On July 25, DoD, GSA and NASA issued a final rule implementing a section of the FY 2013 NDAA addressing the allowability of legal costs incurred by a contractor or subcontractor related to whistleblower proceedings. The new rule, which amends the cost principle at FAR 31.205-47 to make costs incurred in connection with any proceeding brought by contractor or subcontractor employees submitting a whistleblower complaint under 41 U.S.C. 4712 or 10 U.S.C. 2409 unallowable if the contractor is found liable for fraud or similar misconduct in the whistleblower proceeding, modifies the proposed rule published on September 30, 2013. Specifically, the final rule adds adding language to FAR 31.205-47(c) to provide for the same treatment of costs for settled whistleblower complaints as is currently provided for settlement of proceedings brought by a third party under the False Claims Act in which the United States does not intervene intervene (i.e., legal defense costs may be allowable if the government determines that there was very little likelihood that the whistleblower would have been successful on the merits).
While most of the rule is dictated by a statutory requirement that is simply mirrored in the rule, the last part – the modification expressly to include whistleblower cmplaints in the provisions at FAR 31.205–47(c) – was added in response to public comment suggesting that the proposed rule would “effectively prohibit settlement of whistleblower claims by making related legal costs entirely unallowable if the proceeding ‘could have led’ to an agency order for corrective action.” As modified by the final rule, the amended FAR now reads as follows: “In the event of disposition by consent or compromise of a proceeding brought by a whistleblower for alleged reprisal in accordance with 41 U.S.C. 4712 or 10 U.S.C. 2409, reasonable costs incurred by a contractor or subcontractor in connection with such a proceeding that are not otherwise unallowable by regulation or by agreement with the United States may be allowed 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.” While this change does not go as far as many would have desired, it does provide contracting officers with some flexibility regarding the allowability of whistleblower costs in the event of settlement; and it is almost certainly viewed an improvement over the “could have led to” standard set forth in the interim rule.