Introduction

Any contractor that has worked with the United States federal government is familiar with the myriad duties, obligations, and rights in its agreements.  Most contracts will set forth the scope of work, cost, time of performance, provisions for payment and termination, and more, often necessitating interpretation and construction of such clauses over the course of performance.  These diligent federal contractors will also be familiar with the False Claims Act, which the United States uses to pursue those who would defraud government programs.  However, some may be unaware that the simple act of interpreting a contract in good faith could give rise to liability under the False Claims Act, even when the contractor had no fraudulent intent.

Consider the recent litigation involving Kellogg Brown and Root Services, Inc. (“KBR”) in the United States District Court for the District of Columbia.  KBR contracted to provide logistical services to the military to support the United States’ mission in Iraq, and the federal government eventually sued KBR for violations of the False Claims Act.  The suit alleged that KBR knowingly submitted false or fraudulent claims for payment, and potential liability amounted to well over $300 million.  The court applied a theory known as “implied false certification,” and relied on internal KBR communications and an attempted contract modification, creating a Catch-22 situation:  KBR’s internal discussions regarding the allowability of certain costs under its contract and its attempt to negotiate the issue in good faith became evidence of fraud in court.

Though the Department of Justice recently voluntarily dismissed its case against KBR, the legal underpinnings remain alive and well in D.C. and other jurisdictions.  To avoid a similar situation, diligent contractors should be aware of implied certification as a component of their duties and obligations under the False Claims Act.

The False Claims Act And Implied Certification

The False Claims Act, 31 U.S.C. §§  3729-3733 (2012) (the “FCA”), provides that any person who knowingly presents to the government a false or fraudulent claim for payment, or who knowingly makes a falsified record or statement in support of such a false claim, is liable to the United States government for statutory civil penalties between $5,000 and $10,000, plus three times the amount of any false claims actually paid by the government.  The statute can be enforced against a contractor not just by the United States, but also by a private individual called a “relator” –  typically a whistleblower – in the name of the government.  In a successful suit, a private individual may be eligible to receive 15-25% of the award or settlement.

The federal government and private whistleblowers are aggressively pursuing FCA claims; FCA judgments and settlements totaled over $13.3 billion since January 2009, with $4.9 billion in fiscal year 2012 alone.  Beyond the high price tag, the non-monetary side of these settlements and judgments often impose expanded compliance programs and more stringent accounting practices on contractors.  Moreover, an adverse FCA judgment against a contractor could result in collateral consequences for current and future work, such as debarment or suspension, negative past performance evaluations, and disclosure through federal government contract information systems.  Acting Associate Attorney General Tony West lauded the FCA in no uncertain terms, calling the Act “quite simply, the most powerful tool that we have to deter and redress fraud.”

Historically, an FCA claim arose when a contractor submitted to the government a fraudulent claim for payment:  an incorrect description of goods or services tendered, a request for payment for goods or services that were never provided, or similar.  However, FCA plaintiffs have continued to push the boundaries of the law.  Today, the theory of “implied certification” posits that, even though a particular claim for payment contains no misrepresentations of the work performed, the claim may yet be a “false claim” for the purposes of the FCA because the contractor implicitly certifies that by submitting a claim, the contractor has complied with all material terms of its contract.  A claim is therefore false if it contains, even implicitly or by omission, a false representation as to the contractor’s compliance with applicable laws or regulations, or the contract terms.

In other words, a contractor may no longer avoid FCA liability by simply submitting honest invoices.  Instead, a plaintiff could argue for FCA liability based on the contractor’s submission of correct invoices coupled with the contractor’s noncompliance with a law, regulation, or term of the contract.  Implied certification therefore greatly expands the range of acts that may trigger an FCA lawsuit, and the issue remains hotly litigated.  The Courts of Appeals for the First, Third, and District of Columbia Circuits have adopted broad forms of implied certification, while the remaining appellate courts have tended towards a more limited form.  The KBR case is a paradigmatic example of the way implied certification has changed the landscape of FCA litigation, as well as a primer on how contractors may inadvertently trigger FCA liability.

