Recovery Of Legal Fees And Expenses
 
November 6, 2000
 
Richard O. Duvall- Northern Virginia

The Federal Requisition Regulation (FAR) Paragraph 31.205-47 disallows the recovery of costs by a contractor in a cost-reimbursement contract incurred in connection with legal proceedings if the result is a conviction or finding of liability. But what if it is a contractor employee, and not the contractor, who was found to be guilty? That was the case before the Armed Services Board of Contract Appeals in Appeal of DynCorp, ASBCA No. 49714 (June 21, 2000).

DynCorp incurred hundreds of thousands of dollars in defending itself as the Army Criminal Investigation Division, the FBI and the U.S. Attorney’s Office pursued various allegations that the contractor had violated the law during its performance as a base operations contractor for the U.S. Army. The investigative activities of the government resulted in no criminal charge or civil complaint against the contractor. However, as a result of an investigation into certain allegations related to the use of a computer, an employee of the contractor entered into a plea agreement pursuant to which he pled guilty to a single misdemeanor count, resulting in a fine of $25 and one-year’s probation. The contractor was not a party to the plea agreement.

The contractor submitted a claim for attorneys fees and costs incurred in defending the wide range of allegations directed at the contractor. The Army asserted that the fees and costs were unallowable under the Major Fraud Act (10 U.S.C. 2324(k)(1)-(2)) and FAR 31.205-47(b) because the claimed attorneys fees and costs were incurred in a single investigation that had resulted in a conviction—albeit of an employee, not of the contractor.

The contractor argued that the Major Fraud Act required wrongdoing on the part of the contractor before costs of a proceeding were disallowed, and that the statute controlled if the FAR was inconsistent with the statute. The contractor also argued that the investigation of the allegations that lead to the employee’s misdemeanor plea were separate and distinction from investigations into other allegations.

The Board ruled that the employee’s conviction did not result in disallowance of legal fees and costs—regardless of whether there were one or more investigations. The Board first looked to the Major Fraud Act to determine the intent of Congress on the question of whether a finding or determination of contractor liability was necessary before costs of a proceeding would be disallowed. As the Board observed, prior to enactment of the Major Fraud Act, contractor wrongdoing — evidenced by the contractor’s conviction, nolo plea, or a finding or determination that the contractor had violated federal law or regulation — was necessary before costs of a proceeding were disallowable. The provisions of the Major Fraud Act, relied upon by the Army, were silent on the point of contractor wrongdoing versus an employee conviction. The Board found it was “treacherous to find in Congressional silence alone the adoption of a controlling rule of law.” The Board then examined the statute as a whole. It was particularly significant, in the Board’s reasoning, that another section of the act required contractor wrongdoing.

Having construed the Major Fraud Act, the Board then rejected the Army’s reliance on FAR 31.205-47. As the Board observed, a regulation must maintain “consistency with the statute that implements it” and a regulation that does not maintain such consistency is not entitled to deference. Thus, assuming that FAR 31.205-47 was intended to bar recovery of proceedings costs even where there was no contractor wrongdoing, the Board held that the FAR provision “is inconsistent with the statute it implements” and to that extent a mere nullity.

The matter is now before the Board on the issue of quantum. Holland & Knight is privileged to continue to represent the contractor in its appeal.