GOVERNMENT CONTRACTING LAW

AN A.S. PRATT PUBLICATION JUNE 2015 VOL. 1 NO. 3 PRATT S GOVERNMENT CONTRACTING LAW REPORT EDITOR S NOTE PROTEST ALLEGATIONS Victoria Prussen Spears PROTEST ALLEGATIONS: DISCUSSIONS WITH OFFERORS PART I Luke Levasseur and Michelle E. Litteken THE RISING TIDE OF SUSPENSIONS AND DEBARMENTS IN GOVERNMENT CONTRACTS PART II Vincent J. Napoleon and Kevin T. Saunders POLICING BREACH OF CONTRACT WITH FRAUD: FOURTH CIRCUIT ADOPTS IMPLIED CERTIFICATION THEORY OF LIABILITY UNDER THE FCA J. Andrew Howard and Jessica L. Sharron FINAL ANTI-HUMAN TRAFFICKING FAR AND DFARS RULES CREATE SIGNIFICANT NEW SUPPLY CHAIN BURDENS AND LIABILITIES FOR GOVERNMENT CONTRACTORS Robert K. Huffman, Scott M. Heimberg, Kimberly A. Ball, and Carroll A. Skehan GENDER POLICIES AND PRACTICES UNDER THE MICROSCOPE FOR FEDERAL GOVERNMENT CONTRACTORS Colleen P. Lewis and Faith C. Whittaker IN THE COURTS Steven A. Meyerowitz LEGISLATIVE AND REGULATORY DEVELOPMENTS Steven A. Meyerowitz INDUSTRY NEWS Victoria Prussen Spears

PRATT S GOVERNMENT CONTRACTING LAW REPORT VOLUME 1 NUMBER 3 JUNE 2015 Editor s Note Protest Allegations Victoria Prussen Spears 77 Protest Allegations: Discussions with Offerors Part I Luke Levasseur and Michelle E. Litteken 79 The Rising Tide of Suspensions and Debarments in Government Contracts Part II Vincent J. Napoleon and Kevin T. Saunders 86 Policing Breach of Contract with Fraud: Fourth Circuit Adopts Implied Certification Theory of Liability under the FCA J. Andrew Howard and Jessica L. Sharron 92 Final Anti-Human Trafficking FAR and DFARS Rules Create Significant New Supply Chain Burdens and Liabilities for Government Contractors Robert K. Huffman, Scott M. Heimberg, Kimberly A. Ball, and Carroll A. Skehan 97 Gender Policies and Practices under the Microscope for Federal Government Contractors Colleen P. Lewis and Faith C. Whittaker 101 In the Courts Steven A. Meyerowitz 104 Legislative and Regulatory Developments Steven A. Meyerowitz 109 Industry News Victoria Prussen Spears 111

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Editor-in-Chief, Editor, & Board of Editors EDITOR-IN-CHIEF STEVEN A. MEYEROWITZ President, Meyerowitz Communications Inc. EDITOR VICTORIA PRUSSEN SPEARS Senior Vice President, Meyerowitz Communications Inc. BOARD OF EDITORS MARY BETH BOSCO Partner, Holland & Knight LLP DARWIN A. HINDMAN III Shareholder, Baker, Donelson, Bearman, Caldwell & Berkowitz, PC J. ANDREW HOWARD Partner, Alston & Bird LLP KYLE R. JEFCOAT Counsel, Latham & Watkins LLP JOHN E. JENSEN Partner, Pillsbury Winthrop Shaw Pittman LLP DISMAS LOCARIA Partner, Venable LLP MARCIA G. MADSEN Partner, Mayer Brown LLP KEVIN P. MULLEN Partner, Jenner & Block VINCENT J. NAPOLEON Partner, Nixon Peabody LLP STUART W. TURNER Counsel, Arnold & Porter LLP WALTER A.I. WILSON Senior Partner, Polsinelli PC PRATT S GOVERNMENT CONTRACTING LAW REPORT is published twelve times a year by Matthew Bender & Company., Inc. Copyright 2015 Reed Elsevier Properties SA., used under license by Matthew Bender & Company, Inc. All rights reserved. No part of this journal may be reproduced in any form by microfilm, xerography, or otherwise or iii

