             In the United States Court of Federal Claims
                                           No. 17-657C
                                      (Filed: April 3, 2018)

                                                 )    Keywords: Breach of Contract; Contractor
 BECHTEL NATIONAL, INC.,                         )    Costs; Allowability; Geren v. Tecom, Inc.
                                                 )
                        Plaintiff,               )
                                                 )
        v.                                       )
                                                 )
 THE UNITED STATES OF AMERICA,                   )
                                                 )
                        Defendant.               )
                                                 )

Stephen D. Knight, Smith Pachter McWhorter PLC, Tysons Corner, VA, for Plaintiff. Edmund
M. Amorosi and Laura A. Semple, Smith Pachter McWhorter PLC, and Leslie Droubay Killoran,
Bechtel National, Inc., Of Counsel.

Geoffrey M. Long, Trial Attorney, Commercial Litigation Branch, Civil Division, U.S.
Department of Justice, for Defendant, with whom were Patricia M. McCarthy, Assistant
Director, Robert E. Kirschman, Jr., Director, and Chad A. Readler, Acting Assistant Attorney
General.

                                     OPINION AND ORDER

KAPLAN, Judge.

       Plaintiff Bechtel National, Inc. operates a nuclear waste treatment plant in the state of
Washington, pursuant to a contract with the Department of Energy. In 2010 and 2012, two
former Bechtel employees filed lawsuits against the company alleging, among other things,
sexual and racial harassment and discrimination. Bechtel and the former employees settled the
lawsuits out of court. Bechtel then sought reimbursement of its litigation costs from the
Department of Energy under the contract.

        The Department of Energy provisionally approved Bechtel’s request. But after further
consideration, the Department disallowed the costs, relying, at least in part, on the Federal
Circuit’s decision in Geren v. Tecom, Inc., 566 F.3d 1037 (Fed. Cir. 2009). After the contracting
officer issued a final decision upholding the disallowance, Bechtel filed a complaint in this court
alleging breach of contract.

       Now before the Court are the parties’ cross-motions for summary judgment. For the
reasons set forth below, the Court finds that the government did not breach its contract with
Bechtel and that it is entitled to judgment as a matter of law. Accordingly, Bechtel’s motion for
summary judgment is DENIED and the government’s motion for summary judgment is
GRANTED.

                                        BACKGROUND

I.     Bechtel’s Contract with the Department of Energy

         Between 1943 and 1990, the federal government produced approximately two-thirds of
its weapons-grade plutonium for use in nuclear weapons at the Hanford Site, located in the state
of Washington. Washington v. Moniz, No. 2:08-CV-5085-RMP, 2015 WL 12643792, at *1
(E.D. Wash. May 11, 2015). The site occupies 586 square miles and at one point contained nine
nuclear reactors. Id. The production of plutonium at Hanford created substantial chemical and
radioactive waste. Id. That waste has been stored in underground tanks “with capacities ranging
from 55,000 to 1.16 million gallons.” Id. As of 2015, there were 177 underground storage tanks
at the site containing approximately 56 million gallons of nuclear waste. Id. The waste accounts
for 60% of the “high level waste” for which the Department of Energy is responsible. Id.

        Since operations ceased in 1990, activities at the Hanford Site have been focused on
cleaning the radioactive waste and contamination left behind. See id. On August 31, 2000, the
Department of Energy issued a solicitation for a cost-plus-incentive fee contract for the provision
of “personnel, materials, supplies, and services . . . necessary and incident to designing,
constructing, and commissioning the Hanford Tank Waste Treatment and Immobilization Plant.”
Pl. Bechtel Nat’l Inc.’s Mem. in Supp. of Its Mot. for Summ. J. (Pl.’s Mem.) Ex. 2 at 2, 5, ECF
No. 9-2.1

        In December 2000, Bechtel was awarded the contract for the design, construction, and
operation of the Hanford waste treatment plant (WTP). Id. at 2. The contract incorporated
provisions of the Federal Acquisition Regulation and the Department of Energy Acquisition
Regulation. As relevant to the dispute in this case, the parties included the March 2000 version of
FAR 52.216-7 (incorporated at clause I.19B); the February 1999 version of FAR 52.222-26 (at
clause I.43); and the June 1997 version of DEAR 970.5204-31 (at clause I.113). Id. at 174–76.

