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board.

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This is appeal number 182055, Bechtel National Incorporated against the United States.

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Mr. Knight.

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Thank you, Your Honor.

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May it please the Court, my name is Steve Knight, appearing on behalf of Bechtel National in this appeal.

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I would ask three minutes reserved for rebuttal time.

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We are here seeking the reversal of the Court of Federal Claims.

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If in this case you didn't have this DEAR provision and all you had was the FAR provision, which I guess is 31.2012A, do you agree that

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this panel would be bound by TCOM?

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Yes, Your Honor.

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It is, and that is exactly the point of this case.

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This is a situation that TCOM actually anticipated.

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TCOM indicated that in the absence of a contract clause or FAR provision to the contrary, then the general rules of allowability

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would apply.

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Here we have a contract clause in I-113 that provides for broad third-party liability coverage by DOE with two exceptions, only one of which is at issue here.

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And it's in... The problem that I'm having is that that provision doesn't say what's allowable.

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It says that

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you have to look to other provisions of the contract to see what's disallowed.

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And this FAR provision is another provision of this contract, right?

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In other words, the provision you're relying on, specifically FEDS, costs are allowable unless made disallowable by another provision of the contract.

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More specifically your honor I 113 says in e that third-party liability costs including expenses judgment settlements litigation costs Etc are allowable

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unless made unallowable by law or contract provision.

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There is no law or contract provision.

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Well, there's the FAR provision.

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That's your problem, right?

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I mean, the specific DAR provision you're relying on

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Says costs aren't allowable if they're made disallowable by another provision of the contract right that's that's so your honor And there is no provision of the contract that makes these costs on allowable the far provision Why isn't I'm sorry which far provision what the the the one we were just talking about 31 to a 1 to a 31 to a 1 to a with respect says that for a cost to be allowable it must be consistent it

[00:03:34] Speaker 04:
Has to be reasonable allocable consistent with gap or cast terms of the contract and far part 31 there is no cost principle There is no term of the contract wait wait T. Com said that that provision Disallows the very cost that you're seeking here you agreed at the outset of the argument that that was true So why isn't it the case that this dea our provision?

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Incorporates the far provision and says if it's disallowed by the far provision you can't recover with respect your honor t-Com said that in the absence of a contract clause Indicating or stating otherwise well understand that but that's what the far provision does the far provision merely says that the cost has to be consistent and

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with terms of the contract.

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I-113 is a term of the contract and therein DOE in promulgating the clause and in implementing the clause has covered these costs consistently for decades on this contract.

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I'm sorry.

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I'm just not understanding what you're saying the the the provision you're relying on says Except as otherwise provided in subparagraphs G and H of this clause or specifically disallowed elsewhere in this contract the contractor shall be reimbursed your problem is the far provision is a provision of this contract which disallows these costs under the decision in T comp

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The FAR provision does not create a disallowance.

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31.2012 does not create a disallowance.

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It sets the ground rules, the general rules of cost allowability.

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And TCOM explicitly recognized that the parties could negotiate a separate clause covering reimbursement

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of exactly these kinds of costs.

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I don't think you're addressing my point.

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I'm sorry, Your Honor.

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TECOM said this FAR provision disallowed these costs, right?

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TECOM, actually TECOM said that it was the breach of what is in the contract as clause I-43, the EEO clause.

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that costs related to that breach.

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By reason of that FAR provision, 3.201.

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By reason of 31.201 to a 4.

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Yes, Your Honor.

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Because in TCOM, in the absence of a contract clause, those costs were seen as not consistent with the terms of the contract if there were a breach of the EEO clause.

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That's correct.

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Here, however, the parties have provided for otherwise.

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And in fact, it was DOE in its promulgation comments to the closet issue that assured the contracting community that these costs would be covered, absent managerial, willful misconduct, lack of good faith, lack of prudent business judgment.

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But that was prior to TECO.

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Yes, Your Honor.

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Wasn't it?

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Yes, Your Honor.

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It was in 1997 when the version of the clause that we're talking about here was promulgated.

