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Contractor Faces False Claims Act Liability for Payments Made by Iraq’s Coalition Provisional Authority
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April 20, 2009
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By Laura Thomson
Howrey LLP
The U.S. Court of Appeals for the 4th Circuit has held that payments to a U.S. security contractor by the Coalition Provisional Authority in Iraq are subject to the False Claims Act. The appeals court reversed a trial court’s ruling limiting the reach of the False Claims Act to funds paid directly by the U.S. government.
On remand, the 4th Circuit gave the whistleblowers the option of a new trial on their claims under the False Claims Act (31 USC §§3729, et seq.).
Background
The Coalition Provisional Authority was a temporary government body in Iraq created by the U.S. Army and recognized by a United National Security Council resolution. It governed Iraq from May 2003 to June 2004. It was staffed mainly by U.S. personnel, but personnel came from more than a dozen countries.
In 2003, the Coalition Provisional Authority awarded two contracts to Custer Battles LLC, a security contractor founded by two former U.S. Army Rangers. Under the first contract, Custer Battles provided security at Baghdad International Airport. Under the second, it built, equipped and serviced three hubs as part of the dinar exchange program, an initiative to replace Iraqi currency bearing Saddam Hussein’s portrait.
The relators, or qui tam whistleblowers, brought False Claims Act claims on both contracts and for retaliation. One relator was a corporation that was a subcontractor to Custer Battles. The other was an employee of the subcontractor. The United States did not intervene as of right in the case but filed briefs and participated in oral argument as amicus curiae, supporting the relators.
Before trial, the U.S. District Court for the Eastern District of Virginia limited the amount of funds subject to the False Claims Act, reasoning that the Coalition Provisional Authority was not an instrumentality of the United States and, therefore, invoices presented to it were not presented to the U.S. government. Later, after a jury returned a verdict for the full amount of False Claims Act damages that had been allowed, the District Court granted judgment as a matter of law in favor of Custer Battles on grounds that its invoices had not been presented to U.S. government officials or employees as required by the False Claims Act.
The 4th Circuit reversed these orders but affirmed another relating to the airport contract. United States ex rel. DRC, Inc. v. Custer Battles, LLC, No. 07-1220 (4th Cir. April 10, 2009). The appeals were taken from United States ex. rel. DRC, Inc. v. Custer Battles, LLC, 376 F.Supp.2d 617 (E.D.Va. 2005), 444 F.Supp.2d 678 (E.D.Va. 2006) and 472 F.Supp.2d 787 (E.D.Va. 2007).
Airport Contract
The whistleblowers alleged fraud in the inducement of the airport contract. They alleged that Custer Battles promised 138 security personnel in its proposal but provided fewer personnel when it performed the contract. The District Court determined that the relators presented insufficient evidence to support the claim and granted summary judgment in favor of Custer Battles. The 4th Circuit affirmed.
The appeals court noted that the airport contract was a firm-fixed price contract and was not a cost reimbursable contract. In addition, the bid solicitation defined security requirements primarily in terms of promptly opening the airport to commercial traffic rather than in terms of a specific number of security personnel to be provided – that is, particular staffing levels were not required. The appeals court noted that Custer Battles’ proposal had the lowest price and was the only one that met the Coalition Provisional Authority’s demanding schedule to re-open the airport. The court also noted that Custer Battles received high marks for its performance of the contract. Accordingly, the appeals court affirmed dismissal of this claim.
Dinar Contract – Source and Control of Funds
The 4th Circuit’s opinion focused on the dinar exchange contract. It was a cost reimbursable contract with a 25 percent fee for overhead and profit. A central piece of evidence was a spreadsheet that the appeals court termed “astonishing.” It was prepared by Custer Battles and was accidentally left behind after Messrs. Custer and Battles met with Coalition and U.S. government officials. According to the appeals court:
[The spreadsheet] contained rows listing items invoiced under the Dinar Exchange Contract and separate columns listing the "Actual Cost" for the items and the amounts "Invoiced" for the items. This document showed, for example, that for the Baghdad hub of the dinar exchange program, Custer Battles provided two flatbed trucks, for which it paid $18,000 but invoiced the Coalition Authority $80,000. To provide "Life Support, basic level" at the Bagdad hub, it provided generators that cost $74,000 but for which it invoiced the Coalition Authority $400,000. And for the Basra hub, it spent $4,000 to provide laundry facilities but invoiced the Coalition Authority for $12,000. Thus under the Dinar Exchange Contract, Custer Battles improperly received the difference between the actual costs and the inflated invoiced amounts and also 25% [mark-up on] the inflated invoiced amounts.
