Something For Everyone: The Court of Federal Claims Issues Decision in Long Running, Complex Government Contracts Fraud Case
In Veridyne Corp. v. United States, — Fed. Cl. — , 2012 WL 2673091 (July 6, 2012), the Court of Federal Claims (COFC) resolved a long running government contracts dispute involving an agency of the Department of Transportation (the Maritime Administration (MARAD)), and Veridyne, the plaintiff contractor. A must-read for anyone practicing before the COFC, the opinion deals with government counterclaims not only for common law fraud, but also pursuant to the False Claims Act, the Forfeiture of Fraudulent Claims Act (also known as the special plea in fraud), 28 U.S.C. § 2514, and the fraud provision of the Contract Dispute Act (CDA), 41 U.S.C. § 7103(c)(2).
Veridyne and MARAD executed a contract modification extending the life of Veridyne’s contract, which originally was awarded through the Small Business Administration’s 8(a) program. The modification had to satisfy a $3 million ceiling in order for MARAD to continue using Veridyne without opening the contract work to competition. Ultimately, believing that Veridyne’s proposal to obtain the modification was fraudulent, MARAD issued a stop-work order and refused to pay Veridyne’s invoices. Veridyne, in turn, submitted a certified CDA claim seeking payment for fully performed work, and the case proceeded to trial not only on Veridyne’s claims, but also on the government’s counterclaims. The government’s counterclaims sought all money paid under the contract, the forfeiture of plaintiff’s claims, statutory penalties and damages for false invoices, and for damages as a result of plaintiff’s inability to support portions of its CDA claims. In particular, the government alleged not only that that the modification was void ab initio because Veridyne obtained the modification with a fraudulent proposal (designed to stay just below the $3 million threshold, while knowing full well that the contract payments would exceed that amount), but also that Veridyne sought payment from MARAD in an amount in excess of what plaintiff knew was due to it.
Notwithstanding that the modification’s estimated costs and award fee pools totaled $2,999,948 – i.e., just under the $3 million threshold – the court rejected the government’s common law fraud claim, citing a “mountain of record evidence” in support of the finding that “it is inconceivable that MARAD justifiably relied on Veridyne’s $3 million proposal.” Holding that “[a]bsent justifiable reliance . . .[,] the record cannot support a finding that [the modification] was void ab initio[,]” the court determined that Veridyne was entitled to compensation for services rendered (to the extent of available funding in the applicable work orders).
With respect to the government’s remaining counterclaims, however, the government largely prevailed (with the exception that Veridyne was saved from a total forfeiture of its claims).
First, the court rejected Veridyne’s advice of counsel defense, finding that “Veridyne cannot escape the fact that it knew its submitted claims were false and intended to deceive MARAD into paying [plaintiff’s] claims” and invoices. Although the court explained that the amount awarded to Veridyne ordinarily would be subject to forfeiture, the court nevertheless held that, “to the extent that Veridyne performed services and is entitled to be compensated for its performance, recovery in quantum meruit is warranted” and “applies to negate the net monetary penalty represented by the statutory forfeiture.”
Second, the court rejected Veridyne’s reliance on a line of cases, including United States ex rel. Hagood v. Sonoma County Water Agency, 929 F.2d 1416 (9th Cir. 1991), that “stand for the proposition that government knowledge can vitiate FCA liability, depending on the circumstances.” The court viewed those opinions as incorrectly “engrafting on the FCA a requirement that the agency’s knowledge can vitiate the requisite knowledge of the claimant.” Although perhaps somewhat in tension with the court’s ruling on the common law fraud, the court held that “[b]ecause the proposal leading to award of [the] modification itself was fraudulent, all invoices submitted thereunder are tainted by that fraud.” The court assessed a maximum penalty for each of 127 invoices Veridyne submitted under the modification.
Finally, the court held that Veridyne was liable pursuant to the CDA’s fraud provision for failing to support nearly $600,000 in claimed amounts, which included overstated overhead and unincurred expenses.
This case illustrates that the Justice Department will continue to pursue fraud remedies against contractors aggressively and will do so even where some government officials may have been well aware of a contractor’s conduct only later characterized as fraudulent by an agency or DOJ. Contractors, particularly in the wake of Daewoo Eng’g & Constr. Co. v. United States, 557 F.3d 1332 (Fed. Cir. 2009), must continue to be extra-vigilant regarding the factual and legal bases of their CDA claims. [Note: This post’s author was involved in the early stages of this case while at the DOJ. The information contained herein, however, is based solely on publicly available information.]
