Life after the Supreme Court s Decisions in Escobar & Kingdomware October 13, 2016
Speakers Forum Leader - Kevin Joyce, Adobe Systems Moderator Scott Hommer, Partner, Venable LLP Bill Walsh, Partner, Venable LLP Jim Kennell, Senior Vice President & Group General Counsel, Leidos, Inc. Jim Winner, Chief Legal Officer Chief Legal Officer, General Counsel, and Secretary, GardaWorld Federal Services Becky Pearson, Partner, Venable LLP 2
Agenda Introduction Kevin Joyce Panel Kickoff Scott Hommer Enforcement Trends Bill Walsh Escobar Jim Kennell FCA Landscape after Escobar Jim Winner Kingdomware Becky Pearson Questions 3
Three Decades of Qui Tam Enforcement 1987 30 Qui Tam Suits Filed $86M in Total Recovery (Qui Tam + DOJ) 2015 632 Qui Tam Suits Filed $3.6B in Total Recovery Post Escobar Likely to Increase 4
Fiscal Year Here s The History: DOJ Recovery from False Claim Act Cases New Matters (referrals, investigations, or qui tam actions) Settlements and Judgments Non Qui Tam Qui Tam Non Qui Tam Qui Tam Total Qui Tam and Non Qui Tam 2012 145 652 $1,608,112,862 $3,341,567,978 $4,949,680,840 2013 100 754 $833,491,768 $3,009,262,541 $3,842,754,309 2014 96 714 $2,725,589,226 $3,056,326,588 $5,781,915,814 2015 105 632 $670,783,021 $2,913,033,047 $3,583,816,068 5
The Future 2014 - DOJ announces that it will pursue criminal charges in tandem with Civil False Claims Suits 2015 DOJ initiative to increase pursuit of individual wrongdoing 6
Predictions for DOJ Recovery Downstream Likely to increase: Number of FCA cases, and Cost of doing business with the U.S. Government. Universal Health Serv. United States ex rel. Escobar Kingdomware Techs. Inc. v. United States 7
Universal Health Servs. v. United States et al. ex rel. Escobar et al., 136 S. Ct. 1989 (June 2016) Confirmed liability under the Civil False Claim Act for implied certifications; and Narrowed the test for materiality. 8
Universal Health Servs. v. United States ex rel. Escobar Medicaid patient was diagnosed with bipolar disorder by unlicensed and unsupervised UHS counselors. The patient was prescribed medicine for bipolar disorder by a doctor, later discovered to be a nurse who was held out as a psychiatrist. Rivera soon died from complications related to the medication. The patient s parents (Petitioners) sued UHS, claiming; UHS violated Massachusetts Medicaid regulations pertaining to staff licensing, and as a result, UHS did not comply with a condition of payment from the Government. 9
The Escobar Decision Justice Thomas, backed by an 8-0 Supreme Court, imposed an implied [false] certification theory of liability. Liability attaches when a defendant: 1) Submits a claim for payment that makes specific representations about the goods or services provided, 2) Knowingly fails to disclose noncompliance with statutory, regulatory, or contractual requirements, and 3) The omission(s) render those representations misleading, and 4) The misrepresentation is material. The determining factor is whether the misrepresentation about compliance is material to the Government s payment decision. Liability does not depend on whether the requirements were expressly designated as conditions of payment. It is relevant, but not automatically dispositive. 10
The Court Narrowed the Test for Materiality The Court disagreed with the Government s and First Circuit s expansive view of materiality under the FCA holding: statutory, regulatory, and contractual requirements are not automatically material. 136 S.Ct. at 2001-02. The Supreme Court test for materiality is 1. It was material to the other party s course of action; and 2. [Has] a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property. 11
The Government s Actual Knowledge May Disprove Materiality The Court gave examples of situations where actual knowledge by the Government, plus inaction, demonstrates that the requirement is not material: If the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated. If the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position. 12
Post Escobar Interpretations of the Court s Materiality Requirement Two Part Test or Flexible? ND Alabama Two-Part Test US v. Crumb Escobar applied two conditions for liability under implied certification 1. [T]he claim does not merely request payment, but also makes specific representations about the goods or services provided; and 2. The defendant s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths US ex rel. George v. Fresenius Medical Care Holdings. Plaintiff who alleged that his dialysis was cut short failed to allege how incomplete it was and could not demonstrate materiality ND CA & DOJ Flexible Approach Rose v. Stephens Institute Escobar did not apply a rigid two-part test for falsity. The focus under Escobar is not how the condition is designated but instead the effect on the likely or actual behavior of the recipient of the alleged misrepresentation. Ruled that an incentive compensation ban is material. DOJ filed Statement of Interest in US ex rel. Herman et al. v. Coloplast Corp. Escobar embraced the natural tendency test Materiality is determined through a holistic assessment... (Emphasis added). Prohibition on telemarketing is material. 13
