oversight

Department of Energy: Reimbursement of Contractor Litigation Costs

Published by the Government Accountability Office on 2003-11-26.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

United States General Accounting Office
Washington, DC 20548




          November 26, 2003

          The Honorable Edward J. Markey
          House of Representatives

          Subject: Department of Energy: Reimbursement of Contractor Litigation Costs

          Dear Mr. Markey:

          The Department of Energy (DOE) contracts with not-for-profit universities and
          private companies to operate its facilities. As part of the cost of operating these
          facilities, DOE can reimburse its contractors for the litigation costs associated with
          cases brought against them. Each year the department spends millions of dollars in
          such reimbursements. For the most part, litigation expenses involve the costs of
          outside counsel and resulting judgments and settlements for a variety of types of
          cases, such as equal employment opportunity, radiation and/or toxic exposure,
          personal injury, wrongful termination of employment, and whistleblower protections.

          You asked us to study the extent to which DOE reimburses its contractors’ litigation
          costs and the process for doing so. As agreed with your staff, we obtained
          information on (1) how much DOE spends to reimburse litigation costs for its
          contractors, (2) what major criteria DOE uses to reimburse its contractors for
          litigation costs and how it implements these criteria, (3) what major criteria the
          Department of Defense and the National Aeronautics and Space Administration use
          to reimburse their contractors for litigation costs, (4) the extent to which a state
          university that is a DOE contractor has a valid immunity defense to a lawsuit, and (5)
          the extent to which state universities that are DOE contractors have invoked
          immunity as a defense. We provided your staff with a formal briefing on our findings
          on October 16, 2003. (See encl. I.) This report presents the results of that briefing.

          In summary, we found the following:

             •   DOE reimbursed contractors for $330.5 million in litigation costs associated
                 with 1,895 cases from fiscal year 1998 through March 2003, including $249.4
                 million for litigation costs and $81.1 million for judgments and settlements.
                 During the same period, DOE estimates that contractors spent about $12
                 million without being reimbursed.




                                                              GAO-04-148R Contractor Litigation Costs
    •    The major criteria DOE uses to reimburse contractors depend on the nature of
                 1
         a case. DOE pays all reasonable litigation costs in most cases. DOE does not
         pay litigation costs when the contractor’s actions involved either willful
         misconduct; lack of good faith; or failure to exercise prudent business
         judgment by the contractor’s managerial personnel; nor does DOE pay in
         certain other circumstances, such as when the contractor is liable under the
                           2
         False Claims Act. When a contractor prevails in a False Claims Act case or
         prevails in other cases where a government entity has sued the contractor,
         DOE pays a maximum of 80 percent of reasonable litigation costs.

    •    The major criteria the Department of Defense and the National Aeronautics
         and Space Administration use to reimburse contractors for litigation costs are
         similar to DOE’s. The only important difference we identified was that the
         Department of Defense and the National Aeronautics and Space
         Administration do not have specific criteria prohibiting payment to a
         contractor involving the contractor’s managerial personnel’s willful
         misconduct, lack of good faith, or failure to exercise prudent business
         judgment.

    •    A state university that is sued in the course of its operation of a DOE facility
         may be entitled to assert immunity under the Eleventh Amendment and other
         immunity-related defenses, such as being exempt from punitive damages
         under state law.3 Whether a particular state university is entitled to assert
         such defenses depends on whether it qualifies as a state entity, which in turn
         depends on a variety of factors, such as whether the state is liable for
         judgments against the university, the nature of the functions the university is
         performing, and whether the university is a separate incorporated entity.

    •    The University of California is the only DOE contractor to use immunity as a
         defense. Officials at the university, which operates three DOE facilities—Los
         Alamos National Laboratory, Lawrence Livermore National Laboratory, and
         Lawrence Berkely National Laboratory—estimated that the university used
         Eleventh Amendment immunity in 8 of about 35 federal cases in 5-1/2 years.
         Also, officials at the University of California estimated that the university, in
         its role as a DOE contractor, has asserted other immunity-related defenses in
         at least 62 of about 137 cases, predominantly to defend against punitive
         damages.

