Breach of Settlement Agreement Suits Against Federal Government Not Precluded by Finality Clauses

October 2, 2018

By Patrick T. Rothwell

During settlement discussions with the federal government, contractors are sometimes concerned that the government may not live up to the terms or frustrate the purposes of a settlement agreement and that they will be harmed without effective recourse. These concerns may arise from finality clauses, which are often contained in settlement agreements. However, the U.S. Court of Appeals for the Federal Circuit recently issued an opinion in Labatte v. United States, No. 2017-2396 (Fed. Cir. Aug. 16, 2018), which clarifies that a finality clause in a settlement agreement (“Agreement”) does not bar a person from pursuing a lawsuit at the Court of Federal Claims (“COFC”) for a breach of the Agreement. While the underlying dispute in this decision did not involve federal government contracting, the decision is beneficial and instructive to contractors entering such agreements with the federal government.

The underlying lawsuit that gave rise to the Agreement was a class action by Native American farmers against the Secretary of Agriculture, alleging discrimination by the U.S. Department of Agriculture (“USDA”) in the administration of farm loan and other benefits programs in violation of the Equal Credit Opportunity Act, 15 U.S.C. § 1691. Subsequently, the federal government entered into the Agreement on a class-wide basis, which provided for a compensation fund under which members of the class could seek damages.

The Agreement provided a two-track method for processing claims. The claim process relevant to this case was named “Track B,” under which a claimant could seek damages of up to $250,000. Under the “Track B” process, the claimant was required to establish that USDA’s treatment of his or her loan or loan servicing application was less favorable than the treatment provided to a specifically identified, similarly situated white farmer. The identity of the white farmer could be established by a credible sworn statement based on personal knowledge by an individual who was not a member of the claimant’s family. Once a claim was filed, a neutral arbiter (outside of the federal government) would review the record without a hearing. A finality clause in the Agreement provided that, once the arbiter made a claim determination, there could be no appeal of the determination. The finality clause stated that “Claim Determinations, and any other determinations made under this Non-Judicial Claims Process are final and are not reviewable by the Claims Administrator, the Track A Neutral, the Track B Neutral, the District Court, or any other party or body, judicial or otherwise.”

The plaintiff in the instant case was a farmer, a member of an Indian tribe, and satisfied the criteria for membership in the class. The plaintiff identified two non-family individuals, both members of his tribe, who had knowledge of USDA’s treatment of similarly situated white farmers. These persons worked for the Bureau of Indian Affairs (“BIA”) at the time the plaintiff prepared to submit his claim under Track B, and they agreed to provide sworn declarations, which set forth USDA’s discriminatory acts. The plaintiff’s attorney prepared drafts of these declarations. However, before they could be finalized, updated, and signed by two witnesses, federal government officials instructed the BIA employees not to provide any additional information to the plaintiff, making him unable to submit finalized and signed sworn statements to the arbiter. Instead, he submitted a declaration from his attorney that discussed his unsuccessful attempts to obtain the signed sworn statements from the BIA employees. The declaration attached the unsigned initial draft statements of the BIA employees. The arbiter denied the plaintiff’s claim because he failed to provide a sworn statement that named similarly situated white farmers who received USDA loans or loan servicing that he was denied.

Ultimately, the plaintiff filed a breach of contract claim at the COFC, alleging that the government breached the Agreement and its duty of good faith and fair dealing by preventing the two BIA employees from testifying and providing evidence on behalf of his claim. The COFC dismissed the complaint for lack of jurisdiction because the plaintiff had waived his right to challenge a breach of the Agreement because of the Agreement’s finality clause. The COFC held that, by entering into the Agreement, the plaintiff contracted out any right to judicial review.

On appeal, the Federal Circuit reversed the COFC decision, holding that the Agreement on its face did not bar claims for breach of the Agreement. The Federal Circuit also found that the plaintiff did not request judicial review of the arbiter’s determination, but alleged that the government’s interference with the witnesses constituted a breach of the Agreement. Moreover, even though the Agreement did not specifically contemplate the right to money damages in the event of a breach, the Federal Circuit, citing prior precedent, held that the money-mandating requirement for COFC jurisdiction was satisfied by the presumption that money damages are available for breach of contract with no further inquiry needed.

The Federal Circuit also held that the plaintiff’s complaint sufficiently alleged a breach under two theories and that dismissal for failure to state a claim would not be appropriate. The first theory was that the Agreement specifically provided that the United States would have no role in the claims process and that the government’s actions breached that provision by interfering with the plaintiff’s ability to obtain necessary information for his claim since the two BIA employees were the only living witnesses that could provide the information. The second theory was that the government breached the covenant of good faith and fair dealing when it prevented the two BIA employees from signing, revising, and updating their declarations. Such actions interfered with the plaintiff’s ability to present his case to the arbiter.

The government argued that a breach of the duty of good faith and fair dealing could not be found because the Agreement provided that the United States would have no role in the claims process and that its employees cannot play a role in the process by supplying evidence. However, the Federal Circuit held that, absent explicit language to the contrary, a government employee cannot be prohibited from testifying or giving information in the claims process in a personal capacity. Although Department of the Interior (“DOI”) regulations provide for a general policy that its employees are not allowed to testify, such employees are allowed to testify as private citizens with respect to facts or events not related to the official business of DOI, which they did not secure as a result of their government employment. One witness did not work for BIA when he observed relevant events. The second witness, while employed by BIA at the relevant time, would be testifying to information about USDA, not BIA. While it was not clear whether the second witness obtained the information as a result of his BIA employment, this issue was left for the COFC to determine on remand. In any event, testimony from the first witness would have been sufficient under the Agreement.

The Federal Circuit also rejected the government’s contention that, even if wrongful, the government’s actions were harmless because the actual declarations from the BIA employees would have been insufficient, even if they had been signed. It stated that the arbiter made no such finding with respect to the employees, and even if he had, the declarations would have been revised and updated had the government not prevented them from cooperating. The Federal Circuit also found that the termination of the settlement program itself did not mean that the plaintiffs were without remedy.

This decision should make federal contractors more comfortable bringing lawsuits for breach of settlement agreements. That said, such settlement agreements must still be prepared and negotiated with care to assure that the contractor does not unwittingly sign away its rights to pursue remedies for such breaches.

About the Author: Patrick Rothwell is an associate with PilieroMazza in the Government Contracts Group. He may be reached at prothwell@pilieromazza.com.
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