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.

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.