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Government Contracts

10 July 2013

District Court Finds Mere Failure to Comply with All Contractual Conditions for Services Does Not Necessarily Result In a False Claim

Posted by David Rody and Michael Mann

On June 19, 2013, a district court sitting in the Eastern District of Virginia held in United States ex rel. Badr v. Triple Canopy, Inc., No. 1:11-cv-288, Dkt. #55 (GBL), that “[m]ere failure to comply with all contractual conditions does not necessarily render the billing for those services so deficient or inadequate that the invoice constitutes a false claim under the FCA. Nor does it constitute an incorrect description of services provided to constitute a false statement sufficient to impose FCA liability.” Id. at 1-2. In granting the motion to dismiss of defendant Triple Canopy, Inc. (“TCI”), the court also held that a Relator cannot use allegations of a fraudulent scheme at one location to infer a false claim at another.

TCI was awarded government contracts to provide security services to various military installations overseas, including military bases located in Iraq. Given the nature of the assignment, TCI was required to ensure compliance with U.S. Army standard weapons qualification requirements. The government, as Intervenor, alleged that 332 Ugandan TCI guards arrived for duty, and failed to complete basic skills required before even attempting to qualify on a qualification course. Further, TCI allegedly began to falsify scorecards that were placed in the personnel files of the guards in the event of an inspection. The Relator, a former TCI employee, reported the allegedly fraudulent conduct to TCI’s human resources director, vice president, and general counsel. Later, Relator was allegedly instructed to alter TCI’s scorecards to reflect passing scores for all the guards. Although TCI was not awarded a contract renewal, the government alleged TCI continued to perform other government contracts in Iraq, and the Ugandan unqualified guards were allegedly transferred to other installations in Iraq to perform similar services.

In dismissing the claim, U.S. District Judge Gerald Bruce Lee concluded that because the invoices simply identified the quantity of guards, the price for each, the period of service, and the amount for the services, the invoices, without more, “[did] not contain objectively false statements sufficient to render them false claims for purposes of FCA liability.” Id. at 12. The government sought to analogize under-qualified guards to defective products, but the court dispelled the analogy, noting that “defective goods . . . are materially different from a claim for defective services.” Id. at 15 (emphasis in original). There is still some “inherent value retained in a service that is provided by an unqualified employee compared to a complete inability to use a product that is rendered defective.” Id. (citing U.S. ex rel. Sanchez-Smith v. AHS Tulsa Reg. Med. Ctr., LLC, 754 F. Supp. 2d 1270, 1287 (N.D. Okla. 2010) (rejecting a worthless services theory based upon substandard medical care because some care was provided, even if ultimately below expectations).

The “worthless services” theory did not work here because the government failed to allege “that the TCI guards were entirely deficient so as to render their services worthless.” Id. The Ugandan guards provided a service, although perhaps not fully compliant. The court held that the services must be “entirely devoid of value, or the noncompliance must have caused an injury to the Government such that the guards effectively provided no service at all.” Id. (citing In re Genesis Health Care Ventures, Inc., 112 F. App’x 140, 143 (3d Cir. 2001) (“Case law in the area of ‘worthless services’ under the FCA addresses instances in which either services are literally not provided or the service is so substandard as to be tantamount to no service at all.”). While the failure to receive proper qualification may be a breach of contract action, the government never alleged that TCI presented the qualifications in support of a demand for payment.

Judge Lee also held that a Relator cannot use allegations of a fraudulent scheme at one location involving one contract to create an inference of a false claim at other locations, without personal knowledge, as it would fail Fed. R. Civ. P. 9(b)’s requirement of specificity. The court dismissed all the FCA counts, but granted the government leave to re-plead claims of “breach of contract” and “payment by mistake.”