         Clause I.43 of the contract is entitled “Equal Opportunity.” Id. at 175. It incorporates
FAR 52.222-26, which provides that while “performing this Contract, the Contractor agrees” that
it “shall not discriminate against any employee or applicant for employment because of race,
color, religion, sex, or national origin.” Def.’s Resp. to Pl.’s Mot. for Summ. J., & Cross-Mot. for
Summ. J. App. (Def.’s App.) at 103, ECF No. 15-1.

        Clause I.113 of the contract (incorporating DEAR 970.5204-31) is entitled “Insurance –
Litigation and Claims.” Pl.’s Mem. Ex. 2 at 176. It provides in pertinent part that “[t]he
contractor shall give the contracting officer immediate notice in writing of any legal proceeding,
including any proceeding before an administrative agency, filed against the contractor arising out


1
 The Court’s citations for Bechtel’s Exhibit 2 use the page numbers listed at the top of the
document by the Court’s electronic filing system, as Exhibit 2 lacks continuous internal page
numbering.



                                                 2
of the performance of this contract,” and that “[t]he contractor, with the prior written
authorization of the contracting officer, shall proceed with such litigation in good faith and as
directed from time to time by the contracting officer.” DEAR 970.5204-31(b) (2000). It further
provides at subsection (e) that the contractor “shall be reimbursed . . . [f]or liabilities (and
reasonable expenses incidental to such liabilities, including litigation costs) to third persons,”
“[e]xcept as provided in subparagraphs (g) and (h).”

       Subparagraph (g)(1) states, in turn, that:

               Notwithstanding any other provision of this contract, the contractor
               shall not be reimbursed for liabilities (and expenses incidental to
               such liabilities, including litigation costs, counsel fees, judgment
               and settlement)—

                       (1) Which are otherwise unallowable by law or the
                       provisions of this contract . . . .

       And subparagraph (h) states that:

               In addition to the cost reimbursement limitations contained in
               DEAR 970.3101-3, and notwithstanding any other provision of this
               contract, the contractor’s liabilities to third persons . . . shall not be
               reimbursed if such liabilities were caused by contractor managerial
               personnel’s

                               (1) Willful misconduct,

                               (2) Lack of good faith, or

                               (3) Failure to           exercise   prudent     business
                               judgment . . . .

        Finally, clause I.19B of the contract, entitled “Allowable Cost and Payment,” states in
pertinent part that the “Government shall make payments to the Contractor when requested as
work progresses . . . in amounts determined to be allowable by the Contracting Officer in
accordance with Subpart 31.2 of the Federal Acquisition Regulation (FAR) in effect on the date
of this contract and the terms of this contract.” FAR 52.216-7(a) (2000). Subpart 31.2, in turn,
contains FAR 31.201-2, which, as in effect on the date of the contract, stated in part that “[t]he
factors to be considered in determining whether a cost is allowable include the following:
(1) Reasonableness. (2) Allocability. (3) Standards promulgated by the CAS Board, if applicable;
otherwise, generally accepted accounting principles and practices appropriate to the particular
circumstances. (4) Terms of the contract. (5) Any limitations set forth in this subpart.” FAR
31.201-2(a) (2000).

