Northrop Grumman Gets Schooled on Anti-Assignments Act
Northrop Grumman Computing Systems, a subsidiary of aerospace/defense giant Northrop Grumman, brought suit in the U.S. Court of Federal Claims, arguing that the Department of Homeland Security, Bureau of Immigration and Customs Enforcement (ICE) breached its contract when it failed to exercise priced options under an ID/IQ contract’s Delivery Order.
According to Judge Allegra’s decision, the Delivery Order required Northrop to “lease the Oakley software to ICE and perform specific support services for a one-year base period in return for payment of $900,000, with three one-year options at $800,186 per option year—for a total contract price of $3,597,558.” Northrop delivered the software to ICE in October, 2004, and received payment of $900,000. A year later, on September 30, 2005, ICE told Northrop that it would not be exercising the first option year because it lacked sufficient funds.
Northrop filed suit under the Contract Disputes Act, alleging various actions or inactions on behalf of the Government, including failure to use its best efforts to obtain funding, failure to reserve appropriate funding, and replacing the software with another piece of software performing the same function—all of which (Northrop alleged) violated its contract with ICE.
What makes this case a bit more interesting than your run-of-the-mill contract dispute is that Northrop assigned its receivable to a third party—ESCgov. ESCgov paid Northrop $3,296,093 in return for “any payments [Northrop Grumman] received under the Delivery Order.” And then ESCgov turned around and assigned its receivable to “Citizens Leasing Corporation, n/k/a RBS Citizens, N.A. (Citizens), in exchange for $3,325,252.16.” As Judge Allegra noted, “neither plaintiff, ESCgov, nor Citizens ever notified ICE of these assignments.”
The Government had a problem with this.
The Government moved “to dismiss for lack of jurisdiction pursuant to RCFC 12(b)(1), asserting that Northrop had submitted a claim to the contracting officer that failed to provide adequate notice of the nature of the claim and to reveal that the claim was for the losses of a third party.”
As Judge Allegra stated—
[The Government] argues that this claim was deficient because it failed to reveal that Northrop had assigned its rights under the contract to ESCgov, which, in turn, had assigned those rights to Citizens. Defendant asseverates that Northrop should have revealed that it was seeking damages on behalf of a second-level assignee. Indeed, defendant questions whether, after the assignments, Northrop remained the proper party to file such a claim under the contract.
(Before we go on, how cool is that word “asseverate”? We had to look it up to understand it mean “earnestly assert”.)
The Judge determined that Northrop was, indeed, the proper party to file the claim. However, he was less kind to Northrop with regards to its assignment. He wrote—
There is little doubt that, as in Beaconwear, Northrop’s assignment here ran afoul of 31 U.S.C. § 3727. While that section allows for assignments to a ‘financing institution of money due or to become due under a contract,’ 31 U.S.C. § 3727(c), and ESCgov arguably qualifies as such an institution, Northrop admits that it did not notify defendant [the Government] of its assignment, as is required by the statute. See 31 U.S.C. § 3727(c)(3); Uniroyal, Inc. v. United States, 454 F.2d 1394, 1396 (Ct. Cl. 1972). Accordingly, the assignment of Northrop’s claims under the ICE contract was null and void, as against the United States.
[Emphasis added.] So because Northrop never notified ICE that it was assigning its contract interests to ESCgov, that assignment was voided—as was ESCgov’s subsequent assignment to Citizens. But that outcome did not necessarily invalidate Northrop’s claim against ICE under the CDA. But then the Judge asked whether Northrop’s concealment of the information violated the claim requirements of the CDA. He concluded that Northrop’s failure to notify the Contracting Officer of the assignment(s) did violate a required claim element and thus Northrop’s claim failed. He wrote, “allowing Northrop – or any other contractor, for that matter – to withhold the fact that it has assigned its claim against defendant not only prevents the contracting officer from analyzing whether the claimant has truly suffered damages, but might prejudice defendant’s ability to mount a defense to the claim.”
Judge Allegra dismissed Northrop’s claim, and concluded by writing—
In sum, the court finds that Northrop’s putative claim did not ‘contain ‘a clear and unequivocal statement that [gave] the contracting officer adequate notice of the basis’’ of its claim. … At the least, Northrop needed to reveal that it had assigned its claim to a third party and was pursuing this matter as a sponsor. Revealing these facts was important, not only to alert the contracting officer to the potential application of the Anti-Assignment Act and Severin doctrine, but also to put him on notice as to the possible relevancy of a host of other issues that have been associated with sponsored or ‘pass-through’ claims. Northrop did not have the right to keep these facts in pectore. For the court to rule otherwise risks converting the CDA claims process into a high-stakes game of cat and mouse, in which some contractors might hope to catch the contracting officer unawares. Those inclined to forgive such gamesmanship in conferring more latitude upon CDA claimants would be well advised to remember that the filing of a claim is not merely a prerequisite to suit – a way-station along the path to the courthouse – but, rather, a current demand ‘for the payment of money in a sum certain.’ 48 C.F.R. § 2.101. In fact, Congress created the CDA claims process with the expectation that the wide majority of claims would be resolved by the contracting officer and go no further. Consistent with that intent, a CDA claim ought to put the contracting officer on notice of all critical operative facts, lest a claim that should be denied be granted (or vice-versa). And that means that such a claim ought to reveal that it is only being sponsored by the original contractor.
Before we leave this topic, we wanted to direct interested readers to a discussion of the Anti-Assignments Act over in this Court of Appeals (Federal Circuit) decision. In the matter of Fireman’s Fund Insurance Company v. England, the Court wrote in 2002—
What is commonly called the Anti-Assignment Act consists of two statutory provisions. Title 41 of the United States Code, Section 15(a) (2000) (which deals with ‘Public Contracts’) provides that ‘[n]o contract ․ or any interest therein, shall be transferred by the party to whom such contract ․ is given to any other party, and any such transfer shall cause the annulment of the contract or order transferred, so far as the United States is concerned.’ Subsection (b) of that provision states that ‘[t]he provisions of subsection (a) ․ shall not apply in any case in which the moneys due or to become due from the United States or from any agency or department thereof ․ are assigned to a bank, trust company, or other financing institution, including any Federal lending agency.’
Title 31 of the United States Code, Section 3727(a)(1), (b) (2000) (which deals with ‘Money and Finance’) provides that an ‘assignment of any part of a claim against the United States Government or of an interest in the claim ․ may be made only after a claim is allowed, the amount of the claim is decided, and a warrant for payment of the claim has been issued.’ Subsection (c) makes subsection (b) inapplicable ‘to an assignment to a financing institution of money due or to become due under a contract’ provided certain conditions (not here involved) are met.
These two provisions together broadly prohibit (with narrow exceptions discussed below) transfers of contracts involving the United States or interests therein, and assignment of claims against the United States. Such contracts (or interest therein) may not be transferred and such claims may be assigned ‘only after’ they have been allowed in a specific amount and provisions made for their payment.
Northrop Grumman got schooled in the foregoing statutory requirements. And we hope you learned a lesson as well.