On July 3, 2013, TCI moved to dismiss the remaining contractual claims pursuant to Fed. R. Civ. P. 12(b)(1), contending that the court lacked subject matter jurisdiction over such disputes pursuant to the Contract Disputes Act, 41 U.S.C. §§ 7101 et seq. See Triple Canopy, Inc., No. 1:11-cv-288 (GBL), Dkt. #57 (E.D. Va. July 3, 2013). A hearing on the motion to dismiss is scheduled for July 26.

— Andrew Soler, a summer associate, provided assistance in the preparation of this post.

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16 May 2013

District Court Allows Retained Overpayment False Claims Act Case To Go Forward

On March 28, 2013, in a reverse False Claims Act case, the United States District Court for the Eastern District of Wisconsin denied Lakeshore Medical Clinic’s motion to dismiss and allowed the relator’s claim to go forward. U.S. ex rel. Keltner v. Lakeshore Med. Clinic, Ltd., No. 11-CV-00892 (E.D. Wis. Mar. 28, 2013). This case shows the increased risk the Fraud Enforcement Recovery Act of 2009 (“FERA”) presents for government contractors, particularly Medicare and Medicaid providers.

Among other changes to the FCA, FERA broadened the scope of the FCA’s reverse false claims provision to encompass retained overpayments. The FCA, as amended by FERA, prohibits “knowingly and improperly avoid[ing] . . . an obligation to pay” the government even without a false statement to conceal the obligation, 31 U.S.C. §372(a)(1)(G), and expansively defines “obligation” to include a duty to pay the government arising “from the retention of any overpayment.” 31 U.S.C. § 3729(b)(3). Knowledge under the FCA is defined broadly as “actual knowledge . . . deliberate ignorance of the truth [or] reckless disregard of the truth.” 31 U.S.C. 3729(b). Thus, government contractors face FCA liability for knowingly or recklessly failing to return a government overpayment of funds.

In Keltner, the relator, a former billing department employee, brought a qui tam suit alleging that the defendant medical group violated the FCA by knowingly submitting false claims to the government and failing to repay government overpayments. The relator claimed that Lakeshore in its annual audits found that two doctors had an upcoding error rate greater than 10%. She further alleged that even though Lakeshore repaid the specific overpayments identified in the sample audits, it did not go back and review other claims by those doctors to repay additional upcoded claims, and Lakeshore later ceased auditing the doctors.

Lakeshore moved to dismiss the complaint arguing that the realtor failed to plead fraud with the particularity required by Rule 9(b). The district court denied this motion and held that the relator “plausibly suggest[ed] that [Lakeshore] acted with reckless disregard for the truth and submitted some false claims.” As to the retained overpayment theory, the court held that the relator sufficiently pled this claim because Lakeshore failed to review additional claims after the audit and by discontinuing the audits going forward. Thus, the court found that Lakeshore “intentionally refused to investigate the possibility that it was overpaid,” and “may have unlawfully avoided an obligation to pay money to the government.”

This case potentially represents an expanded area of liability for healthcare providers and other government contractors under FERA and the FCA. Because knowledge is defined broadly to include reckless disregard, contractors must act quickly if they discover any evidence of government overpayment. Government contractors must be aware of their affirmative burden, follow up on any evidence of overpayment, and repay to the government any overpayments.

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08 May 2013

Fourth Circuit Clarifies “Protected Activities” Under the First Prong of a FCA Retaliation Claim

Posted by Ellyce Cooper and Maureen Soles

A recent Fourth Circuit decision clarifies what constitutes “protected activity” under the anti-retaliation provision of the FCA (31 U.S.C. § 3730(h)(1)). In Glynn v. Edo Corp., 710 F.3d 209 (4th Cir. 2013), the Fourth Circuit affirmed the District Court’s grant of summary judgment dismissing an employee’s retaliation claim. The court held that because plaintiff’s evidence failed to “raise a distinct possibility of a viable FCA action” or prove that any false certification was material, he failed to establish he engaged in “protected activity,” the first of three elements in a FCA retaliation claim.