Good Enough For Government Work – Court of Federal Claims Rejects Government’s FCA Challenge To Contractor’s Estimates
In Grand Acadian v. United States, — Fed. Cl. –, 2012 WL 1882831 (May 23, 2012), the government filed its usual trio of fraud-related counterclaims against the plaintiff contractor, Grand Acadian, Inc., pursuant to the FCA, the Forfeiture of Fraudulent Claims Act, and the fraud provision of the Contract Disputes Act (CDA). Grand Acadian’s suit against the government arose from a cancelled construction project on property the government had leased from Grand Acadian to serve as a location for emergency housing for victims of Hurricanes Katrina and Rita. Following the government’s termination of the lease, Grand Acadian submitted an approximately $2.8 million settlement proposal to the government. When the parties failed to reach an agreement, Grand Acadian submitted two certified CDA claims to the contracting officer – seeking $5.7 million in an initial claim and $5.75 million in a second, revised claim – for alleged necessary repairs and restoration of the property. Grand Acadian provided no supporting documentation for its first claim; similarly, the revised claim contained no explanation regarding why Grand Acadian’s certified claim cost to replace soil was twice as high as the cost in the settlement proposal.
The government’s fraud counterclaims were based primarily on alleged misrepresentations of material fact in Grand Acadian’s CDA claims concerning the pre-lease conditions of the property. With respect to each of the alleged misrepresentations, the Court of Federal Claims (COFC) held that the government failed to “supply proof sufficient to carry the government’s evidentiary burden.” For example, with respect to the pre-lease condition of the property’s trees, the court credited the testimony of the contractor’s president, who had “estimated – but did not count – the number of trees standing” on the property in question. The COFC agreed with the plaintiff that the company’s estimate “even if inaccurate – was not unreasonable.” Although the COFC entered judgment for the government on Grand Acadian’s claims, the COFC also rejected all of the government’s counterclaims, explaining that “the government has not carried its burden to establish the requisite mental state” with regard to the plaintiff’s CDA claims. This case demonstrates that while a contractor certainly can get into trouble for submitting baseless “estimates” – see, e.g., Daewoo Engineering and Const. Co., Ltd. v. United States, 557 F.3d 1332 (Fed. Cir. 2009) –the COFC will hold the government to its burden of proof, so that contractors need not fear utilizing reasonable, good faith estimates to calculate claimed damages.
D.C. Circuit Decision May Throw Wrench Into <i>Qui Tam</i> Settlement Efforts
We recently posted here regarding a Tenth Circuit decision affirming the government’s unilateral dismissal of a qui tam complaint – before it was served on the defendant – over the objection of the relators. In that case, the Tenth Circuit noted a circuit split regarding the standards governing dismissal pursuant to 31 U.S.C. § 3730(c)(2)(A), with the D.C. Circuit holding that the government has a virtually unfettered right to dismiss a case pursuant to that statutory provision. On April 20, 2012, the D.C. Circuit issued another decision on the subject, Océ N.V. v. Schweizer, — F.3d –, 2012 WL 1372219 (D.C. Cir. April 20, 2012), this time holding that the court’s expansive view of the government’s power pursuant to § 3730(c)(2)(A) does not extend to § 3730(c)(2)(B), which requires a district court to determine “after a hearing, [whether] the proposed settlement is fair, adequate, and reasonable under all the circumstances.”
In Océ, relator Schweizer sued her former employer for various FCA violations related to GSA contract provisions and regulations governing product pricing and country-of-origin requirements. She also sued Océ based upon the FCA’s retaliation provisions, § 3730(h). The government moved to dismiss the qui tam claims based upon a settlement agreement the government reached with Océ. The district court granted the motion over the relator’s objection.
