Chapter 12
Costs of Litigation
Lawyer’s fees and other litigation costs are both a known and unknown element in any lawsuit. They are a known cost because everybody knows that a lawsuit costs money. They are an unknown element because exactly how much the litigation costs will always be unknown to contractors and contracting officers.
Known or unknown, litigation expenses costs can be high. So naturally the question is, “who’s going to pay them?”
The British do it one way: the loser pays. For many reasons, including the belief that the British system discourages the underdog from suing a wealthy and big business, the American system is different. The American way is that each side pays for its own costs.
In American courts, there are a few exceptions to the American way.
One exception involves frivolous lawsuits. If a judge considered a lawsuit to be frivolous, the judge could make the frivolous plaintiff pay the defendant’s attorneys’ fees.
Two other exceptions apply to government contract lawsuits. These exceptions are based on the Equal Access to Justice Act (EAJA) and the Competition in Contracting Act (CICA). In looking at these laws in the context of procurement, it’s important to keep this distinction in mind: EAJA applies to claims before the courts and board of contract appeals; and to protests before the Court of Federal Claims. We’ll look at EAJA first.
Protests to GAO are covered by a different law: CICA. When Congress passed CICA in 1984, it allowed GAO to recommend that an agency pay protest costs and attorneys’ fees in protests. When an agency would have to pay attorneys’ fees and how much an agency would have to pay are different from EAJA as we will see later.
THE EQUAL ACCESS TO JUSTICE ACT
In 1981, Congress passed EAJA. This law allowed a judge to require the government to pay attorneys’ fees under certain circumstances. Previously, the government had been immune from paying attorneys’ fees due to sovereign immunity—Congress had not previously consented to the federal government being sued for attorneys’ fees and having to pay these fees. EAJA changed that.
One of the driving forces behind EAJA was Congress’s belief that government lawyers on salary could take advantage of small businesses and individuals by forcing them to spend large amounts of money either to sue the government or to defend against a government lawsuit when the government did not have a good legal argument. On the other hand, Congress did not want to prevent the government from defending close cases or from making novel legal arguments. Nor did Congress want litigants against the government to recoup huge amounts of tax dollars for their attorneys’ fees.
These beliefs led to the three requirements of EAJA: an eligible party who is a prevailing party in a lawsuit against the government must recover attorneys’ fees not to exceed $125 an hour (adjusted) unless the government has a legal position that is “substantially justified.”
Eligible Party
To be an eligible party, a prevailing party has to fall into one of the following categories:
(i) an individual whose net worth did not exceed $2,000,000 at the time the civil action was filed, or (ii) any owner of an unincorporated business, or any partnership, corporation, association, unit of local government, or organization, the net worth of which did not exceed $7,000,000 at the time the civil action was filed, and which had not more than 500 employees at the time the civil action was filed.1
Prevailing Party
Winning the case is one requirement Congress put on vendors trying to recover attorneys’ fees. When Congress passed EAJA and allowed winning vendors to recover their attorneys’ fees, it required the winning party to prove that it was a “prevailing party.”
But there are many ways of winning a case—some obvious, some subtle. The decisions show three ways for a vendor to be a prevailing party.
A Win on the Merits
The most obvious way to win is where a judge looks at the merits of the case and rules in favor of a contractor.
Dream Management, Inc. (DMI) was awarded $17,079 in damages by the CBCA. This was only 15 percent of DMI’s claim. However, it was still a “prevailing party” because “a judgment for damages in any amount, whether compensatory or nominal, modifies the defendant’s behavior for the plaintiff’s benefit by forcing the defendant to pay an amount of money he otherwise would not pay.” The board pointed out precedent in which a party prevailed though it recovered only 11.5 percent of claim and another where a party prevailed though it recovered only 2 percent of relief sought.2
Court-Ordered Consent Decrees
Another way a winning vendor can become a “prevailing party” is when both sides agree to a settlement agreement and have a court issue an order dealing with the settlement. These court-ordered consent decrees change the legal relationship between the parties and thus are considered a “win” that makes the vendor a prevailing party.
An Equivalent of One of the Above
The two above “obvious” victories are not the only ways to become a prevailing party. A third way is to get a court to impose “the equivalent” of a judgment on the merits or a consent decree.
Typically, the “equivalent” argument comes up when the government “voluntarily” gives the vendor some or all of the relief for which the vendor had asked the court. If the government voluntarily gives in and does what the plaintiff had asked the court to do, has the lawsuit had any impact? If the lawsuit brought about no change in the legal relationship of the parties, how can a protester claim to be a prevailing party?
