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—
-
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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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”.
Court of Federal Claims Discusses Government’s “Special Plea in Fraud” Defense - 1 of 2
Part 1 of 2
This is an article about legal stuff—namely, the Government’s “affirmative defense” called the “special plea in fraud”. (28 U.S.C. § 2514.) Let us remind readers right off the bat 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 here we are.
An “affirmative defense,” Black’s Law Dictionary (6th Edition) tells us, is “in pleading, a matter asserted by defendant which, assuming the complaint to be true, constitutes a defense to it. A response to a plaintiff’s claim which attacks the plaintiff’s legal right to bring an action, as opposed to attacking the truth of claim.”
The Government’s “special plea in fraud” defense has a long and, as we shall learn in Part 2 of this article, a mixed history in Federal jurisprudence. Our favorite example of its use was in the 2006 decision by the U.S. Court of Federal Claims in the matter of Daewoo Engineering and Construction Co., Ltd. v. USA. Here’s a link to that decision. The Judge summed up his decision thusly—
Daewoo’s case against the United States is wholly without merit; its claims are fraudulent. The Corps of Engineers has been as conscientious, patient, and fair in its administration of this contract as Daewoo has been demanding, unreasonable, and inept.
(The good stuff in the decision starts about page 34, for those interested in such things. Fair warning: we are going to be quoting extensively from the decision.)
The Judge wrote—
Plaintiff did not present a clear legal theory to support its large claim against the Government. It appeared that Daewoo did not expect to find itself in court trying to justify its case; perhaps it thought defendant would pay a negotiated amount. The purpose of the Contract Disputes Act is to prevent this sort of gamesmanship. …
[Daewoo’s witnesses] did not seem capable of providing testimony that would support a coherent legal theory, if one could have been identified. This was true despite the court’s conviction that Daewoo prepared its witnesses with unusual care. We did not have an effective understanding of plaintiff’s legal position other than its insistence on having been misled by the Weather Clause [in the contract]. …
Kim [Daewoo’s Project Manager] certified the claim for $64 million, and he testified that he expected the Government to pay the entire amount. Later the same day, he recanted that testimony, stating that the claim was for only $13 million. Plaintiff’s counsel made the remarkable argument that Kim’s testimony concerning the amount of the claim, and in fact the complaint itself, are ‘irrelevant.’ We understood him to mean that Kim’s testimony should be viewed as irrelevant because it was ‘inconclusive.’ The testimony was inconclusive because it was ‘inconsistent.’ Kim was the project manager. He was the person whom Daewoo authorized to certify claims to the United States on plaintiff’s behalf. His ‘conflicting testimony’ on an issue of paramount importance to this case does not go to relevance; it goes to credibility.
Okay, readers. Somewhere about this time you ought to be getting the sense that Daewoo was in trouble with this Judge, that its case wasn’t going as well as it initially may have hoped. This was confirmed later in the decision, as follows—
Mr. Kim’s testimony also provided examples of Daewoo’s lack of good faith. He testified that some part of the claim was intended to indicate ‘the seriousness of the situation’ and to get the Government to ‘pay attention’ so defendant would agree to Daewoo’s preferred method of compaction. This is the source of the dispute regarding plaintiff’s ‘negotiating ploy.’ Using a claim to gain leverage against the United States violates the principle on which Congress enacted the Contract Disputes Act, including its effort to prevent contractors from using the claims process to obtain higher profits. Congress called it ‘horse trading.’
Daewoo’s project manager testified that plaintiff filed at least $50 million of its certified claim as a negotiating ploy; Daewoo’s counsel essentially confirmed it: ‘Daewoo’s suggestion that the Government expedite a previously approved and validated alternative embankment placement method is a reasonable request that served the projects best interests and, therefore, is grossly mischaracterized as a ‘ploy.’’ Unfortunately, Daewoo’s ‘reasonable request’ or ‘suggestion’ that the Government ‘expedite’ approval of the cheaper compaction method took the form of a certified claim.
As some-time expert witnesses we were interested in how Daewoo’s experts fared in the Judge’s scathing decision. Answer: they did not fare well. Here’s a longish snippet—
The testimony of plaintiff’s expert witnesses was obtuse. It was not always clear what they were attempting to accomplish or avoid by their use of such careful semantics, however. They jostled with government counsel about whether the firm was hired to ‘update’ plaintiff’s certified claim or to ‘reprice’ it. … Presumably, they preferred the word ‘reprice’ because [the experts] wanted it known that they had nothing to do with the certified claim, which they reduced by more than $20 million from $64 million (or increased by approximately $30 million from $13 million). ‘Update’ would suggest that they started with numbers used in the certified claim and refined them, accounted for passage of time for example, but that was not the case. Each expert deferred to the other for responses to questions that both should have known but could not or would not address.
The experts emphasized that they had not read the certified claim they were to update or reprice. They wished to distance themselves from any numbers or supporting data that had been a part of that claim. The issue became more cloudy later in their testimony. Mr. Allen reported that he may have ‘looked it over. That’s all.’ Mr. Freas ‘did not go in and look at Daewoo’s bid in its entirety, check every single number, every single quantity. That I did not do.’ So either they merely scanned the certified claim or they did not read it at all.