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And TCOM anticipated exactly that type of situation where the parties would provide for coverage of these third-party liability costs.

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Well, that's the question as to whether this clause makes the costs allowable.

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And certainly you'd have a very good argument if the DEAR provision said except is provided in some paragraphs G and H the costs are allowable, but it doesn't say it says except is provided in G and H or elsewhere disallowed in the contract.

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And it's not elsewhere specifically disallowed in the contract your honor.

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There is no specific disallowance of these

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particular third-party liability clauses.

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And therein is where the trial court jumped the track.

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The trial court read I-113 as saying that the costs are allowable if they are otherwise allowable under the terms of the contract.

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And that's not at all what I-113 says.

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I-113 makes these third-party liability costs allowable unless there is another provision that disallows them.

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There is no such provision, Your Honor.

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And TCOM did not lay down a... That's where you run into TCOM, which said that there is another provision of the contract that disallows the costs, 31-201.

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To read TECOM that way would be to read TECOM in such a way that the parties could never contract to have these types of costs treated otherwise.

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In other words, TECOM would have laid down a cost principle that no one could break.

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That's not what TECOM said.

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And indeed, this is borne out by DOE's statements, DOE's actions, Department of Energy statements and actions, in order to get the qualified bidders in to do this kind of challenging work.

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They said, DOE said, we are going to take on financial risk

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in order to get the kinds of companies like Bethel here to design and build these nuclear waste facilities.

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So what the trial court's position permits is for DOE to do a complete about face in terms of the cost that they are reimbursing under the contract.

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DOE has been very clear that it would reimburse these costs.

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It specified employee discrimination suits in the promulgation comments, leading to the very clause that we're talking about.

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So is your understanding then of how, assuming that the trial court decision stands, that from now on such issues

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even though it might be a prudent business practice to settle of the kind of settlement we have here, that that would not, is less likely to be done, that rather it would be almost obligatory to fight it out in court?

[00:10:45] Speaker 03:
That is certainly a natural reaction on the part of the company, yes, Your Honor.

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If TCOM applies here, that would change the applicability of I-113 and its reimbursement of third-party liability costs.

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And in order to have settlement costs under TCOM reimbursed, the very little likelihood of success on the merits standard would be applied.

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And that is exactly what is at issue here.

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Do you agree that if this discrimination case or cases, the two cases, go on to final judgment and you've lost, that you would not be able to recover those costs?

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No, Your Honor, I would not agree with that.

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So even if you litigate and lose, you think you can recover the costs?

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As long as there is not any lack of good faith, willful misconduct, lack of prudent business judgment under age of the managerial personnel of Bechtel.

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Yes, sir, that is the way that I-113 is constructed.

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and is explicit in that regard.

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It talks about judgments and settlements and litigation costs and that was exactly DOE's intent when it promulgated the closet issue here was to cover those kinds of financial risks in order to get companies like Bechtel to bid on the work and now they're trying to

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undercut or do an about face in terms of what they have covered for the better part of 20 years under exactly this clause.

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It is DOE that is attempting to make a 180-degree change here in terms of what's covered by the contract.

[00:12:40] Speaker 01:
But how do you reconcile this with the allegation

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The basis was a violation of law, which was then settled.

[00:12:51] Speaker 03:
I see that I'm into my rebuttal time.

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May I respond, Your Honor?

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Yes.

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When the clause says, unless made unallowable by law or

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other provision of the contract it is there are laws that Go to cost allowability those are discussed for example in the Abraham case that's discussed in the briefs the DOD authorization act of 1986 is a perfect example of that and

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There is no law, though, that disallows these kinds of costs for government contract purposes.

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It's not as though the Department of Energy is without remedy.

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The Department of Energy has remedies under I-43, the EEO clause, up to and including termination, cancellation, suspension, and debarment.

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And if Bechtel's actions warranted those kinds of remedies,

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One could infer that you would have a 113h situation where the cost would not be Allowable tonight, let me ask you sir unallowable by law wouldn't T. Com be law T. Com is law so if wouldn't doesn't one one if if T. Com makes these kind of costs unallowable doesn't that kick in to the

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I.113G1, which says, unallowable by law.

