## United States Court of Appeals for the Federal Circuit

* Corrected: May 29, 2009
2008-1171 Pete Geren, SECRETARY OF THE ARMY, Appellant,

v. TECOM, INC., Appellee.

Domenique Kirchner , Senior Trial Attorney, Comme rcial Litigation Branch, Civil Division, United States Departm ent of Justice, of Washingt on, DC, argued for appellant. With her on the brief were Jeanne E. Davidson , Director, and Bryant G. Snee , Trial Attorney. Of counsel on the brief was Craig S. Clarke , Deputy Chief, Contract and Fiscal Law Division, United States Army Legal Servic es Agency, United Stat es Department of the Army, of Arlington, Virginia. Jonathan M. Bailey , Bailey & Bailey, P.C., of Sa n Antonio, Texas, argued for appellee. Appealed from: Armed Services Board of Contract Appeals Administrative Judge Rol lin A. Van Broekhoven

* Correction in spelling of Senior Trial Attorney’s name.

## United States Court of Appeals for the Federal Circuit

2008-1171 Pete Geren, SECRETARY OF THE ARMY, Appellant,

v.
TECOM, INC., Appellee. Appeal from the Armed Services B oard of Contract Appeals in no. 53884.

___________________________ DECIDED: May 19, 2009

___________________________ Before LOURIE, DYK, and PROST, Circuit Judges

. Opinion for the court filed by Circuit Judge DYK. Dissenting opinion filed by Circuit Judge LOURIE. DYK, Circuit Judge

. The government appeals from the decision of the Armed Services Board of Contract Appeals (“Board”) granting summary judgment in favor of Tecom, Inc., and holding that defense costs and settlement payments associated with a Title VII sexual harassment suit are allowable costs under t he Federal Acquisition Regulations (“FAR”). Tecom Inc. , ASBCA No. 53884, 54461, 2007 WL 2899660 (Sept. 21, 2007) (“ Board Decision ”). We hold that under the contract the costs associated with an adverse judgment would not be allowable, and that under our decision in Boeing North American, Inc. v. Roche , 298 F.3d 1274 (Fed. Cir. 2002), defense and settlement costsare allowable only if the contra ctor can show that the plaint iff in the Title VII suit had very little likelihood of success. Accord ingly, we reverse and remand for further proceedings. BACKGROUND The material facts are not in dispute. Tecom was awarded a negotiated cost reimbursement contract for military housi ng maintenance at Fort Hood, Texas, on December 13, 1995. The contract incorpor ated by reference numerous provisions of the FAR, including FAR § 52.222-26 Equal O pportunity (Apr. 1984), which states, in part: The Contractor shall not discr iminate against any employee or applicant for employment becaus e of race, color, religion, sex, or national origin. 48 C.F.R. § 52.222-26. Se x discrimination in violation of Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e-2( a) (“Title VII”), is clearly a breach of this provision of the contract; the contractor makes no argument to the contrary. During the performance of the contrac t, a former employee sued Tecom under Title VII, alleging sexual harassment and firing in retaliation for filing a sexual harassment charge. The conduc t forming the basis of the a llegation occurred while the employee was working on the gov ernment contract. The all egations, if proved, would violate Title VII. In the course of defending this Title V II litigation, Tecom incurred legal fees totaling $96,163.16. Tecom ultimately dec ided to settle the matter with the former employee for $50,000. The terms of the settlement agreement stated that the

