employment

Personal 21 15 18 14 7 1 23 99

injury

Radiation 1 4 2 2 7 0 24 40

and/or toxic

EEO 57 62 42 31 14 6 56 268

Ongoing Total

1SThalf fy 

2003

Type 1998 1999 2000 2001 2002

Closed cases

Source: DOE.

aThis includes various types of cases such as contract, labor relations, and tax cases.
Page 19 GAO-04-148R Contractor Litigation Costs 

Enclosure I 

16

Appendix 2: Disposition of Cases

Disposition of Cases (FY 1998 through March 2003)

49

9

22

12

4

0

2

Dismissed

Number of cases

Judgment Other Total Settlement a

reached

FY closed

Total 761 502 20 1,332

First half 73 7 2 91

2003

2002 129 39 9 199

2001 119 74 6 211

2000 147 107 3 261

1999 147 139 0 286

1998 146 136 0 284

Source: DOE.

aThis includes judgments for and against DOE’s contractors.
Page 20 GAO-04-148R Contractor Litigation Costs 

Enclosure II 

Scope and Methodology 

To determine how much DOE spent to reimburse its contractors for litigation costs 

from fiscal year 1998 through March 2003, we obtained data from DOE’s Legal 

Management Tracking System (LMTS)—a Web-based database established to track 

such costs. It relies on entries from the relevant DOE field offices. To address the 

reliability of the LMTS data used in our review, we discussed the development of 

LMTS with agency officials. In addition, we received detailed responses to a list of 

questions about LMTS, including a description of the database, its development, 

limitations of the data it contains, its format, descriptions of how data are entered 

into the database, and quality control checks on its content. Also, we performed 

limited data reliability testing. Responses to these questions were prepared by 

agency officials who are responsible for overseeing the LMTS. In addition, we 

summarized some of the LMTS data for the 5-1/2 year period and compared these 

data with the information in DOE’s summary. After taking these steps, we 

determined that the LMTS data were sufficiently reliable for the purposes of this 

report. 

To obtain information on the amount that contractors have spent without 

reimbursement from DOE, we surveyed DOE’s 18 field offices. Since the information 

is not in a DOE database, DOE field office personnel obtained the information by 

analyzing their records of cases or asking the relevant contractors to assist them in 

providing the information. After we received the data, we discussed the responses 

with attorneys at several DOE field offices to obtain further explanations. 

Respondents in most DOE field offices said they were highly confident the 

information they received was accurate and complete for those cases in which 

contractors responded. However, contractors did not provide their unreimbursed 

costs for all cases, according to DOE’s Deputy General Counsel for Litigation. He 

estimated that contractors might have several million dollars in additional 

unreimbursed costs for ongoing cases that they did not report to DOE. We 

determined the data were sufficiently reliable for the purposes of this report, and we 

added a note to our briefing slides indicating that several million dollars may not be 

included in the estimate. 

To determine DOE’s major criteria for reimbursing its contractors’ legal costs and 

how DOE implements the criteria, we examined federal regulations, including DOE’s 

own regulations, on reimbursement of contractor legal costs, and we interviewed 

attorneys at DOE’s headquarters and field offices about the guidance and their 

implementation. Similarly, to determine the major criteria the Department of 

Defense and the National Aeronautics and Space Administration use to reimburse 

contractor litigation costs, we examined federal laws and regulations, such as the 

Federal Acquisition Regulations, and we interviewed officials at the Department of 

Defense and the National Aeronautics and Space Administration responsible for 

developing those regulations as they pertain to reimbursing contractor litigation 

costs. To determine the extent to which a state university that is a DOE contractor 

may have a valid immunity defense, we examined relevant laws and court cases. To 

determine the extent to which DOE contractors have invoked immunity or immunity- 
Page 21 GAO-04-148R Contractor Litigation Costs 

Enclosure II 

related defenses, we obtained estimates from the University of California. University 

of California attorneys at DOE facilities said that in some cases they relied on 

examining files, but in other cases they relied on summaries of files and institutional 

memory. 

(360310) 
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