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No, Your Honor.

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TCOM is certainly law in terms of case precedent.

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But TCOM was decided in the absence of any kind of a clause like I.113, and specifically provided that parties could, in fact, make arrangements or have separate clauses that address these costs.

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in particular.

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And that's what we have here.

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And that's why TCOM does not apply.

[00:14:55] Speaker 02:
Let me just ask you one other thing.

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You said that the very little likelihood of success standard would now kick over into any kind of a lawsuit that's brought against Bechtel or some other contractor at one of these nuclear sites.

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But isn't that standard grows out of the Boeing case, and it's limited to the setting of a discrimination claim?

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I mean, I'm not sure that I would agree with your argument that the very little likelihood of success argument now applies across the board to all kinds of claims other than just discrimination claims.

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If TCOM is the rule here,

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then the very little likelihood of success on the merit standard would apply to settlements, if TECOM were the standard.

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We urge the... You just said TECOM applies in the case of a discrimination claim.

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It doesn't apply to a environmental claim or some other kind of claim.

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In the absence of a clause like I-113, yes, it applies to discrimination.

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But also, TCOM is phrased broadly enough to apply to any breach.

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And in fact, the underlying, the Dade case on which TCOM is predicated is not a discrimination case at all, Your Honor.

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It is a collective bargaining.

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type of case rights under a collective bargaining agreement which were incorporated into the contract.

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So we would suggest to the court that in fact this is just the first step down the road of eroding the coverage of third-party liability in I-113 that DOE explicitly agreed to take on at the beginning of this contract.

[00:16:58] Speaker 01:
Let's hear from the government and we'll save some more time.

[00:17:02] Speaker 03:
Thank you, Your Honor.

[00:17:07] Speaker 01:
Mr. Long.

[00:17:08] Speaker 00:
Thank you, Your Honor.

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May it please the Court.

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I think it's instructive to first consider what TCOM means here.

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And what it means is it establishes how this Court will interpret these FAR provisions and issues.

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And the Court spoke with my friend about what the impact of Clause I.113 is.

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Well, that is, in this instance, the court's determination.

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So there's a statement in TCOM that unless otherwise provided or something of that nature.

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Well, let's say that there had been a provision here that explicitly permitted discriminations.

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Of course, not happening.

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But let's say it were to occur.

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It would then be on this court to decide the legal construction of the contract in that instance.

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But that's not the facts here.

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The facts here are that clause I.113 points outward.

[00:17:56] Speaker 04:
Well, what TCOM?

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What was saying appeared to be that if the cost is made allowable by another provision of the contract, it might be different.

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And their problem is that this provision they're relying on doesn't say the cost is allowable.

[00:18:12] Speaker 04:
It says it's allowable as long as some other provision of the contract doesn't disallow it, which, of course, is the very provision that TCOM involved, which disallows the cost.

[00:18:24] Speaker 00:
Yes, Your Honor.

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We obviously agree with that interpretation.

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And as you say, the clause I.113 points outward at the contract and the law.

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And TCOM establishes under the FAR how these sorts of costs will be distributed.

[00:18:39] Speaker 01:
I'm trying really to understand that the foundation of this ruling is some sort of inference of an admission of wrongdoing.

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And so that the consequence

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It seems would be either that in government contracts there would be some kind of additional estimate of the possibility of this more or less routine kind of litigation as we are seeing in today's world so that even though it would be

[00:19:20] Speaker 01:
Let's assume that it was a sound business practice to settle this claim.

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We talk about the cost of litigation, whatever else might have happened, that such a therefore straightforward sound business practice, there's an inference that there was wrongdoing that led to the settlement.

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And therefore, it's their problem.

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and the government on whatever cost plus basis is home free, that seems to have all sorts of complex implications for government contract relationships when you have a cost plus contract that does not seem to weigh in favor of government interests.

[00:20:08] Speaker 01:
Is that a fair statement?

[00:20:11] Speaker 00:
Well, two points in response, Your Honor.

