Department of Energy: Reimbursement of Contractor Litigation	 
Costs (26-NOV-03, GAO-04-148R). 				 
                                                                 
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. Rep. Edward J. Markey asked GAO to	 
study the extent to which DOE reimburses its contractors'	 
litigation costs and the process for doing so. GAO 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.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-148R					        
    ACCNO:   A08945						        
  TITLE:     Department of Energy: Reimbursement of Contractor	      
Litigation Costs						 
     DATE:   11/26/2003 
  SUBJECT:   Colleges and universities				 
	     Contractor payments				 
	     Contractors					 
	     Court costs					 
	     Eligibility criteria				 
	     Legal fees 					 
	     Litigation 					 
	     Cost analysis					 
	     Reimbursements from government			 

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GAO-04-148R

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:

o  	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

o  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 False Claims Act.2 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.

o  	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.

o  	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.

o  	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.

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

                                     ------

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

                                                   Closed cases               
                       Type 1998 1999 2000 2001 2002 1SThalf fy Ongoing Total
                                                           2003         
                        EEO   57   62   42   31   14          6      56   268 
     Radiation and/or toxic    1    4    2    2    7          0      24    40 
            Personal injury   21   15   18   14    7          1      23    99 
Wrongful termination of    10   10    8   10    0          2      10    50 
employment                                                           
             Whistle blower   18   16   23   17    9          3      14   100 
Worker compensation        99   86  101   68   99         71     290   814 
                     Othera   78   93   67   69   63          8     146   524 
                      Total  284  286  261  211  199         91     563 1,895 

                                         Number of cases
       FY closed      Dismissed  Settlement reached  Judgmenta  Other  Total 
         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 2003           9                  73          7      2     91 
         Total               49                 761        502     20  1,332 

                             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-

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)

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