Managing DOE: The Department's Efforts to Control Litigation Costs
(Testimony, 05/14/96, GAO/T-RCED-96-170).

GAO discussed the Department of Energy's (DOE) controls over the
litigation costs of defending lawsuits against its management and
operating contractors. GAO noted that: (1) DOE outside litigation costs
were over $25 million in fiscal year 1995; (2) DOE has improved its
control over outside litigation costs by issuing guidance for
reimbursable costs and specifying unreimbursable costs, which has saved
hundreds of thousands of dollars; (3) DOE cost control guidance is not
consistently applied or followed nor is headquarters oversight of field
office billing procedures as effective as it could be; (4) other issues
that have a greater impact on overall DOE litigation costs include the
number of law firms representing DOE contractors, the handling of
discovery requests, and database development; and (5) DOE is taking
action to address these issues, such as consolidating law firms and
contractors in one lawsuit, requiring future codefendants to hire common
counsel, issuing guidance on responding to discovery requests, and
developing plans to combine litigation case databases.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-RCED-96-170
     TITLE:  Managing DOE: The Department's Efforts to Control 
             Litigation Costs
      DATE:  05/14/96
   SUBJECT:  Litigation
             Internal controls
             Legal services contracts
             Cost control
             Lawyers
             Data bases
             Contractor payments
             Billing procedures
             Legal fees

             
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Cover
================================================================ COVER


Before the Subcommittee on Oversight and Investigations,
Senate Energy and Natural Resources Committee

For Release
on Delivery
Expected at
9:30 a.m.  EDT
Tuesday
May 14, 1996

MANAGING DOE - THE DEPARTMENT'S
EFFORTS TO CONTROL LITIGATION
COSTS

Statement of Victor S.  Rezendes,
Director, Energy, Resources, and Science Issues,
Resources, Community, and Economic Development Division

GAO/T-RCED-96-170

GAO/RCED-96-170T


(302179)


Abbreviations
=============================================================== ABBREV

  DOE -
  GAO -

============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We appreciate the opportunity to discuss the Department of Energy's
(DOE) controls over the costs DOE incurs through litigation against
contractors who have operated its facilities.  As you know, numerous
class action lawsuits have been filed against these contractors, and
the costs associated with their defense are being borne by DOE.  In
1994, we reported that DOE poorly managed the costs associated with
these class action lawsuits.  My testimony today is based on our
follow-up review for your subcommittee of DOE's management of these
costs with two major class action lawsuits--In re Hanford and Cook v. 
Rockwell/Dow. 

In summary, we found that DOE has initiated a number of actions to
better control its outside litigation expenses, which were over $25
million in fiscal year 1995.  In this regard, DOE has instituted cost
control guidance governing the litigation expenses that can be
reimbursed by the department.  This action has saved hundreds of
thousands of dollars.  However, in certain instances, the guidance is
not being consistently applied or followed.  Further, our work found
that other issues are driving DOE' s overall litigation costs.  These
include the number of law firms representing DOE contractors, how
discovery requests are handled,\1

and database development.  DOE has begun to take action--such as
consolidating the law firms and contractors in the In re Hanford
case--to address these issues. 


--------------------
\1 Discovery is a pretrial process that one party can use to obtain
facts and information about the case from the other party or from a
non-party. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:1

DOE's responsibility for contractors' litigation costs has its roots
in the early nuclear programs.  Since the inception of these programs
in the 1940s, the federal government has relied on contractors to
operate its nuclear facilities.  However, because of the high risk
associated with operating these facilities, the agencies responsible
for managing nuclear activities--from the Atomic Energy Commission to
DOE--included litigation and claims clauses in their management and
operating contracts.  These clauses generally provide that litigation
expenses are allowable costs under the contracts.  In addition,
judgments against the contractors arising from their performance of
the contracts are reimbursable by DOE. 

Over the past several years, class action lawsuits have been filed
against past and present contractors responsible for operating DOE's
facilities.  In general, these suits contend that the operation of
the facilities released radioactive or toxic emissions and caused
personal injury, emotional distress, economic injury, and/or property
damage.  These suits have been filed against the current and former
operators of certain DOE facilities throughout the country, including
the Hanford Site near Richland, Washington; the Rocky Flats Site in
Golden, Colorado; and, most recently, the Brookhaven National
Laboratory in Upton, New York.\2

DOE has the option of undertaking the defense against such class
action litigation on its own, but it has generally opted to have the
contractors defend these cases.  As standard practice, DOE has
authorized the contractors to proceed with their defense and has
limited its own involvement to approving the hiring of outside
counsel, reviewing billings, and agreeing upon settlement amounts. 
The cognizant DOE field office is responsible for funding each
contractor's litigation and overseeing the litigation effort.  DOE's
outside litigation costs exceeded $25 million in fiscal year 1995. 

