Legal experts explored this new development in civil litigation between the government and its business partners in a recent American Bar Association program, “The Most Important Government Contracts Related Decisions of 2013,” sponsored by the ABA Section of Public Contract Law.
Two cases decided last year in the U.S. Court of Appeals for the 5th Circuit and the U.S. Court of Appeals for the Federal Circuit were some of the first of the Iraq War lawsuits to proceed to trial. In United States ex rel. Conyers v. Kellogg Brown & Root Inc. et al., three KBR employees took kickbacks from two Kuwaiti companies in exchange for awarding them subcontracts. Those employees pleaded guilty to criminal charges, but now the government is pursuing civil damages from the company. In United States of America ex rel. Vavra, et al. v. Kellogg Brown & Root Inc., the Department of Justice alleged that two subcontractors provided unlawful kickbacks in the form of meals, drinks, tickets to sporting events and golf outings to KBR employees for air cargo business related to a program for which KBR served as the primary contractor.
In both of these cases, the government purported that the decision of KBR to engage in business with the subcontractors providing illegal kickbacks led to overbilling for the services performed, costing the government more money than it would have initially been charged.
John Pachter, a member of Smith Pachter McWhorter PLC in Tysons Corner, Va., and practitioner of government contract law for more than 40 years, explained that the Anti-Kickback Act allows the government to recover the amount of money that the person received through a kickback, but it can also recover twice the original amount of the kickback if the contractor “knowingly” engaged in accepting the illegal funds.
“The question becomes, when can a corporation be a person who engages in a kickback, and therefore is liable for double damages and penalties?” Pachter said.
In United States ex rel. Conyers v. Kellogg Brown & Root Inc. et al, the 5th Circuit ruled that there was no sufficient evidence that the contractor knowingly engaged in a kickback scheme and remanded the case to the district court. But with United States of America ex rel. Vavra, et al. v. Kellogg Brown & Root Inc., the Federal Circuit ruled that regardless of the employees’ motivation in collecting the kickbacks, because KBR benefited from the circumstances of the subcontract, the corporation is liable for the action. Pachter said Federal Circuit found that a corporation is strictly liable with the knowledge requirement any time an employee accepts a kickback, based on reliance of “apparent authority.”
Karen Manos, a partner at Gibson Dunn & Crutcher LLP in Washington, D.C., said these two cases “significantly change the law, especially after the Federal Circuit decision on what is a reasonable cost.”
Pachter argued that a corporation can only be liable for the double damage allowance if the employees accepting kickbacks were sufficiently high up on the corporate ladder rather than a couple of bad apples among several thousand workers. They must be in a “position of authority or responsibility, able to speak on behalf of the company,” he said.
In the Federal Circuit’s decision, the corporate hierarchy was not relevant. Pachter criticized this position, asking, “How is it possible to fit that misconduct within the notion of apparent authority?” He cited the Long Island Savings Bank case, where the chairman and CEO of the bank was found to have been committing fraud against the bank rather than the bank as an entity committing fraud against the government. The KBR employees, similarly, kept the kickbacks for their own personal gain, rather than providing that award to the company.
“There is a substantial body of law on this subject,” Pachter added.
He said he believes the 5th Circuit could emerge with a rational result on remand. But for the Federal Circuit, his outlook is grim. “Abandon all hope, yee who enter here,” Pachter said about the Federal Circuit courthouse.
Despite Pachter’s skepticism, Manos identified a “glimmer of hope” in the Federal Circuit decision because KBR is petitioning the case before the Supreme Court.
“In terms of practical implications, we are already starting to see the [District of Columbia Court of Appeals] challenging the reasonableness,” Manos said.