Triple Canopy, Inc. Case 4 th Circuit TCI was hired under to provide a security force at Al Asad base (Iraq s secondlargest air base). TCI hired guards from Uganda, billing full price for them as marksmen despite their lack of qualifications. June 2013: VA district court rule that the USG didn t show it specifically relied on allegedly altered marksmanship tests when it fulfilled invoices. January 2015: Fourth Circuit revived the USG s claims about falsifying marksmanship tests, agreeing they qualified as false statements. June 2016: In the wake of the Escobar ruling, the High Court vacated the Fourth Circuit decision, ordering the court to consider the case anew in light of the new standard for evaluating FCA liability. 14
FCA Landscape after Escobar Increased Cost for FCA Cases Fact-intensive materiality standard decreases likelihood of resolution on the pleadings or on summary judgment. Greater scrutiny and cost associated with negotiating statutory and regulatory provisions to be included in contracts/ subcontracts More Disputes Over FCA Cases Materiality standard may lead to more disputes and increased litigation 15
Contractor Best Practices Establish Intent to Comply Document all decisions Demonstrate deliberate, good faith efforts to comply with all regulatory and contractual provisions Review Certification Process Who will be charged with ensuring that the company is up to date on its certification requirements Do they have the appropriate knowledge to certify? Maintain Dialog with Government Customer Confirm key communications in writing Consider whether to obtain government buy-in for tricky compliance decisions Clarify your understanding of contract ambiguities in writing before a dispute 16
Contractor Best Practices, Continued Develop a Crisis Mitigation Plan Document response to noncompliance Test compliance post plan Proactively Assess Weakness Where is your company vulnerable to fraud waste & abuse? What are the red flags for fraud in your industry? Fraud Awareness Program Revisit your fraud awareness program on an annual basis, and if you have not established one, now would be a good time to think about making that investment 17
Kingdomware Techs., Inc. v. United States, 136 S.Ct. 1969 (June 2016) The Rule of Two and applicable market research is mandatory for all VA procurements. Federal Supply Schedule orders are contracts. 18
Kingdomware Techs. Inc. v. United States The Department of Veteran Affairs (VA) awarded a contract to a non-veteran-owned business. Kingdomware, a service-disabled veteran-owned small business (SDVOSB), filed a bid protest with the GAO, alleging the VA failed to follow its Rule of Two in the solicitation process. The Rule of Two in the VA Act provides that the VA shall award contracts on the basis of restricted competition, where There is a reasonable expectation that two or more small business concerns owned and controlled by veterans will submit offers, and The award can be made at a fair and reasonable price that offers the best value to the United States. 38 U.S.C. 8127(d). Sole source awards may apply in specific circumstances. 19
Outcome of Kingdomware Justice Thomas, backed by an 8-0 Supreme Court, held the VA; 1) Must set-aside procurements for VOSBs (including SDVOSBs) when a contracting officer has a reasonable expectation, based on market research, that two VOSBs are likely to submit competitive offers at a fair and reasonable price, and 2) May employ a non-competitive solicitation process (sole source) where; A contract or order falls below the simplified acquisition threshold ($150k), or A contract or order is above $150k or below $5 mil, and the business is a responsible source with respect to performance of such contract[ing] opportunity, and the award can be made at a fair and reasonable price. Applies to all contracting determinations, including Federal Supply Schedule (FFS) Orders. 20
