Earlier this year, we posted regarding government fraud counterclaims in Court of Federal Claims (COFC) cases (see link to that post, here, and a link to our West’s Briefing Paper on the subject, here). Soon thereafter, the COFC issued a decision once again addressing such counterclaims, see Railway Logistics International v. United States, — Fed. Cl. –, 2012 WL 171895 (Jan. 17, 2012). Railway Logistics offers contractors a powerful lesson in how not to prepare and litigate a claim submitted to the government pursuant to the Contract Disputes Act (CDA), 41 U.S.C. §§ 7101-7109.
In that case, the government awarded two contracts to Railway Logistics International (RLI) to provide materials for the rehabilitation of the Iraqi Republic Railway. After repeatedly missing contractual obligations and deadlines, the government terminated the contracts for convenience. In response to the termination, RLI submitted a certified claim for equitable adjustments and costs totaling nearly $6.5 million, approximately $2.4 million of which was based upon alleged subcontractor and vendor invoices, with the remainder due to the government’s alleged delays and changes. The sole support for RLI’s certified claim was a cost spreadsheet RLI had generated.
The government not only disclaimed responsibility for any of RLI’s damages, but also filed counterclaims against RLI, pursuant to the CDA’s fraud provision, 41 U.S.C. § 7103(c)(2), the False Claims Act, and the Special Plea in Fraud (also known as Forfeiture of Fraudulent Claims Act), 28 U.S.C.§ 2514. The government alleged that RLI knowingly submitted its CDA claim containing overstatements of costs. RLI, in response, contended that “at most, perhaps it could be charged with poor record keeping.”
The court flatly rejected RLI’s story, explaining that although RLI’s revised damages claim “totaled less than $1 million[,]” RLI presented a “certified claim to the contracting officer for over $6 million, and swore that the amount of the claim was what” the government owed RLI. In ruling for the government on all of its counterclaims, the court noted that RLI had “retreated” from the spreadsheet RLI allegedly prepared to support its claim, withdrawing, among other damages items, a claim for $3 million in lost business. Indeed, RLI seemingly was all but compelled to do so because “the spreadsheet was replete with exaggerated or fabricated figures” and costs for which “[p]laintiff provided no support.” In light of the certified claim, the court similarly rejected RLI’s proffered defense that the spreadsheet was intended to be simply “a ‘rough estimate'” of damages. Finally, the court observed that plaintiff “had no support” for many of the factual allegations and legal theories upon which plaintiff’s complaint was based.
Aside from actually possessing evidence to support a CDA claim, the lesson from this case is clear: contractors should scrub their CDA claims for factually (and legally) unsupportable items before submitting them to the contracting officer, and certainly prior to the filing of a complaint in the COFC to appeal a contracting officer’s final decision. Merely declining to pursue certain claim items in litigation may raise red flags, so ideally contractors should consult with counsel during the claim preparation process. The fact is that the government appears prepared to pursue fraud claims based upon abandoned CDA claim items, on the theory that such items likely are baseless, having been included solely for the purposes of negotiation – a particularly dangerous practice in light of Daewoo Eng’g & Constr. Co. v. United States, 557 F.3d 1332 (Fed. Cir. 2009).
Finally, despite the differences between the government’s burden of proof with respect to the Special Plea in Fraud (clear and convincing evidence), on the one hand, and the CDA’s fraud provision and the FCA (preponderance of evidence), on the other, we noted in the aforementioned Briefing Paper that “the Federal Circuit clearly has held that where the Government demonstrates a violation of the CDA’s fraud provision, the Government a fortiori, meets its burden under the FCA.” When the Government’s Best Defense Is a Good Offense: Litigating Fraud and Other Counterclaim Cases Before the U.S. Court of Federal Claims, Briefing Papers No. 11-12 (November 2011), at 9 (concluding that “the Federal Circuit implicitly has held that evidence sufficient to prove a CDA violation also is sufficient to sustain a forfeiture under the Special Plea in Fraud”). The COFC, in Railway Logistics, appears to have continued that trend. While explicitly distinguishing between the applicable burdens of proof, the court held that RLI’s “liability is clear by any standard” where the CDA “claim [was] based upon overestimations of costs” and where “[s]ubstantial parts of the claim cannot be supported.” In that regard, the court observed that the “[g]overnment limited its counterclaims to amounts that are directly contrary to invoices in evidence and costs that are obviously and grossly inflated.” The court thus ordered RLI’s claim forfeited – that is, “[a]ny amount of RLI’s claim that might have been valid” – based upon “[s]tatements contained in the spreadsheet alone[,]” which the court held to constitute clear and convincing evidence of fraud in violation of 28 U.S.C. § 2514.