We met with DOE’s Deputy General Counsel for Litigation and other DOE attorneys
in the General Counsel’s Office to discuss the facts in this report. They generally
agreed with the information in our report and provided some clarifying comments
that we incorporated as appropriate. Our methodology is discussed in enclosure II.
We performed our work from March through October 2003 in accordance with
generally accepted government auditing standards.

1
  See 48 C.F.R. §§ 31.205-47 and 970.5228-1 for the criteria.
2
  The False Claims Act, 31 U.S.C. §§ 3729 to 3733, provides for civil monetary penalties and damages for
anyone who knowingly submits false claims to the United States.
3
  The Eleventh Amendment to the Constitution provides the states with immunity from lawsuit by a
private party in federal court.


Page 2                                                        GAO-04-148R Contractor Litigation Costs
                                        - - - - - -

As arranged with your office, unless you release its contents earlier, we plan no
further distribution of this report until 30 days after its issuance date. At that time,
we will send copies to interested parties. In addition, this report will be available at
no charge on the GAO Web site at http://www.gao.gov.

If you have any questions about this report or need additional information, please
contact me at (202) 512-3841. Key contributors to this report were Robert G. Crystal,
William F. Fenzel, and Daniel J. Semick.

Sincerely yours,




Robin M. Nazzaro
Director, Natural Resources
 and Environment

Enclosures - 2




Page 3                                                GAO-04-148R Contractor Litigation Costs
Enclosure I




               DOE Reimbursement of
              Contractor Litigation Costs

                         Briefing for
               Representative Edward J. Markey

                      October 16, 2003




Page 4                           GAO-04-148R Contractor Litigation Costs
Enclosure I




         Objectives

              • How much does DOE spend to reimburse litigation costs for its
                contractors?

              • What major criteria does DOE use to reimburse its contractors for
                litigation costs and how does it implement these criteria?

              • What major criteria do DOD and NASA use to reimburse their
                contactors for litigation costs?

              • To what extent does a state university that is a DOE contractor have a
                valid immunity defense to a lawsuit?

              • To what extent have DOE contractors invoked Eleventh Amendment
                immunity or other immunity-related defenses?


                                                                                                2




Page 5                                                GAO-04-148R Contractor Litigation Costs
Enclosure I




         Objective 1: Litigation Costs

          DOE reimbursed contractors for about $330.5 million from FY 1998 through
          March 20031
                       •$196.5 million in litigation costs for ongoing cases
                       • $52.9 million for litigation costs on closed cases
                       • $81.1 million for judgment and settlement costs

          For the same period, DOE estimates that unreimbursed contractor costs
          were about $12 million, or about
                       •$7 million in litigation costs for ongoing cases2
                       •$1 million for litigation costs on closed cases
                       •$4 million for judgment and settlement costs

         1In   general, DOE contractors retain outside counsel for handling their litigation cases. The $330.5 million reflects those costs.
         2DOE officials said there might be several million dollars in additional litigation costs for ongoing cases that contractors have not reported to DOE. Contractors   3
         may eventually seek reimbursement for some of these costs.




Page 6                                                                                                           GAO-04-148R Contractor Litigation Costs
Enclosure I




         Objective 2: Major DOE Criteria and
         Implementation
         Major Criteria
             • DOE pays reasonable litigation costs unless the contractor’s actions
                involved
                 • willful misconduct, lack of good faith, or failure to exercise prudent
                    business judgment by the contractor’s managerial personnel in
                    M&O contracts;
                 • certain other circumstances, such as when the contractor is liable
                    under the Major Fraud Act or False Claims Act.

              • DOE pays a maximum of 80 percent for a case where the contractor
                prevails in a case that was
                 • brought by a government entity alleging a contractor’s violation or
                   failure to comply with law or regulation or
                 • brought by a third party under the False Claims Act


                                                                                                  4




Page 7                                                  GAO-04-148R Contractor Litigation Costs
Enclosure I




         Objective 2: Major DOE Criteria and
         Implementation (continued)
         Implementation
             • When a contractor is sued, the contractor alerts DOE’s lawyers in the
               appropriate field office.