Implied Certification In The D.C. Circuit: SAIC II And KB

In 2001, the United States Army awarded an indefinite delivery/indefinite quantity contract to KBR on a cost plus award fee basis.  Under the contract, referred to as LOGCAP III, KBR would provide logistical support services to Army facilities and personnel nationwide.  As the United States expanded its mission in Iraq, KBR became heavily involved in providing services to American troops from 2003 to 2006.  Given the level of unrest in Iraq at the time, protecting personnel and equipment was a vital, but difficult and resource-intensive task.  KBR and the government agreed that LOGCAP III required the government to provide security, but the two disagreed regarding whether KBR could employ armed private security contractors and pass those costs along to the government.  The government believed the terms of the contract prohibited KBR and its subcontractors from hiring, and billing for, private security contractors, while KBR interpreted the terms as simply placing certain restrictions on their use

KBR continued to execute Task Orders under LOGCAP III, requesting reimbursement payments along the way.  Meanwhile, the Army’s ability to provide security to KBR dwindled.  On a number of occasions, KBR’s subcontractors hired private security contractors, and KBR paid those subcontractors and submitted the costs for reimbursement.  KBR even unsuccessfully sought a contract modification to explicitly allow the use of private security contractors.  In 2007, the Defense Contract Audit Agency identified over $100 million in KBR claims for private security contractor costs, and denied reimbursement.  KBR appealed this denial by submitting a certified claim for these costs, which it eventually appealed to the Armed Services Board of Contract Appeals.  Shortly thereafter, the United States filed a lawsuit against KBR, alleging that KBR violated the FCA by including private security costs in its certified claim

KBR moved to dismiss the government’s suit in August 2011.  The court’s decision on KBR’s motion,United States v. Kellogg Brown & Root Services, Inc., 800 F. Supp. 2d 143 (D.D.C. 2011), illustrates the expansive reach of implied certification.  In a memorandum opinion by Chief Judge Royce C. Lamberth, the court held that the government had not proven that the KBR claims at issue were factually false, but endorsed the government’s argument that KBR instead made a legally false claim – an implied false certification.  Relying on a recent decision by the Court of Appeals for the D.C. Circuit, United States v. Science Applications International Corp. (SAIC II), 626 F.3d 1257 (D.C. Cir. 2010) which officially adopted implied certification, the court held the government needed to prove only that KBR “withheld information about its noncompliance with material contractual requirements.”  In essence, the FCA claim turned on whether KBR was fully candid about its compliance with material provisions of LOGCAP III, including those relating to the use of private security contractors

Applying SAIC II, the court first determined that the LOGCAP III private security provisions were indeed material, because the government may have decided not to pay had it known of KBR’s noncompliance.  In making this determination, the court relied in part on internal e-mails in which KBR employees wrote that the “cost [of private security] could be considered unallowable,” holding these conversations demonstrated that the parties to the contract understood that payment was conditioned on compliance.  The court also held that KBR did have the requisite state of mind:  KBR knew that it violated the LOGCAP III security provisions, and it knew its compliance was material to the government’s decision to pay.  The court noted that KBR’s attempt to secure a contract modification regarding private security demonstrated KBR’s state of mind, and again referred to the internal e-mails as supportive of the government’s position.  Bound by SAIC II’s adoption of implied certification, the court denied KBR’s motion to dismiss the government’s FCA claim

In April 2012, the Armed Services Board of Contract Appeals issued its decision on KBR’s appeal from the denial of its initial certified claim, holding for KBR “as a matter of law that there was no categorical prohibition in the terms of [LOGCAP III] on the use of armed private security companies.”  Kellogg Brown & Root Servs., Inc., ASBCA No. 56358, 12-1 BCA (CCH) ¶ 35,001.  Nonetheless, the parties continued discovery in the D.C. federal court litigation.  However, in November 2012, the court granted a motion by the United States to dismiss the entire suit without prejudice.  The motion gave no explanation and the government has not offered one, but for now, KBR seems to have won something of a victory

Conclusion

Though some have expressed hope that KBR’s dismissal signals a change to FCA plaintiffs’ aggressive use of implied certification, it is worth noting that the last written decision out of the D.C. District Court explicitly endorses implied certification and applies it against KBR.  SAIC II and KBR are not merely the recent past of implied certification; these decisions represent the current state of the law.  Even thoughSAIC II reasoned that courts would counter abuses of implied certification through application of the materiality and state of mind requirements, KBR demonstrates that a contractor may face a suit if it even attempts to address the issue in good faith.  In this FCA lawsuit, KBR’s good faith communications – which espoused an interpretation ultimately accepted by the ASBCA – regarding a contract dispute were, effectively, evidence of fraud

In this sense, there is a risk that implied certification could elevate a good faith dispute over the legal meaning of contract terms into a lawsuit for fraud with the potential for civil penalties and treble damages.  Even an honest contractor could find itself in the same Catch-22 as KBR if it submits a certified claim for payment before resolution of a contract dispute.  Accordingly, diligent contractors must consider implied certification as a part of their FCA compliance efforts, particularly when engaged in a contract dispute with the government.