On May 16, 2017, the US Court of Appeals for the Fourth Circuit issued a decision in US ex rel. Badr v. Triple Canopy, Inc. In this case, the government had contracted with a private security company to provide guards at a military airbase in Iraq. Although the applicable contract required the guards to have certain marksmanship scores, the defendant (as alleged by the relator and the government) failed to employ guards with the requisite qualifications.

The Fourth Circuit’s recent decision is the continuation of a years-long battle between the plaintiffs and Triple Canopy over whether the operative complaint adequately pleads violations of the False Claims Act. The Fourth Circuit previously held that the complaint had done so, but after Triple Canopy petitioned the Supreme Court for certiorari, the Supreme Court remanded the case back to Fourth Circuit for reconsideration in light of the high court’s recent Escobar decision.

Continue Reading Fourth Circuit Decision in Triple Canopy Sets up Another Implied Certification Circuit Split

On October 11, 2016, a three-judge panel of the Seventh Circuit Court of Appeals issued a ruling in United States ex rel. Uhlig v. Fluor Corp., affirming summary judgment against the relator in an FCA action where the government had declined to intervene. See generally 2016 WL 5905714, No. 14-2815 (7th Cir. Oct. 11, 2016).

The defendant had contracted with the US Army to perform electrical work at bases in Northern Afghanistan. It hired the relator, an electrician, as a foreperson for this work, but subsequently declined to renew his contract because he did not hold an electrician’s license. The relator then emailed the Defense Contract Management Agency, complaining that he was losing his job while other unlicensed electricians, who were Afghan nationals, were not. In a follow-up email, the relator alleged that the defendant company was committing fraud, and copied a website dedicated to “exposing . . . corporate greed among [defense] contractors.” The company then fired him on the grounds that sending his supervisor’s name and contact information violated its computer-use policy.

The relator filed FCA and retaliatory discharge claims, and the company successfully moved for summary judgment. The district court held that because the relator had no objective basis for asserting that the company had committed fraud, his emails did not constitute protected activity under the FCA.

On appeal, the relator argued that the company violated the FCA by “knowingly employing unlicensed electricians in breach of its contract and submitting invoices for the unlicensed services to the government for payment.” The Seventh Circuit disagreed, noting that the contract in question made electrician licenses optional, and the company had “independently decided to phase in a self-imposed requirement” that electricians such as the relator had to hold licenses. Because the company was accordingly in compliance with the contract, the Court reasoned, there was no false certification.

The Court then turned to the relator’s retaliation claim, noting that the determination of whether an employee’s conduct was protected turned in part on whether “a reasonable employee in the same or similar circumstances might believe that the employer is committing fraud against the government.” Citing the fact that he did not have “any firsthand knowledge of Fluor’s contract obligations to the Army,” the Court held that Uhlig had no reasonable basis for such a belief.

The primary lesson for FCA practitioners regarding retaliation claims is that even if a plaintiff subjectively believes a defendant is committing fraud, courts will not recognize protected activity if there is no reasonable basis for such a belief.

Yet another federal court has rejected a False Claims Act (FCA) lawsuit brought under an implied certification theory, finding that non-compliance with federal laws and regulations that are not express conditions of payment cannot form the grounds for a FCA suit. On March 31, 2016, the suit brought by two former employees of MD Helicopters, Inc. against their former employer, a retired Army Colonel was dismissed by the U.S. District Court for the Northern District of Alabama. In reaching this ruling, the court found that an implied certification FCA claim could not be premised on the violation of either a provision of the Federal Acquisition Regulation (FAR) titled ‘Contractor Code of Business Ethics and Conduct’ (48 C.F.R. § 52.203-13) or the Truth in Negotiations Act (10 U.S.C. § 2306(a)).

