Spencer Abraham, Secretary of Energy v. Rockwell International Corporation
Docket: 02-1277
Court: Court of Appeals for the Federal Circuit; April 16, 2003; Federal Appellate Court
The case involves an appeal by the Secretary of Energy regarding a decision by the Department of Energy Board of Contract Appeals that favored Rockwell International Corporation. The central issue is whether Rockwell can recover legal fees and costs incurred while defending against environmental criminal charges under its contract with the Department of Energy (DOE). The court concluded that these costs are recoverable, affirming the Board's decision on narrower grounds.
Rockwell operated the Rocky Flats Nuclear Weapons Plant under a cost-reimbursement Management and Operation contract with the DOE from 1975 to 1989, during which several modifications were made. The contracts transferred most operational and financial risks to the government, allowing Rockwell to recover allowable costs related to the contracts.
Rockwell seeks reimbursement for three specific cost categories:
1. Attorneys' fees and costs totaling $1,157,364 incurred between June 6, 1989, and December 31, 1989, defending against federal criminal environmental charges.
2. Attorneys' fees and costs amounting to $3,725,461 for defending individual employees against similar charges.
3. A cost of $5,156,686 for a computerized litigation database developed for defense and other administrative uses.
The criminal investigation, initiated by federal agencies, did not result in formal charges against Rockwell or its employees. Rockwell engaged legal counsel for both itself and its employees and utilized the database to manage evidence related to the investigation and other civil litigation tasks.
In 1990, the government alleged additional criminal conduct against Rockwell, involving violations of the Resource Conservation and Recovery Act (RCRA) and the Clean Water Act (CWA). Rockwell retained counsel to address these charges and utilized a database for its defense. Negotiations for a plea agreement began in early 1991, culminating in a March 26, 1992, Plea Agreement where Rockwell pled guilty to four felony RCRA violations and one felony plus five misdemeanor CWA violations. In exchange, Rockwell and its employees received a release, with no counts in the Plea Agreement based on the initial search-warrant allegations.
Rockwell was fined $18.5 million, agreeing not to seek government reimbursement. Both parties acknowledged the challenges in separating defense costs related to Charged Conduct from those linked to Uncharged Conduct, which predominantly stemmed from the search-warrant affidavit. They established January 1, 1990, as the cutoff date for categorizing costs: expenses before this date would be related to Uncharged Conduct, while those incurred afterward would pertain to Charged Conduct.
According to the Plea Agreement, Rockwell could recover specific costs from the Department of Energy (DOE), including attorney fees before January 1, 1990, costs for representing employees, and expenses for a computer system used in related civil litigation. The Agreement explicitly stated that it did not imply any admission of willful misconduct or bad faith by Rockwell's management.
After the settlement, Rockwell submitted three reimbursement requests for costs associated with Uncharged Conduct, which the government denied. Subsequently, Rockwell filed a claim that was also deemed denied under 41 U.S.C. 605(c)(5). Rockwell then initiated an action before the Board under the Contract Disputes Act of 1978. The Board determined that the Major Frauds Act did not prevent Rockwell from recovering costs and confirmed that the requested reimbursement fell within the categories outlined in the Plea Agreement.
The Board analyzed disputed corporate defense costs under the M.O contract, which included 16 categories of allowable costs and 21 categories of unallowable costs. The General Allowability Clause stipulates that allowable costs are those actually incurred by the Contractor in performing contract work, deemed necessary, and evaluated based on reasonableness, adherence to generally accepted accounting principles, and compliance with exclusions outlined in the contract. The Board concluded that defense costs related to allegations in a search warrant were allowable, as they fell within the contract's scope and were reasonable.
Additionally, the Board found these costs allowable under the Environmental Costs Clause, which permits reimbursement for liabilities and expenses related to environmental, safety, and health activities. The Board interpreted this clause broadly, aligning it with the Department of Energy's longstanding practices under M.O contracts.
However, the classification of costs as 'allowable' is subject to contractual exclusions. The Board examined exclusions in the Fines and Penalties Clause and the Contesting Actions Clause. The Fines and Penalties Clause disallows costs associated with fines and penalties from non-compliance with laws, unless they result from fulfilling contract obligations or are pre-approved by the Contracting Officer.
The Board determined that fines and penalties incurred by a contractor while performing work for the Department of Energy (DOE) are allowable expenses if they arise from contract-required work that violates the law. Additionally, costs associated with defending against these fines and penalties are also reimbursable. The Board rejected the government's argument that Rockwell waived its right to claim these costs by not providing prior written notice to the contracting officer. It also dismissed the government's assertion that the 'Contesting Actions Clause' prevented recovery of defense costs, finding this interpretation inconsistent with prior practices and conflicting with other relevant clauses.
The Board ruled that Rockwell was entitled to reimbursement for corporate defense costs incurred from June 6, 1989, to December 31, 1989. For employee defense costs, despite no indictments against employees, the Board held that Rockwell was legally obligated to provide independent counsel under Delaware law and that these costs were allowable under the 'Employee Defense Provision' in the contracts. The Board found that the Contesting Actions Clause did not bar these employee defense costs either.
Regarding database costs, the Board ruled that costs incurred before January 1, 1990, were allowable for the same reasons as corporate defense costs. For expenses incurred after that date, they ruled that such costs must be solely for defending the corporation in the criminal investigation to be barred by the Plea Agreement. Since no evidence showed that any costs were solely for the Charged Conduct, all database costs were deemed allowable.
The government has appealed the Board's decision, with jurisdiction established under 28 U.S.C. 1295(b) and 41 U.S.C. 607(g)(1)(B). The standard of review for Board decisions dictates that questions of law are not final, while factual determinations are conclusive unless proven fraudulent, arbitrary, capricious, or lacking substantial evidence.
