A federal judge in Massachusetts recently ordered the Department of Defense (DoD) to pay $450,447 in attorneys’ fees to the Association of American Universities (AAU), after finding that DoD’s now-defunct “Rate Cap Policy” was not just unlawful, but never substantially justified in the first place. The August 5, 2026, ruling in Association of American Universities v. Department of Defense closes out the indirect cost rate cap fight, which is effectively over: The government has now dropped its appeals in every one of the parallel rate cap cases at NIH, DOE, NSF, and DoD. But the reasoning behind the fee award has less to do with indirect costs than with a specific way agencies get into fee trouble, a pattern already showing up in the next wave of procurement and grant disputes.
DoD’s Unlawful Rate Cap Policy Overturned — AAU Recovered EAJA Fees
DoD’s Rate Cap Policy, issued through a May 2025 memo from Secretary of Defense Pete Hegseth and a June 2025 memo from Under Secretary Emil Michael, directed DoD components to cap indirect cost rates at 15% on new research assistance awards to institutions of higher education, and to apply the same cap to existing awards through renegotiation or termination and reissuance. The court vacated the policy in October 2025 as contrary to regulation, in excess of DoD’s statutory authority, and arbitrary and capricious. DoD appealed, then voluntarily dismissed that appeal in early 2026. On August 5, 2026, the court awarded AAU $450,447 in fees under the Equal Access to Justice Act (EAJA), 28 U.S.C. § 2412, finding that DoD’s position was never substantially justified.
The “Ostrich” Rule
EAJA lets a prevailing party recover fees from the government unless the government’s position was “substantially justified,” a standard that ordinarily gives agencies real room to be wrong and still avoid fee liability. What stripped DoD of that room here wasn’t the merits of the rate cap itself; it was how DoD got there. DoD built its policy on two nearly identical rate cap policies from NIH and the Department of Energy, without ever acknowledging that federal courts had already enjoined both as unlawful before DoD’s own memos were issued. The court did not mince words: “The ostrich burying his head in the sand is manifestly unreasonable.” The opinion treats an agency’s failure to grapple with directly adverse precedent on a nearly identical policy as “an independent breakdown all its own,” separate from whatever merits problems the policy has. It also closed the door on fixing that failure after the fact: Post-hoc justifications offered during litigation don’t count, only what the administrative record actually shows at the time the agency acted.
The rule the court applied is broader than indirect costs. When an agency adopts a policy that mirrors something a court has already rejected, and the administrative record doesn’t show the agency engaged with that ruling, it has built itself an EAJA problem before the case is even filed.
Why This Travels Beyond Indirect Costs
The indirect cost fights are done, but the underlying fact pattern, an agency moving quickly on a directive that resembles something already struck down without addressing the precedent, is a recurring feature of the current regulatory environment, not a one-off tied to research funding. It is already surfacing in live disputes. A coalition of 20 states and the District of Columbia is challenging the FAR Council’s April 2026 memorandum and related agency class deviations implementing the federal contractor DEI executive order, arguing the agencies bypassed required notice-and-comment procedures and adopted contract terms so vague as to be arbitrary and capricious (Maryland v. Hegseth, D. Md., filed June 10, 2026). Grant recipients have separately pushed back on agency terminations of existing awards for failing to align with new administration priorities that postdate the award itself. The subject matter differs, but the vulnerability is the same: agencies moving through memo, deviation, or directive rather than reasoned process, on ground the courts have already covered.
For any contractor or grant recipient evaluating whether to challenge a new agency policy, directive, or termination decision, the DoD fee ruling supplies a concrete diagnostic worth raising early, in a comment letter, protest, or complaint, and worth raising again in a fee petition if the challenge succeeds: Has this agency, or a sister agency, already lost on substantially the same theory, and does the administrative record show the agency engaged with that loss? If the answer is no, the exposure runs beyond vacatur to the agency’s own litigation budget.
Coalition and Trade Association Fee Recovery
The ruling also matters to anyone litigating through a trade association or a coalition of members with mixed size and resources, a structure common well beyond higher education. DoD argued that because AAU’s university members are large, well-resourced institutions, some individually ineligible for EAJA fees on their own account, an award to AAU was inappropriate. The court rejected that outright: An association’s own EAJA eligibility turns on the association’s finances and employee count, not its members’ eligibility. The court also held that funding litigation through supplemental member dues doesn’t disqualify an association, and treated the other, EAJA-ineligible co-plaintiffs as merely nominal participants since AAU alone directed the litigation and paid the bills. For any coalition, whether a trade group, an industry association, or a group of contractors banding together against a shared agency policy, structuring the case so an EAJA-eligible entity is clearly the real party in interest preserves fee recovery even when larger, ineligible members are also named plaintiffs.
The Bigger Picture
Indirect cost caps are gone as a live issue, but the ruling’s value to government contractors and grant recipients isn’t tied to that subject matter. It offers a working diagnostic for the “ostrich” pattern, copying an already-rejected policy without addressing the rejection, that is very much alive in this administration’s approach to procurement rules and grant terminations, plus a playbook for how coalitions preserve fee recovery and how billing discipline determines how much of that recovery survives.
For contractors and grant recipients evaluating whether to challenge an agency policy, directive, or termination decision, and weighing whether a fee petition is worth the effort if they win, the case is a useful data point wherever it applies: Documenting an agency’s failure to grapple with adverse precedent pays off twice, first on the merits and again at the fee-recovery stage.
If you have any questions about the foregoing or require assistance, please do not hesitate to contact Aron Beezley or Nathaniel Greeson.