Continue Reading Implied Certification FCA Suit Against Defense Contractors and Retired Army Colonel Dismissed

On February 25, 2016, the United States District Court for the Eastern District of Virginia dismissed a False Claims Act (FCA) case alleging that PAE Government Services (PAE) intentionally overcharged the Department of State (DOS) for bottled water supplied to various facilities in Iraq.  United States of America ex rel. Anthony Garzione, 2016 WL 775780 (E.D. Va. 2/25/2016).  Even though PAE allegedly chose the highest bidder when it awarded a subcontract for the water and terminated the relator, Anthony Garzione, when Garzione complained, the court dismissed claims that PAE violated the FCA and retaliated against Garzione.  According to the court, the Federal Acquisition Regulations (FAR) required only that PAE award the subcontract at a “reasonable price.”  Id. at *5-6.  Garzione came forward with nothing in his complaint to show that the highest bid was objectively “unreasonable.”  Id.  For the same reason, Garzione did not engage in protected activity when he raised complaints.  Id. *8.

In 2013, DOS awarded PAE a contract to supply “life support and logistical function” at embassies and consulates throughout Iraq.  The contract included “food and supplies,” among other things.  Id. *1.  For the first year of the contract, PAE supplied very small quantities of bottled water to DOS facilities through a subcontract with Taylors International Services, Inc. (Taylors).  In 2014, however, DOS modified the contract to require PAE to supply much greater quantities of bottled water.  PAE immediately issued a request for bid proposals, which ultimately included the following:  a bid from Taylors for $3.65 per case for Pearl brand water; a bid from Pearl itself for $3.50 per case; and a bid from AWI for $1.18 per case.  Id.

PAE chose Taylors.  Garzione complained and sought to solicit other companies to fill the subcontract. Eventually, the complaint alleges, PAE supervisors began to treat Garzione with hostility, excluded him from meetings and communications, and eventually fired him in February 2015.  Id. *2.  Throughout it all, the subcontract for bottled water remained with Taylors.

Garzione sued, raising three claims. Counts I and II alleged that PAE “falsely certified” that it had complied with the requirements of the FAR to seek the payment of only “reasonable” prices.  As the district court explained, “[t]his claim is based on the legal theory that PAE’s costs for bottled water were necessarily not ‘reasonable’ because it selected Taylors[.]”  Id. *3. Under Count III, Garzione alleged that he engaged in “protected activity” when he questioned PAE’s selection of Taylors and was terminated in retaliation for doing so.  Id.

With little trouble, the district court dismissed all three counts.

First, the court dismissed Counts I and II.  To begin, the court rejected Garzione’s allegations that Taylors’ prices were unreasonable, observing that Garzione did not cite “any authority for the proposition that the highest bid constitutes an ‘unreasonable price’[.]”  Id. at *5.  In addition, the court rejected an argument that PAE had made false statements to the government by impliedly certifying, when it submitted invoices, that the price paid for bottled water was reasonable when, in fact, it was not. Id. at *6.  According to court, there was nothing in the contract requiring PAE to comply with the FAR regulations that the price was “reasonable.”  Id.

Second, the court held that the complaint failed to adequately allege that PAE either had the “specific intent to defraud” the government, or acted with recklessness when it submitted claims for bottled water.  Id. *7.  For these same reasons, the complaint failed to meet Federal Rule of Civil Procedure 9(b)’s heighten pleading standard.  Id.

Finally, the court turned to the retaliation claim and dismissed it. To bring a successful claim for retaliation under the FCA, a plaintiff must allege that he engaged in “protected activity” by acting to prevent a FCA violation at the time of the adverse employment action. Id. at *7.  But “protected activity” requires that the company conduct at issue involve “an objectively reasonable possibility of an FCA action[.]”  Id. *8.  “Here,” the court explained, “plaintiff failed to plead anything more than his subjective belief that PAE” violated the “reasonable” price regulations.  Id. At most, Garzione put PAE on notice that he disagreed with the selection of Taylors, and that he thought the company could get a better price. That was neither enough to state a FCA claim or to act as the foundation for a retaliation claim. Id.