Prevailing Party: A Change in Legal Relationship
When the IRS issued a solicitation for debt-collection services, it limited the solicitation to vendors who were currently doing debt-collection for the IRS. A vendor not currently working for the IRS protested to the COFC. After a hearing, the court issued an order advising the parties that it intended to enjoin the solicitation. But before the order was issued, the government cancelled the solicitation so the court eventually dismissed the case. The court concluded that the protester was a prevailing party. The court said its order had “had sufficient judicial imprimatur to materially alter the legal relationship between Universal and the Government. . . . The matter had been fully briefed, and the court and the parties agreed that no hearing was necessary . . . this court’s conclusions exhibited an essence of finality and were made late in the process. Moreover, we stated a l egal conclusion: ‘excluding vendors on the Schedule that do not have current task orders irrespective of their experience or ability is arbitrary and capricious in the circumstances presented.’ Had defendant not performed the curative act right away, we were prepared to issue an opinion granting injunctive relief to plaintiff.”3
Not a Prevailing Party: No Change in the Legal Relationship
Rice Services Ltd. lost a Navy contract and asked the Court of Federal Claims to stop performance on it, award a new one, and stop the Navy from exercising any options with the new vendor. But before the court had made any ruling on the merits of the protest, the Navy itself fixed Rice’s problem, opened up discussions with Rice and the other offerors, and awarded a new contract. Without ruling on the merits of the protest, the court issued an order concluding that it no longer had to rule on the protest because the Navy had solved the problem all by itself without any court involvement. Rice’s try to get attorneys’ fees was denied. The CAFC concluded that Rice was not a prevailing party. To be the “equivalent” to a merits ruling or a consent decree, a court order must “materially change” the legal relationship of the parties. Here, “the Navy acted unilaterally in reevaluating the bids before the lower court made any rulings. In addition all the offerors including Rice responded to the Navy’s re-evaluation before the lower court had done anything. And finally, the lower court’s order itself said the Navy had voluntarily fixed the problem.”4
Substantially Justified
EAJA makes the government pay if its litigation position on the facts and the law is not “substantially justified.”
“Substantially justified” does not mean “justified to a high degree” but rather “justified in substance or in the main”—that is, justified to a degree that could satisfy a reasonable person. . . . The Government’s position must have a reasonable basis both in law and fact. A position can be justified even though it is not correct, and we believe it can be substantially (i.e., for the most part) justified if a reasonable person could think it correct, that is, if it has a reasonable basis in law and fact.5
Going back to percentages of recovery, the judge can consider the extent to which a party prevailed on its claim. In one case, a recovery of only 21 percent was an indicator that the agency’s position was substantially justified.6
Here is an example of a board giving three good reasons for the government being substantially justified.
Both in its claim and during the litigation before the Board, DMI primarily asserted its entitlement to damages based on a theory of breach of contract of an IDIQ task order with a guaranteed minimum. The agency, however, contested this l egal theory, and the board agreed. DMI only secondarily asserted that it was entitled to termination for convenience damages, the basis for the board’s ultimate award. Thus, the Immigration and Customs Enforcement (ICE) decision to challenge DMI’s primary legal theory was reasonable.
Second, the damages claimed by DMI were excessive, lacked support, and included dollar amounts for items not awarded by the Board (G&A [general and administrative expense], profit, performance costs, and costs incurred in seeking a dispute resolution). Given the damages claimed, ICE was substantially justified in its decision to litigate the claim.
A third basis that justified the agency’s decision to litigate was DMI’s refusal to accept a settlement offer that was higher than the amount awarded by the board. ICE’s attempt to settle the case for more than awarded and DMI’s rejection of the settlement offer prolonged the final resolution of the matter and further justified ICE’s position going forward.7
When the federal government loses a case because it relied on information—wrong information—from a local government, the government was substantially justified.