ANHAM Applies Common Sense to Government Contracting Issues, with Predictable Results
On July 30, 2011, the Special Inspector General for Iraqi Reconstruction (SIGIR) published an audit report discussing costs incurred by ANHAM FZCO—a company incorporated in the United Arab Emirates (UAE). ANHAM was awarded a $300 million ID/IQ contract with six cost-reimbursement Task Orders “to provide for the receipt, storage, and forward movement of supplies and equipment needed to reconstitute the Iraqi Security Forces and reconstruct the country’s infrastructure.” According to the SIGIR’s report—
The contract required Anham to provide all resources necessary to operate and maintain the warehouses, including logistics, management, and life support. These warehouse and distribution sites received, held, repackaged and redistributed supplies and equipment to Iraqi government ministries. The U.S. military’s ultimate goal was to transfer operational control to the Iraqi military. While the contract stated that some services could be used to move materiel for projects supporting U.S. military forces, coalition and/or multinational forces, and other governmental/non-governmental agencies, U.S. on-site commanders stated that almost all goods shipped through these facilities went to the Government of Iraq.
The SIGIR found significant problems with the Government’s oversight of ANHAM. Its criticisms had many targets, including DCAA, DCMA, the cognizant ACO, and the cognizant Contracting Officer’s Representative (COR). Its audit report stated—
SIGIR found significant weaknesses in the government’s oversight of Anham business systems and other contract administration functions. These weaknesses left the government at particular risk of paying unreasonable costs. The government’s oversight of Anham’s business systems was supposed to provide assurances that Anham was following FAR requirements and reduce risks of paying unreasonable prices for goods and services, but it broke down. Of the three key Anham business systems that DCAA was responsible for reviewing, DCAA approved only Anham’s accounting system. DCAA did not review Anham’s estimating system, and, while it did review Anham’s billing system, it was done late into the contract and only then uncovered significant weaknesses.
DCMA reviewed and recommended approval of Anham’s purchasing system but did so without asking important questions about close and/or affiliated relationships that Anham may have had with its subcontractors. Further, DCMA recommended approval of the purchasing system even though it was unable to find documentation of price analysis in any of the cases that it reviewed.
According to DCMA officials, they have changed their approach to performing purchasing system reviews, and based on their current procedures, they would not have recommended approval of Anham’s purchasing system. In addition, DCAA has not yet completed an incurred cost review.
SIGIR also found that ACO and COR contract oversight was weak. The CORs did not compare all vouchers to receiving documents, as required, to assure that the government was billed for only delivered items, and the government allowed Anham employees to sign for receipt of $10 million in goods, a major control problem.
Notably, the SIGIR audit report stated that DCAA had concluded that ANHAM’s accounting system was adequate, but that its “procedures utilized in the audit program were not sufficiently robust to render an opinion on the key control activities and objectives that comprise a full-scope audit of internal controls.”
And while DCAA had issues with ANHAM’s billing system, the company was 20 months into contract performance before the DCAA audit report report was issued. Finally, DCAA never got around to performing a review of ANHAM’s estimating system, and never performed an incurred cost audit. The SIGIR report noted (somewhat dryly, we think) that “DCAA is behind in conducting its incurred cost audits.”
Looking at DCMA’s oversight of ANHAM, SIGIR reported—
Although DCMA approved Anham’s purchasing system, its review of 55 Anham purchase orders and subcontracts found the following:
- 38 purchase orders and subcontracts lacked adequate documentation (source justification, price analysis, etc.).
- 34 purchase orders and subcontracts required a price analysis, and all 34 had “ineffective” price analyses (e.g.,“The files lacked documentation to support this.”).
- 34 subcontracts/purchase orders required a justification for awards made without adequate price competition, and 32 of the justifications to support these single/sole source awards were inadequate.
The SIGIR’s report went into much detail regarding overlapping management relationships between ANHAM and some of its subcontractors. As it reported, “Exploring these relationships is important because it may raise important questions about whether there is truly an arms-length business relationship between the prime contractor and its subcontractors.” (Knowing how the Middle East does business, we’re not surprised at the relationships. Perhaps if the SIGIR auditors had spent some time in Japan auditing keiretsu … but we digress.)
The SIGIR conducted its own review of ANHAM’s costs and—perhaps unsurprisingly—questioned several million dollars’ worth. The SIGIR audit report stated: “SIGIR questions $4.4 million or almost 39 % of the costs from a judgmentally selected sample of about $11.4 million in vouchers and procurement actions because they appear to be not fair and reasonable or were not properly documented.” But that was just the ante. SIGIR’s conclusion was a bit more … well, to use a poker metaphor, SIGIR went “all-in”, saying—
As a result of the multiple problems identified in this report, SIGIR is questioning all of the costs on this contract, $113.4 million, and recommends that the U.S. military initiate a systematic review of billing practices on all Anham contracts in Iraq and Afghanistan. Currently, Anham holds about $3.9 billion in U.S. government contracts.
The SIGIR audit report raised the ire of the usual taxpayer advocates. For example, David Isenberg wrote this op-ed piece on HuffPo, in which he quotes a SIGIR report for the proposition that the Department of State is actually hindering effective oversight of contractors in Southwest Asia. According to Mr. Isenberg, SIGIR reported that—
U.S. Embassy-Baghdad again took an extremely circumscribed view of how many persons under COM [Chief of Mission] authority are involved in the ‘reconstruction effort.’ According to its implausibly narrow approach, as of June 30, 2011, there were only 10 U.S. government civilian employees and 57 contractors under COM authority overseeing or implementing reconstruction programs in Iraq--or just 0.08% of all personnel.
ANHAM had some issues with the SIGIR audit report. It issued a press release that stated—
[SIGIR’s] conclusions are false, without legal or factual justification and convey the completely unfounded claim that the Company overcharged the U.S. Government for one or more items. In fact, the Company saved the U.S. Government and the U.S. Taxpayers nearly 153 million dollars ($153,000,000) through its performance of the Contract.
That’s not all. ANHAM also asserted—
SIGIR also contends that ANHAM's subcontractors may have overcharged for various purchases. This is also false. Every purchase by every subcontractor was the result of a competitive bidding process where the lowest price subcontractor was selected and not a single screw or nail was purchased without prior, advance approval by the U.S. Government after their review of the competitive bidding process amongst potential subcontractors. Full disclosure of the nature of every potential subcontractor was fully disclosed to the U.S. Government.
The Company takes enormous exception to the SIGIR implications. Its suggestions -– based on innuendo rather than hard facts -– are not the result of a meaningful ‘audit.’ ANHAM is continually audited by the Defense Contract Audit Agency (DCAA) and welcomes such true audits. ANHAM is also very proud of the savings that it effectuated for the U.S. Government and U.S. Taxpayers on the Contract.
Well, that’s a kind of in-your-face response to an audit report, isn't it?
What we find interesting is ANHAM’s assertion that the company actually “saved” $150 million during contract performance. How did ANHAM arrive at that figure? Well, according to its press release—
[ANHAM] was awarded the Contract for its competitive bid of 115 million dollars ($115,000,000). This price was 132 million ($132,000,000) less than the Government's independent estimate. This was 53 percent below what the Government had concluded it would have to pay for performance and was substantially more below what was expended, on information and belief, on the contract performance prior to ANHAM's operation thereof. Through the efforts and capabilities of ANHAM, the U.S. Government reduced its costs by more than half on the Contract, which is axiomatic of the fallacies in the SIGIR conclusions.