II.    The Discrimination Lawsuits and Settlements

        In September 2010, Bechtel notified the Department of Energy of potential litigation
arising out of its work at the Hanford Site, as required by clause I.113 of the contract. See Def.’s


                                                    3
App. at 208. In response, on October 7, 2010, the Department informed Bechtel in writing that
“[i]n accordance with Clause I.113, [it was] authorized to proceed with defense of th[e] case,”
but that “[a]uthorization [was] not a determination of the allowability of costs to the subject
contract; that determination [would] be made at a later date.” Id. Such costs, the Department
continued, would “be reviewed pursuant to relevant statutes, regulations, terms of the subject
contract, and the holding of the U.S. Court of Appeals for the Federal Circuit in Secretary of the
Army v. Tecom, 566 F.3d 1037 (Fed. Cir. 2009).” Id. It also stated that Bechtel was “authorized
to provisionally charge outside and in-house costs to the contract, although such costs [could]
later be determined to be disallowed.” Id.

        A few months later, on December 22, 2010, Linda Mims-Johnson, a former employee at
the Hanford Site, filed a lawsuit against Bechtel arising out of her termination on April 12, 2010.
Id. at 209. Ms. Mims-Johnson, who is African-American, alleged that during her employment
she had been subjected to a hostile work environment and racial and sexual harassment in
violation of 42 U.S.C. § 1981 and state law. Id. at 219. Additionally, she alleged that Bechtel
transferred and ultimately terminated her employment in retaliation for the actions she took to
report and stop the allegedly harassing behavior. Id. at 220. Finally, she asserted that Bechtel had
engaged in disparate treatment and took adverse employment actions against her on the basis of
her sex and race. Id. at 220–21. Ultimately, Bechtel and Ms. Mims-Johnson settled the lawsuit
and on March 12, 2012, the parties filed a joint stipulation of dismissal. See id. at 230–31.

         On April 27, 2012, a second discrimination lawsuit was filed against Bechtel, by another
former employee at the Hanford Site, Willie S. Lockhart. Id. at 233. Mr. Lockhart alleged that
Bechtel discriminated and retaliated against him in violation of 42 U.S.C. § 1981 and state law,
on the basis of race and disability. Id. at 234. In May, Bechtel informed the Department of
Energy of the lawsuit pursuant to clause I.113, and the Department authorized Bechtel to proceed
with defense of the case. Id. at 239. It repeated the warning contained in its October 2010 letter
that its authorization was “not a determination of the allowability of costs” and that such a
determination would be made at a later date in light of, inter alia, the Federal Circuit’s decision
in Tecom. Id. Bechtel and Mr. Lockhart settled this lawsuit and in November 2012 filed a joint
motion to dismiss with prejudice. Id. at 240.

       Bechtel subsequently submitted invoices to the Department of Energy seeking
reimbursement for its costs in defending these lawsuits. Pl.’s Mem. Ex. 1 ¶ 22, ECF No. 9-1. It
requested $250,000 for each suit. Id. The Department then reimbursed Bechtel $500,000 for
those costs on a provisional basis. Answer ¶ 31, ECF No. 6.

III.   The Department’s Disallowance of Costs

        On May 11, 2016, the contracting officer wrote a letter to Bechtel entitled “Notice of
Intent to Disallow Costs for Legal Defense Costs.” Def.’s App. at 245. He stated that the
Department had “been reviewing the costs incurred in defending the lawsuit filed . . . by Willie
S. Lockhart, as well as the case filed . . . by Linda Mims-Johnson.” Id. The contracting officer
informed Bechtel that “[a]s a result of this review, [he had] determined that the costs incurred by
[Bechtel] in defending these matters [were] unallowable under the standards set forth in Tecom.”
Id. He found that, “in each case, the plaintiff’s claim had more than very little likelihood of



                                                 4
success on the merits.” Id. He concluded, therefore, that under Tecom the “defense costs related
to the claim[s] are not allowable.” Id.

        Bechtel responded to the contracting officer’s letter on July 13, 2016. Id. at 247. On
September 13, 2016, the contracting officer issued a “Final Contracting Officer’s Decision –
Legal Defense Costs Disallowance.” Id. He wrote that the “Notice of Intent to Disallow Costs
[would] not be withdrawn, and [that] th[e] letter constitute[d] [his] final decision on this matter.”
Id. at 248. The contracting officer also wrote that the government would offset the amount it had
provisionally reimbursed Bechtel from future amounts the government owed to it as a result. See
id. at 256.