On July 13, 1994,\3 we testified before the House Committee on Energy
and Commerce's Subcommittee on Oversight and Investigations on our
review of DOE's management of its outside litigation costs.  As we
indicated at that hearing, and subsequently reported,\4 we found that
DOE had little control over litigation-related expenses.  DOE (1) did
not know how much it was spending to defend contractors in
litigation, (2) had not established cost guidance or criteria for
allowable costs, and (3) had not instituted effective procedures for
reviewing the legal bills. 

At that time, DOE's General Counsel acknowledged that the
Department's management of outside litigation costs had been
inadequate and said that DOE was initiating actions to strengthen its
controls over these costs.  DOE, in August 1994, issued cost control
guidance and established detailed procedures for reviewing
contractors' legal bills.  Furthermore, DOE has recognized that major
savings can be realized by reducing the number of law firms
representing its contractors and it has begun efforts to consolidate
cases involving multiple contractors and law firms.  The General
Counsel said that case consolidation was one of his office's highest
priorities because it would allow DOE to improve its case management
and greatly reduce costs. 


--------------------
\2 Osarczuk v.  Associated Universities, Inc., No.  96-02836 (Sup. 
Ct.  Suffolk County, N.Y.  filed Feb.  13, 1996). 

\3 Managing DOE:  Tighter Controls Needed Over the Department of
Energy's Outside Litigation Costs (GAO/T-RCED-94-264, July 13, 1994). 

\4 Managing DOE:  The Department of Energy Is Making Efforts to
Control Litigation Costs (GAO/RCED-95-36, Nov.  22, 1994). 


   DOE HAS IMPROVED COST CONTROLS
---------------------------------------------------------- Chapter 0:2

Since we first reviewed DOE's litigation costs, the Department has
made considerable efforts to improve its procedures for controlling
these costs, saving hundreds of thousands of dollars.  However, in
certain instances, the guidance is not being consistently applied or
not followed.  Furthermore, headquarters' oversight has not been as
effective as it could be.  Consequently, DOE is still being
charged--and is paying--more than it should for litigation expenses. 


      DOE HAS INSTITUTED SEVERAL
      POLICIES AND PROCEDURES TO
      ADDRESS LITIGATION COSTS
-------------------------------------------------------- Chapter 0:2.1

As a result of our July 1994 testimony, DOE issued detailed interim
guidance in August 1994 setting forth policies for contracting
officers to consider in determining whether particular litigation
costs are reasonable.  This guidance--which became effective for all
ongoing class action suits on October 1, 1994--establishes limits on
the costs that DOE will reimburse contractors for outside litigation. 
For example, the guidance specifies that the cost of duplicating
documents should not exceed 10 cents per page; the charges for
telephone calls, facsimile transmissions, and computer-assisted
research are not to exceed the actual costs of providing these
services; airfare is not to exceed the coach fare; and other travel
expenses must be moderate, consistent with the rates established in
the Federal Travel Regulations.  The new guidance also sets forth
DOE's policy for reimbursing attorneys' fees, profit and overhead,
and overtime expenses, and it designates specific nonreimbursable
costs. 

In addition, as part of its efforts to improve controls over
litigation expenses, DOE has instituted detailed procedures for
reviewing bills.  DOE now requires contractors to submit copies of
bills and accompanying supporting documentation to the responsible
field offices for their review.  Copies are also sent to headquarters
so that if questions come up in the field, the Office of General
Counsel's staff can review the charges in question.  Staff in each
field Chief Counsel's office are required to develop procedures for
reviewing the bills each month to ensure compliance with the
guidance.  At headquarters, the Office of General Counsel hired an
attorney with expertise in litigation management to coordinate DOE's
efforts to control costs.  As a separate audit function, the Office
of General Counsel established a team to audit each Chief Counsel's
office annually to ensure compliance with the guidance for managing
litigation. 

As a result of these initiatives, DOE has questioned and/or
disallowed hundreds of thousands of dollars in unnecessary and/or
undocumented costs.  Such costs have appeared in many of the bills
reviewed by DOE.  For example, DOE has disallowed time charges for
attorneys when the work is clearly for other cases or when the
description of work was vague or incomplete.  DOE has also questioned
charges for work such as "document management," "filing," and
entertainment expenses.  Finally, charges for long-distance telephone
calls, overnight delivery, special messenger services, computer
database research and other disbursements have been denied for lack
of supporting documentation. 