 

In a November 12, 2015 decision in a long running qui tam suit under the False Claims Act (FCA), the U.S. District Court for the Eastern District of Virginia dismissed a relator’s case pursuant to the first-to-file bar (31 U.S.C. § 3730(b)(5)) for the second time. The case, including the meaning of the first-to-file bar, was the subject of a May 26, 2015 Supreme Court decision on which we previously reported. (Kellogg Brown & Root Servs., Inc. v. United States ex rel. Carter, 135 S. Ct. 1970 (2015) (“KBR”)). In that decision, the Supreme Court interpreted the word “pending” in the first-to-file bar to mean that the bar is inapplicable if the first-filed suit has been dismissed.

On remand in the district court, the defendants again moved to dismiss on first-to-file grounds. The relator argued that although there were prior actions asserting similar claims pending at the time he filed his case, the fact that such actions had since been dismissed meant that, under the Supreme Court’s decision, the first-to-file bar was inapplicable. The district court explained, “Carter believes the dismissal of the earlier actions automatically advanced him to the first-filer position, even though he filed this case when those actions were pending in 2011. For the following reasons, Carter interprets [KBR] too broadly.” The district court found that whether the first-to-file bar applies depends on whether the prior action is pending at the time the second case is filed; subsequent dismissal of the prior action is irrelevant. The first-to-file bar is not assessed “mid-course whenever an earlier suit is dismissed.”

The district court held that this result does not conflict with the Supreme Court’s holding, which was narrow and only concerned whether “new claims” would be barred by dismissed cases. According to the district court, the Supreme Court did “not purport to address what effect a dismissal has on existing claims that were previously barred.” The district court thus held that because the prior cases were pending when the relator filed his suit, the relator’s claims were barred, and the subsequent dismissal of those suits did not “automatically advance” the relator to first-filer position.

Moreover, in response to the relator’s request for leave to amend, the district court held that amendment would not cure the preclusive effect of the first-to-file bar, rejecting the relator’s assertion that a court should look at the facts in existence at the time an amended complaint is filed. The district court observed that “[i]n the first-to-file context, however, the timing of the [initial] filing carries the weight of jurisdictional relevance.”

The court did not dismiss the relator’s claims with prejudice, however, despite defense arguments that refiling would be foreclosed by the statutes of limitations and repose. The district court determined that doing so before any such refiling would effectively be issuing an advisory opinion, which it declined to do. Accordingly, there may be yet another chapter in this long-running litigation. But the district court’s rejection of the broad interpretation of the Supreme Court’s KBR holding advocated by the relator is certainly heartening for FCA defendants. In the Eastern District of Virginia, at least, defendants seeking dismissal of a case on first-to-file grounds can rely on the facts in existence at the time the case was filed.

We have previously posted about the United States Court of Appeals for the Fourth Circuit’s January 8 panel decision in U.S. ex rel. Badr v. Triple Canopy and its implications for “implied certification” False Claims Act (FCA) claims based on breaches of contract in the Fourth Circuit.  On Monday, March 9, the Fourth  Circuit denied Triple Canopy’s petition for rehearing en banc.  In seeking rehearing, Triple Canopy argued that, among other things, the Fourth Circuit’s decision expands the implied certification theory of FCA liability beyond the bounds recognized in other jurisdictions, rendering the Fourth Circuit an outlier:

Despite this clear and restrained jurisprudence, the panel decision embraced the theory of implied certification and expanded it beyond the bounds ever considered by this Court or applied by those circuits which recognize the theory. Under the panel’s theory, any knowing breach of contract is a violation of the FCA.

Further:

And by not even restricting viable implied certification claims to circumstances where compliance with a statute or contractual provision was an express condition of payment, the panel’s opinion abandoned that safeguard in favor of making every contract breach an FCA violation. This is a striking expansion of FCA liability, especially where this Court has repeatedly rejected such an outcome.

Triple Canopy cited the Western District of Virginia’s decision in Skinner v. Armet Armored Vehicles, Inc., on which we also recently posted, as an example of the potentially overly broad reach of the FCA in the Fourth Circuit after Triple Canopy.  While the arguments advanced in favor of rehearing were consistent with many of the criticisms the Triple Canopy opinion has drawn, the Fourth Circuit was not convinced, declining to revisit its decision.

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.