Recovering Qui Tam Costs Under Fixed Price Contracts—an Exception to the Rule

The US government recently learned that, in addition to its customary liability for having given a contractor defective specifications, where those defective specs prompt a relator's frivolous False Claims Act (FCA) case, the government will also owe the contractor's defense costs when it does not promptly intervene to dismiss the action. The Court of Federal Claims found those defense costs allowable, even under a fixed price contract.

In The Tolliver Group, Inc. v. United States, No. 17-1763C (Ct. Claims 2020), the court considered a fixed-price, level-of-effort contract (with a $1.41 million ceiling) to produce technical manuals for an Army mine clearing vehicle. The Project Work Statement required the Army to provide Tolliver a technical data package (TDP), including the vehicle manufacturer's engineering drawings, so Tolliver would not need to reverse engineer the machine. The Army failed to deliver the TDP, but still directed Tolliver to perform. Only after Tolliver had worked for seven months did the Army issue Modification 8, which removed the government's obligation to provide the TDP, converted the contract type from level-of-effort to purely firm-fixed-price, and increased the price to nearly $6.5 million.

The Army's failure to provide the TDP prompted a relator to bring an FCA case alleging that, prior to Mod 8, Tolliver had falsely certified compliance with the non-existent TDP. The government never intervened or moved to the dismiss the case, forcing Tolliver to incur costs to defend the litigation all the way up to the Fourth Circuit, which affirmed the district court's dismissal.

Tolliver submitted a Contract Disputes Act claim for an equitable adjustment seeking 80% of its legal fees,¹ which the contracting officer denied after finding that the costs were neither allocable nor allowable within the terms of the firm-fixed-price contract. Tolliver appealed.

The court analyzed the claim under so-called Spearin doctrine, which provides that when the government gives its contractor defective specifications, the government is deemed to be in breach and is liable for all costs proximately flowing from that breach.² Here, the court found that the Army's failure to provide Tolliver with the TDP constituted a breach under Spearin that prevented Tolliver from performing in accordance with the PWS. It also found that breach proximately caused Tolliver's litigation costs, rendering the government liable to pay them.³

In a footnote, the court distinguished an earlier ruling in the case where it stated that Tolliver was not due an equitable adjustment based on the government's failure to intervene and dismiss because the government was not obligated to take those steps. Instead, the court said it was granting the adjustment based on the government's failure to supply the TDP, which "alter[ed] the conditions of performance and, among other things, lead[] to the qui tam suit…."

The court overcame or ignored multiple potential flaws with the contractor's case in order to reach this conclusion. First, despite the requirement to seek equitable adjustments within 30 days,⁴ the court permitted Tolliver's claim to proceed, despite being submitted 112 days after the qui tam litigation became final, because it found no prejudice to the government from the late filing. Second, the court concluded that, while the Spearin doctrine does not apply to costs to defend third-party claims, that limitation would not apply because the United States is considered the actual plaintiff in qui tam actions. Third, other courts might question the finding that the proximate cause of Tolliver's incurrence of legal fees was the faulty specification, and instead focus on the contractor's decision to affirmatively certify compliance with a TDP it had not received. Fourth, while the decision dismisses any limitation on the application of cost allowability principles to firm fixed price contracts due to the incorrect PWS specification, this is in conflict with other decisions finding that "firm fixed price" means just that.

In sum, while Tolliver Group provides some assurance that costs incurred to litigate an FCA suit may be found allowable under fixed price contracts in limited circumstances, this result is unlikely to be extrapolated into other fact patterns. As in many cases, the exception mainly proves the rule. The case also, however, provides a caution to the government to exercise its authority to intervene and dismiss frivolous cases where the government played some role in establishing the circumstances underlying the FCA action in order to avoid being on the hook for a contractor's litigation costs.

© Arnold & Porter Kaye Scholer LLP 2020 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.