Feb 222017

DC Circuit Affirms Dismissal of FCA Claim Based On Insufficient Evidence of Materiality

Scott D. Stein
, ,

In United States ex rel. McBride et al. v. Halliburton Co. et al., No. 15-7144, 2017 WL 655439 (D.C. Cir. Feb. 17, 2017), the D.C. Circuit affirmed a district court’s summary judgment in favor of several FCA defendants because the Relator failed to show their alleged misrepresentation was “material to the Government’s decision to pay,” as required by the Supreme Court’s decision in Escobar.

KBR was contracted by the U.S. Army to provide “morale, welfare, and recreation (‘MWR’) services” to troops serving in the Iraq war. As part of its “MWR” services, KBR maintained “recreation centers where U.S. troops could exercise, play games, watch television, and use the internet, among other things.” The Army reimbursed KBR for its actual costs and a “base fee of 1% of the pre-determined estimated costs of performing the services[.]” A discretionary “award fee” could also be paid to KBR “based upon better than average performance.”

The Relator was a former KBR employee who signed in troops to the recreation centers and created reports using headcount data. She filed a qui tam action alleging that KBR inflated its headcount data and “failed to disclose violations of its obligations to maintain accurate data to support its costs, and as such, rendered its claims impliedly false.” KBR’s contractual obligations did not require headcount data to be maintained by KBR (or produced to the Government). However, the Relator pointed to a federal regulation that required costs be “reasonable” and substantiated by “supporting documentation.” She argued that, by submitting inflated headcount data, “KBR deprived the Government of the opportunity to examine records in order to determine the reasonableness, or allowability of the costs.”

The D.C. Circuit rejected the Relator’s theory of liability because she could not support her “assumption” that “accurate headcount data was relevant to determining the reasonableness of costs.” (emphasis added). KBR was not required to track headcount data but, apparently, “voluntarily undertook to track this data and, at times, provided it to the Government.” The Army’s witnesses admitted that “headcount data (false or not) had no bearing on costs billed to the Government, and that there was no indication the data affected award fee decisions.” And one government official’s “speculative statement” that “the Government might have had the ‘option to decline to pay’” was not enough to sustain the Relator’s burden to satisfy the “rigorous” and “demanding” materiality standard under the FCA.

Employing “the benefit of hindsight,” the Court refused to “ignore what actually occurred[.]” The Government “investigated [the Relator’s] allegations and did not disallow any charged costs.” In fact, “even after the Government learned of the allegations,” it continued to award KBR “an award fee for exceptional performance[.]” The Court, quoting Escobar, considered this fact to be “very strong evidence” that the allegedly inflated headcount data was immaterial to the Government’s payment decisions.  This ruling should be helpful in future cases to rebut DOJ’s frequent argument post-Escobar that lack of government action (so-called “outcome materiality”) is not relevant in determining whether the defendant’s actions were material to payment decisions.

A copy of the court’s opinion can be found here.

Scott D. Stein

Chicago

sstein@sidley.com

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