[Emphasis in original.] In our experience, ANHAM’s position—that it “saved” the U.S. Government money by bidding lower than the Independent Government Estimate (IGE)—is the kind of “common sense” businessperson approach to Government contracting that gets companies in trouble time after time. The obvious fact of the matter is that, regardless of its priced offer, ANHAM was awarded cost-reimbursement Task Orders and it had to comply with applicable contract requirements. We don’t pretend to know the merits of the parties’ positions, but that particular argument is (in our view) a non-starter.
Similarly, SIGIR dismissed ANHAM’s arguments, telling GovExec –
‘The one true point Anham makes … is that the government didn't complain about the charges. There was a breakdown in the process of cost review, which wasn't as strong as it should have been, but that doesn't render the billings valid.’
We think that, like all Government contractors accused of wrong-doing, ANHAM should lawyer-up and quit trying to use the press as a shield and/or sword. First of all, the press loves a “waste, fraud, and abuse” story because that’s what gets attention. The “we’ve been wronged” bit really doesn’t play well. ANHAM should learn from KBR and fight its fights in the ASBCA and/or Court of Federal Claims—and not via press releases.
Second—as previously mentioned—ANHAM is going to need better arguments than “we were the low bidder and thus anything we spend is a better deal than the U.S. was going to get anyway.” The company needs to muster some expert Government cost accounting (and Government contracting) experts and have them write some expert reports. The current “common-sense” approach just won’t get it done.
We have a word for business people who approach contracting with the U.S. Government with common sense and a passionate conviction that cost-savings can atone for other compliance sins.
We call those people “defendants”.
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Industry Associations Battle on Your Behalf for Regulation Roll-Backs
Is your company a member of an industry association? If not, why not?
Generally, the associations benefit like-positioned companies through advocacy and lobbying. The associations also provide a forum where member companies can meet to discuss cross-cutting issues. The associations can meet with Senior Executive Service policy-makers, Congressional staffers, and others without creating any perceived conflicts of interest, since they are independent of the companies that comprise their memberships. In other words, plausible deniability.
There are many associations serving diverse constituencies. Ones that come immediately to mind include—
- The Professional Services Council, representing “the federal government’s professional and technical services industry”.
- The National Defense Industrial Association, representing companies that provide national defense and homeland security products to the Federal government (primarily NASA, DOD, and DHS).
- The Aerospace Industries Association, representing “more than 300 major aerospace and defense companies and their suppliers … embodying every high-technology manufacturing segment of the U.S. aerospace and defense industry from commercial aviation and avionics, to manned and unmanned defense systems, to space technologies and satellite communications.
There are also the more prosaic organizations such as the U.S. Chamber of Commerce, who represent any business that wants to be a member—and benefits many businesses that are not members.
Finally, there are what may termed “meta-associations” which are groups of like-minded associations that band together for the (hoped-for) purpose of influencing policy-makers through the sheer weight of numbers. A good example of a meta-association is the Council of Defense and Space Industry Associations (CODSIA). According to CODSIA’s sporadically updated website, it has seven member associations, including all those listed above.
Recently, CODSIA met with a high-level leader in the General Services Administration (GSA) for a routine “government-industry cross-talk”. As usual, the topics were carefully vetted beforehand and the Government representatives were careful not to speak beyond their authority. Despite all the caveats and controls, however, some communication took place. We were on distribution for the meeting notes, and we thought the CODSIA representatives did a good job of advocating for their members.
The topic of conversation was the “retrospective regulatory review” required by President Obama’s Executive Order 13653, issued January 18, 2011. That Executive Order states—
… each agency must, among other things: (1) propose or adopt a regulation only upon a reasoned determination that its benefits justify its costs (recognizing that some benefits and costs are difficult to quantify); (2) tailor its regulations to impose the least burden on society, consistent with obtaining regulatory objectives, taking into account, among other things, and to the extent practicable, the costs of cumulative regulations; (3) select, in choosing among alternative regulatory approaches, those approaches that maximize net benefits (including potential economic, environmental, public health and safety, and other advantages; distributive impacts; and equity); (4) to the extent feasible, specify performance objectives, rather than specifying the behavior or manner of compliance that regulated entities must adopt; and (5) identify and assess available alternatives to direct regulation, including providing economic incentives to encourage the desired behavior, such as user fees or marketable permits, or providing information upon which choices can be made by the public.
The Executive Order also states—
To facilitate the periodic review of existing significant regulations, agencies shall consider how best to promote retrospective analysis of rules that may be outmoded, ineffective, insufficient, or excessively burdensome, and to modify, streamline, expand, or repeal them in accordance with what has been learned. Such retrospective analyses, including supporting data, should be released online whenever possible.
So that is what CODSIA was asking the GSA folks about.
Specifically, CODSIA asked whether GSA had looked at FAR Case 2005-036, Definitions of Cost and Pricing Data, in implementing the President’s Executive Order. We wrote about the rules stemming from that FAR Case here. We said at the time—
We notice that the prohibition on obtaining cost or pricing data when certain conditions (e.g., adequate competition) are found has been de-emphasized in favor of a more detailed discussion of the types of data the contracting officer should obtain. This appears to represent a return to a pre-Federal Acquisition Streamlining Act (FASA) pricing environment, which may add to contractors’ proposal costs— meaning that, ultimately, the Government may end up paying more for the goods and services it, acquires.
CODSIA inquired as to whether the FAR Councils were measuring the efficacy of the new rules, whether they were looking—as the President directed—at costs versus benefits. The response was telling. The CODSIA notes state—
GSA representatives said that no attempts were made to measure compliance costs, to monitor if an increase in the number of adequate price reasonableness determinations had taken place, or if an increase in requests for Certificates of Current Cost or Pricing Data has occurred. Most importantly, the question asked if any noticeable reduction of prices paid by the government had been noted and GSA replied that a review of the operational ‘success’ of the rule has not been conducted.
We were not in attendance at the meeting. But it looks to us like a case could be made for asserting that the FAR Councils were ignoring the Presidential Executive Order.
But CODSIA wasn’t yet done with the topic. More discussion ensued. Here’s another quote from the meeting notes—
GSA recognizes that the rules imposed by the acquisition regulatory systems drive overhead costs and hence, price. The government’s estimate of compliance with the Truth in Negotiations Act was cited as one example and that estimate is over ten million hours per year. Cost benefit analyses can help to identify those regulations whose benefits to the government exceed their costs. The regulated population, however, has little insight into those analyses and is unable to compare the burden estimates with actual time and dollars spent. Industry suspects the burden hours are larger than the government believes. GSA reported that they are updating their guide to existing burden estimates and it will be available on the DPAP website. The aggregate cost of compliance is impressive. The CODSIA reps asked that the government investigate whether the benefits justify that cost.
See? You’re not alone. There are people inside the Beltway who understand your plight and are challenging The Powers That Be on your behalf. They’re called industry associations and you should support them through membership.