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The first is TCOM is limited to discrimination context, and specifically to the application of FAR 52.222-26.

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So that cabinets the scope of the TCOM holding, and the Department of Energy has applied TCOM only to those contexts.

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With respect to claims brought against contractors in that context, I'm going to your question, Your Honor.

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The fundamental question is, did the discriminatory conduct occur?

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And so the very little likelihood of success standard in cases where discrimination claims are settled provides the contractor the opportunity to prove that a given claim was not meritorious.

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And that analysis is undertaken by the contracting officer.

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And it is necessary in order to know whether the contractor indeed breached the contract.

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And so I don't think that it's the inference of settlement that really

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could, well, the inference of settlement seems to be beside the point into account.

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The point is, did the discriminatory conduct occur?

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And the contractor has the opportunity to prove to the contracting officer that it did not.

[00:21:22] Speaker 04:
And one way to do that would be through a... What are their theories?

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They're entitled to recover even if they're found guilty of wrongdoing and there's

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adverse judgment.

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Their theory is not limited to settlements.

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It includes actual adverse determination.

[00:21:36] Speaker 00:
That's correct, Your Honor, and obviously we disagree with that interpretation based on the application of TCOM.

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Returning to your question, Your Honor, they have the opportunity to prove it under what we contend to be the correct construction of these contractual terms.

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They can prove that no discrimination occurred through

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of showing to the contracting officer now, of course, an adverse judgment, which Judge Dyke just addressed, of course, would demonstrate that they did factually did discriminate.

[00:22:05] Speaker 00:
But they have the opportunity where they settle to prove that that would not have occurred, that that judgment would not have occurred because the facts don't support it.

[00:22:13] Speaker 01:
So if they had litigated and won on that theory, the cost of litigation would be recoverable?

[00:22:21] Speaker 00:
Yes, that's right, because they did not discriminate.

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Now, it would, of course, depend on the trial court's ultimate findings.

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But yes, assuming the trial court reached the holding, there was no discrimination.

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Then no discrimination occurred, and the litigation costs would be recoverable.

[00:22:40] Speaker 02:
Let me ask you a question.

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Your position is that these costs are not recoverable because TCOM says via FAR 31.21201-2 and the anti-discrimination provision,

[00:23:00] Speaker 02:
such costs can't be recovered, correct?

[00:23:03] Speaker 02:
And that was the thrust, I think, of Judge Dyke's discussion with Mr. Knight.

[00:23:09] Speaker 02:
So you're not relying simply on the language of G1.

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In other words, you're not saying that G1 says it refers to costs which are otherwise unallowable by law or the provisions of this contract.

[00:23:26] Speaker 02:
You're not saying that that kicks in

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simply because you have an anti-discrimination provision.

[00:23:37] Speaker 02:
The discussion between Judge Dyke and Mr. Knight was along the lines of, well, look, you can't prevail here, or you've got a problem here, because in TCOM we said the general cost provision, I always have to check my notes here, 31.201-2 makes these costs unallowable because there's the anti-discrimination provision.

[00:24:06] Speaker 02:
And what I'm just asking you as a hypothetical is, or maybe it's not a hypothetical, I apologize.

[00:24:14] Speaker 02:
What I'm saying is you're not relying simply on G1 alone in the absence of the general cost provision 31.201.

[00:24:28] Speaker 00:
Correct, Your Honor.

[00:24:29] Speaker 00:
No, G1 is, I think this gets to your question, G1, as I said earlier, points outward to these anti-discrimination provisions and the cost allowable provisions.

[00:24:38] Speaker 02:
But if you didn't have the cost allowable provision, G1 wouldn't be enough for you because it would just say otherwise not allowable, otherwise unallowable by the provisions of the contract.

[00:24:53] Speaker 00:
Potentially, Your Honor.

[00:24:54] Speaker 00:
I'm having difficulty thinking of a situation where the cost allowability provisions of 31.2 wouldn't apply.

[00:25:00] Speaker 00:
But they certainly do in this contract.

[00:25:05] Speaker 00:
The court has no more other questions.