IV.    This Action

        Bechtel filed its complaint against the government in this court on May 18, 2017. ECF
No. 1. In the complaint, Bechtel alleges that the Department of Energy breached clause I.113(e)
of the contract when it disallowed the costs Bechtel incurred in connection with its settlement of
the two discrimination complaints. See Compl. ¶¶ 52–55. It seeks declaratory relief from the
Court concluding that “the allowability of costs for third party litigation and claims is governed
by Clause I.113, not Tecom” and reversing the contracting officer’s final decision. Id. at 10–11.

         On September 17, 2017, the parties filed their joint preliminary status report, in which
they stated their views that the case “should be submitted on cross-motions for summary
judgment prior to discovery.” Joint Prelim. Status Report at 1, ECF No. 7. Accordingly, on
October 6, 2017, Bechtel filed its motion for summary judgment. ECF No. 8. The government
filed a response and cross-motion for summary judgment on December 4, 2017. ECF No. 15.
The Court held oral argument on the motions on March 22, 2018. ECF No. 22.

                                           DISCUSSION

I.     Subject Matter Jurisdiction

         The Tucker Act grants the United States Court of Federal Claims the power “to render
judgment upon any claim against the United States founded either upon the Constitution, or any
Act of Congress or any regulation of an executive department, or upon any express or implied
contract with the United States, or for liquidated or unliquidated damages in cases not sounding
in tort.” 28 U.S.C. § 1491(a)(1) (2012). Further, the Court has “jurisdiction to render judgment
upon any claim by or against, or dispute with, a contractor arising under section 7104(b)(1) of
title 41 [i.e., the Contract Disputes Act (CDA)], including a dispute concerning termination of a
contract, rights in tangible or intangible property, compliance with cost accounting standards,
and other nonmonetary disputes on which a decision of the contracting officer has been issued
under section 6 of that Act.” Id. § 1491(a)(2).

          The CDA applies to, among other things, an “express or implied contract . . . made by an
executive agency for . . . the procurement of services” or “the procurement of construction,
alteration, repair, or maintenance of real property.” 41 U.S.C. § 7102(a) (2012). Under the CDA,
it is a jurisdictional prerequisite that the contracting officer issue a final written decision on any
claim before it is brought in this court. See id. § 7103(a)(3), (d); M. Maropakis Carpentry, Inc. v.
United States, 609 F.3d 1323, 1327 (Fed. Cir. 2010). Following the contracting officer’s written


                                                  5
decision (or failure to issue a decision in the allotted timeframe), a contractor may bring an
action directly on the claim in the Court of Federal Claims, which reviews the matter de novo.
See 41 U.S.C. § 7104(b).

         A contractor is not required to file its own claim with the contracting officer prior to
challenging a government claim in the Court of Federal Claims where the contracting officer has
issued a final decision on the government’s claim. See Placeway Constr. Corp. v. United States,
920 F.2d 903, 906 (Fed. Cir. 1990); Tiger Nat. Gas, Inc. v. United States, 61 Fed. Cl. 287, 292–
93 (2004); Greenhill Reforestation, Inc. v. United States, 39 Fed. Cl. 683, 686–87 (1997); Cecile
Indus., Inc. v. United States, 18 Cl. Ct. 730, 732 (1989). The government’s assertion of a set-off
is a claim by the government under the CDA. Placeway Constr. Corp., 920 F.2d at 906; Roxco,
Ltd. v. United States, 77 Fed. Cl. 138, 145–47 (2007); Volmar Constr., Inc. v. United States, 32
Fed. Cl. 746, 752 (1995).

       Here, Bechtel is challenging the government’s assertion of a set-off based on the
government’s interpretation of the parties’ contract. The contracting officer has issued a final
decision reflecting the basis and amount of that set-off. Accordingly, the Court has jurisdiction
over Bechtel’s complaint.