Court of Federal Claims Discusses Government’s “Special Plea in Fraud” Defense - 2 of 2
Part 2 of 2
Disclaimer: We once again remind readers that we are not attorneys and we are not giving legal advice and we are not qualified to have any opinions whatsoever on such tricky topics as common-law fraud or affirmative defenses or special pleas in anything. Yet this is Part 2 of a two-part article on the Government’s affirmative defense, the “special plea in fraud.” As we discussed in Part 1 of this article, the U.S. Government uses its “special plea in fraud” defense to allege that a claim filed by a contractor against the Government is fraudulent. If the Government can show that any part of the contractor’s claim is fraudulent—i.e., that the contractor knowingly presented a false claim to the Court with the intention of being paid for it—then the entire claim (even any accurate parts) is “forfeit” and the case is tossed-out. There are no other fines or penalties—the remedy for knowingly submitting a false contract claim is the loss of the case. We learned that the Judge has no discretion in the matter; the statute mandates that a fraudulent claim must be forfeited, regardless of any merits it may otherwise have. In Part 1, we discussed the Daewoo case, where Daewoo submitted a $64 million claim and, instead of receiving a $64 million judgment, found itself owing more than $50 million in fines and penalties. On appeal, the Judges wrote—
Unlike the antifraud provision of the Contract Disputes Act, 41 U.S.C. § 604, under which a contractor may incur liability only for the unsupported part of a claim, forfeiture under 28 U.S.C. § 2514 requires only part of the claim to be fraudulent. For instance, in Young-Montenay, Inc. v. United States, we held that because a contractor had submitted a claim to the government for $153,000 when the contractor knew the government was liable only for $104,000, such a knowingly false claim forfeited the contractor’s later damages claim against the government under the contract. 15 F.3d 1040, 1042-43 (Fed. Cir. 1994).
In Part 2, we want to discuss a very recent—and interesting—discussion of these issues in the U.S. Court of Federal Claims (which is where the original Daewoo decision was issued). Today we want to discuss the July 6, 2011, decision in the matter of Kellogg Brown & Root Services, Inc. v. United States. We have discussed the travails of Kellogg Brown & Root (KBR) several times on this blog; many folks consider the company to be the poster child for rapacious, war-profiteering, contractors. In the main, their views are shaped by biased Congressional testimony and sensational allegations, rather than facts. Nonetheless, ask any average citizen what company comes to mind when thinking about government contractor fraud, waste, and abuse—and they are likely to name KBR. In this case, KBR filed suit in the U.S. Court of Federal Claims two years ago, seeking payment of $41 million in costs it had incurred on the LOGCAP III contract supporting troops in Iraq. As part of the proceedings, the United States filed several affirmative defenses, as follows—
- Count 1: The contract was unenforceable because it was tainted by kick-backs received by KBR employees.
- Count 2: KBR’s claim should be forfeit under the special plea in fraud defense, because fraud was practiced during performance of the contract.
- Count 3: KBR was liable for the kick-backs received by its employees.
- Count 4: KBR filed false claims and is liable under the False Claims Act.
- In addition, the U.S. Government filed two other motions for rescission of various portions of KBR’s contract.
- For its part, KBR moved to dismiss the Government motions.
This decision would discuss whether the Government’s “special plea in fraud” defense was limited to the contractor’s submitted claim, or whether it could be tied to the contractor’s performance on its contract. Much of the dispute concerned kick-backs allegedly received by KBR employees. The kick-backs were paid by a KBR subcontractor, Tamimi Global Company to Terry Hall and Luther Holmes, who were responsible for “dining facility, morale and welfare, laundry, and fuel delivery services” (DFAC) at Camp Arifjan and Camp Anaconda. According to the Court (which had to assume all allegations are true for purposes of ruling on a motion for summary judgment)—
Beginning in late 2002 through the end of 2003, Messrs. Hall and Holmes received a combined $45,000.00 in cash kickbacks from Mr. Khan. ‘Mr. Hall understood that the money was being provided so that Tamimi would remain in KBR’s good graces and continue to get DFAC contracts from KBR.’ … In 2003 Messrs. Hall and Holmes each accepted $5,000.00 in cash that Mr. Khan delivered to them at an airport in Kuwait. Mr. Khan also gave Mr. Hall an automated teller machine (‘ATM’) card to withdraw cash from a bank account into which Mr. Khan had deposited another $5,000.00. Mr. Hall used the ATM card to withdraw $3,500.00 in cash. Mr. Holmes withdrew the remaining $1,500.00. Mr. Holmes accepted an additional $10,000.00 in cash from Mr. Khan, which Mr. Holmes gave to his secretary. Towards the end of 2003, Mr. Hall accepted $20,000.00 from Mr. Khan, which purportedly was to be used as an investment in a ‘Golden Corral’ restaurant. However, Mr. Hall made no such investment, and Mr. Khan did not request that the money be paid back. …
In response to Army task orders issued upon the LOGCAP III contract, KBR issued numerous work releases to Tamimi under Master Agreement 3. These task orders include Task Order 59 issued by the Army on August 2003 … and Task Order 89…. KBR paid Tamimi approximately $466,290,328.00 for all of the work releases issued under Master Agreement 3. KBR submitted vouchers to the Army for reimbursement of payments made to Tamimi for amounts due under the work releases. In addition to reimbursement vouchers for these direct costs, KBR received a base fee of one percent of direct costs, an award fee of up to two percent of direct costs, as well as a fee for indirect costs.
The Government asserted its defenses based on the conduct of KBR’s employees. KBR, for its part, did not accept the Government’s assertions. Among its many arguments was this one made in response to the Government’s attempt to assert the affirmative defense of special plea in fraud. In the Court’s words—
Plaintiff [KBR] attacks defendant’s ‘taint’ theory as insufficient to state a claim for commonlaw fraud or a violation of the FCA, let alone as the predicate for an affirmative defense. These counterclaims fail because (1) they do not allege any causal link between the kickbacks and any inflated claim or scheme to defraud the Government; (2) the facts pleaded lack the requisite scienter; (3) the facts do not allege any causal nexis between the award of Master Agreement 3 or Work Release 3 and the kickbacks; and (4) the counterclaims do not support corporate vicarious liability because they do not allege that the kickbacks were accepted with any intent to benefit KBR or that they did benefit KBR. According to plaintiff, the Special Plea in Fraud does not state a claim for relief in that defendant does not allege that plaintiff possessed the specific intent to defraud the Government. Further, the forfeiture statute proscribes fraud in the prosecution of a claim, which defendant does not allege, not fraud in the performance of a contract.
