Court Confirms That Mere Contract Breaches and Immaterial Performance Flaws Do Not Establish FCA Liability
Despite a sense among many government contractors that asserted contract breaches increasingly morph into fraud claims, a recent DC District Court opinion provides encouragement that the distinction between the two may yet be preserved. The same ruling also signaled that several frequently referenced FCA defenses retain viability at the pleading stage.
The relators in United States ex rel. Hutchins, et al., v. Dyncorp Int'l, Inc., Case No. 15-355 (RMC), alleged a dozen counts of false claims and certifications relating to goods and services provided in Afghanistan under the Army's LOGCAP IV contract. A September 28, 2018 dismissal ruling resolved most of the case in the contractor's favor, and allowed the case to proceed to discovery on just one count alleging duplicate billing for certain vehicles. 2018 WL 4674577 (Sept. 28, 2018).
The court dismissed several counts because the complaint did not establish plausible FCA liability, as distinguished from alleging possible contract breaches based on performance shortfalls. Quoting United States ex re. Totten v. Bombardier Corp., 286 F.3d. 542, 551 (D.C. Cir. 2007), the court stressed that "the bare assertion that defendants delivered goods that did not conform to contractual specifications is not enough to state a violation of the FCA. Instead,…the statute proscribes only false 'claims'—that is, actual demands for money or property—and 'false records or statements' used to induce such claims." For example, the court found that FCA liability did not arise from a policy that allegedly triggered more frequent employee medical exams than the contract required, and thus higher costs. The court noted the absence of allegations that the Army was unaware of the practice, or that DynCorp had misrepresented its policies or submitted any false statements about them. The court described such behavior as a potential contract breach rather than indicating fraud. Likewise, regarding alleged billings for additional equipment and training not originally on the contract, but which was later approved, the court noted that "cost overruns, without more, do not amount to fraud."
The court also dismissed several counts based on insufficient allegations of materiality. Notably, the court found a lack of materiality because relators repeatedly failed to connect allegedly false statements to specific contract performance issues. The court observed that the "lack of alleged [resulting] performance failures renders [the challenged conduct] non-material."
In addition, the Escobar decision emphasized that government payments with knowledge of the challenged practice is strong evidence that the conduct was not material to the government's payment decision. Several courts have wrestled with the question of who within the government must have that knowledge. In this case, relators alleged that DynCorp adopted a more costly (and profitable) practice of charging directly for services rather than providing them under less expensive subcontracts. Although the complaint acknowledged that this practice had been reported to the Administrative Contracting Officer (ACO), the relators argued that the ACO did not have authority to amend the contract to permit it. The court noted that relators did not allege that the change in billing caused DynCorp to bill for goods and services not provided, so while the change in billing practice might constitute a contract breach resulting in higher Army payments, there was no falsity and thus no FCA claim. Importantly, the court also found that DynCorp's reports to the ACO were sufficient to undermine the required materiality showing, given that the Army paid the claims despite knowing of the challenged practice.
The court also relied on lack of materiality to reject FCA claims that certain employees did not meet education and experience requirements. In this case, the relators did not identify the contract itself as the source of the employee qualification requirements (as distinguished from DynCorp's own policies or some other source). The court noted that in Escobar, the Supreme Court found that "defendant misrepresented its compliance with mental health facility requirements that are so central to the provision of mental health counseling that the Medicare program would not have paid these claims had it known of these violations." In contrast, the Army's repeated renewal of the contract "notwithstanding whatever performance issues may have arisen" demonstrated a lack of materiality of alleged employee qualification shortfalls.
Finally, the court dismissed counts based on insufficient pleading of scienter and because several claims lacked sufficient particularity under Rule 9(b). For example, the court found that scienter was not sufficiently pled regarding claims that DynCorp provided vehicles that were older than stated when relators did not allege that DynCorp even knew the challenged representations were incorrect at the time they were made. And, while Federal courts await Supreme Court guidance regarding the pleading particularity required by Rule 9(b) in FCA cases, the court did not hesitate to dismiss as too "broad and speculative" the alleged "widespread problem" of purportedly false reports about the mission capable status of vehicles absent further specific details regarding the vehicles implicated. In this same vein, the court rejected general allegations that DynCorp had presented billing documents misrepresenting the condition of vehicles "at least some of the time," observing that the contract was "performed in a war zone" so that pristine "mission capability" could not be presumed regardless of different descriptions documented at some point in time.
© Arnold & Porter Kaye Scholer LLP 2018 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.
