The Fourth Circuit’s Triple Canopy Decision: Implied Certification Versus “Garden-Variety” Breaches of Contract (and does the Government’s intervention decision matter to the analysis?)

By on February 10, 2015

The Fourth Circuit’s January 8, 2015 decision in United States ex rel. Badr v. Triple Canopy, Inc. is notable in several respects.  The decision announces the court’s explicit endorsement of the “implied certification” theory of False Claims Act (FCA) liability.  However, it leaves some uncertainty regarding how that theory is to be applied in courts within the Fourth Circuit.  The decision also contains language arguably suggesting that in such cases, Government-intervened FCA claims may have a higher likelihood of survival than FCA claims pursued exclusively by relators.

Triple Canopy contracted to provide security services at a military base in Iraq.  The Government’s complaint in intervention alleged that Triple Canopy’s employees did not possess the weapons qualifications they were required to have under the contract, that supervisors knew they were not qualified, and that they created false documents to hide the deficiencies.  The contract itself did not condition payment on compliance with the weapons qualification requirements.

The Fourth Circuit reversed the district court’s dismissal of the FCA claims.  While the Fourth Circuit acknowledged that the FCA cannot be used to “shoehorn” a breach of contract claim into a claim under the FCA, it held that noncompliance with a contractual term can give rise to an implied false certification claim under the FCA in some instances.  This holding in itself is not remarkable except inasmuch as the Fourth Circuit explicitly endorsed the implied certification theory of FCA liability for the first time.  What is notable, however, is the minimal guidance provided by the court regarding which types of contractual violations can support FCA claims.

Essentially sidestepping the FCA’s element of falsity, the court held that the elements of materiality and scienter are the best gatekeepers with respect to whether a contractual violation can give rise to a cognizable claim.  After finding the Government had easily pled scienter, the court then addressed materiality.  The court held that “common sense strongly suggests that the Government’s decision to pay a contractor for providing base security in an active combat zone would be influenced by knowledge that the guards could not, for lack of a better term, shoot straight.  In addition, Triple Canopy’s actions covering up the guards’ failure to satisfy the marksmanship requirement suggest its materiality.  If Triple Canopy believed that the marksmanship requirement was immaterial to the Government’s decision to pay, it was unlikely to orchestrate a scheme to falsify records on multiple occasions.”

While the court’s decision may have “common sense” appeal, it falls short of providing a clear standard for determining when a contractual violation can give rise to an FCA claim and when a violation is sufficiently benign that it cannot.  The Triple Canopy court was undoubtedly bothered by the idea of security forces lacking the requisite weapons training (as well as by the associated cover-up), but this begs the question of how the materiality determination should be made in other cases, when and by whom.

Triple Canopy stands in stark contrast to the clarity imparted by the Fourth Circuit’s own decision last year in United States ex rel. Rostholder v. Omnicare, Inc., 745 F.3d 694 (4th Cir. 2014), in which the relator alleged that violations of FDA safety regulations gave rise to FCA claims.  There, the Fourth Circuit affirmed the district court’s dismissal of the relator’s complaint, and clearly held that materiality and falsity are “distinct elements of an FCA claim.”  The court reviewed the relevant regulatory and statutory framework and determined that because Medicare/Medicaid payment was not conditioned on compliance with the safety regulations in question, the relator had failed to plead falsity.  Further, “were we to accept relator’s theory of liability based merely on a regulatory violation, we would sanction the use of the FCA as a sweeping mechanism to promote regulatory compliance, rather than a set of statutes aimed at protecting the financial resources of the government from the consequences of fraudulent conduct.”

The Fourth Circuit’s objective analysis of the relator’s claim — and in particular the distinct element of falsity — in Omnicare differs substantially from its Triple Canopy decision, in which the court seemed to rest its holding on what is fundamentally a gut-driven assessment of materiality.

Finally, it is worth pointing out some interesting language in the Triple Canopy decision: the suggestion that the Government’s decision to intervene (or not) is relevant to whether a contractual violation is merely “garden-variety” or whether it can sustain an FCA claim.  The court stated in a footnote that “there are several key distinctions between this case and what we viewed as garden-variety breaches of contract in [previous cases].  First, this case does not involve uninjured third parties making claims against their former employers or contracts under which the Government does not ‘express dissatisfaction.’  To the contrary, the Government has clearly expressed its displeasure with Triple Canopy’s actions by prosecuting this action.”  Is this a signal from the court that unintervened claims pursued exclusively by relators will be subject to a more exacting level of scrutiny?  Maybe.  Indeed, Omnicare was just such a case.  However, the court’s language must be reconciled with the fact that even where the Government declines to intervene, a relator acts on its behalf.

Laura McLane
Laura McLane serves as head of McDermott's Boston Litigation Practice Group. Laura represents national and international clients in health care, securities and other government enforcement matters, both civil and criminal. She also represents clients in professional and products liability cases and in complex commercial disputes. A significant part of Laura's practice is devoted to representing health care and other companies, as well as individuals, in government investigations and qui tam litigation based on the False Claims Act (FCA) and related statutes, including the Anti-Kickback Statute and the Stark Law. Read Laura McLane's full bio.