There are literally pages and pages of the Judge’s review of Daewoo’s witnesses and scathing dismissal of their arguments. (You may be gleaning the reason why this is one of our favorite cases….) But now we’ll skip to the Government’s counterarguments—which included counterclaims for fraud.
The evidence of fraud arose from and during the testimony of plaintiff’s own witnesses, during its case-in-chief. … The Government showed primarily through cross-examination that it was not liable on plaintiff’s claims, and that Daewoo’s claims were fraudulent. Defendant used its own case to establish additional evidence supporting findings of fraud and quantifying them. Defendant did not hire new experts to pursue its fraud counterclaims or call new witnesses. Its accountants expanded their testimony somewhat to include additional examples of plaintiff’s efforts to inflate its claims. We offered plaintiff’s counsel the opportunity to depose defendant’s expert witnesses on the expanded testimony, but they declined.
Despite the magnitude and importance of this case, plaintiff did not present a coherent legal theory for recovery other than its insistence on having been misled by the Weather Clause. Every witness seemingly was instructed to emphasize that the Weather Clause was misleading. …
The Government is entitled to judgment on all its counterclaims for reasons discussed throughout this Opinion. Plaintiff made obvious mistakes and overly-optimistic assumptions in its bid proposal, but its claims against the Government go well beyond mere error or oversight.
The Judge went into some detail regarding the Contracts Disputes Act (CDA) and the role of claim certification in the disputes process. He wrote—
The Contract Disputes Act requires that an authorized corporate official certify that the contractor’s claims are ‘made in good faith.’ See 41 U.S.C. § 605(c)(1). ‘The supporting data must be accurate and complete to the best of [the official’s] knowledge and belief, [and] the amount requested [must] accurately reflect[] the contract adjustment for which the contractor believes the government is liable. . . .’ Id.
Congress provided that claims against the United States must be certified by an authorized corporate official, to ‘discourag[e] the submission of unwarranted contractor claims.’ … Plaintiff’s Project Manager, Mr. Kim, certified Daewoo’s claim. He testified repeatedly that the claim totaled $64 million. He expected the Government to pay the entire amount. …
Daewoo’s experts could have performed an important service by checking plaintiff’s books and records concerning operating costs and acquisition costs of equipment. They could have found the duplicated and scrapped equipment in the claim …. See United States v. TDC Mgmt Corp., 24 F.3d at 292, 298 (D.C. Cir. 1994) (‘[E]very party filing a claim before the contracting officer and this court has a duty to examine its records to determine what amounts the Government already has paid or whether payments are actually owed to subcontractors or vendors. . . . [A] failure to make a minimal examination of records constitutes deliberate ignorance or reckless disregard, and a contractor that deliberately ignored false information submitted as part of a claim is liable under the False Claims Act.’).
The Government filed counterclaims pursuant to the False Claims Act, the Special Plea in Fraud, and the Contract Disputes Act. Defendant also claimed fraud in the inducement, or ‘bait and switch,’ an unusual counterclaim in this context.
According to the Judge in the Daewoo case, the Government’s “special plea in fraud” defense is summarized by this quote from the United States Code:
A claim against the United States shall be forfeited to the United States by any person who corruptly practices or attempts to practice any fraud against the United States in the proof, statement, establishment, or allowance thereof.
As the Judge found—
The forfeiture counterclaim carries no monetary penalties other than the forfeiture itself. We found no liability against the Government on plaintiff’s claim, so Daewoo has nothing to forfeit. Defendant made the necessary showings of intent and otherwise met the elements and the burden called for by this section, however. For example, defendant showed by clear and convincing evidence that the contractor knowingly presented a false claim with the intention of being paid for it. Once these standards and burdens are established, this court must forfeit plaintiff’s entire claim. ‘In such cases, the United States Court of Federal Claims shall specifically find such fraud or attempt and render judgment of forfeiture.’ 28 U.S.C. § 2514 (emphasis added).
Thus, regardless of the merits of Daewoo’s claim against the Government, its claim was forfeit and it received nothing as a matter of law.
If the foregoing wasn’t a sufficient penalty, the Judge also invoked the fraud provisions of the Contract Disputes Act. (41 U.S.C. § 604.) He quoted the statute as follows—
If a contractor is unable to support any part of his claim and it is determined that such inability is attributable to misrepresentation of fact or fraud on the part of the contractor, he shall be liable to the Government for an amount equal to such unsupported part of the claim in addition to all costs to the Government attributable to the cost of reviewing said part of his claim.
As you may well suspect by this point in the story, the Judge found that Daewoo had violated the fraud provisions of the CDA. He wrote—
The Government proved by any standard that Daewoo’s $64 million claim was fraudulent. Plaintiff made the claim for purposes other than a good faith belief that the Government owed Daewoo that amount. Plaintiff in fact did not believe that the Government owed it $64 million as a matter of right. … Daewoo submitted a certified claim as a negotiating ploy; that is, for a reason other than an attempt to recover money for which Daewoo believed the Government is liable. … Daewoo’s entire $64 million claim was an attempt to defraud the United States.