Holding FSS Orders are Contracts The Court held: When the Department places an FSS order, that order creates contractual obligations for each party and is a contract within the ordinary meaning of that term. See, e.g., Black s Law Dictionary 389 (10th ed. 2014) ( [a]n agreement between two or more parties creating obligations that are enforceable or otherwise recognizable at law ). It also creates a contract as defined by federal regulations, namely, a mutually binding legal relationship obligating the seller to furnish the supplies or services... and the buyer to pay for them, including all types of commitments that obligate the Government to an expenditure of appropriated funds and (as a general matter) are in writing. 48 CFR 2.101 (2015). An FSS order creates mutually binding obligations: for the contractor, to supply certain goods or services, and for the Government, to pay. The placement of the order creates a new contract; the underlying FSS contract gives the Government the option to buy, but it does not require the Government to make a purchase or expend funds. Further confirming that FSS orders are contracts, the Government is not completely bound by the FSS contract s terms; to the contrary, when placing orders, agencies may sometimes seek different terms than are listed in the FSS. See 8.405 4 (permitting agencies to negotiate some new terms, such as requesting a price reduction, when ordering from the FSS. 21
VA Implementation of Kingdomware The VA released an Acquisition Policy Flash, providing guidance for implementation of Kingdomware, effective as of June 22, 2016. Required actions by VA Contracting Officers, include; Solicitations set-aside for SDVOSBs/VOSBs, where Two or more SDVOSBs/VOSBs are likely to submit competitive offers. Verification of GSA FSS SDVOSBs/VOSBs, Must complete Department of Veterans Affairs, Office of Small and Disadvantaged Business Utilization Vendor Information Pages (VIP) database verification. Limitation on Subcontracting, At least 50% of Services & Supplies performed by VOSB/SDVOSB. Conduct & review robust market research, Ensures compliance with Rule of Two requirements and appropriate set-asides. 22
VA Procurement Landscape after Kingdomware Improved opportunities for non-competitive procurement by existing SDVOSBs & VOSBs Non-competitive solicitation process for low-value contracts/orders creates barriers for new and emerging veteran-owned businesses Diminishes path for growth to compete for high-value contracts. Unlikely to have a major impact to VOSB purchasing off the Federal Supply Schedule (FSS) Veteran-owned small businesses on the FSS are vetted. These businesses are committed and have the requisite time and experience to do business with the government. Non-competitive process may increase leverage of Contracting Officers, leading to unexpected results and increased risk in the solicitation process, regardless of contract value. 23
VA Procurement Policy Memo (2016-05), July 25, 2016 Intended [t]o implement changes required as a result of the U.S. Supreme Court decision in Kingdomware, and provide revised policy, procedures, guidance, and instruction Contains guidance on market research, requirements in the pre-solicitation phase, requirements in the solicitation/evaluation phase, all new competitive requirements, and strategies to promote competition among SDVOSB and VOSB firms. Attachments: Class deviation Decision Tree Tool 24
VA Procurement Policy Memo Decision Tree Mandatory sources? No If 2 or more SDVOSBs/VOSBs are on FSS/VA FSS, VA National contracts, MAC or other strategic contracts, use competitive set-aside Market research (verify in VIP); develop acquisition strategy Yes Are existing contracts in place? No If 2 or more SDVOSBs/VOSBs are available on the open market, use competitive setaside procedures. Or Do non-competitive alternatives apply? No 2 or more verified SDVOSBs/VOSBs in VIP capable of performing the work? Yes Interagency agreements; include requirement to adhere to 8127 & 8128 in BPAS IAA; use competitive set-aside procedures when appropriate 25
Beyond the VA The Impact on GSA FSS Orders If FSS orders are contracts, then does the rule of two apply to FSS Orders? GSA Position (via Blog) Kingdomware applies only to VA FSS contracts At this time, the Supreme Court decision applies only to VA contracting rules and is specific to Veterans Affairs and to VA awarded contracts. Unless there is a regulatory change, agencies other than the VA should recognize that there has been no policy change in regard to the discretionary nature of FSS set-asides. Are ordering activity contracting officers required to set aside task or delivery orders against FSS contracts if the Rule of Two is met? No, it is not required unless agency specific statutes or regulations require set-asides. FAR 8.405-5(1) states preference programs of part 19 are not mandatory in this subpart, and ordering activity contracting officers are provided the discretionary authority to set aside FSS orders. GAO (?) In Aldevra, B-411752 (Oct 16, 2015), the GAO held that the Rule of Two did not apply to FSS Orders. GAO denied Aldevra s request for reconsideration, holding that Kingdomware was prospective only in effect. STAY TUNED... 26