On appeal, the relator argued that the government may not invoke § 3730(c)(2)(A) because the government never intervened in the case. The D.C. Circuit rejected that argument because the government’s intervention is necessary only if it wishes to proceed with the action. Here, however, “the government did not seek to proceed with the qui tam portion of the case; it sought to end it.” Nevertheless, the court held that “[t]he settlement agreement here falls squarely within § 3730(c)(2)(B)” because that provision covers dismissals arising from a settlement, whereas § 3730(c)(2)(A) covers unilateral dismissals. The court thus rejected the government’s position that because it may unilaterally dismiss a complaint pursuant to § 3730(c)(2)(A) – i.e., absent a hearing and judicial approval – the government may similarly dismiss a qui tam complaint without judicial approval of the settlement upon which the dismissal is based. The D.C. Circuit explained that “[t]hat the language of § 3730(c)(2)(B) leaves no space for [the government’s] interpretation” and that “allowing dismissal without judicial review of the settlement would render § 3730(c)(2)(B) a nullity and thus contravene” the canon of statutory construction disfavoring any interpretation which renders a provision meaningless or superfluous.
The D.C. Circuit also rejected Océ’s argument that § 3730(c)(2)(B) violated the separation of powers and is therefore unconstitutional, and also reversed the district court’s grant of summary judgment to Océ on the relator’s retaliation claims.
Railway Logistics How not to prepare and litigate a claim under the Contract Disputes Act
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.
Litigating Fraud And Other Counterclaim Cases Before the U.S. Court of Federal Claims
“When you strike at a King, you must kill him.”
— Ralph Waldo Emerson
FCA cases are not limited to qui tam actions and federal district courts. Some of the leading procurement fraud jurisprudence arises from cases decided by the United States Court of Federal Claims (COFC) and its appellate court, the Court of Appeals for the Federal Circuit. See, e.g., Daewoo Eng’g & Constr. Co. v. United States, 557 F.3d 1332 (Fed. Cir. 2009); Commercial Contractors, Inc. v. United States, 154 F.3d 1357 (Fed. Cir. 1998). The COFC possesses exclusive jurisdiction over claims in excess of $10,000 “founded . . . upon any express or implied contract with the United States.” 28 U.S.C. §§ 1346, 1491(a)(1). In such a case, however, the government may pursue monetary counterclaims against a plaintiff contractor based upon just about any cause of action, including fraud-related claims, such as the FCA, the Forfeiture of Fraudulent Claims Act (also known as the special plea in fraud), 28 U.S.C. § 2514, and the fraud provision of the Contract Dispute Act (CDA), 41 U.S.C. § 7103(c)(2). The COFC has jurisdiction over CDA cases pursuant to 28 U.S.C. § 1491(a)(2).
Together, the aforementioned fraud remedies are a powerful weapon in the arsenal of the Department of Justice in defending against contractor claims. In that regard – and consistent with Emerson’s aphorism and the old proverb that when dancing with a bear, you don’t decide when to stop – the government’s assertion of fraud counterclaims may radically alter the settlement position of both parties, if not entirely eliminate any motivation on the part of the government to settle a case. For that reason, contractors and their counsel seeking to sue the government in the COFC must be aware not only of the most salient substantive and procedural issues surrounding fraud counterclaims, but also of the government’s settlement calculus, generally, and in counterclaim cases.
A recently published Briefing Paper authored by Sidley Austin attorney Matthew Solomson – entitled When the Government’s Best Defense is A Good Offense: Litigating Fraud And Other Counterclaim Cases Before the U.S. Court of Federal Claims – addresses basic counterclaim issues with which plaintiffs in the COFC need to be familiar, including, but not limited to: counterclaim initiation and pleading requirements; discovery issues; significant substantive legal issues involving the FCA, the CDA’s fraud provision, and the special plea in fraud; scienter issues; parallel proceeding considerations; and settlement negotiations. The Briefing Paper may be accessed here.
Recent DOD Regulations Increase FCA Liability Risk
The Department of Defense (DoD) recently issued a final regulation, requiring prospective government contractors to represent, as part of their offers, that certain former DOD officials employed by the offeror are in compliance with the post-employment restrictions contained in 18 § U.S.C. 207, 41 U.S.C. §§ 2101–07, 5 CFR parts 2637 and 2641, as well as FAR § 3.104–2. See Defense Federal Acquisition Regulation Supplement: Representation Relating to Compensation of Former DoD Officials (DFARS Case 2010–D020), Final Rule, 76 Fed. Reg. 71,826 (Nov. 18, 2011). Those statutes and regulations are designed to combat the so-called “revolving door” problem of contractors hiring former government employees in order to do business with their former agencies.