2008-1171 2settlement did not include “back pay.” The settlement also stated that Tecom did not admit to any wrongdoing. On September 2, 1999, Teco m requested reimbursement from the government in the amount of $146,163.16, representing defense costs and settlement payments related to the Title VII litigation. Tecom s ought to include its legal fees as an indirect cost charged to its G&A expense pool. Tecom sought to bill its settlement cost as a direct cost of the contract. Tecom claimed that it did not violate the law and the allegations of the former employee were false, but that the co st of trying the case would have been approximately $300,000. Teco m argued that the defense and settlement costs were allowable under the contract and the FAR, and were reasonable because the settlement costs were less than the costs of going to trial, even if Tecom had prevailed. The government denied that these expenses were allowable, and, on June 22, 2001, Tecom converted its request for pay ment to a formal claim and requested a contracting officer’s final decision. Afte r the statutory period elapsed without a final decision, the claim was deemed denied by the Contracting Officer pursuant to 41 U.S.C. § 605(c)(5), and Tecom fil ed a notice of appeal to the Board. On cross-motions for summary judgmen t, the government ar gued that the attorney’s fees and damages associated with a judgment of liability under a Title VII claim were not allowable costs, and that, under Boeing , 298 F.3d at 1288-89, the cost of settling such claims would also be unallowable unless the contractor proved that the suit had very little likelihood of success on the merits. The contractor argued that the cost of

2008-1171 3settling a Title VII suit (except for an explicit backpay award) 1 is always allowable, notwithstanding Boeing , because Boeing was limited to suits that involved allegations of fraud or similar misconduct. The Board granted the contract or’s motion, and held that Boeing did not apply where there were no charges that the c ontractor had engaged in criminal conduct, fraud, or violations of the Major Fraud Act of 1988. The B oard remanded to the contracting officer for the limited purpose of a “determinat ion of the reasonable amounts to be reimbursed appellant cons istent with this decision and the Allowable Cost and Payment clause.” Board Decision , slip op. at 29. The parties agree that the decision of the Board was a final decision subjec t to appeal under 41 U.S.C. § 607(g)(1). 2 The government timely appealed to this cour t. We have jurisdiction pursuant to 28 U.S.C. § 1295(a)(10). We review the B oard’s grant of summary judgment de novo. Lear Siegler Servs., Inc. v. Rumsfeld , 457 F.3d 1262, 1266 (Fed. Cir. 2006). Legal determinations of the Board, including inte rpretation of statutes, regulations, and contracts are reviewed without def erence. 41 U.S.C. § 609(b).

1 FAR § 31.205-6(h) addresses backpay , and states that “[b]ackpay is unallowable” with certain exceptions, includi ng that backpay “resulting from underpaid work actually performed [is] allowable, if required by a negotiated settlement, order, or court decree.” 2 We agree that the Board’s decisi on is final within the meaning of 28 U.S.C. § 1295(a)(10) because t he contracting officer’s “dec ision” that was on review before the Board was a claim deemed denied under 41 U.S.C. § 605(c)(5). Dewey Elecs. Corp. v. United States , 803 F.2d 650, 653-58 (Fed. Cir. 1986). As such, the only issue decided by the contracting officer was a llowability, and, in deciding this issue, the Board therefore decided the onl y issue that was before it on review, remanding for a determination only of the amount to be allowed (an issue not previously decided by the contracting officer). Id.

2008-1171 4DISCUSSION The issue on appeal is whether the co sts of defending and settling a Title VII suit are allowable costs under this governm ent contract. Under the FAR, the costs incurred by the contractor are “allowable only when the cost complies with all of the following requirements: (1) Reasonableness. (2 ) Allocability. (3) [The CAS accounting principles]. (4) Terms of the contract. (5) Any limitations set forth in this subpart.” FAR § 31.201-2. We have previ ously held that the regulations distinguish between allocability, which “is an acc ounting concept involving the relationship between incurred costs and the . . . [contracts] to which thos e costs are charged,” and allowability, which “concerns whether a particular cost can be re covered from the government in whole or in part.” Boeing , 298 F.3d at 1280. Only the fourth and fifth elements are at issue in this appeal. Both relate to the allowability of costs. The fourth element of allo wable costs requires that the “cost complies with [the] . . . [t]erms of the contract.” FAR § 31.201- 2. This condition on allowable costs can be found in regulatory provisions governing government contracts going back decades, including the former Armed Services Procur ement Regulations. 32 C.F.R. § 7.203-4 (Cum. Sup. 1960) (stating that costs must “be allowable in accordance with . . . [t]he terms of this contract”); see 23 Fed. Reg. 6345, 6347 (Aug. 19, 1958). The fifth element of allowable costs require s that “the cost complies with . . . [a]ny limitations set forth in this subpart.” FA R § 31.201-2. This refers to costs made unallowable in FAR subpart 31.2. The FAR specif ically provides that a number of costs are either allowable or not allowable. However, as FAR § 31.204 makes clear, the FAR “does not cover every element of cost. Fa ilure to include any it em of cost does not