Whew! That’s quite a bit of lawyering in a single paragraph. As far as we can tell, KBR argued that the Government’s special plea in fraud cannot prevail because there was no proof that KBR intended to defraud the Government by submission of its claim for payment; and, furthermore, KBR argued that the special plea in fraud affirmative defense addresses fraudulent claims and not fraudulent contract performance. What did the Court think of KBR’s arguments? Judge Miller wrote—
The Federal Circuit has held that to prevail on a counterclaim alleging fraud under 28 U.S.C. § 2514 defendant is required to ‘‘establish by clear and convincing evidence that the contractor knew that its submitted claims were false, and that it intended to defraud the government by submitting those claims.’’ Daewoo Eng’g & Constr. Co., v. United States, 557 F.3d 1332, 1341 (Fed. Cir. 2009) …. ‘[F]orfeiture under 28 U.S.C. § 2514 requires only part of the claim to be fraudulent.’ Daewoo Eng’g, 557 F.3d at 1341. ‘The statutory language has been construed as proscribing fraud in the prosecution of claims against the United States, not fraud in the performance of the contract.’ Veridyne Corp. v. United States, 83 Fed. Cl. 575, 586 (2008) …. Therefore, to overcome plaintiff’s motion to dismiss, defendant’s pleadings must show KBR’s knowledge that a claim submitted was false and a specific intent on the part of KBR to defraud the Government.
Pivotal to defendant’s contention for Special Plea in Fraud is the scope of the prohibited conduct targeted by the statute. … The parties diverge on whether the conduct targeted by the statute includes any and all fraudulent conduct in the performance of the contract, or whether the qualifying phrase—‘fraud . . . in the proof, statement, establishment, or allowance thereof’—limits the prohibited activity to the prosecution of a claim. For the instant case, the issue is decisive because plaintiff contends that defendant has failed to allege fraud in the prosecution of a claim. …
Defendant has not connected the action of accepting a kickback to the ‘proof, statement, establishment, or allowance’ of a claim, except insofar as the allegation that Messrs. Hall’s and Holmes’s acceptance of kickbacks ‘tainted’ the entire contract with fraud. Plaintiff asserts that this allegation alone will not implicate the forfeiture statute, which is aimed at punishing fraud in the prosecution of a claim. …
Defendant contends that the statute requires forfeiture when plaintiff engages in any fraudulent activity in the performance of a contract, regardless of its relationship to the presentation of a claim. … Under this theory any fraud ‘places a stigma upon the contract at issue . . . and on all the claims arising under the contract-in-suit, sufficient to deem [a claim] unenforceable due to public policy considerations.’ Supermex, Inc. v. United States, 35 Fed. Cl. 29, 42 (1996). Defendant reads this rationale into the forfeiture statute, asserting that the statute should be implicated when ‘fraud [was] practiced against the Government that was not practiced in the claim that was the basis for the lawsuit, but was practiced in the course of the performance of the contract.’ … Defendant includes within the concept of ‘course of performance’ acceptance of a kickback, even if the acceptance had no bearing on the award of the contract or performance of the claim that plaintiff seeks to recover. Defendant relies on cases from the United States Court of Federal Claims to support his theory, capitalizing upon an overly broad articulation of the law in an effort to fashion a new cause of action under the forfeiture statute.
Several Court of Federal Claims decisions state that ‘[t]he words of the statute make it apparent that a claim against the United States is to be forfeited if fraud is practiced during the contract performance or in the making of a claim.’ … This interpretation of the statute divorces fraud in the performance of a contract from the submission of claim and, consequently, would not require the Government to prove that the alleged fraud relates in any way to the submitted claim. However, on its face, the statute is limited to those circumstances where the Government proves fraud ‘in the proof, statement, establishment, or allowance’ of a claim. 28 U.S.C. § 2514. These cited Court of Federal Claims decisions thus appear to ignore the qualifying phrase altogether, an interpretation that runs contrary to a basic canon of statutory construction and that the undersigned judge will not adopt without an express direction from the Federal Circuit.
[Emphasis added.] Following that powerful declaration of judicial independence, Judge Miller devoted considerable verbiage to supporting her position, and discussing why the other Court of Federal Claims decisions were erroneous. The Court winds up with the following—
Most recently, in 2004 American Heritage cited O’Brien and Little as evidence that ‘the Federal Circuit and this court [have applied] the forfeiture statute to situations outside the strict terms of the statute, as logic has dictated.’ Am. Heritage, 61 Fed. Cl. at 386 (citing O’Brien, 591 F.2d at 680; Little, 152 F. Supp. at 87-88). American Heritage relied on Supermex, Anderson, and UMC for the proposition that the forfeiture statute calls for forfeiture ‘‘if fraud against the government occurs during contract performance.’’ Id. (quoting Anderson, 47 Fed. Cl. at 444) (citing UMC, 43 Fed. Cl. at 791; Supermex, 35 Fed. Cl. at 39-40).
Not only does this expansion depart from Court of Claims precedent, it does not comport with the Federal Circuit’s articulation of the legal requirement of the forfeiture statute: to prevail on a counterclaim alleging fraud under 28 U.S.C. § 2514, defendant ‘‘is required to establish by clear and convincing evidence that the contractor knew that its submitted claims were false, and that it intended to defraud the government by submitting those claims.’’ Glendale Fed. Bank, 239 F.3d at 1379 (emphasis added) (quoting Commercial Contractors, 154 F.3d at 1362). Defendant pushes the boundaries of the forfeiture statute’s applicability. A valid cause of action under that statute must be tied to the submission of a claim, whether in producing false proof to support a claim, see, e.g., Kamen Soap, 124 F. Supp. at 622 (forfeiting claim because falsified documentation was submitted in presentation of claim), or in falsely establishing the claim, see, e.g., N.Y. Mkt., 43 Ct. Cl. at 136 (Government’s objection to claim based on contractor’s not fulfilling contract specifications, i.e., ‘establishment’ of a false claim).
In relying on a hospitable line of non-binding trial court cases that beg to be distinguished, defendant’s theory of the case not only misinterprets binding precedent, but ignores the explicit statutory requirement that ‘the contractor knew that its submitted claims were false.’ Glendale Fed. Bank, 239 F.3d at 1379. Mere ‘taint’ is insufficient when defendant must allege that the contractor intended to defraud, specifically, through the submission of its claim.
Defendant has not cited any Federal Circuit or Court of Claims precedent to support an expansion of the plain—and limited—language of the forfeiture statute. The forfeiture statute is aimed at proscribing fraud in the prosecution of claims against the United States, not any and all fraud in the performance of the contract. Defendant’s argument that Messrs. Hall and Holmes ‘tainted’ Master Agreement 3 ‘by the fraud of the kickbacks’ when they ‘sat on upon the board that awarded Master Agreement 3,’ … ‘[r]egardless of . . . whether Tamimi might have, nevertheless, still been awarded the exact same contracts even without [Messrs. Hall’s and Holmes’s] advocacy,’ … circumvents the stated objective of the statute. The mere ‘taint’ of the kickback is insufficient to state a claim under the forfeiture statute when it is not alleged that the kickback is related to the ‘proof, statement, establishment, or allowance’ of a claim. Defendant has not alleged that the kickbacks were in any way related to the required performance under the contract or to the proof of that performance submitted with plaintiff’s claim.