GSA typically promises to pay any real estate tax increase imposed by a local jurisdiction on landlords renting space to the government. After GSA signed a lease with Airport Building Associates (ABA) in fall of 1997, the lessor asked GSA for the tax increase over taxes ABA paid in 1999. GSA checked with the local tax assessors who told GSA in effect that the lessor should start getting tax increases at the earliest only for taxes paid in 2000. Relying on the word and expertise of the local tax officials, GSA refused to pay ABA for any increase in taxes paid in 1999. But it turned out that the local tax collectors were wrong. Their opinion was based on the mistaken belief that only one property was involved when in fact several properties were involved. So GSA lost to ABA on the tax increase issue at the board. ABA came back to the board for attorney’s fees. Now ABA lost. Even though GSA had lost the earlier case, it had a decent argument. The board said, “We cannot fault the Government for relying on the information provided by the County Assessor’s Office. Any reasonable person would have done the same. Neither are we surprised that the Government, relying on the information it so diligently garnered at the outset of this dispute and during discovery, brought a motion for summary relief. In a well-reasoned and documented opposition to the motion, counsel for ABA convinced us that the motion should be denied. . . . We saw nothing unjustified on the part of GSA in standing firm on its position.” The board refused to award ABA its attorney’s fees.8
But the government’s position is not substantially justified when the government has bad facts and mistakes by a contracting officer.
After 25 years of being in a rented office building, the government moved out. According to the landlord, A & B Limited Partnership, the government left the building in shambles. And to prove its point, the landlord had pictures of the building’s condition. A & B also gave GSA a seven-page letter describing the damaged condition of the building and asked for $239,000 to fix all this. GSA didn’t agree with the landlord. It thought it owed A & B only $16,032. Unfortunately for GSA, it did not have much information on what condition the building was in when GSA left. The contracting officer did not inspect the building after the government moved out. And the GSA property manager’s inspection was labeled by the board to be “cursory,” lasting only a half-hour, and he had made no notes of his inspection. These were government mistakes no. 1: little effort and little documentation. Adding to the lack of government effort and documentation was the government’s belief on what was permissible “fair wear and tear” by the government employees after 25 years of being t here. For example, the government thought that leaving wires dangling from the ceiling and putting holes in walls and concrete floors could be considered normal wear and tear. Relying on these bad facts, bad law, and little effort, the government fought the case and lost. The landlord came back for attorneys’ fees and won. The board said that the government’s argument “was based on assumptions of agency employees which were without any justification whatsoever. The employees’ views as to the agency’s liability were predicated on cursory investigation, extravagant ideas of the critical question of what constitutes normal wear and tear, and admittedly erroneous arithmetic.” The board awarded the landlord over $31,000 for attorneys’ fees and costs of the litigation.9
Amount
The EAJA sets the hourly rate at $125. But that rate can be increased by the cost of living or if there are special circumstances.
Under EAJA, a $125 per-hour cap applies to attorneys’ fees “unless the court determines that an increase in the cost of living or a special factor . . . justifies a higher fee.” To receive a cost of living adjustment (COLA) in its award, a plaintiff must “allege that the cost of living has increased, as measured by the Department of Labor’s Consumer Price Index (CPI),” and supply the court with relevant CPI data.
A base date of March 1996 is the starting point used to calculate the COLA because EAJA was amended that month to increase the hourly statutory rate for attorneys’ fees from $75 to $125. The end date for calculating the COLA is the final date on which legal services were rendered. The Federal Circuit has also endorsed using “a single mid-point inflation adjustment factor applicable to services performed before and after that mid-point” in appropriate circumstances.
Q Integrated’s attorneys performed services from January 2016 to July 2016, using April 2016 as a mid-point to calculate the COLA. Accordingly, based upon an increase in the CPI from 155.70 in March 1996 to 239.26 in April 2016, the proper rate was $192.08 ($125 × 239.26/155.7 = $192.08).10
THE COMPETITION IN CONTRACTING ACT
According to its regulations, GAO can recommend that an agency give a protester attorneys’ fees and protest costs.
(d) If GAO determines that a solicitation, proposed award, or award does not comply with statute or regulation, it may recommend that the contracting agency pay the protester the costs of:
(1) Filing and pursuing the protest, including attorneys’ fees and consultant and expert witness fees; and
(2) Bid and proposal preparation.
(e) If the contracting agency decides to take corrective action in response to a protest, GAO may recommend that the agency pay the protester the reasonable costs of filing and pursuing the protest, including attorneys’ fees and consultant and expert witness fees.11
When a protester wins at GAO, one remedy is to put the solicitation process back on track and put the protester back into the solicitation. This is a victory—of sorts—for the protester. Generally, that “victory” is enough.
But sometimes a protester gets a double dip: not only does the agency take “corrective” action, such as fixing the solicitation the way the protester wanted in the first place; the agency also has to pay the protester’s costs.