2008-1171 5imply that it is either allowable or unallowable.” As we discussed in Boeing , where neither the contract nor the FAR dictates the treatment of specific costs, we must determine how those costs are to be treated by looking to “the pr inciples and standards in this subpart and the treatment of similar or related selected it ems.” 298 F.3d at 1285 (emphasis omitted) (quoting FAR § 31.204(c)). As described in Boeing , even though costs of professi onal services and costs of settling litigation are generally allowable, this is not always the case . Where the claimed costs are associated with a settlement agreement we conduct a two-step inquiry in addressing the allowability of such costs: (1) we ask whether, if an adverse judgment were reached, the damages, costs, and attorney ’s fees would be allowable; (2) if not, we ask whether the costs of se ttlement would be allowable. Boeing , 298 F.3d at 1285- 89. I As to the first step—the judgment costs—t he contractor at oral argument first conceded that the costs associ ated with an adverse judgment in a Title VII suit would not be allowable, and later in oral argument sought to retract that concession. Oral Arg., Jan. 6, 2009, 16:12-30; 20:44-21:32, available at http://oralarguments.cafc. uscourts.gov/mp3/2008-1171.mp3. We conclude that the initial concession was well taken because the damages, costs, and attorney ’s fees associated with a violation of Title VII would not be allowable under this contract. Like the present case, Boeing involved a claim for the co st of settling a private lawsuit. In Boeing the underlying private suit was a shareholder suit against, inter alia, fourteen directors of the company. 298 F.3d at 1276. Prior to the underlying

2008-1171 6shareholder suit at issue in Boeing , the contractor had been convicted by the government of, inter alia, fraud against the government. Id. at 1277. After this conviction and the resulting fines and penalties , the shareholder suit was brought. The shareholder suit was based largely on the crim inal convictions that were allegedly incurred because the directors of the company “fail[ed] to establish internal controls sufficient” to prevent fraud. Id. We noted that FAR § 31.205-47 specifically dealt with the criminal convictions and fraud against the government. See Boeing , 298 F.3d at 1287 n.14. 3 However, the

3 FAR § 31.205-47 addresses certain co sts related to legal proceedings: (b) Costs incurred in connec tion with any proceeding brought by a Federal, State, local, or fo reign government for violation of . . . law or regulat ion by the contractor . . . , costs incurred in connection with any proceeding brought by a third party in the name of the Un ited States under the False Claims Act, 31 U.S.C. § 3730, are unallow able if the result is— (1) In a criminal proceeding, a conviction ; (2) In a civil or administrativ e proceeding, either a finding of contractor liability where the proceeding involves an allegation of fraud or simila r misconduct or imposition of a monetary penalty where the proceeding does not involve an allegation of fraud or similar misconduct; * * * (4) Disposition of the matter by consent or compromise if the proceeding could have led to any of the outcomes listed in subparagraphs (b)(1) through (3) of this subsection (but see paragraphs (c) and (d) of this subsection); (c) (1) To the extent they are not otherwise unallowable, costs incurred in connecti on with any proceeding under paragraph (b) of this subsection commenced by the United States that is resolv ed by consent or compromise pursuant to an agreement entered into between the contractor and the United States, and which are unallowable solely because of paragraph (b) of this subsection, may be allowed to the extent specifically provided in such agreement.