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PRATT S GOVERNMENT CONTRACTING LAW REPORT Policing Breach of Contract with Fraud: Fourth Circuit Adopts Implied Certification Theory of Liability under the FCA By J. Andrew Howard and Jessica L. Sharron * Recently, the U.S. Court of Appeals for the Fourth Circuit for the first time recognized the validity of the implied certification theory of False Claims Act liability. The authors of this article discuss the case and its implications. As every government contracts lawyer knows, the False Claims Act ( FCA ) was originally passed in the midst of the American Civil War to combat procurement fraud perpetrated by unscrupulous suppliers to and agents of the Union Army. The legislative intent behind the law was primarily to preserve and protect the U.S. Treasury to ensure taxpayer dollars were spent on goods and services that met the government s needs and specifications. Today, after major amendments to the law in 1986 and, more recently, in 2009, the FCA is applied to situations surely never contemplated in the latter part of the 19th Century, including in situations where the government receives precisely the quality and quantity of goods and services it bargained for, and at the agreed upon price. These cases usually involve what has become known as the implied false certification theory of liability under the FCA. Recently, the U.S. Court of Appeals for the Fourth Circuit joined the majority of other circuit courts of appeals and recognized that a contractor s implied representation of compliance with material terms of a contract can state a claim for fraud liability under the FCA in appropriate circumstances. The Fourth Circuit s decision is a timely reminder that largely because of the FCA s qui tam provisions contractors increasingly find themselves defending allegations of fraud in cases perhaps more appropriately brought directly by the government as contract claims under the Contract Disputes Act ( CDA ). UNITED STATES V. TRIPLE CANOPY, INC. In United States v. Triple Canopy, Inc., 1 the Fourth Circuit Court of Appeals for the first time recognized the validity of the implied certification theory of FCA liability. In Triple Canopy, a relator filed a qui tam complaint against Triple * J. Andrew Howard, a member of the Board of Editors of Pratt s Government Contracting Law Report, is a partner and Jessica L. Sharron is a senior associate in Alston & Bird s Construction and Government Contracts practice group Los Angeles, CA. The authors may be contacted at andy.howard@alston.com and jessica.sharron@alston.com, respectively. 1 No. 13-2190 (4th Cir. Jan. 8, 2015). 92

POLICING BREACH OF CONTRACT WITH FRAUD Canopy, Inc., arising out of a June 2009 task order to provide security services at the Al Asad Airbase in Iraq. Background Pursuant to its contract, Triple Canopy agreed, among other things, to provide internal operations at entry control points, to prevent unauthorized access to the airbase, and to check ammunition lists. Triple Canopy also was responsible for ensuring that all employees received initial weaponry training and earned qualifying scores on a U.S. Army marksmanship qualification course (the marksmanship requirement ). Notably, nothing in Triple Canopy s contract expressly conditioned payment to Triple Canopy on compliance with these responsibilities. To satisfy its obligations under the contract, Triple Canopy hired over 300 Ugandan guards to serve at the airbase. Once the guards arrived, however, Triple Canopy supervisors discovered that the guards could not meet the marksmanship requirement. Nonetheless, Triple Canopy submitted monthly invoices for payment to the government for the guards. The government also alleged that Triple Canopy falsified scorecards for the guards indicating that they satisfied the marksmanship requirement even though they had not. During the single year that Triple Canopy provided security services at the Al Asad Airbase, Triple Canopy submitted 12 invoices for payment totaling over $4.4 million. Significantly, all of the information provided on each invoice (e.g., the number of guards employed and the amount of money due) was correct. Against this backdrop, a relator filed a qui tam action against Triple Canopy alleging multiple counts of FCA liability. The government intervened and filed a superseding complaint, alleging Triple Canopy knowingly presented false claims to the government for payment in violation of 31 U.S.C. 3729(a)(1)(A) (Count I), and caused the creation of a false record material to a false claim in violation of 31 U.S.C. 3729(a)(1)(B) (Count II). Triple Canopy moved to dismiss the Count I claim on grounds that the government failed to plead facts sufficient to establish that Triple Canopy submitted a claim for payment that contained an objectively false statement. The district court agreed and dismissed the claim. The government appealed. The Fourth Circuit s Decision On appeal, the government argued that Triple Canopy submitted actionable false claims because its monthly invoices sought the full amount of payment despite the company s knowledge that the guards for which it was invoicing had not complied with one of contract s requirements the marksmanship requirement. The Fourth Circuit agreed and reversed the district court s dismissal, concluding that the government had pleaded an FCA claim against Triple 93