II.    Merits

         Bechtel argues that the contracting officer erred when he referenced the court of appeals’
decision in Tecom as a basis for disallowing Bechtel’s liability costs for its two discrimination
settlements. It contends that Tecom has no bearing on the allowability of those costs because,
unlike in Tecom (where the contract was silent as to the issue), the contract here (at clause
I.113(e)) “explicitly allocat[ed] the risk of third party claims to the Government.” Pl.’s Mem. at
27, ECF No. 9. Bechtel further contends that its interpretation of the contract is supported by the
Department of Energy’s prior course of performance in reimbursing Bechtel and others for
liabilities incurred in discrimination cases. See id. at 21–25.

        Bechtel’s arguments lack merit. The issue before the court of appeals in Tecom was
whether a contractor’s costs of defending against and settling a Title VII sexual harassment
lawsuit were allowable under the FAR where the contract incorporated FAR 52.222-26. See 566
F.3d at 1039–40. As explained above, that provision prohibits contractors from discriminating
against any employee because of race, color, religion, sex, or national origin. The court reasoned
that to be allowable under FAR 31.201-2, costs must meet five requirements, one of which is
compliance with the terms of the contract. Id. at 1040–41. The court of appeals concluded that
the costs of an adverse judgment in the sexual harassment case “would be unallowable . . .
because a contractor violation of Title VII would breach this contract,” i.e., FAR 52.222-26. Id.
at 1043. Further, the court observed, the conclusion that the cost of an adverse Title VII
judgment is unallowable is “underscored by the clear public policy of Title VII,” which
precludes the government from being “complicit” in discrimination by subsidizing its costs. Id.
at 1044.

       The court then turned to the question of whether the same result would obtain where the
discrimination complaints are settled before judgment. In that circumstance, the court of appeals
observed, its earlier ruling in Boeing North American, Inc. v. Roche, 298 F.3d 1274 (Fed. Cir.


                                                 6
2002), dictated that defense and settlement costs would be allowable “only if the contractor can
show that the plaintiff in the Title VII suit had very little likelihood of success.” Id. at 1038,
1041, 1045.2

         In the present case, Bechtel does not dispute that if the Tecom standard applies, then its
costs of defending against and settling the two discrimination suits at issue here would not be
allowable. See Pl.’s Mem. at 15–18, 27–30 & n.12. Thus, it does not disagree that if it had been
found liable for the alleged discrimination, then the costs of defending against the suit would
have resulted from a breach of the non-discrimination clause of its contract with the Department.
See id. Nor does Bechtel take issue with the contracting officer’s determination that the plaintiffs
in the discrimination cases had more than very little likelihood of prevailing on their claims. See
id.; see also Pl. Bechtel Nat’l Inc.’s Mem. in Opp’n to the Def.’s Cross-Mot. for Summ. J. &
Reply in Supp. of Its Mot. for Summ. J. (Pl.’s Reply) at 14 n.11, ECF No. 18.

         Rather, Bechtel argues, as noted above, that this case is distinguishable from Tecom
because the contract at issue in this case—at clause I.113—“specifically provides that costs
incurred to defend and settle third party claims are allowable, thus establishing a specific and
clear agreement in advance that [Bechtel] is eligible for reimbursement of these types of costs.”
Pl.’s Mem. at 16. But while subparagraph (e) of clause I.113 states that the contractor “shall be
reimbursed . . . [f]or liabilities (and reasonable expenses incidental to such liabilities, including
litigation costs) to third persons,” that general right of reimbursement is made subject to the
exceptions set forth in subparagraphs (g) and (h) of the clause. DEAR 970.5204-31(e).
Subparagraph (g)(1) then makes the allowability of those costs dependent upon whether they are
otherwise allowable under the terms of the contract, a determination to which Tecom speaks with
respect to contracts that include non-discrimination clauses, as Bechtel’s does. See id.
§ 970.5204-31(g)(1) (providing that “[n]otwithstanding any other provision of this contract, the
contractor shall not be reimbursed for liabilities (and expenses incidental to such liabilities,
including litigation costs, counsel fees, judgment and settlement) . . . [w]hich are otherwise
unallowable by law or the provisions of this contract” (emphasis supplied)); see also FAR
52.216-7 (Clause I.19B of the contract, stating that costs are to be paid by the Department in