[00:25:06] Speaker 00:
We ask that you affirm the trial.

[00:25:07] Speaker 01:
I do have a question.

[00:25:09] Speaker 01:
Perhaps it's a bit far afield.

[00:25:12] Speaker 01:
But would it in this case, therefore, have been appropriate in connection with a reimbursement to inquire into the background of the claim

[00:25:24] Speaker 01:
And as to whether there was foundation, I think we will accept that it's often prudent to settle even an not well-supported claim rather than litigate it.

[00:25:39] Speaker 01:
So that if we accept the premise that this was a prudent business practice, is it at all relevant whether there was any foundation for the claim?

[00:25:56] Speaker 00:
Your Honor, the burden is on the contractor to make that showing to the contracting officer in the first instance.

[00:26:04] Speaker 00:
And in this instance, the contractor had that opportunity.

[00:26:08] Speaker 00:
So with respect to the merits of the underlying claims, certainly those are central here.

[00:26:14] Speaker 00:
They are important.

[00:26:16] Speaker 00:
As to whether the claims might be frivolous or well-founded, whichever it may be, or somewhere in the middle,

[00:26:24] Speaker 00:
there is an inquiry that should occur at the contracting officer level, with the burden on the contractor to make a showing that the costs are allowable.

[00:26:32] Speaker 02:
They have a very little likelihood of success issue.

[00:26:35] Speaker 00:
Correct, Ron.

[00:26:35] Speaker 02:
And I guess in this case, the contractor made that argument before the contracting officer, and the contracting officer found against the contractor.

[00:26:44] Speaker 02:
But then in the court of federal claims, the contractor chose not to challenge that finding.

[00:26:50] Speaker 02:
Is that correct?

[00:26:51] Speaker 00:
Correct, Ron.

[00:26:51] Speaker 00:
At the court of federal claims,

[00:26:53] Speaker 00:
The contractor chose not to allege that the underlying plan has had no more than very little likelihood of success.

[00:26:59] Speaker 00:
They instead have presented this as a legal issue related to TCOM.

[00:27:04] Speaker 01:
That's right.

[00:27:05] Speaker 01:
Okay.

[00:27:06] Speaker 01:
Anything else?

[00:27:07] Speaker 01:
Anything else?

[00:27:16] Speaker 03:
Thank you.

[00:27:16] Speaker 03:
I would take issue with my friend's last statement.

[00:27:21] Speaker 03:
Bechtel presented this at the Court of Federal Claims as the what is the correct

[00:27:27] Speaker 03:
legal standard to apply with respect to these costs and the correct legal standard is Clause I-113.

[00:27:34] Speaker 03:
Returning your honor to your line of questioning I would just like to refer the court to 171 of the appendix where the clause is reproduced and in full it says except as provided in subparagraph G and H

[00:27:52] Speaker 03:
or specifically disallowed elsewhere in the contract, the contractor shall be reimbursed for liabilities, reasonable expenses, incident to such liabilities, including litigation costs to third persons not compensated by insurance or otherwise.

[00:28:10] Speaker 03:
This is a broad provision providing for reimbursement of third party liability costs.

[00:28:17] Speaker 03:
Again, return to G and H.

[00:28:21] Speaker 03:
H is not an issue here.

[00:28:23] Speaker 03:
G says that notwithstanding any other provision of the contract, the contractor shall not be reimbursed

[00:28:31] Speaker 03:
for liabilities, including judgments, litigation costs, so on, which are otherwise unallowable by law or the provisions of this contract.

[00:28:44] Speaker 03:
So I-113 makes third party liability costs allowable, subject to some other contract provision that says that they are not.

[00:28:56] Speaker 04:
Like 31-201.

[00:28:58] Speaker 03:
No, your honor 31 201 does not say that any costs are unallowable It is it lays out the four general five general parameters that sets the structure for

[00:29:13] Speaker 03:
legal cost, I'm sorry, that sets the structure for allowability of contract costs.

[00:29:20] Speaker 03:
31-2012 does not render any particular cost unallowable.

