Tort/Negligence – False Claims Act – Government Contract – Home Office Expenses – Loaned Employees

United States v. Savannah River Nuclear Solutions, LLC (Lawyers Weekly No. 002-232-16, 61 pp.) (J. Michelle Childs, J.) 1:16-cv-00825; D.S.C.

Holding: Even if the government didn’t know that its contractor’s parent company – which had loaned employees to the contractor – was charging the government for (unallowable) home-office expenses, the complaint alleges that either the contractor had an obligation to forward to the government the information contained in the parent company’s certifications or that the government otherwise had the right or ability to access such information; these allegations meet the materiality requirement under the False Claims Act.

The court grants defendants’ motion to dismiss the government’s claims of unjust enrichment and payment by mistake. Otherwise, defendants’ motion is denied. The court will seek an advisory opinion from the Civilian Board of Contract Appeals as to the issues of falsity and scienter.

The parties agree that the defendant-contractor was authorized to enter into loaned employee agreements with its owners and their affiliates (defendant Fluor Federal Services, Inc. or FFS), a practice known as “corporate reachback.” Although the contract between the government and the contractor did not allow the contractor to charge the government for home office (HO) expenses or independent research and development bid and proposal (B&P) expenses, the government alleges that FFS charged the contractor for HO and B&P expenses and that the contractor passed these expenses along to the government.

The government’s allegations as to B&P costs are sufficient to survive a challenge under Rule 9(b), FRCP.  The complaint identifies who committed the fraud – FFS’s and the contractor’s management – and identifies specific individuals who worked for the contractor as FFS reachback employees and certified to the Department of Energy (DOE) that the costs were allowable under the maintenance and operation (M&O) contract. It alleges what the fraud entailed and how it operated: invoices including undisclosed B&P costs were certified by FFS and submitted by FFS to the contractor which were then forwarded as claims to the DOE by the contractor, which were later certified by specific officers as in compliance with the M&O contract and resulted in the DOE’s making improperly inflated payments to the contractor, which then forwarded such payments to FFS under the terms of their cost transfer assignment (CTA). Further, the complaint also alleges the method by which defendants covered up their activities – by means of secretly amending the CTA and advancing pretextual arguments regarding the allowability of costs. The government specifies the time period at issue (Oct. 8, 2008, onward), the annual amounts of B&P costs at issue, some details regarding the numerous invoices from FFS to the contractor that include the alleged B&P costs, and some details regarding the numerous payments from the contractor to FFS in response to these invoices. These allegations are sufficient.

With regard to the HO expenses, the court notes that the False Claims Act (FCA) is a limited purpose fraud prevention statute. Normal contractual disputes are not cognizable under the FCA.

The government must prove, among other elements, that defendants’ claims were false and that those responsible for submitting an objective falsehood acted knowingly in so doing. The legal question faced by the court is whether the challenged costs are allowable under the M&O contract and the applicable regulations.

Government contracting law is complex, technical, esoteric, important and monumental. The Civilian Board of Contract Appeals (CBCA) and the other boards of contract appeals were formed specifically because, whatever a district court’s expertise or experience in this area, theirs would exceed it.

The court concludes that the likely benefits to be gained from an advisory opinion from the CBCA far outweigh the potential for increased inefficiency in the instant litigation. Accordingly, the court will refer the issues of falsity and scienter to the CBCA.

With regard to the element of materiality, an FCA defendant (such as a subcontractor) may be liable for statements made to a third party (such as a prime contractor) which the prime contractor uses in its claim for payment or approval from the government. The complaint sufficiently alleges circumstances that allow the imposition of liability against a defendant who submits a statement to a third party and not directly to the government. Defendants cite no authority for their proposition that materiality cannot be proved when the government is unaware of the underlying statement.

When the test has been applied in contexts outside the FCA, it is clear that a defendant’s statement made to a third party but not disclosed to the government can yet be material, especially when the third party has some obligation to forward the information contained in the statement to the government or when the government otherwise has the right or ability to access the information. The complaint alleges that either the contractor had an obligation to forward to the DOE the information contained in FFS’s certifications or that the DOE otherwise had the right or ability to access such information. These allegations meet the materiality requirement under the test for materiality as it has been applied in other contexts.

The DOE’s not being aware of FFS’s certifications is not dispositive of materiality.

Furthermore, contrary to defendants’ assertion, the complaint sufficiently alleges a causal relationship between the annual certifications and the DOE’s approval and payment of the claims. The complaint alleges that the annual certifications were required by the M&O contract; that, in them, the contractor was obligated to certify that the costs it charged on a daily basis were allowable; that the alleged non-disclosure of HO expenses in the annual certifications prompted an investigation that resulted in the contracting officer’s concluding that the costs, past and present, were unallowable and in a demand from that DOE that the contractor cease charging DOE for the costs.

Common sense suggests that the alleged unallowability of the challenged costs would influence the DOE’s decision to pay them, and defendants’ alleged conduct in covering up the costs suggests that they would be material to the DOE. These allegations are sufficient for purposes of satisfying the materiality requirement at this stage.

With regard to the government’s breach of contract claim, under the Contract Disputes Act (CDA), all claims by the government against a contractor relating to a procurement contract are subject to the decision of a contracting officer, with appeal to the applicable board of contract appeals or the Court of Federal Claims, and may not be brought in federal district court. Nevertheless, where a breach of contract claim is based on the same factual allegations as an FCA claim, the CDA does not deprive federal district courts of jurisdiction over the breach claim.

However, where it is undisputed that there was a valid contract between the government and the defendant-contractor, the government may not pursue its alternate claims of unjust enrichment and payment by mistake.

Motion granted in part and denied in part.