2
  In ruling that the costs arising out of a breach of the contract’s non-discrimination provision
were unallowable, the court in Tecom also relied upon the decision of its predecessor court in
Dade Brothers, Inc. v. United States, 325 F.2d 239 (Ct. Cl. 1963) (per curiam). See Tecom, Inc.,
566 F.3d at 1043–44. In Dade Brothers, the contract included a provision requiring the contractor
to abide by all terms and conditions of a collective bargaining agreement with the union. Id. at
1043. The contractor sought to recover the costs of litigating a third party lawsuit, in which a
jury had found that the contractor had acted in concert with the union to “wilfully [sic] and
maliciously interfer[e] with [the employees’] right to employment under the collective
bargaining agreement.” Dade Bros., Inc., 325 F.2d at 239. The contractor based its claim for
costs on a provision in its contract that specifically provided that the costs of defending against
third party suits (including the costs of judgment) were generally allowable. See id. at 239–40.
The Court of Claims held nonetheless that “[n]either the wording nor the policy of the litigation
reimbursement article of the government contract authorizes reimbursement of expenses incurred
because the contractor breached its agreement with the Government or failed to perform the
contract faithfully.” Id. at 240.



                                                 7
“amounts determined to be allowable by the Contracting Officer in accordance with Subpart 31.2
of the [FAR] as in effect on the date of this contract and the terms of this contract” (emphasis
supplied)).

        The exception set forth in subparagraph (g)(1) is applicable here because, employing the
principles set forth in Tecom, the “provisions of the contract” render Bechtel’s costs of
defending against and settling the discrimination complaints unallowable. As the court of appeals
held in Tecom, costs do not comply with the terms of a contract where (as here) they are incurred
as a result of a breach of the contract’s non-discrimination provision. Such a breach is
established where the underlying lawsuit involved a claim of discrimination that was settled,
absent a showing that the plaintiff had very little chance of succeeding.

        There is no merit to Bechtel’s arguments that this interpretation of the contract “leaves
subsection (e) of the clause superfluous [and] internally inconsistent” or that it “giv[es] with one
hand [in subsection (e)] and tak[es] with another [through subsection (g)(1)].” Pl.’s Mem. at 16.
According to Bechtel, it is difficult to conceive of a circumstance in which a third-party legal
action would not, if successful, also establish a breach of contract. In the Court’s view, however,
the holding in Tecom was a limited one and does not necessarily extend to breaches of
obligations other than the obligation not to engage in discrimination that is set forth in FAR
52.222-26. It is noteworthy that the court of appeals made reference in Tecom to “the expansive
scope of the public policy preventing the government from being complicit in paying for
discriminatory employment practices.” Tecom, Inc., 566 F.3d at 1044. Indeed, the executive
order establishing the Equal Employment Opportunity contract provision states that “[i]t is the
policy of the Government of the United States to provide equal opportunity in Federal
employment . . . to prohibit discrimination in employment because of race, creed, color, or
national origin, and to promote the full realization of equal employment . . . through a positive,
continuing program in each executive department and agency.” Exec. Order No. 11,246, 30 Fed.
Reg. 12,319 (Sept. 24, 1965).3 The executive order also provides strict penalties for contractors
who fail to comply with the equal employment provision, including contract termination and
debarment. See id. at 12,320–23. Additionally, the Department of Energy’s predecessor agency
stressed that “[t]he equal employment and nondiscrimination obligations of Executive Order
11246 and the Civil Rights Act of 1964 are applicable to AEC [the Atomic Energy
Commission]” and that “[c]omplaints of contractor discrimination . . . are of special concern.”
O.S. Hiestand, Jr. & Mark. J. Florsheim, The AEC Management Contract Concept, 29 Fed. Bar.
J. 67, 96 (1969).