Well, that lengthy recap disposed of the Government’s affirmative defense. But then Judge Miller turned on her own brethren, writing—
More fundamental, however, is the problem that several of the Court of Federal Claims decisions received summary affirmance or were affirmed on other grounds. Although not precedential, loose language can be adopted inadvertently on review. This is detrimental to the integrity of precedent, and plaintiff justifiably is concerned that the Court of Federal Claims could become a preferred forum for government fraud claims. … What should not occur—but be stopped in its tracks—is the exportation of judge-made law, exemplified in Ab-Tech, wherein the court proclaimed that the claim ‘arises out of the very contract relationship that [the plaintiff’s] deceptive dealings . . . helped falsely to maintain,’ … and held broadly that Little, commands ‘the forfeiture of all claims arising under a contract tainted by fraud,’ …. Little stands for no such proposition, but unfortunately Ab Tech’s broad invitation to declare forfeited all claims in a contract tainted by fraud fuels defendant’s new theory that the taint of fraud is sufficient to warrant forfeiture. While several of these Court of Federal Claims decisions factually conform with the binding precedent in that fraud was committed in the establishment of a claim, the adopted broader formulation of the law is of concern. If it were applied in this case, the expansion would be unwarranted. Therefore, the undersigned judge returns to the forfeiture statute’s targeted language, as construed by precedential case law, and rules that the conduct pleaded by defendant is insufficient to state a claim under § 2514. Defendant has not pleaded that plaintiff’s alleged fraudulent conduct related to the ‘proof, statement, establishment, or allowance’ of a claim.
That was not the end of the decision, by an means. There were pages and pages of further discussion and analysis of the Government’s defenses. In the end, the Court found—
1. Plaintiff’s [KBR’s] motion to dismiss Count I of defendant’s [Government’s] counterclaims for forfeiture of plaintiff’s breach of contract claim is granted.
2. Plaintiff’s motion to dismiss Count II, defendant’s AKA [Anti-Kickback Act] counterclaim for double the amount of damages of kickbacks given to Messrs. Hall and Holmes, is denied. Defendant has stated a claim based on an AKA violation of 41 U.S.C. § 53(2) due to the acceptance of the kickbacks and a claim under 41 U.S.C. § 55(a)(1). Alternatively, defendant has stated a claim under §§ 53(2) and 55(a)(2) for recovery of a civil penalty in the amount of the kickbacks.
3. Plaintiff’s motion to dismiss Count III of defendant’s counterclaims for a violation of the FCA is granted.
4. Plaintiff’s motion to dismiss Count IV of defendant’s counterclaims for rescission of the portion of the LOGCAP III contract affected by the award of Master Agreement 3 to Tamimi and for disgorgement of all moneys paid to KBR related to any work release upon Master Agreement 3 is denied.
5. Plaintiff’s motion to dismiss Count V of defendant’s counterclaims for disgorgement of all moneys paid to plaintiff related to Task Order 59 is denied.
6. Plaintiff’s motion to strike defendant’s affirmative defense is granted.
7. Plaintiff’s motion to dismiss for failure to plead fraud with specificity is denied because the remedy would be to allow defendant to amend its affirmative defense and counterclaims. In ruling on the legal sufficiency of the affirmative defense and counterclaims, the court has construed these in a light that pleads the most fulsome—and, hence, adequately stated, facts.
The foregoing may appear to be a partial victory for KBR. Importantly, however, the Court firmly stopped the “exportation of judge-made law” which had held that the special plea in fraud affirmative defense could be asserted by the Government when the alleged fraud had nothing to do with the actual claim in front of the Court. Judge Miller clearly articulated the position that the special plea in fraud was reserved for contractors that knowingly submitted fraudulent claims. And that is a very beneficial outcome for Government contractors.
Court of Federal Claims Discusses Government’s “Special Plea in Fraud” Defense
Part 2 of 2
Disclaimer: We once again remind readers that we are not attorneys and we are not giving legal advice and we are not qualified to have any opinions whatsoever on such tricky topics as common-law fraud or affirmative defenses or special pleas in anything.
Yet this is Part 2 of a two-part article on the Government’s affirmative defense, the “special plea in fraud.”
As we discussed in Part 1 of this article, the U.S. Government uses its “special plea in fraud” defense to allege that a claim filed by a contractor against the Government is fraudulent. If the Government can show that any part of the contractor’s claim is fraudulent—i.e., that the contractor knowingly presented a false claim to the Court with the intention of being paid for it—then the entire claim (even any accurate parts) is “forfeit” and the case is tossed-out. There are no other fines or penalties—the remedy for knowingly submitting a false contract claim is the loss of the case.
We learned that the Judge has no discretion in the matter; the statute mandates that a fraudulent claim must be forfeited, regardless of any merits it may otherwise have. In Part 1, we discussed the Daewoo case, where Daewoo submitted a $64 million claim and, instead of receiving a $64 million judgment, found itself owing more than $50 million in fines and penalties.
On appeal, the Judges wrote—
Unlike the antifraud provision of the Contract Disputes Act, 41 U.S.C. § 604, under which a contractor may incur liability only for the unsupported part of a claim, forfeiture under 28 U.S.C. § 2514 requires only part of the claim to be fraudulent. For instance, in Young-Montenay, Inc. v. United States, we held that because a contractor had submitted a claim to the government for $153,000 when the contractor knew the government was liable only for $104,000, such a knowingly false claim forfeited the contractor’s later damages claim against the government under the contract. 15 F.3d 1040, 1042-43 (Fed. Cir. 1994).
In Part 2, we want to discuss a very recent—and interesting—discussion of these issues in the U.S. Court of Federal Claims (which is where the original Daewoo decision was issued). Today we want to discuss the July 6, 2011, decision in the matter of Kellogg Brown & Root Services, Inc. v. United States. We have discussed the travails of Kellogg Brown & Root (KBR) several times on this blog; many folks consider the company to be the poster child for rapacious, war-profiteering, contractors. In the main, their views are shaped by biased Congressional testimony and sensational allegations, rather than facts. Nonetheless, ask any average citizen what company comes to mind when thinking about government contractor fraud, waste, and abuse—and they are likely to name KBR.
In this case, KBR filed suit in the U.S. Court of Federal Claims two years ago, seeking payment of $41 million in costs it had incurred on the LOGCAP III contract supporting troops in Iraq. As part of the proceedings, the United States filed several affirmative defenses, as follows—
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Count 1: The contract was unenforceable because it was tainted by kick-backs received by KBR employees.
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Count 2: KBR’s claim should be forfeit under the special plea in fraud defense, because fraud was practiced during performance of the contract.
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Count 3: KBR was liable for the kick-backs received by its employees.
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Count 4: KBR filed false claims and is liable under the False Claims Act.
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In addition, the U.S. Government filed two other motions for rescission of various portions of KBR’s contract.
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For its part, KBR moved to dismiss the Government motions.
This decision would discuss whether the Government’s “special plea in fraud” defense was limited to the contractor’s submitted claim, or whether it could be tied to the contractor’s performance on its contract.