Although the new requirement does not change the underlying post-employment restrictions, the new required “representation” opens contractors to greater penalties should they fail to comply. Of course, the point is that should a contractor’s representation prove to be false, the contractor is looking at a possible False Claims Act violation, assuming the requisite scienter is also present. U.S. ex rel. Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370, 376 (4th Cir. 2008) (quoting Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 788 (4th Cir. 1999), for the proposition that “the term ‘false or fraudulent claim’ includes those instances ‘when the contract or extension of government benefit was obtained originally through false statements or fraudulent conduct'”); United States ex rel. Willard v. Humana Health Plan of Texas, Inc., 336 F.3d 375, 384 (5th Cir. 2003) (explaining that FCA liability may be imposed “when the contract under which payment is made was procured by fraud”).
DOD, on the other hand, specifically indicated that it “elected to employ a representation rather than a certification.” 76 Fed. Reg. 71826. In that regard, one comment that DOD received argued that the Clinger-Cohen Act prohibits the creation of contractor certifications that are not required by law. In response, DOD acknowledged that “[t]he Clinger/Cohen Act prohibited the creation of contractor certifications that are not required by law,” but asserted that “[t]he FAR and DFARS regularly employ the distinction between a representation and a certification, and representations have regularly been deemed not subject to the Clinger/Cohen Act ban.” Id. at 71828. Indeed, DOD went so far as to say that the new rule does not require the creation of new compliance systems and additional costs should not be incurred.
There are a number of problems with DOD’s explanations.
First, section 4301(b)(1) of the Clinger-Cohen Act of 1996, P.L. 104-106, amended 41 USC § 425 to restrict the inclusion of nonstatutory certification requirements in the FAR. Federal Acquisition Circular 97-11 explained that this statutory provision “apparently” responded to an industry perception that a “certification” requires a high level of attention within the company, may entail personal accountability of the signing official, and is more likely to be subject to criminal prosecution. 64 Fed. Reg. 10530, 10531 (Mar. 4, 1999). Indeed, prior to the enactment of Public Law 104-106, there were over 100 certifications required by law. See 40 No. 14 Gov’t Contractor ¶ 172. Some of the certifications that were specifically eliminated by the Act include the certification of procurement integrity (§ 4304) and the certification regarding a drug-free workplace (§ 4301(a)). Id.
Contractors, however, may well argue that the representation is, in effect, an invalid certification. There do not appear to be any cases addressing when a representation is really nothing more than a prohibited certification, although the GAO has held, in a bid protest decision, that “[a] certification is ‘the formal assertion in writing of some fact.'” Sea-Land Service, Inc., B- 278404 (February 09, 1998). In that regard, the new representation is made pursuant “to the best of its [i.e., the contractor’s] knowledge or belief.” 76 Fed. Feg. 71827. One comment complained about the vagueness of that phrase. In response, DOD asserted that the meaning of the phrase “is a recognized legal term of art,” but the example DOD cited for that assertion is, ironically, the certification required by the Truth in Negotiations Act. 10 U.S.C. § 2306a(a)(2). And, similar language is found in the Contract Disputes Act’s certification requirement. 41 U.S.C. § 7103(b).
Second, DOD does not even attempt to explain what the practical distinction is between a representation and a certification, which is particularly troubling given DOD’s assertion that “[b]y the terms of the representation, an offeror is prohibited from submitting an offer if it cannot make the representation.” 76 Fed. Feg. 71829 (emphasis added). That statement, of course, is an attempt to use the representation as a hook for False Claim Act liability.
In sum, the entire point of the new regulation is to require offerors to verify their employees’ compliance with existing laws and regulations in order to deter non-compliance. The DOD cannot have it both ways. Either the new the new rule is designed to force contractors to be extra careful regarding how they employ and monitor the employment of former DOD officials, or the rule imposes no particular additional duties or costs – but those possibilities are mutually exclusive.
The bottom line is that a representation employing standard certification language is a distinction without a difference for the purposes of the FCA and, notwithstanding any DOD disclaimers to the contrary, contractors should not be lulled into a false sense of security by the “representation” label.