        Given this expansive public policy, a bar against having the government reimburse the
contractor for costs resulting from discrimination could be considered part and parcel of the
contract’s substantive prohibition against discrimination. Additionally, it is not clear that similar
public policies could be invoked to preclude the government from paying the costs of other types
of liability, even where they result from what might be breaches of substantive obligations in the
contract. Indeed, at the oral argument in this case, counsel for the government represented that

3
 Subsequent executive orders have amended Executive Order 11,246 to include religion, sex,
and sexual orientation as protected characteristics. Exec. Order No. 11,375, 32 Fed. Reg. 14,303
(Oct. 13, 1967); Exec. Order 13,672, 79 Fed. Reg. 42,971 (July 21, 2014).



                                                  8
the Department of Energy has only invoked the rationale of Tecom as a basis for disallowing
costs where those costs arise from breaches of contractual anti-discrimination provisions. Oral
Argument at 2:37pm–2:41:07pm.

         Further, the purpose of subparagraph (e) is to significantly shift to the government the
enormous financial risks that are specifically attendant to the operation and cleanup of nuclear
facilities. See DEAR 970.5204-31; see also In re Rockwell Int’l Corp., EBCA Nos. C-9509187
et al., 02-2 BCA ¶ 32,018 (Oct. 31, 2001) (noting origins of government’s enlistment of private
industry in nuclear activities; describing the work as some “of the most complex and dangerous
industrial processes ever conducted”; and noting that the relevant “contracts allocated virtually
all operational and financial risks to the” government as a “prerequisite to engaging suitable
companies”), aff’d sub nom. Abraham v. Rockwell Int’l Corp., 326 F.3d 1242 (Fed. Cir. 2003).
Using Tecom to give subparagraph (g)(1) a very broad reading, under which the provision would
preclude the recovery of liability costs whenever such costs result from any breach of contract
(even if such breach was not the result of willful misconduct, lack of good faith, or a failure to
exercise prudent business judgment within the meaning of subparagraph (h)), could significantly
undermine that unique purpose.4 The Court, accordingly, declines to read the rationale of Tecom
as applicable whenever liability costs arise out of conduct that could also constitute a breach of
contract. Instead, the Court reads the decision as resting upon the unique public policies that
underlie the anti-discrimination provisions of the Executive Order, which would be undermined
if the government were to effectively subsidize a contractor’s discriminatory conduct.5

        In addition to its textual arguments, Bechtel contends that the Department’s interpretation
of the contractual language is inconsistent with the parties’ course of performance and with
certain regulatory history surrounding a 1997 amendment to the DEAR provision included at
clause I.113. Pl.’s Mem. at 18–24. That amendment established subparagraph (h)’s prudent
business judgment test as a measure of the allowability of the costs of third-party liability.
Acquisition Regulations; Department of Energy Management and Operating Contracts, 62 Fed.

4
  For instance, Bechtel’s costs arising from a personal injury lawsuit could arguably be rendered
unallowable under such a reading by virtue of clause I.105, regarding safe working conditions.
Pl.’s Reply at 15; see also DEAR 970.5223-1 (stating that “the Contractor shall perform work
safely”). And numerous possible third party liabilities and related costs could be rendered
unallowable under such a broad interpretation by virtue of clause I.117, which requires Bechtel
to comply with “the requirements of applicable Federal, State, and local laws and regulations,”
because countless third party claims could arise out of some violation of the universe of
applicable federal, state, and local laws. Pl.’s Reply at 16.
5
  It is admittedly difficult to square this Court’s narrow reading of Tecom with some of the broad
language used in the decision, including the court of appeals’ characterization of Dade Brothers
as holding that the “costs resulting from a breach of a contractual obligation are not allowable
costs under the contract.” See Tecom, Inc., 566 F.3d at 1043. But in Dade Brothers, the
disallowed costs resulted not just from a breach of the contract, but from the contractor’s willful
misconduct. 325 F.2d at 239. In any event, the holding in Tecom was that where a contract
contains a non-discrimination clause, costs resulting from the breach of that clause are not
allowable under the terms of the contract. This Court’s decision is faithful to that holding.



