Following the instructions of Congress, the FAR Councils have clarified that federal contractors may not include as allowable costs any legal expenses incurred in unsuccessful or non-meritorious defense of whistleblower reprisal claims. The Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council (the Councils) recently issued a final revision to FAR 30.205-47, effective July 25, 2014, that lays out how the allowability of legal costs incurred in whistleblower proceedings between contractors or subcontractors and their employees is determined. In general, if the whistleblower is successful in obtaining relief or government action against the contractor, defense costs will not be allowable. A new exception was added to the final rule, however, providing for allowability of legal costs incurred in negotiating nuisance settlements. 

The new rule, which amends FAR 31.205-47(b), (b)(2), and (c), implements a Congressional mandate under the National Defense Authorization Act for Fiscal Year 20131 (FY13 NDAA) to make unallowable legal costs associated with whistleblower complaints where the whistleblower's complaint is successful. This mandate was part of a comprehensive set of enhancements to whistleblower protections for employees of federal contractors under Sections 827 and 828 of FY13 NDAA. These enhancements included expanding whistleblower protections to the employees of subcontractors of a federal contractor and employees providing evidence of abuse of authority relating to federal contracts.

The interim rule created concerns, however, because it failed to include a safe harbor for legal expenses incurred during negotiation of a settlement with a whistleblower. A commenter pointed out that, under the proposed rule, there was no exception for settlements in whistleblower proceedings. In other words, contractors' legal costs would be allowable only if they were spent on full-blown litigation, regardless of the merits of the whistleblower's claim, or the contractor's defense, or the contractor's desire to avoid litigation for reasons unrelated to the merits of the claim. Such a limitation would create disincentives to settle disputes. This was in contrast to the existing provision at FAR 31.205-47(c)(2), which let settlement costs in False Claims Act cases be allowable if the Contracting Officer found the qui tam plaintiff's allegations to have little merit.

In response to this concern, the Councils included in the final rule an amendment to FAR 31.205-47(c) that makes allowable legal costs associated with settling a complaint of reprisal if "the contracting officer, in consultation with his or her legal advisor, determined that there was very little likelihood that the claimant would have been successful on the merits."2 This exception brings parity between the treatment of settlements involving whistleblower complaints of reprisal and the treatment of settlements in the whistleblowing cases under the qui tam provisions of the False Claims Act.

In light of the new rule, contractors should consider whether legal costs related to whistleblower complaints of reprisal submitted to the government for reimbursement on federal contracts comply with the new rules on allowability of legal costs. Additionally, contractors should ensure they are not passing on costs made unallowable under this rule that may have been incurred by their subcontractors for a federal contract.  Lastly, contractors should take note of the exception made for settling whistleblower's complaints of reprisal and ensure that they work with the contracting officer to obtain the needed determination to make the legal costs of that settlement allowable.

The final rule amends FAR 31.205-47 as follows (new language in italics):

FAR 31.205-47(b)  In accordance with 41 U.S.C. 4310 and 10 U.S.C. 2324(k), costs incurred in connection with any proceeding brought by a Federal, State, local, or foreign government, or by a contractor or subcontractor employee submitting a whistleblower complaint ofreprisal in accordance with 41 U.S.C. 4712 or 10 U.S.C. 2409, for violation of, or a failure to comply with, law or regulation by the contractor (including its agents or employees), or costs incurred in connection with any proceeding brought by a third party in the name of the United States under the False Claims Act, 31 U.S.C. 3730, are unallowable if the result is--

FAR 31.205-47(b)(2) In a civil or administrative proceeding, either a finding of contractor liability where the proceeding involves an allegation of fraud or similar misconduct; or imposition of a monetary penalty, or an order issued by the agency head to the contractor or subcontractor to take corrective action under 41 U.S.C. 4712 or 10 U.S.C. 2409, where the proceeding does not involve an allegation of fraud or similar misconduct;

FAR 31.205-47(c)(2)(ii)  In the event of disposition by consent or compromise of a proceeding brought by a whistleblower for allegedreprisal in accordance with 41 U.S.C. 4712 or 10 U.S.C. 2409, reasonable costs incurred by a contractor or subcontractor inconnection with such a proceeding that are not otherwise unallowable by regulation or by agreement with the United States may be allowed if the contracting officer, in consultation with his or her legal advisor, determined that there was very little likelihood that the claimant would have been successful on the merits.