              • If DOE attorneys initially determine the contractor’s actions appear
                proper, DOE conditionally pays litigation costs.

              • DOE attorneys continually reevaluate whether the case meets the
                payment criteria as they get more information. They base their
                judgment on the facts and contract case law.

              • If at any time DOE attorneys determine the contractor should not be
                reimbursed they can recommend that DOE stop reimbursements and
                seek the return of funds paid to the contractor.


                                                                                                 5




Page 8                                                 GAO-04-148R Contractor Litigation Costs
Enclosure I




         Objective 2: Major DOE Criteria and
         Implementation (continued)

              • We identified only one case where a contractor paid all costs
                because of managerial personnel’s willful misconduct, lack of
                good faith, or failure to use prudent business judgment.

              • Managerial personnel were defined and limited from 10 to 41
                individuals in the contracts we reviewed.

              • DOE lawyers can help shape the legal defense strategies in
                individual cases (e.g., by encouraging early settlements or
                deciding whether to appeal).

              • DOE lawyers also review the contractor’s litigation costs
                against established allowable cost guidelines.

                                                                                            6




Page 9                                            GAO-04-148R Contractor Litigation Costs
Enclosure I




          Objective 3: Major DOD and NASA Criteria


           • DOD and NASA pay reasonable litigation costs, but do not have
             written overall criteria similar to DOE’s in which they specify that they
             will not pay a contractor’s litigation costs resulting from willful
             misconduct, lack of good faith, or failure to exercise prudent business
             judgment by the contractor’s managerial personnel in M&O contracts.

           • DOD and NASA pay a maximum of 80 percent for a case where the
             contractor prevails in a case that was
              • brought by a government entity alleging a contractor’s violation or
                failure to comply with law or regulation or
              • brought by a third party under the False Claims Act.




                                                                                                7




Page 10                                               GAO-04-148R Contractor Litigation Costs
Enclosure I




          Objective 4: Potential State University
          Immunity
          Eleventh Amendment immunity

              • Eleventh Amendment provides for state immunity from lawsuit by a
                private party in federal court.

                 • In some areas, such as employment discrimination, Congress has
                   abolished states’ immunity.

                 • States may waive immunity (state waiver would preclude state
                   university from invoking immunity). Congress may be able to
                   preclude states from invoking immunity by requiring them to waive
                   immunity as a condition of receiving federal benefits or protections
                   —e.g., H.R. 2344; S. 1191.


                                                                                                8




Page 11                                               GAO-04-148R Contractor Litigation Costs
Enclosure I




          Objective 4: Potential State University
          Immunity (continued)
          Other immunity-related defenses

              • Sovereign immunity in state court—depends on nature of action and
                varies from state to state (conditions and waivers are set by states).

              • Statutes that apply to “persons” or specific types of entities may not
                apply to states—e.g., the False Claims Act.

              • Punitive damages generally do not apply to states—e.g., California.

              • State employees in some states have limited rights in suing states—
                e.g., California employees may not sue for breach of contract.



                                                                                                 9




Page 12                                                GAO-04-148R Contractor Litigation Costs
Enclosure I




          Objective 4: Potential State University
          Immunity (continued)
          Whether a state university is an arm of the state and thus may have a
          valid immunity claim depends on a variety of factors

              • Liability of state for judgments against the university [DOE
                reimbursement for judgments does not divest university of Eleventh
                Amendment immunity—Regents of the University of California v. John
                Doe, 519 U.S. 425 (1997)]
              • Nature of the functions the university is performing
              • Ability of the university to sue and be sued
              • Right of the university to hold property in its own name
              • Corporate status of the university—e.g., University of California (UC) is
                a corporation


                                                                                            10




Page 13                                               GAO-04-148R Contractor Litigation Costs
Enclosure I