Under 4 CFR 21.8(e) quoted above, GAO may recommend that the agency pay costs when an agency unduly delays taking corrective action in the face of a clearly meritorious protest. GAO’s rule
is intended to prevent inordinate delay in investigating the merits of a protest and taking corrective action once an error is evident, so that a protester will not incur unnecessary effort and expense in pursuing its remedies before GAO.12
Congress did not want agencies needlessly running up the money protesters would pay to protest an agency decision. So it let the Government Accountability Office (GAO) recommend that an agency pay a protester’s costs if the agency “unduly delays taking corrective action in the face of a clearly meritorious protest.” What do these three critical phrases mean?
Undue Delay
What is “undue delay?”
There is no undue delay, generally, if an agency admits defeat before it submits its report on the protest to GAO.13
There is undue delay if an agency waits over two months to fix things, according to GAO.
The record here shows that the agency filed three requests for dismissal, two of them after we had already informed the Air Force that we were treating BFl’s challenge to the estimates as timely. Despite the acknowledged validity of the protester’s questions and the agency’s own professed concerns about the estimates, the agency made no reasonable factual investigation of the basis for the estimates for more than 2 months after the filing of the protest. That investigation occurred only in response to our questions, which essentially repeated those asked by the protester in its response to the agency’s third motion to dismiss.14
In another case, GAO found this:
In resolving requests for declaration of entitlement to costs following corrective action by contracting agency, GAO does not deem 38 working days taken by the agency before taking corrective action to be an undue delay where four separate protests were filed simultaneously against the agency; the protests involved complex and detailed evaluation issues; the agency had to review and organize numerous documents to respond to the protester’s document production requests; four separate good faith dismissal requests by the agency had to be resolved; and the agency diligently and quickly responded to all requests by our Office to expedite the discovery and protest process.15
Corrective Action
But an agency’s delay in studying a protest is not enough to make it pay attorneys’ fees. The critical error an agency must make is delay in taking corrective action on a valid protest. A GAO decision gives one answer: when an agency simply lets the protested contract die, making the protest a moot issue, an agency is not taking corrective action that may let a protester gets protest costs.
REMSA, Inc. protested the use of an option to a contract issued by National Oceanic and Atmospheric Administration (NOAA), for fishery observer services. As the protester, REMSA, and the agency argued over whether the option was beyond the scope of a competitor’s contract and whether the government should have competed its needs and not used an option, the contracting officer found himself with not enough time to thoroughly review the option so he let the contract expire and never exercised the option. But he did not tell his lawyers right away so the agency and the protester continued the protest fight for another 28 days after the contract expired. Since there was no contract and therefore no option, the protest was dismissed by GAO as academic. REMSA came back to GAO for protest costs but because the agency had not taken “corrective action.” The protester was not entitled to any.
GAO granted that the parties continued to needlessly fight for weeks after the contract had expired. But the agency did not take any corrective action in the face of the protest. It simply let the protested contract die. And it did so without regard to the protest: “The administrative contracting officer states that as a result of an administrative lapse by the procuring activity, a request to exercise options under either contract was not submitted to him until April 30, the day on which the contract expired. The contracting officer explains that he did not have sufficient time to obtain the necessary contractor consent and legal review prior to the time the contracts expired and, therefore, he allowed the contracts to expire.”16
Clearly Meritorious Protest
Losing a protest does not automatically mean the agency pays costs. The government is entitled to make losing arguments as long as those arguments are good ones. The government will pay only where the protest is clearly meritorious. “A protest is clearly meritorious when a reasonable agency inquiry into the protest allegations would show facts disclosing the absence of a defensible legal position. For protest to be clearly meritorious, the issue involved must not be a close question. Rather, the record must establish that the agency prejudicially violated a procurement statute or regulation.”17
In one case, GAO found a protest to be “clearly meritorious.”
The solicitation the Army used required vendors for bus services to have a sufficient number of buses currently available. The Army, however, awarded the contract to a company even though the equipment was on order. “In the case at hand, the record clearly shows that the agency’s determination that the winner’s proposal was overall technically acceptable—and that it met the solicitation’s requirements concerning the equipment factor—was inconsistent with the stated evaluation factors.” The competitor’s successful protest clearly raised the issue of whether the winner had the buses currently available. The company clearly argued that the winner “did not, and does not yet, possess such buses.”18
Amount
Rates recoverable by a large business are capped at $150 per hour adjusted by the Consumer Price Index for Urban Consumers, U.S. City Average, All Items.
