New FAR Rule Makes Unallowable Proceeding Costs for Successful Whistleblower Complaints of Reprisal

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):