Kingdomware s Impact on Protest Case Law The Federal Circuit relied on Kingdomware to confirm the U.S. Court of Federal Claims bid protest jurisdiction over Federal Supply Schedule Task Orders. Even when a new Task Order contracts for the same work previously performed by the same contractor under the GSA Schedule contract, this new Task Order is the award of a new contract. Coast Professional, Inc. v. United States, 828 F.3d 1349 (Fed. Cir.) 27
Questions? 28
Jim Winner, GardaWorld Federal Services Chief Legal Officer, General Counsel & Secretary Panelist Jim Winner is the Chief Legal Officer, General Counsel & Secretary for GardaWorld Federal Services, a global security and risk management company serving the U.S. Government. He is the senior executive responsible for legal, compliance, contracts, security and risk management. Jim also serves as the company secretary and technology control officer. Prior to joining GardaWorld, Jim was a Corporate Director and Assistant General Counsel at Northrop Grumman. He served as the lead counsel for Northrop Grumman's cyber intelligence, civil solutions and information security lines of business. Prior to joining Northrop, Jim served in legal, contracts and procurement executive leadership roles for ITT Corporation, including Vice President and General Counsel and Vice President, Contracts and Procurement for ITT Information Systems, headquartered in Herndon, Virginia, and Associate General Counsel for the ITT Mission Systems, headquartered in Colorado Springs, Colorado. Jim previously served as Corporate Counsel for Cummins Inc., in Indianapolis, Indiana and practiced law with the law firm of Barnes & Thornburg LLP, specializing in contracts, procurement and labor and employment law. Jim s work for Barnes & Thornburg included an in-house counsel assignment with Rolls-Royce Corporation, also located in Indianapolis. Prior to joining the private sector, Jim honorably served as an Air Force Judge Advocate and Systems Acquisition Officer. Jim worked across multiple legal disciplines, including trial and appellate litigation, and began his acquisition career in the MILSATCOM Joint Program Office, where he supported major DoD satellite communications programs, including DSCS, Milstar and Advanced EHF. His military assignments included: Deputy Staff Judge Advocate, Holloman Air Force Base, NM; Appellate Defense Counsel, Bolling Air Force Base, Washington, DC; Area Defense Counsel, Keesler Air Force Base, MS; Assistant Staff Judge Advocate, Keesler Air Force Base, MS; and Pentagon Liaison and Program Control Manager, MILSATCOM Joint Program Office, Space and Missile Systems Center, Los Angeles Air Force Base, CA. Jim received his Bachelor of Science degree as a distinguished graduate of the United States Air Force Academy in Colorado Springs, Colorado. He received his Juris Doctorate degree, magna cum laude, from Loyola Law School in Los Angeles, CA. Jim is licensed to practice law in California, Colorado, Virginia and Washington, D.C. He is active in many professional organizations, including the Professional Services Council and the Washington Metropolitan Chapter of the Association of Corporate Counsel. Jim was serves as a board member to the Northern Virginia Chamber of Commerce and was selected as a top five finalist for the Association of Corporate Counsel National Capital Region Chief Legal Officer or the Year Award in both 2015 and 2016. 29
Jim Kennell, Leidos, Inc. Senior Vice President & General Counsel Advanced Solutions and Intelligence & Homeland Security Groups Panelist Jim Kennell is the Senior Vice President & General Counsel for the Advanced Solutions and Intelligence & Homeland Security Groups of Leidos, Inc. His areas of practice include government and commercial contracts, litigation, internal investigations and compliance-related counseling. He is a member of the American Bar Association Public Contract Law Section, the ABA Section of Litigation, the ABA Standing Committee on Law & National Security and the National Defense Industry Association, and is also a past chair of the NDIA Procurement Division s Legal Committee. Prior to joining Leidos (then SAIC) in the Fall of 2000, he practiced with the law firm of Fried, Frank, Harris, Shriver & Jacobson in its Washington, DC office. He is a graduate of the University of Illinois (B.A. 1987), and the University of Michigan Law School (J.D. 1990). 30