Much of the dispute concerned kick-backs allegedly received by KBR employees. The kick-backs were paid by a KBR subcontractor, Tamimi Global Company to Terry Hall and Luther Holmes, who were responsible for “dining facility, morale and welfare, laundry, and fuel delivery services” (DFAC) at Camp Arifjan and Camp Anaconda. According to the Court (which had to assume all allegations are true for purposes of ruling on a motion for summary judgment)—
Beginning in late 2002 through the end of 2003, Messrs. Hall and Holmes received a combined $45,000.00 in cash kickbacks from Mr. Khan. ‘Mr. Hall understood that the money was being provided so that Tamimi would remain in KBR’s good graces and continue to get DFAC contracts from KBR.’ … In 2003 Messrs. Hall and Holmes each accepted $5,000.00 in cash that Mr. Khan delivered to them at an airport in Kuwait. Mr. Khan also gave Mr. Hall an automated teller machine (‘ATM’) card to withdraw cash from a bank account into which Mr. Khan had deposited another $5,000.00. Mr. Hall used the ATM card to withdraw $3,500.00 in cash. Mr. Holmes withdrew the remaining $1,500.00. Mr. Holmes accepted an additional $10,000.00 in cash from Mr. Khan, which Mr. Holmes gave to his secretary. Towards the end of 2003, Mr. Hall accepted $20,000.00 from Mr. Khan, which purportedly was to be used as an investment in a ‘Golden Corral’ restaurant. However, Mr. Hall made no such investment, and Mr. Khan did not request that the money be paid back. …
In response to Army task orders issued upon the LOGCAP III contract, KBR issued numerous work releases to Tamimi under Master Agreement 3. These task orders include Task Order 59 issued by the Army on August 2003 … and Task Order 89…. KBR paid Tamimi approximately $466,290,328.00 for all of the work releases issued under Master Agreement 3. KBR submitted vouchers to the Army for reimbursement of payments made to Tamimi for amounts due under the work releases. In addition to reimbursement vouchers for these direct costs, KBR received a base fee of one percent of direct costs, an award fee of up to two percent of direct costs, as well as a fee for indirect costs.
The Government asserted its defenses based on the conduct of KBR’s employees. KBR, for its part, did not accept the Government’s assertions. Among its many arguments was this one made in response to the Government’s attempt to assert the affirmative defense of special plea in fraud.
In the Court’s words—
Plaintiff [KBR] attacks defendant’s ‘taint’ theory as insufficient to state a claim for commonlaw fraud or a violation of the FCA, let alone as the predicate for an affirmative defense. These counterclaims fail because (1) they do not allege any causal link between the kickbacks and any inflated claim or scheme to defraud the Government; (2) the facts pleaded lack the requisite scienter; (3) the facts do not allege any causal nexis between the award of Master Agreement 3 or Work Release 3 and the kickbacks; and (4) the counterclaims do not support corporate vicarious liability because they do not allege that the kickbacks were accepted with any intent to benefit KBR or that they did benefit KBR. According to plaintiff, the Special Plea in Fraud does not state a claim for relief in that defendant does not allege that plaintiff possessed the specific intent to defraud the Government. Further, the forfeiture statute proscribes fraud in the prosecution of a claim, which defendant does not allege, not fraud in the performance of a contract.
Whew! That’s quite a bit of lawyering in a single paragraph. As far as we can tell, KBR argued that the Government’s special plea in fraud cannot prevail because there was no proof that KBR intended to defraud the Government by submission of its claim for payment; and, furthermore, KBR argued that the special plea in fraud affirmative defense addresses fraudulent claims and not fraudulent contract performance.
What did the Court think of KBR’s arguments? The Judge wrote—
The Federal Circuit has held that to prevail on a counterclaim alleging fraud under 28 U.S.C. § 2514 defendant is required to ‘‘establish by clear and convincing evidence that the contractor knew that its submitted claims were false, and that it intended to defraud the government by submitting those claims.’’ Daewoo Eng’g & Constr. Co., v. United States, 557 F.3d 1332, 1341 (Fed. Cir. 2009) …. ‘[F]orfeiture under 28 U.S.C. § 2514 requires only part of the claim to be fraudulent.’ Daewoo Eng’g, 557 F.3d at 1341. ‘The statutory language has been construed as proscribing fraud in the prosecution of claims against the United States, not fraud in the performance of the contract.’ Veridyne Corp. v. United States, 83 Fed. Cl. 575, 586 (2008) …. Therefore, to overcome plaintiff’s motion to dismiss, defendant’s pleadings must show KBR’s knowledge that a claim submitted was false and a specific intent on the part of KBR to defraud the Government.
Pivotal to defendant’s contention for Special Plea in Fraud is the scope of the prohibited conduct targeted by the statute. … The parties diverge on whether the conduct targeted by the statute includes any and all fraudulent conduct in the performance of the contract, or whether the qualifying phrase—‘fraud . . . in the proof, statement, establishment, or allowance thereof’—limits the prohibited activity to the prosecution of a claim. For the instant case, the issue is decisive because plaintiff contends that defendant has failed to allege fraud in the prosecution of a claim. …
Defendant has not connected the action of accepting a kickback to the ‘proof, statement, establishment, or allowance’ of a claim, except insofar as the allegation that Messrs. Hall’s and Holmes’s acceptance of kickbacks ‘tainted’ the entire contract with fraud. Plaintiff asserts that this allegation alone will not implicate the forfeiture statute, which is aimed at punishing fraud in the prosecution of a claim. …
Defendant contends that the statute requires forfeiture when plaintiff engages in any fraudulent activity in the performance of a contract, regardless of its relationship to the presentation of a claim. … Under this theory any fraud ‘places a stigma upon the contract at issue . . . and on all the claims arising under the contract-in-suit, sufficient to deem [a claim] unenforceable due to public policy considerations.’ Supermex, Inc. v. United States, 35 Fed. Cl. 29, 42 (1996). Defendant reads this rationale into the forfeiture statute, asserting that the statute should be implicated when ‘fraud [was] practiced against the Government that was not practiced in the claim that was the basis for the lawsuit, but was practiced in the course of the performance of the contract.’ … Defendant includes within the concept of ‘course of performance’ acceptance of a kickback, even if the acceptance had no bearing on the award of the contract or performance of the claim that plaintiff seeks to recover. Defendant relies on cases from the United States Court of Federal Claims to support his theory, capitalizing upon an overly broad articulation of the law in an effort to fashion a new cause of action under the forfeiture statute.
Several Court of Federal Claims decisions state that ‘[t]he words of the statute make it apparent that a claim against the United States is to be forfeited if fraud is practiced during the contract performance or in the making of a claim.’ … This interpretation of the statute divorces fraud in the performance of a contract from the submission of claim and, consequently, would not require the Government to prove that the alleged fraud relates in any way to the submitted claim. However, on its face, the statute is limited to those circumstances where the Government proves fraud ‘in the proof, statement, establishment, or allowance’ of a claim. 28 U.S.C. § 2514. These cited Court of Federal Claims decisions thus appear to ignore the qualifying phrase altogether, an interpretation that runs contrary to a basic canon of statutory construction and that the undersigned judge will not adopt without an express direction from the Federal Circuit.