      DOE'S COST CONTROL GUIDANCE
      NOT CONSISTENTLY APPLIED OR
      NOT FOLLOWED
-------------------------------------------------------- Chapter 0:2.2

We reviewed the bills associated with the Cook v.  Rockwell/Dow and
In re Hanford cases for fiscal year 1995, and found problems in many
of them.  Specifically, we identified additional expenses--over and
above those disallowed by DOE--that should not have been approved
according to the guidance.  These examples show that the existing
guidance is not being consistently applied or not being followed in
certain instances.  The following examples illustrate some of the
most frequently occurring problems: 

  -- DOE's guidance directs that the legal fees be reasonable. 
     Following this guidance, the Richland Chief Counsel's staff--who
     manage the In re Hanford case--routinely question if an attorney
     charges more than 8.5 hours per day unless they are in trial,
     and charges exceeding this limit have been disallowed.  However,
     staff at Rocky Flats--managing the Cook case--made no effort to
     question these charges even though several attorneys and
     paralegals from one law firm have frequently billed more than
     8.5 hours per day--including one attorney who billed 17 hours
     for one day. 

  -- DOE's guidance says that the costs for meals and lodging for
     personnel while on travel should be billed at moderate rates
     using the Federal Travel Regulations as a guide.  Nevertheless,
     the Rocky Flats office allowed lawyers to bill $28 for in-room
     breakfasts and for lodging that exceeded the government's per
     diem rates.  For example, one law firm was reimbursed in full
     for hotel charges of $221 per night in Washington, D.C.  (where
     the federal maximum allowance for hotel rooms was $113), and
     $177 per night in Denver (where the federal maximum allowance
     for hotel rooms was $77). 

  -- DOE's guidance states that the cost controls are applicable to
     charges billed by consultants who work on the litigation. 
     However, at Rocky Flats this criterion is not being adhered to. 
     Consultants and expert witnesses are being reimbursed for
     expenses that are significantly higher than the guidance allows. 
     For example, consultants and expert witnesses are being
     reimbursed for their administrative expenses at rates higher
     than their actual costs.  They are being reimbursed for overhead
     at a rate of 140 percent of the administrative and secretarial
     support costs.  Additionally, the mileage charged by some
     consultants is 133 percent of the federal limits. 

  -- DOE's guidance specifies that certain costs are nonreimbursable. 
     However, some nonreimbursable expenses are being paid at both
     Rocky Flats and Hanford.  Staff from these field offices are
     reimbursing purchases of reference materials, such as books and
     articles; costs for conference meals in excess of $10 per
     person; and overtime charges for secretaries--all of which are
     nonreimbursable under the guidance. 

  -- DOE's guidance requires certain costs to be approved in advance. 
     However, we found that expenses requiring advance approval, such
     as the costs of hiring temporary personnel, were reimbursed even
     though the advance approval had not been obtained. 

Finally, we found that headquarters provided inadequate oversight of
the field's review of the bills.  Bills are being forwarded to
headquarters at the same time as the field office receives them, yet
the Office of General Counsel's staff was not aware of many of the
problems we have identified.  The Office of General Counsel's staff
said that they had not reviewed the bills to ensure uniformity and
consistency with the guidance because they had devoted their limited
resources to other efforts.  However, they now intend to examine the
bills more closely and oversee the field offices' work.  In fact,
after learning of our findings, DOE headquarters staff clarified the
applicability of the guidance to consultants and expert witnesses. 
On April 23, 1996, the Office of General Counsel issued a memo to all
field office Chief Counsels stating that consultants, experts, and
all other outside firms retained by the law firms are subject to the
Department's cost control guidance.  These actions should help
tighten controls over litigation costs. 


   OTHER ISSUES ARE DRIVING COSTS
---------------------------------------------------------- Chapter 0:3

While DOE has taken a number of actions to institute cost controls
over its outside litigation expenses, the dollar savings resulting
from these actions are relatively small compared with DOE's overall
costs for outside litigation.  Other issues have a far greater impact
on the costs associated with the class action suits.  These include
the number of law firms representing DOE contractors, responding to
discovery requests, and database development.  DOE's General Counsel
is bringing more management attention to these issues in order to
further reduce the costs of the class action litigation. 


      CASE CONSOLIDATION
-------------------------------------------------------- Chapter 0:3.1

Officials in DOE's Office of General Counsel believe that
consolidating the law firms and contractors in a case gives the
department its greatest cost-saving potential.  This alleviates
potential duplication of work, reduces the number of legal staff
billing on the case, and helps the staff in the field streamline
their management of the litigation expenses.  Since we completed our
1994 work, DOE has consolidated its largest class action case--In re
Hanford--which had six codefendants, each represented by at least one
law firm and some by as many as three firms.  The Office of General
Counsel acknowledged in 1994 that duplication of effort was likely
occurring and, with it, unnecessary costs.  Today, only two law firms
are handling the litigation. 

DOE originally estimated that consolidating the defense for its
lawsuits would significantly reduce its annual expenses for outside
litigation.  In 1995, DOE reduced its legal expenses by $1 million by
consolidating the In re Hanford case.  DOE explained that the savings
at Hanford were less than expected this first year because the law
firms experienced difficulties in reviewing and consolidating the
voluminous work product of the former law firms.  In future years,
DOE expects the savings to be higher.  To achieve further cost
savings, DOE has considered consolidating the Cook case--which has
two contractors as defendants.  However, DOE has decided not to
consolidate in light of the circumstances of this case. 