After conducting a source-of-funds analysis to trace the approximately $15 million paid to Custer Battles under the dinar contract, the District Court limited Custer Battles’ liability to a $3 million advance paid with a U.S. Treasury check funded from an account consisting of assets seized from Iraqi government sources as part of the war effort. It excluded from liability the remaining $12 million paid to Custer Battles, which was paid out of the Coalition Provisional Authority’s “Development Fund for Iraq.” The development fund consisted of funds from various non-U.S. sources and $210 million confiscated by the United States from Iraqi bank accounts.
The damages limitation was based on the District Court’s interpretation of “claim.” In 31 USC §3729(c), “claim” is defined as:
any request or demand, whether under a contract or otherwise, for money or property which is made to a contractor, grantee, or other recipient if the United States Government provides any portion of the money or property which is requested or demanded, or if the Government will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded.
The District Court focused on the word “provides” and read it to require U.S. government control. Because the U.S. government relinquished control of funds contributed to the Development Fund for Iraq, the District Court determined that requests for payments paid from that source were not “claims” under the False Claims Act.
The 4th Circuit held that this was error. It held that the operative terms in the definition were “grantee” and “any portion.” Because Custer Battles made claims to a grantee of U.S. money and claims were paid from the grantee’s funds, a portion of which had been provided by the U.S. government, the 4th Circuit held that all of the claims presented on the contract, totaling $15 million, were qualifying “claims.” So long as any portion of the claim was or would be funded with U.S. money given to the grantee, all of the claims come within the False Claims Act, the appeals court held.
It also held that the United States need not retain control over funds once they were given to a grantee because the False Claims Act imposed no such requirement.
Custer Battles pointed to the language of its contract with the Coalition Provisional Authority, which provided: “No funds, appropriated or other, of any Coalition country are or will be obligated under this contract.”
The 4th Circuit rejected this argument because “ ‘claim’ is not defined in relation to the obligation of the U.S. government but rather to the provision of United States funds.”
The 4th Circuit also rejected Custer Battles’ argument that it had to be in privity of contract with the U.S. government to be subject to False Claims Act liability. The appeals noted that the statute imposed no such requirement and cited a recent U.S. Supreme Court decision in which a subcontractor was held liable under the False Claims Act. Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123, 2129-30 (2008). The 4th Circuit noted that a subcontractor could not, by definition, be in privity with the U.S. government.
Accordingly, the appeals court held that all $15 million paid to Custer Battles under the dinar contract was subject to False Claims Act liability.
Dinar Contract – U.S. Personnel
The 4th Circuit also held that the District Court erred in granting Custer Battles’ Motion for Judgment as a Matter of Law on the issue of presentment to a U.S. government official or employee.
Custer Battles submitted its invoices for the dinar contract to U.S. government personnel who had been detailed to work with the Coalition Provisional Authority. The invoices then were forwarded to a U.S.-retained contractor, then to U.S. military personnel and then to the Coalition Provisional Authority for payment.
The False Claims Act provides at 31 USC §3729:
Any person who
| (a)(1) | knowingly presents, or causes to be presented, to an officer or employee of the United States Government or a member of the Armed Forces of the United States a false or fraudulent claim for payment or approval;
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| (2) | knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the Government;...
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is liable to the United States Government for a civil penalty of not less than $5,000 and not more than $10,000, plus 3 times the amount of damages which the Government sustains because of the act of that person....
Relying on these provisions, Custer Battles argued that its actions were outside the purview of the False Claims Act because the contracting officers were not working in their official capacities as U.S. employees or officers and because the Coalition Provisional Authority was not exclusively controlled by the U.S. government. The District Court agreed, ruling as a matter of law and thereby overturning the jury’s $3 million verdict.
The 4th Circuit agreed that 31 USC §3729(a)(1) requires presentment be made to U.S. government personnel working in their official capacity but found there was sufficient evidence on that issue. It noted evidence showed that contracting officers, “while detailed to the Coalition Authority, were functioning as employees of the United States to do precisely the jobs that the United States hired them to do full-time and for which the United States paid them.” Accordingly, the 4th Circuit held that there was “ample evidence to show that the fraudulently inflated invoices were presented to U.S. government employees or officials who were acting in their official capacities.”
As for 31 USC §3729(a)(2), the 4th Circuit held there is no presentment requirement, citing Allison Engine Co. v. United States ex rel. Sanders, 128 S.Ct. 2123 (2008).
On remand, the 4th Circuit gave the whistleblowers the option of a new trial on their dinar exchange claims.
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For more information about the issues covered in this report, please contact Laura Thomson in our Washington, D.C. office at 202-383-7386 or at thomsonl@howrey.com or contact your Howrey attorney. For more information about Howrey’s Construction Practice Group, click here.
©2009 Howrey LLP
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