                                                 9
Reg. 34,842-01, 34,844, 34,868–69 (June 27, 1997). In explaining the application of the standard
in the Federal Register notice announcing the change, the Department of Energy employed a
hypothetical in which a contractor sought reimbursement for third-party liability arising out of a
sexual harassment suit. Id. at 34,844. After explaining the steps the contracting officer should
take to determine whether the hypothetical contractor exercised prudent business judgment, the
Department of Energy stated that it “acknowledge[d] that third-party actions, including
employment discrimination complaints, are normal business risks, and is not seeking to shift all
such risk to the contractor,” but that it “d[id] intend that the contractor assume the risk for
management’s unreasonable actions or unreasonable failure to act in those situations which carry
the potential for third-party liability.” Id.

         The Court finds that this regulatory history adds little to Bechtel’s argument. First, it does
not address the application of subparagraph (g)(1) at all. Second, and in any event, the
Department of Energy has already conceded that before Tecom it did not treat the costs of
liability incurred by contractors in discrimination cases categorically as “liabilities . . . otherwise
unallowable . . . by the provisions of the contract” within the meaning of clause I.113(g)(1). The
Department was required to revisit the application of clause I.113(g)(1) to discrimination cases
as a result of Tecom. As described above, in Tecom the court of appeals held that where costs
result from violation of a contract’s non-discrimination clause, it is inconsistent with the terms of
that clause to allow such costs to be reimbursed by the government. The Department began to
disallow these costs after Tecom was decided because clauses I.113(e) and (g)(1) similarly
provide that third-party liability costs are not reimbursable where they are made “otherwise
unallowable by . . . the provisions of th[e] contract.”

        Bechtel misses the mark when it argues that the Department’s revised application of
clauses I.113(e) and (g)(1) in the discrimination context results in a “rewrite” or unilateral
change in the contract that violates the parties’ original understanding of the Department’s
obligations and Bechtel’s rights. This argument conflates a change in a contractual standard with
a change in how the standard is applied as mandated by an intervening change in (or clarification
of) the law. The language of the contract does not reflect an intent that Bechtel would be
reimbursed for third-party liabilities incurred in discrimination cases in particular; in fact,
nothing in the contract mentions reimbursement for the cost of such liabilities specifically.
Instead, the language of the contract reflects a more general intent that Bechtel would be
reimbursed for third-party liabilities except where they are “otherwise unallowable by the
provisions of . . . the contract” or are the product of willful misconduct, lack of good faith, or a
failure to exercise prudent business judgment. As a matter of law, Tecom established that costs
resulting from a breach of the FAR’s non-discrimination provision are “otherwise unallowable”
under a contract that contains such a provision.

        In short, the costs at issue here, which were incurred as a result of violations of the
contract’s anti-discrimination provision within the meaning of Tecom, are not allowable under
the terms of clauses I.113(e) and (g)(1). Accordingly, the government is entitled to judgment as a
matter of law as to Bechtel’s claim that the Department of Energy violated the contract by
disallowing the costs it incurred to defend and pay for the settlement of the two discrimination
complaints at issue in this case.




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                                    CONCLUSION

      For the reasons set forth above, Bechtel’s motion for summary judgment is DENIED.
The government’s motion for summary judgment is GRANTED. The Clerk is directed to enter
judgment accordingly. Each side shall bear its own costs.

      IT IS SO ORDERED.



                                                s/ Elaine D. Kaplan
                                                ELAINE D. KAPLAN
                                                Judge




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