PRATT S GOVERNMENT CONTRACTING LAW REPORT Canopy under an implied certification theory of liability sufficient to withstand dismissal at the pre-answer stage of the litigation. In deciding the appeal, the Fourth Circuit focused on the FCA elements of scienter and materiality, stating that the pertinent inquiry is whether, by submitting a demand for payment, a contractor knowingly and falsely implied that it was entitled to payment under all material terms of the underlying agreement for goods or services. Unlike common law fraud, the FCA defines knowing and knowingly to mean actual knowledge of the information ; deliberate ignorance of the truth or falsity of the information ; or reckless disregard of the truth or falsity of the information. 2 The court easily concluded that the government s allegations that Triple Canopy knew of the contract s marksmanship requirement and knew that the guards failed to satisfy that requirement adequately pleaded facts to establish the requisite scienter for liability under the FCA. The court observed that the statute defines material as having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property. 3 The appellate panel explained that materiality under the FCA may be established in several ways, such as express contractual language that constitutes dispositive evidence or through testimony demonstrating that the parties to the contract understood that payment was conditioned on compliance with the term at issue. With these principles in mind, the Fourth Circuit held that the marksmanship requirement was material because common sense suggests that the government s decision to pay for security services would be impacted by the failure of its guards to satisfy the marksmanship requirement and because Triple Canopy s actions in falsifying the scorecards also suggested that this requirement was material to the government s decision to pay. Based on these conclusions, the Fourth Circuit reversed the district court s dismissal of Count I. In resolving these issues, the Fourth Circuit Court of Appeals joined several other circuits in adopting the implied certification theory of liability under the FCA. For this reason alone, this decision is important in that it expands generally the reach of the FCA. The more significant takeaway from this case, 2 31 U.S.C. 3729(b)(1). 3 31 U.S.C. 3729(b)(4). It is worth noting that although this definition of material comes directly from the FCA, the term only appears in 31 U.S.C. 3729(a)(1)(B). The FCA claim at issue here, however, is under 31 U.S.C. 3729(a)(1)(A), which does not include a materiality component. Although outside the scope of this article, this potentially raises the question of whether the definition of material set forth in the FCA is the appropriate standard to apply in the context of an implied certification claim. 94

POLICING BREACH OF CONTRACT WITH FRAUD however, is how the court applied this theory and the future impact it may have. THE IMPACT OF TRIPLE CANOPY As an initial matter, the direct impact of the Triple Canopy decision is already evident: on February 10, 2015, the District Court for the Western District of Virginia reconsidered its prior decision to dismiss several counts of a qui tam case under the FCA. Previously, the district court had concluded that the complaint at issue should be dismissed because the implied certification theory of liability (upon which the relator s claims were based) was not recognized in the Fourth Circuit. Following the Triple Canopy decision, however, and upon a motion for reconsideration, the district court reversed its prior ruling because of a change in the law. 4 In terms of the broader impact of this decision, this change in the law further evidences that traditional contract claims under the CDA are being eschewed in favor of fraud claims under the FCA. In other words, the question of where to draw the line between an FCA claim and a CDA claim is becoming less clear and perhaps nonexistent. In Triple Canopy, this lack of distinction is less bothersome because there was a level of deceit alleged (i.e., the alleged fact that the contractor falsified records) that sounded as much like common law fraud as the underlying failure to supply fully qualified security personnel sounded like breach of contract. However, under Triple Canopy, FCA liability may still attach when a contractor, with the requisite scienter, makes a request for payment under a contract in spite of its failure to comply with material requirements of the contract, even in the absence of the type of wrongdoing that the FCA was initially intended to combat. The implied certification theory of liability substantially raises the stakes on government contracting, as contractors could face treble damages and penalties from what in essence is a simple breach of contract claim. To be fair, the Fourth Circuit addressed this issue in its decision. The appellate court properly recognized that the FCA is not intended to police every breach of contract, nor is the implied certification theory intended to be a vehicle to turn every contractual violation into an FCA fraud claim. However, the court also acknowledged that the FCA is intended to protect the Treasury and must be applied with that objective in mind. To reconcile these potentially conflicting goals, the court adopted the implied certification theory of liability, but encouraged strict enforcement of the FCA s scienter and materiality requirements to avoid abuse and overreaching. The court also added that those who engage in abusive litigation, for example by filing an unmeritorious FCA 4 Skinner v. Armet Armored Vehicles, Inc., No. 4:12-cv-00045 (W.D. Va. Feb. 10, 2015). 95

PRATT S GOVERNMENT CONTRACTING LAW REPORT case, remain subject to appropriate sanctions, both in the context of the FCA and otherwise. Whether this potential risk will deter the filing of meritless FCA cases (mostly by qui tam relators) remains to be seen. 96