Dennis Glynn worked as an engineer for Impact Science & Technology (“IST”). IST designs and manufacturers Mobile Multi-Band Jammer systems (“MMBJs”), which jam the frequencies used to detonate IEDs, for the government. Glynn alleged IST terminated him for reporting to the government alleged fraudulent conduct, specifically that IST was “shipping systems that … were putting our troops in jeopardy” and IST had failed to implement a quality assurance plan (“QAP”) as contractually required.

The first element of a retaliation claim under the FCA requires a plaintiff to prove that he “engaged in ‘protected activity’ by acting in furtherance of a qui tam suit.” Glynn, 710 F.3d at 214 (citing Zahodnick v. Int’l Bus. Mach. Corp., 135 F.3d 911, 914 (4th Cir. 1997)). Glynn attempted to satisfy this prong with three theories; the court rejected each theory.

Glynn first argued he engaged in “protected activity” by investigating IST’s alleged fraudulent activity of supplying a substandard product to the government. Although an employee does not need to file an actual qui tam case, the plaintiff must be investigating matters that reasonably could lead to a viable FCA case. Here, the court found that the issue identified by Glynn “was not severe enough in degree to trigger any contractual obligation on IST’s behalf.” The court held that plaintiff failed to offer sufficient evidence that his investigation raised a “distinct possibility of a viable FCA action,” because the product still “met the Government Customer’s standards.” Therefore, Glynn did not engage in protected activity.

Plaintiff next claimed he engaged in “protected activity” when he reported IST’s false certification of compliance with government contracts based on IST’s failure to implement a QAP or to report defects. With regard to the defects, the court applied the same reasoning as to the first theory and found that product improvements did not trigger any reporting requirement. As to the QAP, the court disagreed with the district court’s holding that the “false certification theory was essentially dead on arrival because he never actually received the contracts.” Instead, the court clarified that plaintiff is not required to have “firsthand knowledge of a contract” (i.e. the plaintiff does not have to see the contract itself); circumstantial evidence of a false certification can be sufficient if it raises a distinct possibility of a viable FCA action. But, any false certification must be material. In this case, the failure to implement a QAP was not material because the contractual language relating to the QAP required IST to perform inspections and testing, which the record established IST engaged in at both the modular and systems level. Therefore, any failure to implement a QAP was likely an administrative failure, and not a material false certification.

Finally, the court rejected Glynn’s third theory – that he engaged in “protected activity” by initiating the government investigation – because his complaint failed to “raise a distinct possibility of a viable FCA claim.” Merely “perk[ing] the government’s ears” is not enough to satisfy the “protected activity” prong of the anti-retaliation provision of the FCA.

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06 March 2013

District Court Judge Applies Public-Disclosure Bar to Dismiss FCA <i>Qui Tam</i> Suit With Prejudice

In a case defended by Sidley, a district court in the Central District recently granted a motion to dismiss with prejudice based on the public disclosure bar and, in doing so, clarified several important principles. United States of America, ex rel. Steven Mateski v. Raytheon Co., 2:06-cv-03614-ODW-FMO, Dkt. # 127. The Court recognized that the public-disclosure bar does not require a defendant to establish an exact one-to-one correspondence between public disclosures and allegations in a qui tam complaint. The Court rejected such a “particularity requirement” because the public disclosure bar broadly applies whenever a qui tam complaint rehashes “allegations or transactions” that are “substantially similar” to public disclosures. Slip op. at p. 4. “[P]ublic disclosures need not detail information underlying allegations or transactions so long as they supply enough information for the United States to pursue an investigation.” Id. at p. 6. In addition, the Court affirmed that a defendant need not prove that a qui tam complaint is “solely based upon” public disclosures to defeat jurisdiction – “a qui tam complaint partly based upon publicly disclosed information” is barred as well. Id. at p. 5. Finally, the Court found the relator failed to satisfy the three “independent source” requirements under Ninth Circuit law: (1) he did not “ha[ve] a hand in the public disclosure”; (2) he lacked “direct and independent knowledge” of the alleged fraud; and (3) he had not disclosed the basis of his qui tam allegations to the Government prior to filing the action. Id. pp. 7-9.