[00:29:25] Speaker 03:
It is TECOM reading the EEO clause

[00:29:29] Speaker 03:
through combining it with 31201 to A4 that then says costs related to a breach of a contract clause are unallowable.

[00:29:44] Speaker 03:
So the

[00:29:47] Speaker 03:
The crux of this case is does I-113 control or does the consistent statement by the Department of Energy, the consistent reimbursement over 20 years of exactly these kinds of costs,

[00:30:01] Speaker 03:
they admit in the papers that that's what they've done, that that's how they've interpreted this clause, does TCOM, which did not pertain to a clause like I-113, essentially eviscerate

[00:30:17] Speaker 03:
part of the third-party liability reimbursement clause.

[00:30:23] Speaker 03:
And we urge the court to find that it does not.

[00:30:27] Speaker 03:
TCOM does not apply here because TCOM does not have the kind of clause that I-113 provides.

[00:30:36] Speaker 03:
So it is not a question of who shows what under TECOM.

[00:30:44] Speaker 03:
TECOM just doesn't even enter the discussion because of clause I-113.

[00:30:50] Speaker 03:
And to say that TECOM, all of this discussion occurred before TECOM, yes, it did.

[00:30:56] Speaker 03:
Your Honor is exactly right on that.

[00:31:00] Speaker 03:
The Department of Energy

[00:31:02] Speaker 03:
made the pronouncements on risk allocation in order to get people to bid on this contract in 1997.

[00:31:11] Speaker 03:
And they said, absent managerial misconduct of the types set forth in I-113H, we, DOE, acknowledge that employment discrimination suits are business risks, and we will cover them.

[00:31:27] Speaker 03:
That's what the promulgation comments indicated.

[00:31:31] Speaker 03:
And now what the Department of Energy is trying to do is to gut that coverage, reverse course on what it was that they promised to do to get Bechtel in to do this work.

[00:31:44] Speaker 03:
And we are simply asking for the court to enforce.

[00:31:48] Speaker 02:
Let me ask you, has this TCOM issue been raised at the outside of the setting of

[00:31:56] Speaker 02:
a discrimination claim?

[00:32:00] Speaker 03:
I'm sorry.

[00:32:01] Speaker 02:
In other words, has the Department of Energy taken the position with respect to a non-discrimination claim that was settled that the costs aren't allowable because of the TECOM rule?

[00:32:14] Speaker 03:
Not yet, Your Honor.

[00:32:15] Speaker 03:
But in the court below, my friend, while assuring the court, and it's in the appendix,

[00:32:25] Speaker 03:
assuring the court that DOE's position was only on discrimination also candidly acknowledged that he could not make any representations that they would not go further.

[00:32:40] Speaker 03:
And there is language and the predicate of TECOM being dade, a labor case, there is certainly ample room for the Department of Energy to push this further down the slippery slope.

[00:32:54] Speaker 03:
But the point here is that DOE promulgated this regulation and said these are normal business risks that absent the managerial misconduct in H, we will cover.

[00:33:11] Speaker 03:
And now they are trying to get away with not reimbursing the very costs that they have reimbursed and have said that they would cover with no change in the contract clause.

[00:33:26] Speaker 03:
They could change the contract clause.

[00:33:29] Speaker 03:
And indeed, as indicated in our last brief, they are doing just that at the Savannah River project.

[00:33:37] Speaker 03:
They have changed the contract clause to explicitly carve out discrimination costs as not being reimbursable.

[00:33:46] Speaker 03:
That's not the situation here at Hanford.

[00:33:49] Speaker 03:
And so these costs, we would submit, are in fact allowable as they have always been allowable.

[00:33:56] Speaker 03:
The other thing that the Department of Energy could do is ask to negotiate a modification to the contract, which is something that the parties did in Abraham with regard to environmental costs.

[00:34:10] Speaker 03:
So the coverage here going into the contract

[00:34:19] Speaker 03:
Implementing the contract clause has been and should continue to be third party liability costs of this kind are reimbursed subject to H because there is no specific contract clause that disallows these costs Thank you, thank you both because she's taken over submission I