The case does not necessitate an evaluation of the Major Frauds Act of 1988 regarding the contract at hand, as the Board determined that the government waived its application through a plea agreement, a decision that remains unchallenged by the government. Consequently, the Major Frauds Act cannot serve as a basis for disallowing the costs in question.
The primary issue is whether costs incurred by Rockwell in defending against uncharged Federal environmental allegations qualify as allowable under the M.O contract. The Board referenced the General Allowability Clause, which permits costs that are necessary or incidental to contract work. Although this clause broadly encompasses the claimed costs, it is not definitive.
The government correctly asserts that the General Allowability Clause is constrained by specific disallowance provisions within the contract. Subsection (c) states that allowable costs exclude any items classified as unallowable in paragraph (e), particularly the Contesting Actions Clause (e)(16), which disallows costs associated with contesting actions or proposed actions of the United States. Both parties agree that this clause applies to Rockwell's defense costs related to the criminal investigation, thus affirming that the General Allowability Clause does not support their claim.
Additionally, the Board considered the Fines and Penalties Clause, which states that fines and penalties are unallowable unless incurred with written approval from the Contracting Officer or as stipulated in the contract. The Board interpreted this clause in two ways: allowing fines and penalties incurred while performing contracted work for DOE, and implicitly allowing legal costs associated with defending against those fines or penalties. The Board reasoned that since legal fees for uncharged conduct would be allowable had fines been imposed, they should also be considered allowable under this clause, despite no actual fines or penalties being levied.
The clause in question raises uncertainty regarding the reimbursement of fines and penalties related to contract work, primarily due to a strong public policy against recovering criminal fines and penalties. A 1985 statute explicitly disallows payments of fines and penalties resulting from violations of laws unless incurred from compliance with specific contract terms or written instructions from the contracting officer. This statute does not support a broad interpretation allowing recovery for all fines but rather focuses on compliance with specific contract conditions. For instance, fines incurred from fulfilling a contract requirement may be recoverable, whereas fines that could have been avoided through reasonable actions would not be reimbursable.
The limited scope of the exception is reinforced by similar provisions in the Department of Defense Authorization Act, which restricts the allowability of fines under DOD contracts. However, the analysis concludes that the Fines and Penalties Clause's interpretation is unnecessary because the Environmental Costs Clause, cited by the Board, allows for the reimbursement of costs without being affected by the Fines and Penalties Clause. This clause permits the recovery of all costs related to liabilities, claims, and penalties from environmental activities, including investigation-related costs. Although the clause excludes costs resulting from willful misconduct or lack of good faith by managerial personnel, there are no such claims against Rockwell in this instance. Thus, the Environmental Costs Clause supports the reimbursement of costs incurred by Rockwell in relation to EPA investigations, an assertion that the government appears to acknowledge.
The government argues that Rockwell's defense costs, while possibly allowable under the Environmental Costs Clause, are rendered unallowable by the Contesting Actions Clause due to an internal order of precedence in the contract. This order suggests that exclusions in paragraph 54(e) take precedence over inclusions in paragraphs 54(c) and 54(d). However, the government’s interpretation effectively nullifies the Environmental Costs Clause, which was specifically designed to cover environmental law proceedings. A conflict exists between the Environmental Costs Clause, which allows for reimbursement of specific costs, and the more general Contesting Actions Clause, which excludes certain costs.
In resolving this conflict, contract interpretation rules indicate that specific provisions take precedence over general ones. The Environmental Costs Clause is tailored to the costs in question, while the Contesting Actions Clause is broader and more general. Additionally, separately negotiated terms, like the Environmental Costs Clause, hold more weight than standardized terms.
Interpreting the clauses in a way that renders any part ineffective contradicts sound contract principles. The government's position would undermine the Environmental Costs Clause significantly, while a more reasonable interpretation allows for a broad application of the Contesting Actions Clause in non-environmental contexts. Therefore, the Environmental Costs Clause is determined to prevail, allowing Rockwell to recover legal fees related to its defense against Uncharged Conduct. Similarly, costs incurred from defending individual employees are also recoverable since the government does not contest their substantive allowability.
The government contends that employee defense costs are not allowable due to the lack of prior approval from the Contracting Officer, as stipulated in the contract. The contract specifies that such costs are permissible only with prior approval. Although Rockwell sought this approval, the Contracting Officer's denial was deemed unreasonable by the Board. Consequently, the Board concluded that the employee defense costs are allowable under the contract.
Regarding database costs, which were associated with both unsuccessful and successful criminal environmental defense and other uses, the government argued for their complete unallowability based on the same rationale as the corporate defense costs. However, since the Board found the corporate defense costs allowable and the government did not advocate for a cost apportionment, the database costs are also deemed allowable.
In conclusion, Rockwell incurred reimbursable costs for defending against environmental violation allegations that did not lead to criminal charges. The allowable costs include corporate defense, employee defense, and database costs, affirming the Board's decision. No costs are awarded.
Claims and legal actions against employees are treated similarly to those against the Contractor, requiring the Contracting Officer's approval for retained legal counsel costs. The FAR provisions state that costs associated with legal, accounting, and consultant services related to organization or reorganization, as well as defenses against government claims or appeals, are generally unallowable. The Department of Energy's specific provision expands this exclusion to include "proposed actions" by the United States. The government acknowledged the absence of an "Order of Precedence Clause" in the contracts, which could have clarified conflicts between contract specifications and drawings. The court's decision does not require addressing potential conflicts between the Environmental Costs Clause and the Fines and Penalties Clause regarding the allowability of criminal environmental fines and associated defense costs.