          Objective 4: Potential State
                       University Immunity (continued)
          Past and current litigation regarding the issue of UC as a state entity
          • The U.S. Court of Appeals for the Ninth Circuit relied on the state’s
            potential liability for judgment against UC in holding that UC is a state entity
            in its operation of a DOE facility and may assert Eleventh Amendment
            immunity—John Doe v. Lawrence Livermore National Laboratory, 131 F.3d
            836,839 (9th Cir. 1997).
          • The issue of whether UC is a state entity when acting as a DOE contractor
            is in litigation again in United States ex rel. Adrian v. Regents of the
            University of California in the U.S. Court of Appeals for the Fifth Circuit.
            The plaintiff is relying on factors such as UC’s corporate status and its
            authority to sue and be sued to show that UC is not a state entity, but is a
            “person” subject to qui tam liability under the False Claims Act. Under the
            California Constitution, Art. IX, §9, UC is a “corporation” with the “power to
            sue and to be sued.”


                                                                                               11




Page 14                                                  GAO-04-148R Contractor Litigation Costs
Enclosure I




          Objective 4: Potential State
                       University Immunity (continued)

              The plaintiff’s arguments in the Adrian case include:
              • The Supreme Court has held that a municipal corporation is a “person”
                under the False Claims Act—Cook County v. United States ex rel.
                Chandler, 538 US 119 (2003).
              • The Supreme Court has said that when Congress gives an agency
                authority to sue and be sued, unless it is clear that such language is to
                be narrowly construed, that agency should be treated like a private
                enterprise when sued—Federal Housing Administration v. Burr, 309
                U.S. 242, 245 (1940).




                                                                                             12




Page 15                                                GAO-04-148R Contractor Litigation Costs
Enclosure I




          Objective 5: Use of Immunity as a Defense

          Only two of DOE’s current major contractors, UC and Iowa State, are state
          universities that may be able to claim Eleventh Amendment immunity or
          other immunity-related defenses. UC operates three DOE facilities (Los
          Alamos National Laboratory, Lawrence Livermore National Laboratory, and
          Lawrence Berkeley National Laboratory) and Iowa State operates one
          facility (Ames Research Laboratory).
          Eleventh Amendment immunity
                  UC identified 8 out of about 35 federal cases where it invoked
                  immunity under the Eleventh Amendment in 5-1/2 years; 2 were
                  dismissed without further litigation because of this argument; 2
                  were resolved in federal or state court on other grounds; 2 were
                  settled; and 2 are pending. DOE said Iowa State has not used the
                  argument.


                                                                                            13




Page 16                                               GAO-04-148R Contractor Litigation Costs
Enclosure I




          Objective 5: Use of Immunity as a
          Defense (continued)
          Other immunity-related defenses
           • UC officials estimated that the university used immunity-related
             defenses in at least 62 of about 137 cases from October 1998
             through March 2003.
           • Often these defenses are successful in obtaining a dismissal for
             at least part of the cases. UC officials estimated that in at least 42
             cases where an immunity-related defense was used at least that
             part of the case was dismissed.
           • The predominant immunity-related argument used by UC at Los
             Alamos and Lawrence Livermore was to defend against punitive
             damages; at Lawrence Berkeley it was to defend against
             employee breach of contract arguments.


                                                                                          14




Page 17                                             GAO-04-148R Contractor Litigation Costs
Enclosure I




              Appendix 1: Number and Types of Cases

              Number and Type of Closed and Ongoing Cases (FY 1998 through March 2003)
              Closed cases                                                                                                      Ongoing     Total
              Type                   1998               1999              2000              2001            2002   1SThalf fy
                                                                                                                       2003
              EEO                      57                  62                42                31             14           6         56      268
              Radiation                  1                  4                  2                   2          7            0         24          40
              and/or toxic

              Personal                 21                  15                18                14             7            1         23          99
              injury
              Wrongful                 10                  10                  8               10             0            2         10          50
              termination of
              employment
              Whistle                  18                  16                23                17             9            3         14      100
              blower
              Worker                   99                  86               101                68             99          71        290      814
              compensation

