But whistleblowers won the case as well. The Supreme Court rejected KBR’s interpretation of the FCA’s “first to file” rule, which bars any plaintiff other than the government from bringing a suit related to fraud allegations in a pending FCA case. Citing a split 2014 decision from the District of Columbia U.S. Circuit Court of Appeals in U.S. ex rel Shea v. Cellco, KBR had argued that Congress meant “first filed” when it used the word “pending” in the FCA statute. According to KBR and its business-friendly amici – which groused to the Supreme Court about serial complaints by avaricious whistleblowers – a first-filed FCA suit remains pending for the purposes of the first-to-file bar even after the case has been dismissed.

If the justices had agreed with KBR and the D.C. Circuit, the filing of one FCA case would forever preclude whistleblowers from bringing related claims, regardless of why the original case was tossed. The court, however, said KBR’s “very peculiar” definition of pending distorted both the word’s ordinary meaning and Congress’ intention of deterring fraud. (The opinion, written by Justice Samuel Alito, pointed out that under KBR’s analysis, 1803′s Marbury v. Madison is pending, as is, for that matter, the trial of Socrates.)

Justice Alito said that in the KBR case, for instance, the first FCA suit to accuse the company of overbilling for water purification was dismissed for failure to prosecute. It just doesn’t make sense, he said, to assume that Congress meant for “the abandonment of an earlier suit to bar a later potentially successful suit that might result in a large recovery for the government.” The court said it would hew to the conventional meaning of pending: An FCA suit, the opinion concluded, ceases to be pending when it is dismissed.

That holding, said whistleblower lawyer Colette Matzzie of Phillips & Cohen, is a “tremendous victory.” It’s quite common in FCA litigation, she said, for dismissed first suits to be followed by new complaints that flesh out or expand upon the original allegations. The Supreme Court’s decision will permit the government to continue to collect in such cases, she said.

Matzzie and plaintiffs’ lawyer Mark Hurt, who is facing a pending petition for certiorari by Purdue Pharma in another case involving the FCA’s first-to-file rule, said whistleblowers will still have to show their allegations are not based on publicly disclosed information, which includes previous complaints. And the Supreme Court opinion won’t shield follow-on plaintiffs from collateral estoppel defenses in cases in which judges have dismissed first-filed suits on the merits. But considering the potentially disastrous consequences for whistleblowers if the court had sided with KBR, Matzzie and Hurt said, the opinion is great news.

I reached out to lawyers on both sides of the Cellco FCA case in which the D.C. Circuit adopted the broad reading of the first-to-file rule that the Supreme Court rejected in Tuesday’s KBR decision. (Cellco does business as Verizon Wireless.) The justices have scheduled the Cellco case for conference tomorrow. Neither whistleblower counsel at London & Mead nor Cellco lawyers at Wilmer Cutler Pickering Hale & Dorr got back to me.

By Alison Frankel — Follow me on Twitter

The underlying dispute stemmed from a cost-reimbursement contract between KBR and the DOD, under which KBR was required to provide dining services for up to 50,000 troops in support of military operations in Iraq. As the military action escalated, however, the dining service requirements quickly and dramatically expanded to supporting 200,000 soldiers at 56 sites throughout Iraq.

After a “disastrous” attempt to self-perform certain portions of the expanded contract, KBR engaged a subcontractor, Tamimi Global Company, (“Tamimi”) to provide dining services at one of the Army camps and sought payment for those subcontractor services. The Defense Contract Audit Agency (“DCAA”) subsequently audited KBR and determined that KBR incurred $41 million in unreasonable subcontractor costs between July and December 2004. Acting on DCAA’s audit report, the contracting officer then withheld $41 million from payment to KBR. KBR filed a claim against the agency, which the Government denied, and then filed its claim appeal with the COFC. The COFC denied KBR‘s claim, adopting DCAA’s position that the costs were unreasonable because KBR did not engage in effective bargaining with Tamimi. The Court noted that although KBR‘s failed attempt at self-performance undermined its negotiating position, that complication did not mitigate KBR‘s failure or inability to negotiate better service rates with Tamimi.

Before the Federal Circuit, KBR argued that DCAA, the contracting agency, and the COFC impermissibly second-guessed KBR‘s business judgment in a wartime environment, contending that contractor’s cost of performance should be presumed reasonable unless the result of “gross misconduct,” “arbitrary action,” or “a clear abuse of discretion.” In substance, KBR advocated for application of the “business judgment rule” (a fundamental corporate law doctrine) to cost reasonableness determinations. The Federal Circuit rejected KBR‘s position, noting that earlier precedent deferring to contractor cost judgments does not outweigh the regulatory flexibility embodied in the cost principles contained in Federal Acquisition Regulation Part 31.

Now that the Supreme Court has denied certiorari and the Federal Circuit’s decision is final, contractors, subcontractors, accountants, auditors, and counsel must adapt to the newly recognized regulatory discretion held by all agency contracting personnel who are called upon to make cost reasonableness determinations. A few important aspects of theKBR decision may prove helpful to that adaptation process:

Documentation. Well-documented subcontractor price negotiations and flowdown provisions. KBR‘s exposure resulted from subcontract terms negotiated in and around the exigencies of a war zone at a time when performance was urgently needed. These unique circumstances left KBR without a comparable private marketplace benchmark for establishing cost reasonableness. KBR was forced to rely solely on its record of subcontract negotiations and the subcontract itself to establish reasonableness. Taking KBR‘s lessons learned to heart, cost-reimbursement contractors that are considering subcontracting should (i) look early (even at the time of proposal preparation) for a commercial market benchmark against which to make outsourcing price comparisons, and where no such counterpart exists, (ii) develop and pursue a robust plan for conducting and documenting subcontract negotiations, to include specially tailored clauses that enable the contractor to claw back costs paid and subsequently disallowed by the agency.

Burden of Proof. KBR I preserves the fundamental tenet that the burden to prove cost reasonableness always falls on the contractor. To meet that burden, contractors performing on large complex cost reimbursement contracts should expect and prepare for cost controversies and claims with the Government by meticulously documenting costs in order to justify their claim.

No Business Judgment Rule. The KBR I court took a dim view of KBR‘s argument that the costs were not unreasonable and were not the result of gross negligence. 

Second-Guessing — the New Standard. Cost-reimbursement contracts are now even more susceptible to agency second-guessing. Contractors should consider stepping up their administrative efforts to justify and document costs to mitigate the risk of material second-guessing during audit and closeout actions.