To avoid future situations where multiple contractors each hire
individual law firms to represent them, DOE instituted a policy
requiring contractors to select joint counsel.  Staff from the Office
of General Counsel cited several recent cases filed against several
current and former DOE contractors involved in human radiation
experimentation in which the contractors were encouraged to select
common counsel to represent them.  In addition, the General Counsel
has directed that all new management and operating contracts contain
a clause that will allow DOE to require that contractors serving as
codefendants select common counsel. 


      DISCOVERY COSTS
-------------------------------------------------------- Chapter 0:3.2

In both the Cook and the In re Hanford cases, DOE incurred high costs
in responding to plaintiffs' discovery requests--requests to obtain
facts from DOE.  In the Cook case DOE failed to meet deadlines in a
court order and the judge issued a contempt order against DOE in
November 1995.  Consequently, DOE has rededicated staff and funds to
identify, declassify and prepare hundreds of thousands of pages for
review by the plaintiffs.  After the contempt order was issued, DOE
assigned as many as 82 people to the discovery effort.  As of March
31, 1996, DOE had spent over $3 million for discovery efforts in Cook
in fiscal year 1996.  The Rocky Flats Chief Counsel estimates that
DOE may spend as much as $11 million before discovery is completed. 

Discovery matters in the In re Hanford case have also proven costly
for DOE.  To comply with a court discovery order and avoid a contempt
order in that case, DOE temporarily suspended cleanup activities at
its Richland facility for a week in February 1996 so that all staff
could identify and index documents requested by the plaintiffs.  DOE
estimates that this effort alone cost over $2.3 million.  Ongoing
efforts to declassify and catalog discovery documents have cost DOE
an additional $4.7 million in this case. 

DOE recognizes that discovery is costly and that, in the past, it has
lacked a coordinated approach for responding to discovery requests. 
To address this issue, the Office of General Counsel, in March 1996,
began circulating draft guidance setting forth procedures for dealing
with discovery issues, including procedures for assigning
responsibility for contesting discovery requests.  DOE's General
Counsel issued this guidance in final form on May 3, 1996.  The
Office acknowledged that if these procedures had been in place during
the initial stages of discovery in the Cook case, they would have
helped DOE avoid the contempt citation and the additional discovery
costs it entailed. 


      DATABASE DEVELOPMENT
-------------------------------------------------------- Chapter 0:3.3

The final area that is driving costs is the development and
maintenance of litigation databases.  Since 1989, DOE has spent over
$27 million to develop a litigation support database--maintained at
Los Alamos National Laboratory--to be used to provide assistance to
ongoing and future cases involving DOE and its former and current
contractors.  In addition, DOE contractors have developed their own
litigation databases at DOE's expense--that may be redundant and
ineffective.  In one instance, DOE allowed a law firm to get a copy
of the scanned document tape from Los Alamos to search and organize
on its own.  The law firm maintained that this would be more
cost-effective than its using the Los Alamos database directly. 
However, the final costs were double the amount estimated and the
scanned documents were not as easily searchable as the law firm
thought. 

We identified seven databases used in support of the Cook case.  In
fiscal year 1995, DOE spent over $600,000 on these databases.  When
we questioned Rocky Flat's Chief Counsel about the purpose and need
for these databases, she indicated that she was aware of only one
database that DOE had developed in support of the Cook case.  DOE's
Attorney for Litigation Management acknowledges that the functions of
the various Cook databases may overlap and she has begun to identify
the databases and their functions in order to minimize or reduce
costs. 

For In re Hanford, we identified over 20 databases that had been
developed by the contractors and their law firms before the case was
consolidated.  These databases are now being reviewed and combined by
the lead law firm.  In addition, DOE has reimbursed the contractors
over $6.6 million for developing a separate database--the Westlake
database--that serves as a repository for the plaintiffs' medical
records.  DOE has recently undertaken efforts to reduce the costs
associated with this database by, first, relocating to a less
expensive location and, second, scaling down the number of documents
being entered into the database. 

DOE has no formal written policy on developing databases.  However,
DOE's Office of General Counsel is looking closely at the number of
databases for each class action case intending to consolidate as many
as possible and eliminate those that are duplicative.  Officials from
this office told us that with the new policy encouraging contractors
to select common counsel and the cost controls now in place, it is
unlikely that a large number of databases will be generated in the
future for any one case. 


-------------------------------------------------------- Chapter 0:3.4

Thank you, Mr.  Chairman and Members of the Subcommittee.  That
concludes our testimony.  We would be happy to respond to any
questions you or Members of the Subcommittee may have. 


*** End of document. ***