But, if the protester is a small business, the only cap is “reasonableness.”
In CourtSmart’s attorney’s fees claim for $213,434, three items became important: the hourly rate for the lawyers, the hourly rate for a paralegal, and the cost of the time spent by CourtSmart to simply get all these protest costs back. Lawyer’s hourly rate: GAO will pay attorneys’ fees if they are “reasonable” considering “the customary fee charged for similar work in the community, as well as the experience, reputation and ability of the practitioner. . . . In doing so, where relevant and appropriate, we will consider the fee rates found allowable by our Office in similarly complex proceedings.” CourtSmart asked for an hourly rate of $475. CourtSmart gave GAO an article in a legal newspaper surveying 19 firms in the Washington, D.C., showing that hourly rates for partners ranged from $185 to $750. “The highest rates for partners for all but two of these firms were in excess of $500.” GAO concluded that the $475 rate was reasonable.19
Here’s an example of the GAO “protest cost recovery” process. A successful protester entitled to protest costs can also recover other personnel costs as long as the time is not excessive and is well documented.
After Intermarkets Global (IMG) of Amman, Jordan, won the right to get the government pay its protest costs, it asked for more than $770,000 in protest expenses. However, it won only $54,889.61 for a wide range of protest expenses, due in part to the lack of adequate documentation and explanation of those costs.
Costs related only to winning issues. Protesters typically raise several issues, only some of which are winning ones. GAO lets a successful protester recover the costs incurred with res pect to all issues, not merely those upon which it prevailed unless the unsuccessful issues are based on different facts or legal theories. Here, IMG’s winning protest was based on its arguments that DLA failed to properly do a price realism study and the technical evaluation of IMG’s proposal. IMG also raised unsuccessful arguments based on different facts: DLA failed to conduct a risk assessment and a proper best value determination. As a result, IMG could recoup its costs only for those winning “severable” arguments.
Page-counting for allocating time on winning issues. The bills IMG’s lawyers submitted on the protest did not identify specific issues they had worked on so they had to estimate the percentage of hours spent on the winning issues. They estimated 60 percent of their time had been spent on winning issues. DLA disagreed and argued that the proper percentage was 41.26 percent based on the number of pages in IMG’s protest pleadings dealing with the winning issues. GAO agreed: “In circumstances where information submitted to support a claim is not detailed enough to establish how much of the claimed amount was incurred in pursuit of the successful protest issues, we have recognized that using a page count method is a reasonable means of determining this amount. Given the absence of more probative evidence from IMG, it was reasonable for the agency to use a page count to determine the amount of the claimed hours attributable to the price realism and related issues.
No costs for protest-related issues. A protester can spend money on issues related to the protest but not the protest itself. Here, IMG’s lawyers spent 0.5 hour to review the possibility of getting an override of the automatic stay of contract performance from the COFC but since that did not involve GAO, GAO would not approve that time. Nor would GAO approve 11.0 hours of the lawyers’ time after the protest was over related to DLA’s corrective action: “A protester generally cannot be reimbursed for hours expended after our decision is issued.” GAO described several interesting exceptions to this rule: “a reasonable amount of time to review the decision, hours expended in filing a request for entitlement to costs and time spent pursuing a claim for costs where there is an unreasonable delay by the agency in settling the claim.”
Hourly rates for IMG personnel. IMG asked for reimbursement for the time four of its employees spent on the protest. GAO approved of the hourly rates ranging from $94.14 to $54.61. For example, the $94.14 was based on the following: “an annual salary, bonuses plus an additional amount for social security (9% of the base salary), medical benefits (5% of the total salary), overhead of 15%, and G & A of 25% . . . divided by 1800 hours for an hourly salary” in American dollars of $94.14.
Number of hours to be reimbursed. GAO refused to make DLA pay for the time these employees spent “for any hours on or before the date of the debriefing, or for one hour spent to advise firms that other counsel had been selected. The cost of looking for protest issues and deciding whether to protest are not hours spent in pursuit of the protest.” Nor would GAO allow IMG to recoup the costs of time they spent on supplemental protest issues AFTER the supplemental protest had been filed and before the agency commented on the supplemental protest. Other employee costs were also not eligible: time they spent “locating and sending counsel a letter to Secretary Gates; June 18, reviewing letters to Secretary Gates; and hours on July 22 through July 25 and July 28 for reportedly corresponding with counsel about possible agency actions, information release, and allowing” the awardee to perform the contract.20