So let’s recap Daewoo’s situation at this point. It had filed a $64 million claim against the U.S. Government which had been forfeited by the special plea in fraud. In addition, the company was looking at roughly $50 million in civil penalties related to its filing of a fraudulent claim under the CDA. But that’s not all. There was still more to come for this inept contractor.
In addition to its other arguments, the Government alleged that Daewoo also violated the False Claims Act by submitting its fraudulent claim. As the Judge explained—
Daewoo presented a false claim for payment and knowingly used false records or statements to support the claim. The penalty is $10,000 plus three times the amount of damages. 31 U.S.C. § 3729(a)(3). ‘Claim’ is defined broadly by the statute to include ‘any request or demand . . . for money or property’ from the Government. See § 3729(c). …
The certified claim itself was false or fraudulent and plaintiff knew that it was false or fraudulent. Whether the United States suffered damages as a result, however, is a matter that we could not establish.
Because the Court couldn’t determine any damages actually suffered by the Government, it could only assess a simple $10,000 penalty. Had damages been able to have been assessed, the Judge opined that Daewoo might have been liable for an additional $7.6 million. He concluded his decision as follows—
Daewoo violated the False Claims Act by knowingly submitting false or fraudulent claims; it violated the Contract Disputes Act through its submission of false or fraudulent claims with an intent to deceive or mislead the government; and it attempted to practice fraud against the United States ‘in the proof, statement, establishment, or allowance’ of its claims. … These findings are supported by testimony of plaintiff’s witnesses and other evidence produced by plaintiff and defendant. Plaintiff’s claim to the contracting officer and its complaint in this court sought a ‘total monetary damage claim’ of $64 million, an amount that Daewoo’s own witnesses, experts, and attorneys abandoned before the trial was over. …
Daewoo obtained this contract under false pretenses, though we have not attempted to assign damages to the Government’s claim of fraud in the inducement. It submitted false records and made false statements in preparing, certifying, and pursuing its claim and subsequent “updates.” Defendant lists a number of instances in which plaintiff made false statements to the Government to further its ambitions or to obtain money or property ultimately. …
We enter judgment for defendant on its counterclaims pursuant to the Contract Disputes Act, the Special Plea in Fraud, and the False Claims Act as follows:
Contract Disputes Act – $50,629,855.88.
False Claims Act – $10,000.
Special Plea in Fraud – No monetary judgement.
Daewoo appealed the decision. It did not fare well in the appellate decision either. We quote some of the interesting bits below.
The Court of Federal Claims did not find that Daewoo’s theories of the government’s breach of the contract—based on alleged defective specifications, failure to disclose superior knowledge, and impossibility—were fraudulent (though it ultimately found these theories to be without merit). Rather, the Court of Federal Claims found that Daewoo’s $50.6 million projected cost calculation was fraudulent. That calculation assumed that the government was responsible for each day of additional performance beyond the original 1080-day contract period, without even considering whether there was any contractor-caused delay or delay for which the government was not responsible. The calculation then simply assumed that Daewoo’s current daily expenditures represented costs for which the government was responsible.6 Daewoo apparently used no outside experts to make its certified claim calculation, and at trial made no real effort to justify the accuracy of the claim for future costs or even to explain how it was prepared. … Indeed, Daewoo’s damages experts at trial treated the certified claim computation as essentially worthless, did not utilize it, and did not even bother to understand it. … The Court of Federal Claims pointed out that Daewoo’s claim preparation witnesses inconsistently referred to and interchanged actual, future, estimated, calculated and planned costs. … The court found that J.W. Kim, who certified the claim, gave false testimony. … The court also found that the testimony of Daewoo’s witness Mr. Richardson regarding the calculation of Daewoo’s certified claim ‘left no doubt that [Daewoo’s] case was unsupportable and was pursued by Daewoo with fraudulent intent.’ …
Daewoo appears to argue that a claim can be fraudulent only if it rests upon false facts rather than on a baseless calculation. We disagree. Here Daewoo certified, as required by 41 U.S.C. § 605(c)(1), that ‘the claim is made in good faith; that the supporting data are accurate and complete to the best of my knowledge and belief; that the amount requested accurately reflects the contract adjustment for which the Contractor believes the Government is liable.’ … By certifying a claim for damages in the amount of $64 million, Daewoo represented that the claim was made ‘in good faith.’ It is well established that a baseless certified claim is a fraudulent claim.
Going a bit into the Government’s special plea in fraud defense, the Appellate Court 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).
Needless to say, the original Court of Federal Claims decision was affirmed.
Think this was a long article? It was just prelude. In the next installment, we will discuss a recent Court of Federal Claims decision in which the Government’s special plea in fraud defense was rebuffed by the Judge.
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