2008-1171 7FAR did not specifically address shareholder su its alleging a failure to prevent criminal wrongdoing. To determine whether the cost of defending the shareholder suit in this case would be allowable, we asked whether t he shareholder suit was “similar or related” to the costs of the underlying convicti ons as described in FAR § 31.204(c). Boeing , 298 F.3d at 1285-86. We first held that costs of shareholder suits are not similar to costs incurred in connection with criminal convictions or any other disallowed cost in the FAR. Id. at 1286. However, we held that this particular shareholder suit was “related” to the convictions. Id. at 1287. Judgment against the contract or in the suit would require “a judicial determination that the [contractor ’s] directors had failed to maintain adequate controls to prevent the occurrence of the wrongdoing against the government.” Id. This, we held, established a sufficiently direct relationship to the disallowed costs of the criminal convictions, that the cost of defending against an adverse judgment in the shareholder suit would also be disallowed. Id. at 1288-89. The Ninth Circuit followed this aspect of our Boeing decision in Southwest Marine, Inc. v. United States , 535 F.3d 1012 (9th Cir. 2008). Southwest Marine involved an adjudication of liability for civ il penalties under the Clean Water Act in a citizen suit pursuant to 33 U.S.C. § 1365(a). Id. at 1014-15. Under the FAR, “costs

(2) In the event of a settl ement of any proceeding brought by a third party under the False Claims Act in which the United States did not in tervene, reasonable costs incurred by the contractor in connection with such a proceeding, that are not otherwise unallowable by regulation or by separate agreement with the United States, may be allowed if t he contracting officer, in consultation with his or her l egal advisor, determines that there was very little likelihood that the third party would have been successful on the merits. (emphases added).

2008-1171 8incurred in connection with any proceeding brought by a third party in the name of the United States under the Fals e Claims Act, 31 U.S.C. § 3730, are unallowable if the result is . . . imposition of a monetary penalty.” FAR § 31.205-47(b). The court held citizen suits under the Clean Water Act that re sulted in civil penalties were “similar” to these costs disallowed in the FAR in False Claims Act proceedings. Sw. Marine , 535 F.3d at 1017. As a result, the costs in Southwest Marine were not allowable. Id. The parties agree that, in general, neither the statute nor th e FAR explicitly discusses the allowability of costs associated with adjudicated Title V II violations. The government argues that, under FA R § 31.205-47 and our decision in Boeing , any costs associated with a judgment of contractor violation of Federal law would not be allowable. Alternatively, the government argues that, because punitive damages are recoverable under Title VII, a violation of Title VII would be similar or related to disallowed monetary penalties under FAR § 31.205-15. 4 However, we need not go so far to resolve this case. We find that the cost of an adverse judgment in this case would be unallowable in any event, because a contract or violation of Title VII would breach this contract, and costs related to such a breach would not be allowable. The FAR states specifically that costs are allowable only if the “cost complies with [the] . . . [t]erms of the contract.” FAR § 31.201-2. As the government points out, the contract specifically requi red the contractor not to discr iminate on the bas is of sex: “During perform[ance of] this contract, the C ontractor agrees . . . [t]he Contractor shall

4 FAR § 31.205-15 addresses fines and penalti es, and states that “[c]osts of fines and penalties resulting from violations of . . . Federal, State, local, or foreign laws and regulations, are unallowable except when incurred as a result of compliance with specific terms and conditions of the contract.”