[Emphasis added.] Following that powerful declaration of judicial independence, the Judge devoted considerable verbiage to supporting his position, and discussing why the other Court of Federal Claims decisions were erroneous. The Court winds up with the following—
Most recently, in 2004 American Heritage cited O’Brien and Little as evidence that ‘the Federal Circuit and this court [have applied] the forfeiture statute to situations outside the strict terms of the statute, as logic has dictated.’ Am. Heritage, 61 Fed. Cl. at 386 (citing O’Brien, 591 F.2d at 680; Little, 152 F. Supp. at 87-88). American Heritage relied on Supermex, Anderson, and UMC for the proposition that the forfeiture statute calls for forfeiture ‘‘if fraud against the government occurs during contract performance.’’ Id. (quoting Anderson, 47 Fed. Cl. at 444) (citing UMC, 43 Fed. Cl. at 791; Supermex, 35 Fed. Cl. at 39-40).
Not only does this expansion depart from Court of Claims precedent, it does not comport with the Federal Circuit’s articulation of the legal requirement of the forfeiture statute: to prevail on a counterclaim alleging fraud under 28 U.S.C. § 2514, defendant ‘‘is required to establish by clear and convincing evidence that the contractor knew that its submitted claims were false, and that it intended to defraud the government by submitting those claims.’’ Glendale Fed. Bank, 239 F.3d at 1379 (emphasis added) (quoting Commercial Contractors, 154 F.3d at 1362). Defendant pushes the boundaries of the forfeiture statute’s applicability. A valid cause of action under that statute must be tied to the submission of a claim, whether in producing false proof to support a claim, see, e.g., Kamen Soap, 124 F. Supp. at 622 (forfeiting claim because falsified documentation was submitted in presentation of claim), or in falsely establishing the claim, see, e.g., N.Y. Mkt., 43 Ct. Cl. at 136 (Government’s objection to claim based on contractor’s not fulfilling contract specifications, i.e., ‘establishment’ of a false claim).
In relying on a hospitable line of non-binding trial court cases that beg to be distinguished, defendant’s theory of the case not only misinterprets binding precedent, but ignores the explicit statutory requirement that ‘the contractor knew that its submitted claims were false.’ Glendale Fed. Bank, 239 F.3d at 1379. Mere ‘taint’ is insufficient when defendant must allege that the contractor intended to defraud, specifically, through the submission of its claim.
Defendant has not cited any Federal Circuit or Court of Claims precedent to support an expansion of the plain—and limited—language of the forfeiture statute. The forfeiture statute is aimed at proscribing fraud in the prosecution of claims against the United States, not any and all fraud in the performance of the contract. Defendant’s argument that Messrs. Hall and Holmes ‘tainted’ Master Agreement 3 ‘by the fraud of the kickbacks’ when they ‘sat on upon the board that awarded Master Agreement 3,’ … ‘[r]egardless of . . . whether Tamimi might have, nevertheless, still been awarded the exact same contracts even without [Messrs. Hall’s and Holmes’s] advocacy,’ … circumvents the stated objective of the statute. The mere ‘taint’ of the kickback is insufficient to state a claim under the forfeiture statute when it is not alleged that the kickback is related to the ‘proof, statement, establishment, or allowance’ of a claim. Defendant has not alleged that the kickbacks were in any way related to the required performance under the contract or to the proof of that performance submitted with plaintiff’s claim.
Well, that lengthy recap disposed of the Government’s affirmative defense. But then the Judge turned on his own brethren, writing—
More fundamental, however, is the problem that several of the Court of Federal Claims decisions received summary affirmance or were affirmed on other grounds. Although not precedential, loose language can be adopted inadvertently on review. This is detrimental to the integrity of precedent, and plaintiff justifiably is concerned that the Court of Federal Claims could become a preferred forum for government fraud claims. … What should not occur—but be stopped in its tracks—is the exportation of judge-made law, exemplified in Ab-Tech, wherein the court proclaimed that the claim ‘arises out of the very contract relationship that [the plaintiff’s] deceptive dealings . . . helped falsely to maintain,’ … and held broadly that Little, commands ‘the forfeiture of all claims arising under a contract tainted by fraud,’ …. Little stands for no such proposition, but unfortunately Ab Tech’s broad invitation to declare forfeited all claims in a contract tainted by fraud fuels defendant’s new theory that the taint of fraud is sufficient to warrant forfeiture. While several of these Court of Federal Claims decisions factually conform with the binding precedent in that fraud was committed in the establishment of a claim, the adopted broader formulation of the law is of concern. If it were applied in this case, the expansion would be unwarranted. Therefore, the undersigned judge returns to the forfeiture statute’s targeted language, as construed by precedential case law, and rules that the conduct pleaded by defendant is insufficient to state a claim under § 2514. Defendant has not pleaded that plaintiff’s alleged fraudulent conduct related to the ‘proof, statement, establishment, or allowance’ of a claim.
That was not the end of the decision, by an means. There were pages and pages of further discussion and analysis of the Government’s defenses. In the end, the Court found—
1. Plaintiff’s [KBR’s] motion to dismiss Count I of defendant’s [Government’s] counterclaims for forfeiture of plaintiff’s breach of contract claim is granted.
2. Plaintiff’s motion to dismiss Count II, defendant’s AKA [Anti-Kickback Act] counterclaim for double the amount of damages of kickbacks given to Messrs. Hall and Holmes, is denied. Defendant has stated a claim based on an AKA violation of 41 U.S.C. § 53(2) due to the acceptance of the kickbacks and a claim under 41 U.S.C. § 55(a)(1). Alternatively, defendant has stated a claim under §§ 53(2) and 55(a)(2) for recovery of a civil penalty in the amount of the kickbacks.
3. Plaintiff’s motion to dismiss Count III of defendant’s counterclaims for a violation of the FCA is granted.
4. Plaintiff’s motion to dismiss Count IV of defendant’s counterclaims for rescission of the portion of the LOGCAP III contract affected by the award of Master Agreement 3 to Tamimi and for disgorgement of all moneys paid to KBR related to any work release upon Master Agreement 3 is denied.
5. Plaintiff’s motion to dismiss Count V of defendant’s counterclaims for disgorgement of all moneys paid to plaintiff related to Task Order 59 is denied.
6. Plaintiff’s motion to strike defendant’s affirmative defense is granted.
7. Plaintiff’s motion to dismiss for failure to plead fraud with specificity is denied because the remedy would be to allow defendant to amend its affirmative defense and counterclaims. In ruling on the legal sufficiency of the affirmative defense and counterclaims, the court has construed these in a light that pleads the most fulsome—and, hence, adequately stated, facts.
The foregoing may appear to be a partial victory for KBR. Importantly, however, the Court firmly stopped the “exportation of judge-made law” which had held that the special plea in fraud affirmative defense could be asserted by the Government when the alleged fraud had nothing to do with the actual claim in front of the Court. The Judge clearly articulated the position that the special plea in fraud was reserved for contractors that knowingly submitted fraudulent claims.
And that is a very beneficial outcome for Government contractors.
MARK:
On “Part 1” link to: http://www.apogeeconsulting.biz/index.php?option=com_content&view=article&id=574:court-of-federal-claims-discusses-governments-special-plea-in-fraud-defense&catid=1:latest-news&Itemid=55
On “This decision” link to: KBR Special Plea.pdf file attached
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