On June 25, 2014, the Department of Defense, General Services Administration, and National Aeronautics and Space Administration issued a final rule that establishes when government contractors and subcontractors may recover legal costs incurred in defending against whistleblower retaliation lawsuits. Generally, the rule prohibits a contractor from billing the government for the costs of litigating employees’ claims under federal whistleblower laws unless it is found not to be liable for the claim.

The final rule adopts, with few changes, an interim rule published in September 2013 implementing a provision of the National Defense Authorization Act (NDAA). One of the modifications to the interim rule authorizes contractors to bill for legal costs for certain settlements. During the notice-and-comment period, one respondent contended that the interim rule “effectively prohibits settlement of whistleblower claims by making related legal costs entirely unallowable if the proceeding ‘could have led’ to an agency order for corrective action, with no apparent exceptions.”

To address this concern, the final rule treats whistleblower settlements the same as the settlement of False Claims Act lawsuits in which the United States does not intervene. The final rule explains that “reasonable costs incurred by a contractor or subcontractor in connection with such a proceeding that are not otherwise unallowable by regulation or by agreement with the United States may be allowed if the contracting officer, in consultation with his or her legal advisor, determined that there was very little likelihood that the claimant would have been successful on the merits.” Contractors should verify that any costs they incur regarding whistleblower lawsuits comport with the final rule.