              Othera                   78                  93                67                69             63           8        146      524

              Total                   284                286                261               211            199          91        563     1,895



          Source: DOE.
          This includes various types of cases such as contract, labor relations, and tax cases.
          a

                                                                                                                                              15




Page 18                                                                                                GAO-04-148R Contractor Litigation Costs
Enclosure I




          Appendix 2: Disposition of Cases

          Disposition of Cases (FY 1998 through March 2003)
                                                                             Number of cases


              FY closed                Dismissed               Settlement          Judgmenta      Other               Total
                                                                 reached
              1998                                  2                  146               136          0                284
              1999                                  0                  147               139          0                286
              2000                                  4                  147               107          3                261

              2001                                12                   119                74          6                211
              2002                                22                   129                39          9                199
              First half                            9                   73                 7          2                 91
              2003
              Total                               49                   761               502         20              1,332


          Source: DOE.
          a
          This includes judgments for and against DOE’s contractors.
                                                                                                                              16




Page 19                                                                                GAO-04-148R Contractor Litigation Costs
Enclosure II


                               Scope and Methodology

To determine how much DOE spent to reimburse its contractors for litigation costs
from fiscal year 1998 through March 2003, we obtained data from DOE’s Legal
Management Tracking System (LMTS)—a Web-based database established to track
such costs. It relies on entries from the relevant DOE field offices. To address the
reliability of the LMTS data used in our review, we discussed the development of
LMTS with agency officials. In addition, we received detailed responses to a list of
questions about LMTS, including a description of the database, its development,
limitations of the data it contains, its format, descriptions of how data are entered
into the database, and quality control checks on its content. Also, we performed
limited data reliability testing. Responses to these questions were prepared by
agency officials who are responsible for overseeing the LMTS. In addition, we
summarized some of the LMTS data for the 5-1/2 year period and compared these
data with the information in DOE’s summary. After taking these steps, we
determined that the LMTS data were sufficiently reliable for the purposes of this
report.

To obtain information on the amount that contractors have spent without
reimbursement from DOE, we surveyed DOE’s 18 field offices. Since the information
is not in a DOE database, DOE field office personnel obtained the information by
analyzing their records of cases or asking the relevant contractors to assist them in
providing the information. After we received the data, we discussed the responses
with attorneys at several DOE field offices to obtain further explanations.
Respondents in most DOE field offices said they were highly confident the
information they received was accurate and complete for those cases in which
contractors responded. However, contractors did not provide their unreimbursed
costs for all cases, according to DOE’s Deputy General Counsel for Litigation. He
estimated that contractors might have several million dollars in additional
unreimbursed costs for ongoing cases that they did not report to DOE. We
determined the data were sufficiently reliable for the purposes of this report, and we
added a note to our briefing slides indicating that several million dollars may not be
included in the estimate.

To determine DOE’s major criteria for reimbursing its contractors’ legal costs and
how DOE implements the criteria, we examined federal regulations, including DOE’s
own regulations, on reimbursement of contractor legal costs, and we interviewed
attorneys at DOE’s headquarters and field offices about the guidance and their
implementation. Similarly, to determine the major criteria the Department of
Defense and the National Aeronautics and Space Administration use to reimburse
contractor litigation costs, we examined federal laws and regulations, such as the
Federal Acquisition Regulations, and we interviewed officials at the Department of
Defense and the National Aeronautics and Space Administration responsible for
developing those regulations as they pertain to reimbursing contractor litigation
costs. To determine the extent to which a state university that is a DOE contractor
may have a valid immunity defense, we examined relevant laws and court cases. To
determine the extent to which DOE contractors have invoked immunity or immunity-


Page 20                                             GAO-04-148R Contractor Litigation Costs
Enclosure II


related defenses, we obtained estimates from the University of California. University
of California attorneys at DOE facilities said that in some cases they relied on
examining files, but in other cases they relied on summaries of files and institutional
memory.




(360310)




Page 21                                             GAO-04-148R Contractor Litigation Costs
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