2008-1171 9not discriminate against any employee or app licant for employment because of race, color, religion, sex, or national origin.” J.A. 4; FAR § 52.222-26; see 42 U.S.C. § 2000e2(a). Sexual harassment is a form of sex discrimination. Meritor Sav. Bank, FSB v. Vinson , 477 U.S. 57, 66-67 ( 1986). The violation of Title VII by sex discrimination or retaliation is a textbook breach of this contract ual provision. Thus, if sexual harassment and retaliation were established at trial, the costs of the def ense and the judgment would certainly result from a breach of the contract. Under the decision of our predecessor court in Dade Brothers, Inc. v. United States , costs resulting from a breach of a cont ractual obligation are not allowable costs under the contract. 325 F.2d 239, 240 (Ct. Cl. 1963). The contract in Dade preceded the modern system of uniform procurement regulations; nonetheless, the contract in Dade was very explicit that the cost of defending third party suits was generally allowable. The court noted that: [T]he contractor would be entit led to reimbursement of “the cost and expense of such liti gation, including judgments and court costs, allowances r endered or awarded in connection with suits for wages, overtime or salaries, and reasonable attorney’s fees for private counsel.” Id. at 239-40 (quoting the contract). However, in Dade the cost-plus-fixed-fee governm ent contract also contained a provision specifically stating that “[t] he Contractor will abide by all the terms and conditions of the Union Agreement with [the relevant union].” Dade Def.’s Br. 6 (filed Feb. 28, 1963). Fifty-four employees w ho were members of the union sued the contractor and certain union offi cials in state court, alleging that the employees were denied seniority rights they were entitled to under the union contract as a result of a

2008-1171 10conspiracy among the employer and these certain union officials. The contractor was found liable by a jury, and the verdict was upheld on appeal to the highest level of the state court system. Dade , 325 F.2d at 239. The contractor sought to tr eat the cost of defending the suit in state court and the cost of satisfying the adver se judgment as allowable costs under the contract. The Court of Claims held that these co sts were not allowable costs: [T]here is no ground for recovery against the Government. Neither the wording nor t he policy of the litigationreimbursement article of the government contract authorizes reimbursement of expenses in curred because the contractor breached its agreement with the Government or failed to perform that contract faithfully. Id. at 240 (emphasis added). After the date of the contract in Dade , the government regulations were amended to include this principle, which has been explicitly articulated in uniform government contract regulations since 1958. 32 C.F.R. § 7.203-4 (Cum. Supp. 1960) (stating that co sts must be “allowable in accordance with . . . [t]he terms of this contract”); see 23 Fed. Reg. 6345, 6347 (Aug. 19, 1958). The modern FAR as well explicitly articulates this principle, stating that a cost is allowable only if the “cost complies with . . . [t]he terms of this contract.” FAR § 31.201-2. In this case, the alleged discrimination would clearly violate the contract, and thus costs associated with an adverse judgment on the merits would not be allowable. This conclusion is underscored by the clear public policy of Title VII. For example, the Supreme Court in NAACP v. Federal Power Commission considered whether the Federal Power Commission (“FPC”) had authority to disallow the costs of unlawful discriminatory employm ent practices of regulatees in setting rates. 425 U.S. 662, 668 (1976). The FPC had statutor y authority to set “just and reasonable” rates for the

2008-1171 11transmission and sale of electricity. Id. at 666. The Court of A ppeals had held that this authority included the power to prevent the cost of t he regulatees’ discriminatory employment practices from being reflected in the rate charged and thus passed on to

consumers: The Commission’s task in prot ecting the consumer against exploitation can be alternativ ely described as the task of seeing that no unnecessary or illegitimate costs are passed along to that consumer. Cost s incurred by reason of a regulatee’s choosing to practice racial discrimination are within the reach of t hat responsibility. . . . [For example,] duplicative labor costs incurr ed in the form of back pay recoveries . . . [and] the costs of legal proceedings

. Id. at 666-67 (quoting NAACP v. Fed. Power Comm’n , 520 F.2d 432, 444) (emphasis added). The Supreme Court agreed, and held that costs result ing from violations of Title VII were unreasonable and should not be part of the rate passed on to consumers: To the extent that such co sts are demonstrably the product of a regulatee’s discriminatory employment practices, the Commission should disallow them . For example, when a company complies with a backpay award resulting from a finding of employment discriminat ion in violation of Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e et seq. , it pays twice for work that was performed only once. Id. at 668 (emphases added). This case clear ly demonstrates the expansive scope of the public policy preventing the government from being complicit in paying for discriminatory employment practices. Just as it is not “just and reasonable” for a company to pass the costs of Title VII viol ations on to consumers, similarly it is unreasonable to pass such costs on to t he government in a contract context. Tecom provides no reason why the violation of Title VII alleged in this case, if established, would not also es tablish a breach of contract. Instead, Tecom would have us limit Dade , without any principled basis, to the specif ic contractual facts of that case.

