Under a new final rule, contractors and subcontractors may not seek to recover from the government their legal costs and expenses incurred in connection with whistleblower retaliation claims. The Department of Defense, the General Services Administration, and the National Aeronautics and Space Administration recently made final the interim rule deeming such expenses unallowable. The final rule, which is effective July 25, 2014, tracks the September 30, 2013, interim rule, with minor changes.

Specifically, the final rule prohibits contractors and subcontractors from billing the government for costs associated with unsuccessfully litigating whistleblower retaliation claims brought by the contractors’ or subcontractors’ employees. The rule closes a gap in the Federal Acquisition Regulations (FAR) permitting contractors to bill the government for such costs.

Generally, contractors and subcontractors can recover costs associated with legal proceedings when they successfully defend lawsuits brought by a federal, state, local, or foreign government for violations of, or failures to comply with, a law or regulation. If the defense is not successful, however, the costs are not allowable. The same rule also applies to the defense of False Claims Act claims, and now applies to the defense of claims brought by a contractor’s employee under federal whistleblower laws. If the legal proceedings result in a settlement, the contractor or subcontractor may recover legal costs if it can show that the plaintiff’s allegations had very little likelihood of success on the merits.

Prior to the interim rule, contractors and subcontractors could bill their legal costs associated with defending and settling whistleblower lawsuits to the federal government. The interim rule amended FAR 31.205-47 to specifically disallow such costs unless the contractor succeeded in defending the lawsuit. Under the interim rule, costs associated with settling whistleblower lawsuits were disallowed. In contrast, the final rule treats settlement costs associated with whistleblower actions as it does other settlements with private parties. The costs are allowable if the contractor or subcontractor proves that the plaintiff’s allegations had very little likelihood of success on the merits. Contractors and subcontractors should be aware that the information associated with proving the plaintiff’s likelihood of success may raise attorney-client privilege and work product concerns.

While contractors and subcontractors cannot recover their legal costs related to unsuccessfully defending a whistleblower retaliation lawsuit, they can recover up to 80% of the costs incurred in a successful defense, or incurred in settling a case that can be shown to have had very little likelihood of success on the merits.  Before entering into any settlement involving a whistleblower lawsuit, contractors should determine whether the costs of defense will be recoverable, and whether the settlement can be structured so as to maximize the chances that defense costs will be allowed. More generally, this rule-change is a reminder that the rules pertaining to allowability are constantly being fine-tuned.