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02 October 2012

Second Circuit Adopts Special Damages Calculation For False Claims Submitted To Federal Grant Programs

Posted by Jonathan Cohn and Brian Morrissey

Last month, in United States ex rel. Feldman v. van Gorp., __ F.3d __, 2012 WL 3832087 (2d Cir. Sept. 5, 2012), the Second Circuit joined four other circuits in holding that damages arising from a false claim submitted to a federal grant program may equal the full amount of the grant funds paid to the defendant, and that the traditional “benefit of the bargain” test need not be applied in such cases.

Feldman involved a grant application submitted to the National Institutes of Health (“NIH”) by researchers at Cornell University Medical College. The application proposed a two-year research fellowship program entitled “Neuropsychology of HIV/AIDS” that would train post-doctoral fellows in the neuropsychology of child and adult HIV/AIDS patients. The NIH approved the grant application, along with several subsequent renewal applications. A fellow in the program brought a qui tam suit under the FCA, alleging that the actual fellowship was not what had been advertised in the grant applications. According to the relator’s complaint, faculty members identified in the applications as “Key Personnel” did not contribute in any substantive way to the program, lectures promised in the applications were never delivered, and much of the program’s research had no relation to HIV/AIDS patients at all.

The United States did not intervene, and the relator pursued the litigation on its behalf. The district court entered summary judgment in favor of the United States, and entered damages equal to the full amount of the grants awarded to the defendants. The Second Circuit affirmed.

The FCA provides for treble damages and civil penalties, 31 U.S.C. § 3729(a)(1), but does not specify how damages are to be calculated. In most FCA cases, damages are calculated in the same way as a traditional breach of contract case, using a “benefit of the bargain” analysis in which damages equal the difference between the amount the government paid and the amount it received. See, e.g., United States v. Foster Wheeler Corp., 447 F.2d 100, 102 (2d Cir. 1971). When a false claim relates to a federal grant, however, the government often receives no tangible benefit at all. That was the case here—the grant program was designed to benefit third parties, rather than the government itself.

Nonetheless, the defendants argued that the “benefit of the bargain” calculation should control. Since the fellowship program provided many services promised in the applications, the defendants argued that damages should equal the amount paid by the government minus the value of the services that had been promised, but were not provided. The Second Circuit rejected that argument, refused to apply the benefit of the bargain test, and held that damages should equal the full amount of the grant funds paid. Feldman, 2012 WL 3832087, *9-*10. This required the defendants to surrender the full amount of the grant awards—times three—notwithstanding the fact that the fellowship program provided at least some of the services on which the grant awards were based. The Court held that this result was appropriate because, when a defendant “successfully uses a false claim regarding how a grant will be used in order to obtain the grant, the government has entirely lost its opportunity to award the grant money to a recipient who would have used the money as the government intended.” Id. at *9. In reaching this conclusion, the Second Circuit joined the Fifth, Seventh, Ninth, and D.C. Circuits in holding that the traditional benefit of the bargain test should not apply when the false claim relates to a federal grant or other program from which the government derives no tangible benefit. United States ex rel. Longhi v. United States, 575 F.3d 458, 473 (5th Cir. 2009); United States v. Rogan, 517 F.3d 449, 453 (7th Cir. 2008); United States v. Mackby, 339 F.3d 1013, 1018-19 (9th Cir. 2003); United States v. Science Application Int’l Corp., 626 F.3d 1257, 1279 (D.C. Cir. 2010).

The Second Circuit’s decision in Feldman imposes an especially heavy burden on FCA defendants in federal grant cases, and appears to reflect a growing consensus among the federal courts of appeals that a special damages calculation is necessary in such cases.

