Government’s Claims Accrued When Invoices Were Submitted, Not When Kickback-Tainted Subcontracts Were Awarded; United States District Court for the Southern District of Texas, Houston Division, No. 4:06-CV-04024, U.S. ex rel. Bud Conyers v. Halliburton Company and Kellogg Brown & Root Inc. et al.

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The district court granted in part and denied in part Kellogg Brown & Root’s motions for summary judgment on the government’s complaint alleging the company submitted claims for multiple subcontracts that were tainted by kickbacks. As an initial matter, the parties disputed over whether the government’s claims were barred by the statute of limitations. KBR argued that the cost of the alleged kickbacks was included in the contract price, which occurred when certain kickback-tainted subcontracts were awarded. However, the government successfully argued the prohibited conduct occurred when KBR submitted claims for payment. The court agreed that the claim accrued when the claims were submitted, not when the parties agreed on pricing. KBR also argued the government could not show that any invoices included the cost of the subcontractors’ kickbacks, but the court found it reasonable to assume the subcontractor would include that cost in its bid and invoices. The court also found the claims factually false, because the kickback amounts included in the invoices were not related to any service received by KBR or the government. The court also found that the employees’ conduct could be imputed to KBR, because the employees acted in their official capacity when awarding the tainted subcontracts and because they believed they were acting in the company’s interest. In relation to one subcontract, the court found the evidence clearly showed that KBR did not believe that it owed a subcontractor certain payments, but paid them anyway as an expedient way to resolve a dispute, and then billed the government as though an actual service had been provided.

Generally, the court found the allegations material to the government’s payment decision, as KBR’s contract prohibited the inclusion of any kickback amount into the contract price and because there was no evidence the government was aware of the arrangements when it paid invoices. However, the court held that one of the government’s claims failed on materiality, as the alleged misconduct had been uncovered by DCAA during a cost audit, but no action was taken to seek reimbursement of the overpayments. The court also granted summary judgment on the government’s breach of contract claims, explaining that the government could pursue either FCA or breach of contract claims, but not both.

 

The United States intervened in a qui tam complaint alleging that Halliburton Company, Kellogg Brown & Root Inc., and its affiliates and foreign subcontractors committed various acts of fraud and misconduct in the execution of an Army contract to provide logistical support services to the Army in Iraq between 2002 and 2005. KBR moved for summary judgment and the government cross-filed for partial summary judgment.

As an initial matter, the court granted KBR’s motion for summary judgment on the government’s common law fraud claim, finding that the statute of limitations had passed.

In its complaint, the government alleged that KBR submitted invoices for subcontract work that was tainted by kickbacks. According to the government, a KBR employee accepted payments in exchange for providing sensitive procurement information to First Kuwait Trading and Contracting WLL and for directly awarding contracts to FKTC. The employee later entered into a plea agreement with the government, in which he admitted to his conduct.

The government argued that KBR’s invoices related to these subcontracts were tainted by the kickback and therefore violated the AKS. Specifically, the government alleged that FKTC included the amount of the kickback in its invoices and that this amount was incorporated into KBR’s claims for payment.

The government sought summary judgment on AKS liability. KBR argued that this claim was barred by the statute of limitations and that the government could not prove that the amounts billed to DoD under the subcontracts included any kickback amounts.

The parties stipulated that the relevant limitations period began to run on May 9, 2004. However, KBR argued that to the extent the government sought to attach liability, the alleged inclusion of kickback amounts in the contract prices occurred when the prices of the respective subcontracts were fixed, which occurred at an earlier date, not when KBR actually billed the government for the costs it incurred. In response, the government argued that the prohibited conduct occurred when KBR submitted vouchers for the subcontracts to the government.

The court agreed with the government’s interpretation, noting that the AKS expressly prohibits inclusion of a kickback amount in the contract price that a prime contractor “charges” the government. Therefore, the violation occurred when the final element—the submission of a claim—was completed, not when the parties agreed upon pricing. Further, the government alleged that its cause of action under the AKS accrued separately on each date that KBR submitted to the government a voucher that included a kickback amount for reimbursement. Given the dates involve, the court found the claim were not time-barred.

On the merits, KBR argued that the government could not show that any invoices included the subcontractor’s kickbacks to the employee. KBR did not dispute the employee’s misconduct.

However, the court found it reasonable for the government to allege that the subcontractor would include the kickback amounts in its invoices to KBR. While KBR noted that its employee testified that he was unaware whether the subcontractor’s bid or invoices contained kickback amounts, the court found the employee’s knowledge immaterial. The court explained that prior rulings have found that kickbacks necessarily inflate the price to the government. Because KBR is liable for the conduct of its employees, the court found it liable for each instance in which its employees charged the government a kickback amount.

Next, KBR challenged the claims on the elements of falsity, scienter, and materiality. On falsity, the government argued that KBR’s claims for these subcontract invoices were both factually and legally false, while KBR argued that neither standard was satisfied.