2008-1171 12In support of limiting Dade to its facts, Tecom argues that if private lawsuits establishing a violation of the contract are unallowable that will mean virtually any lawsuit will result in unallowable costs because the Permits and Responsibilities Clause, FAR § 52.236-7, incorporated in construction contracts by FAR § 36.507, makes it a violation of the contract to violate any law. Tecom’s policy concerns are founded on an in correct premise. The Permits and Responsibilities Clause does not broadly make fa ilure to comply with the law a violation of the contract. Rather, the Permits and Re sponsibilities Clause simply states that the contractor is “ responsible for obtaining any necessary licenses and permits, and for complying with any Federal, State, and municipal laws, codes, and regulations applicable to the performance of the work” so that the contractor’s failure to perform is not excused if impeded by the c ontractor’s failure to comply with legal obligations. FAR § 52.236-7 (emphasis added).
II The second step of this inquiry—how to treat a settlem ent agreement when an adverse adjudication would not be allowabl e—need only be discussed briefly, as the issue is squarely addressed by our decision in Boeing . We first noted that costs of settling suits brought by the federal government would be una llowable if the costs of satisfying a judgment would be unallowable: This policy judgment appears to be based on the assumption that suits brought by governm ent entities are in most situations likely to be meritorious , thus justifying a bright line rule that does not look behind t he settlement. Where a suit is brought by a private party and the suit is settled, however, such a blanket assumption is not appropriate.

2008-1171 13298 F.3d at 1288. Thus, the policy of the FAR was to disallow the cost of settling suits that were likely to have been meritorious and therefore would have been disallowed if not settled. But we also concluded that no blanket assumption that the suit was meritorious applied to private suits. Rather, where an adver se judgment would be unallowable in a private suit, the settlement of the private suit is similar to the FAR provisions concerning private suits under the False Claims Act: The regulations suggest that wher e a private suit is involved an inquiry is necessary to determine whether the plaintiff was likely to prevail. This approach is most clearly reflected in the FAR regulations’ treatm ent of settlements of private suits brought under the Fals e Claims Act where the government does not interv ene. FAR § 31.205-47(c)(2) (2000). Such costs may be allowabl e if the contracting officer determines that there was “very little likelihood that the third party [plaintiffs] would have been successful on the merits.” Id. Id. (emphases added, footnotes omi tted, and alteration in original). As this quotation clearly shows, in private suit s “an inquiry is necessary to determine whether the plaintiff was likely to prevail.” Id. We found this approach “most clearly reflected” in regulations relating to fraud but did not limit our holding to that situation. 5 Id. We held that, under the principles and standards of the FAR, whenever the cost s of a judgment would be unallowable, the cost of a settlement would also be unallowable unless the contractor could prove that the private suit had very little likelihood of success on the merits. Id. While Boeing involved only defense costs and not settlement payments, Boeing applies equally to settlement payments. Settlement payments are related to the

5 Although subsection (c)(2) was added in 1996 and the contract was signed in 1995, as discussed in Boeing , (c)(2) was added to clarify the application of cost principles, and applies retroactively. Boeing , 298 F.3d at 1288 n.17. To the extent that the Board suggested ot herwise, the Board erred.

