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Litigation News

Litigation News | 2021

Government Contractor Not Immune from Fraud Claims

Frances Codd Slusarz


  • Government approval of work does not confer sovereign immunity on contractors.
  • The decision serves as a cautionary reminder to government contractors that not all actions taken pursuant to government contracts and approval will be immunized from litigation
Government Contractor Not Immune from Fraud Claims
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A divided state supreme court held that a government’s sovereign immunity from suit did not extend to its contractor, and thus, did not insulate the defendant from fraud claims. The decision serves as a cautionary reminder to government contractors that not all actions taken pursuant to government contracts and approval will be immunized from litigation, ABA Litigation Section leaders say.

Confusing Lottery Instructions Lead to Fraud Suits

In Nettles v. GTECH Corporation, the defendant, a designer of scratch-off games for state lotteries, proposed a game called “Fun 5’s” to the Texas Lottery Commission. The Fun 5’s ticket included a tic-tac-toe game. As initially proposed, if the ticket had three dollar-bill symbols in a row, the player would win the amount in the “PRIZE” box. A person could win five times that amount if the “multiplier box” contained a “5.” Only multiplier boxes on winning tickets would contain a “5.”

The commission required the dollar bill symbol to be changed to a “5,” and the “5” in the multiplier box changed to a money bag. The commission also told the defendant to put the money bag on losing tickets to prevent microscratching—scratching a tiny portion of a ticket to determine if it is a winner. The defendant made these changes but did not change the instructions, which read: “Reveal three ‘5’ symbols in any one row, column, or diagonal, win PRIZE in PRIZE box. Reveal a Money Bag ‘[money bag icon]’ symbol in the 5X Box, win 5 times that PRIZE.”

A group of plaintiffs sued the defendant in Travis County alleging fraud, among other things, claiming that the instructions led them to believe they won five times the amount in the PRIZE box even if they did not have tic-tac-toe. Another plaintiff in Dallas County filed a similar suit for fraud. In both cases, the defendant asserted that derivative sovereign immunity barred the plaintiffs’ claims and filed pleas to the jurisdiction—a procedural vehicle that challenges the court’s subject matter jurisdiction.

The Dallas County trial court granted the defendant’s plea to the jurisdiction and dismissed the case. The Dallas Court of Appeals affirmed the dismissal. The Travis County trial court, however, denied the plea. The Austin Court of Appeals affirmed the plea denial as to the fraud claim but reversed on the other claims.

No Government Control, No Immunity

On a consolidated appeal, the Texas Supreme Court declined to address whether it should adopt a doctrine of derivative sovereign immunity for contractors. Instead, it applied a “control-based immunity standard” used by other courts determining whether sovereign immunity applied to government contractors. The court noted that under that standard, “the primary considerations . . . are the government’s control and the contractor’s discretion.” It explained that immunity would extend to the contractor if “the government [told] the contractor what to do and how to do it (as opposed to the contractor having ‘some discretion in performing the contract’)” and “the contractor [did] as it was told.” The court observed that in those circumstances, immunity applied because the government was acting through the contractor, and thus, the “complained-of conduct” was attributable to the government.

Looking to the plaintiffs’ allegations and the contract between the commission and the defendant, the high court concluded that the game designer was not immune because it retained sufficient discretion over the wording of the instructions. In so holding, the court pointed out that the commission did not tell the defendant how to write the instructions either before or after its changes were made to the game. Rather, the defendant acted as an adviser to the commission, since the contract provided that the commission “may rely upon the guidance of [GTECH] in all matters related to instant game development and manufacturing services.” The court also rejected the defendant’s argument that it was immune because the commission approved of the final game design, noting that “close supervision and final approval of work over which a contractor has discretion are not the same as the government specifying the manner in which a task is to be performed.”

Sovereign Immunity Protects Government Actions

ABA leaders see the decision as consistent with the purpose of the sovereign immunity doctrine. “If you look at sovereign immunity strictly as protecting the government, then leaving a contractor exposed to liability neither furthers nor inhibits the government’s protecting itself,” explains Brian R. Gaudet, Houston, TX, publication editor of the Litigation Section’s Construction Litigation Committee. “Sovereign immunity and derivative sovereign immunity are intended to keep the judiciary from interfering with the acts of the executives,” notes Erin Frazee Masini, Washington, DC, cochair of ABA Section of Public Contracts Law’s Acquisition Reform & Emerging Issues Committee. “I think the supreme court’s reasoning is correct.”

“This decision reemphasizes caution and care on a day-to-day basis,” Masini concludes. The defendant made the commission’s changes to the game but did not look at whether those changes warranted changes to the instructions. “Just because the government approves your work does not mean you are off the hook for liability,” Masini warns.

However, the decision may increase defense costs. To get a case dismissed for lack of subject matter jurisdiction, “contractors have to develop evidence and demonstrate a heightened level of control by the public entity over the relevant decisions,” cautions Gaudet.

Looking ahead to the merits of the case, Gaudet questions whether the defendant made any representations to the public and whether anyone suffered any harm. “It is not the defendant’s lottery. It is the commission’s lottery. The defendant did not put the tickets on the counters of convenience stores,” he says. “Also, what is the harm? A few minutes of thinking you won and then disappointment?” he asks. “It seems de minimis.”