Rebecca E. Pearson, Venable LLP Partner, Government Contracts Panelist Rebecca Pearson assists clients in government contract litigation; contract award protests before the Government Accountability Office, U.S. Court of Federal Claims, and federal agencies; size and NAICS Code challenges before the Small Business Administration Office of Hearings and Appeals; administrative claims before agency boards of contract appeals; representation before the Department of Justice and federal courts on civil matters involving government contractors, including the Civil False Claims Act; and civil litigation in federal courts involving government prime contractors and subcontractors. Ms. Pearson also counsels clients matters on issues involving small business issues, joint ventures and teaming issues, and further counsels on defective pricing and cost allowance questions, teaming agreements, and legal and regulatory compliance and ethics. Ms. Pearson is a Board Member of The George Washington University Government Contracts Alumni Board of The George Washington University Law Board. She is also a past President of the National Contracts Management Association and an active Member of the American Bar Association. 31
Bill L. Walsh, Venable LLP Partner, Government Contracts Panelist Bill Walsh concentrates his practice representing federal and state sector companies who contract with DOD and civilian agencies. He represents clients locally, nationally, and internationally in issues including dispute resolution (ADR) and bid protests before the U.S. Government Accountability Office, Federal Boards of Contract Appeals, and executive agencies on contract administration matters, contract claims, contract terminations, teaming agreements, organizational conflict of interest concerns and small business matters. Mr. Walsh has over 40 years of federal and state government contract experience and extensive knowledge and skills in this complex area. Mr. Walsh s legal career began as a lawyer with the DOD on government contract and legislative issues. Mr. Walsh also served as Chief Counsel for NASA s Marshall Space Flight Center. In the past number of years, in addition to assisting several clients in pursuing protest claims before the Government Accountability Office, Mr. Walsh has also represented clients with matters before the Armed Services Board of Contract Appeals. An active member of the business community, Mr. Walsh serves on the board of directors for the Fairfax County Chamber of Commerce and served as its general counsel, and is a former chair of the Government Affairs Committee of the Northern Virginia Technology Council. Past and recent activities include serving as chair of the Small Business and Federal Regulations Committees of the American Bar Association, Public Contract Law Section, and vice-chair of the Ethics, Compliance and Professionalism Responsibility Section, membership in the Professionalism Committee of the Virginia State Bar Association, membership on the Advisory Board of the National Center for Technology and the Law, and membership on the Dean's Council of George Mason University School of Management, as well as Marymount University's School of Business Board of Visitors. He is also a member of the American, Virginia, District of Columbia, Fairfax County, and Arlington County Bar Associations. 32
J. Scott Hommer, Venable LLP Partner, Government Contracts Moderator Scott Hommer is a partner in the Tysons Corner office of Venable LLP. He concentrates his practice in business counseling and litigation with an emphasis on technology companies and government contractors. He represents clients locally, nationally, and internationally on issues including negotiating contracts, doing acquisitions, protecting intellectual property rights, and litigating successfully. Mr. Hommer also has significant experience in counseling clients who do business with the Federal, state, and local governments and has represented clients on contract administration matters, contract claims and disputes, bid protests, contract terminations, teaming agreements, conflicts of interest issues, intellectual property rights issues, government socio-economic programs, and small business matters. Mr. Hommer is committed to developing relationships with his clients that go beyond the usual role of legal advisor. He works closely with his clients on a proactive basis, developing strategic plans and managing legal issues that may arise, and more importantly, identifying potential problems before they develop. This approach is not only smart, but is efficient, cost effective and significantly enhances opportunities for success. Mr. Hommer is a member of the Executive Committee and the Board of Directors of the Northern Virginia Chamber of Commerce (the "Chamber") and he is serving as the General Counsel to the Chamber. Through his involvement with the Chamber in the late 1980s, Mr. Hommer was one of the first to work on developing a regional high-tech council, currently known as NVTC. Mr. Hommer is a member of the Executive Committee and Board of Directors of the Northern Virginia Technology Council ("NVTC"), and he has served five terms as the General Counsel to NVTC. Previously, Mr. Hommer was elected to serve as General Counsel to the NVTC s Equal Footing Foundation, and he has served as a member of the NVTC s Senior Advisory Board. 33