2008-1171 14damages or penalties that would have been associated with an adverse judgment. Indeed, Tecom does not argue ot herwise. Where the damages or penalties paid in the event of an adverse judgment are disallowed, the settlement cost is also unallowable unless the contractor can est ablish that the private Title VII plaintiff had very little likelihood of success on the merits. The dissent does not disput e that a Title VII judgment against the contractor would not have been allowable in this case. However, the dissent suggests that (apart from fraud situations) settlement costs shoul d be allowable, regardless of how clearly meritorious the claim, and urges that Boeing adopted a rule limited to fraud settlements. We think that Boeing clearly adopted a broader rule app licable to private settlements generally where the defense and judgment costs would be disallowed in the case of a final adjudication. Indeed, t hat was the whole point of Boeing —to determine the applicable rule for similar or related ca ses not covered by the regulations. Boeing concluded that “[f]or the costs to be allowable in a settlement situation (where the costs of an unsuccessful defense would be disa llowed), Boeing must show that the allegations in the [underlying] action had ‘ver y little likelihood of success on the merits.’” Id. at 1288-89. The dissent suggests that applying the likelihood of success test to private settlements generally would be un wise. Dissent at 4-5. But the rule urged by the dissent would allow a cont ractor who engaged in conduct prohibited by the contract— where defense and judgment costs would be disa llowed if it were tried to judgment—to nonetheless recover the defense and settlement costs if it resolved the case before judgment. It cannot be the policy of the FAR to permit a contractor who is certain to

2008-1171 152008-1171 16 lose on the merits to defeat disallowance by the simple expedient of settling before the litigation is concluded. The Boeing rule prevents such an outcome by applying a very little likelihood of success standard to a ll private settlements where defense and judgment costs would be disallowed if the case went to final judgment against the
contractor. CONCLUSION We find that the Board erred in refusing to apply our decision in Boeing to the costs at issue in this case . To the extent that other decisions of the Board are inconsistent with this decision, they are no longer good law. We therefore reverse and remand for further proceedings consistent with this opinion. REVERSED and REMANDED COSTS No costs.

## United States Court of Appeals for the Federal Circuit

2008-1171 Pete Geren, SECRETARY OF THE ARMY, Appellant,

v. TECOM, INC., Appellee.

Appeal from the Armed Services Boar d of Contract Appeals in no. 53884.

LOURIE, Circuit Judge , dissenting. I respectfully dissent from the majority opi nion, which reverses the decision of the Armed Services Board of Contract Appeals (the “Board”) and extends Boeing North American, Inc. v. Roche , 298 F.3d 1272 (Fed. Cir. 2002), to reac h the facts of this case. I believe that such an extension is unwarra nted given the different factual background of the instant action. In Boeing , this court faced the question of which standard should apply for determining the allowability of settlement co sts of a shareholder derivative suit. That derivative suit, referred to as the Citron suit, was brought by private parties and alleged a breach of fiduciary duty by directors and o fficers of a corporation for “failing to establish internal controls sufficient to in sure that the [c]orporation’s business was carried on in a lawful manner.” 298 F.3d at 1277 (quoting the complaint, alteration in original). Specifically, t he parties agreed that “five inst ances of underlying misconduct”were involved in the Citron suit: (1) a civil suit brought by the government under the False Claims Act; (2) criminal charges br ought by the government for making false statements; (3) government alle gations of defective pricing that resulted in indictments for fraud, mail fraud, and willfully making fals e statements and that, ultimately, led to a guilty plea to two counts of the indictment; (4) a civil qui tam suit, brought on behalf of the government under the False Claims Act; and (5) allegations of hazardous waste dumping and other environm ental law violations. Id. Thus, although the lawsuit brought by private parties that resulted in se ttlement was on its face based on breach of fiduciary duty, four of the five instanc es of underlying misconduct involved false statements or fraud. After determining that no regulation spec ifically addressed wh ether the defense costs of the Citron lawsuit were or were not allowable, the Boeing court concluded that the costs were not “similar” to costs specifically disallowed under the Federal Acquisition Regulations (“FAR”) but were “related to” disallowed defense costs for a suit that resulted in criminal conv ictions of the directors. Id. at 1286-87. But, given that there was no judicial determination of wrongdoing because the parties settled, the Boeing court then had to determine whether the settlement costs of the Citron suit were allowable. The court found that the regulations did not provide a blanket rule that stated that settlement costs for a privat e litigation should be disall owed if the costs for an unsuccessful defense of such a su it would have been disallowed. Boeing , 298 F.3d at 1287-88. The court presumed, however, that meritorious suits should be treated