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01 October 2012

New York Attorney General Continues Investigation Into Food Service Companies; Settles with Compass Group for $18 million

Posted by </sup>gt;Kristin Graham Koehler and Amy Markopoulos

The New York Attorney General’s Office and Compass Group USA, a foodservice management company, reached a settlement in which Compass Group will pay New York $18 million for illegally retaining rebates from food vendors rather than passing those credits on to New York schools for more than seven years.

According to Attorney General Eric Schneiderman, the settlement with Compass Group requires that it repay almost $3 million to the schools for vendor discounts that by law should have been passed on. Compass Group will also have to pay $15 million in damages and penalties under New York’s False Claims Act.

Part of an ongoing investigation by the Attorney General’s Taxpayer Protection Bureau of food management companies and food distributors doing business with the state, it follows last year’s $1.6 million settlement with the Whitsons companies. The settlement also follows the 2010 settlement of a qui tam lawsuit against foodservice management company, Sodexo. Like Compass Group, Sodexo was charged with illegally pocketing vendor discounts, and in July 2010, agreed to pay $20 million to settle charges. After the Sodexo settlement, the New York Attorney General’s office launched an investigation into rebate practices by Compass Group and other foodservice companies. The Sodexo settlement remains the largest non-Medicaid settlement under the New York False Claims Act.

The Taxpayer Protection Bureau was established by Schneiderman last year to help with fraud recoveries from contractors, who collect about $13 billion annually from state taxpayers and billions more in local government contracts.

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09 August 2012

Ninth Circuit Holds That “Underbidding” Is Actionable Under The FCA

In a case of first impression in the Ninth Circuit, the court held in United States ex rel. Hooper v. Lockheed Martin Corp., __ F.3d __, 2012 WL 3124970 (9th Cir. Aug. 2, 2012) that “false estimates, defined to include fraudulent underbidding in which the bid is not what the defendant actually intends to charge, can be a source of liability under the FCA, assuming that the other elements of an FCA claim are met.” (Id. at *9).

The defendant argued that an allegedly false estimate cannot form the basis of FCA liability, because it is an opinion or prediction that cannot be false within the meaning of the FCA. In reversing the district court’s grant of summary judgment, the Ninth Circuit reasoned that an opinion or estimate “carries with it an implied assertion, not only that the speaker knows no facts which would preclude such an opinion, but that he does know facts which justify it.” (Id. (citations and internal quotations omitted)).

In a passage of the opinion somewhat in tension with its holding – that a bid lower than “what the defendant actually intends to charge” can give rise to FCA liability – the court found the district court erred by requiring evidence of the defendant’s wrongful intent. (Id. at *9). In opposing summary judgment, the relator submitted testimony that the defendants’ employees were instructed to lower their cost estimates without regard to actual costs, and that the defendant “was dishonest in the productivity rates that it used to determine the cost.” (Id.). No evidence appears to have been submitted regarding what the defendant intended to charge. Nevertheless, citing the FCA’s definition of “knowing” to include deliberate ignorance and reckless disregard, the court found this evidence sufficient to prevent summary judgment and require a trial on the merits. (Id.).

In support of its ruling, the Ninth Circuit relied on the Supreme Court’s decision in United States ex rel. Marcus v. Hess, 317 U.S. 537 (1943), which the court interpreted as supporting a “‘fraud-in-the-inducement’ theory of FCA liability.” (2012 WL 3124970 at *8). Thus, this decision will likely be cited as support for all types of “fraud-in-the-inducement” theories of FCA liability, including fraudulent underbidding. Precisely when an ultimately inaccurate cost estimate becomes “false or fraudulent,” however, is not clearly answered by Hooper and will no doubt be the subject of further litigation.

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01 August 2012

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.]

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24 July 2012

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.

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29 March 2012

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.

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