2008-1171 2differently from those that lacked meri t and looked to the FAR for guidance as to whether the settlement costs of the Citron suit were allowable: The regulations suggest that where a pr ivate suit is involved an inquiry is necessary to determine whether the plaintiff was likely to prevail. This approach is most clearly reflected in the FAR regulations’ treatment of settlements of private su its brought under the False Claims Act where the government does not intervene. Such costs may be allowable if the contracting officer determines that ther e was “very little likelihood that the third party [plaintiffs] would hav e been successful on the merits.” Id. at 1288 (quoting FAR § 31.205-47(c)(2), 48 C. F.R. § 31.205-47(c)(2)) (other citations omitted, alteration in original). The Boeing court concluded that the very little likelihood of success standard from FAR § 31.205-47(c)(2 ) was “an appropriate standard for private suits in the present context.” Id. The Boeing court held, quoting the exact language of FAR § 31.205-47(c)(2), that “[f]or the costs to be allowable in a settlement situation (where the costs of an unsucce ssful defense would be disallowed), Boeing must show that the allegations in the Citron action had ‘very little likelihood of success on the merits.’” Id. at 1288-89. It is clear to me from the analysis in Boeing that the very little likelihood of success standard, which is foun d in the FAR only in § 31.205- 47(c)(2), was a far more “appropriate standard” for the facts of that case than for the present situation. FAR § 31.205-47(c)(2) specifical ly applies to “settlement of any proceeding brought by a third party under the False Claims Act in which the United States did not intervene.” It does not apply to any and all settlements of lawsuits brought by private parties involving any and all types of allegations. As discussed above, the private su it that settled in Boeing involved several instances of fraudulent behavior and the ma king of false statements, including a qui tam suit brought under the False Claims Act. Clearly, the fact that FAR

2008-1171 3§ 31.205-47(c)(2) specifically ad dresses a private suit under the False Claims Act lends support to the Boeing court’s decision to utilize the very little likelihood of success language from that regul ation as the standard of allowability of the settlement costs of the Citron suit. Unlike Boeing , however, the case at hand does not present the same opportunity for analogizing to qui tam cases brought under the False Claims Act. There is no nexus between the facts of the private suit in this case, a sexual harassment suit filed by a former employee, and a lawsuit brought by a third party on behalf of the government that alleges fraud or similar misconduct. To apply Boeing here would be extending the reach of that decision, which looked to the very little like lihood of success language in a far more similar set of circumstances to wh at FAR § 31.205-47(c)(2) actually covers, to apply to any settlement of a lawsuit brought by a private party when the costs of an unsuccessful defense would be disallowed. Such an extension, in my opinion, is unwarranted given the specif ic applicability of FAR § 31.205- 47(c)(2) to private suits brought under the False Claims Act in which the government does not intervene, and I believe the Board was correct in refusing to apply the Boeing standard in this case. A final thought: Determining the likeliho od of success in a la w suit is not so easily done. If it were, we would not have so many suits, appeals, and reversals of decisions in our legal system generally. It is one thing to have that standard be a criterion for allowability of costs in defending a suit when fraud against the government is alleged. It is quite another to have that standard be the criterion in a suit involving two private parties, even when the subject matte r relates to a government contract. The government has an interest in setting a higher barrier for the allowability of settlement

2008-1171 42008-1171 5 costs when it is the party allegedly being defrauded, and may in fact be suing for that fraud, than when it is two pr ivate parties who are contending. I therefore recoil from judicially extending that di fficult-to-apply likelihood of success rule beyond its current borders. Finally, the whole po int of a settlement generally is that neither party is assured of success and the law favors settle ment of such disputes. Thus, I do not believe we as a court should extend the Boeing application of a regulation to settlements beyond fraud cases, where the government’s intere st is especially compelling. For the foregoing reasons, I respectfully dissent.