Again, KBR appeared to argue that its employee did not know whether FKTC’s bids to KBR included the amounts paid to him as kickbacks. However, as already noted, the court found the employee’s knowledge irrelevant and did not rebut the government’s assertion that the bid and invoices did include these amounts. Accordingly, it followed that when KBR submitted its claims to the government, those claims included the kickback amounts baked into the bid. Because those costs did not correspond to any service that KBR or the government received, the court found that KBR, by definition, fraudulently overcharged the government and therefore the claims were factually false.

Next, the court found that KBR’s employee knowingly caused the making or use of a false record related to KBR’s claims for payment. At a minimum, he acted in reckless disregard of the fact that his actions would cause KBR to submit tainted invoices.

The court also found the government successfully demonstrated that the employee’s knowledge imputed to KBR. The employee agreed to the kickback arrangement and awarded the subcontracts in the course of performing his core responsibilities. Further, in his deposition, he attempted to justify the awards to FKTC on the grounds that KBR had an urgent need to meet certain deliverables for the Army. In other words, the employee believed that his conduct would benefit KBR by enabling it to timely perform its obligations. Thus, as a matter of law, the court found the employee’s scienter imputed to KBR.

Next, the court considered the challenge to materiality. First, the court noted that KBR’s contract specifically incorporated regulatory language prohibited the direct or indirect inclusion of any kickback amount into the contract price. The court found the evidence already established this had occurred.

Second, the court found no evidence the government was aware of the kickback arrangement when it paid KBR’s claims. While KBR conceded the government did not learn of the kickbacks until after the employee entered into his plea agreement, it argued that the government did not offset or attempt to recoup unallowable costs from KBR’s subsequent vouchers.

In a deposition, a DCMA employee testified that DCMA learned of the plea agreement sometime in early 2008 and subsequently notified KBR that it intended to disallow approximately $25 million in costs as a result. The evidence suggested the parties continued to negotiate but did not indicate how long KBR continued to bill the government under the task order nor the result of the negotiations. Given the record, the court was not willing to infer the government considered the kickbacks immaterial. Finally, given the contract terms, the court concluded KBR had reason to know the conduct was material.

Next, KBR moved for summary judgment on the count of conspiracy. As the government had alleged no independent injury arising from its allegations, the court granted summary judgment in KBR’s favor. The court also granted KBR’s motion for summary judgment on the breach of contract claims, explaining that the government was entitled to recovery under a breach of contract claim or the FCA, but not both. As the FCA provided for a higher potential recovery, the court granted summary judgment on the breach of contract claim in favor of KBR.

The government also filed claims related to a change order under one of the subcontracts. The subcontract contemplated a six-month lease for truck-trailer units, ending on December 20, 2003. However, between January and July 2004, FKTC continued to submit monthly invoices under the subcontract for the cost of leasing all 50 units. KBR’s reconciliation showed that only two vehicles were returned to FKTC after January 4, 2004, and KBR determined that it owed FKTC $176,625.85 for the late-delivered vehicles. The parties agreed that March 30, 2004, would be considered the expiration date of the subcontract and that KBR would generate a change order to reflect that date. KBR subsequently issued a voucher for reimbursement of $2,655,018.28 related to this change order.

The government alleged that KBR knowingly submitted false claims for costs incurred in connection with Change Order 1, and knowingly created, used, or caused to be created or used, false records related to those claims. KBR challenged the falsity, scienter, and materiality elements of these theories.

On falsity, the court sided with the government, finding that KBR could not substantiate the costs it later charged the government. In fact, KBR had determined that all but two of the leased vehicles had been returned to FKTC by January 4, 2004, only a few days after the expiration of the original subcontract, and that it owed FKTC $176,625.85 for the delay.

KBR characterized the amount as a settlement of a dispute between KBR and FKTC, but neither the voucher nor any supporting documentation suggested that the amount billed the government was for this purpose. Rather, they indicated KBR sought reimbursement for an extended lease of the vehicles. Because the voucher sought reimbursement that was unrelated to any service that KBR or the government received, the court found the claim factually false and that the voucher and requisition forms were false records.

The court also found the government had demonstrated scienter. The court found that KBR employees did not have an objectively reasonable basis to believe that a three-month extension for the lease of all 50 truck-trailer units was warranted. While KBR and FKTC seemed to agree that no more than nine trailers had not been returned by February 18, FKTC insisted that no vehicle could be considered returned until accompanied by delivery tickets. However, the subcontract’s terms did not require delivery tickets for the vehicles. As already noted, KBR concluded that it owed FKTC $176,625.85 for the delayed returns.

KBR argued that the decision to settle was reasonable. The court found, at best, that KBR raised a fact issue as to whether they subjectively believed that the parties’ settlement was an expedient solution to the dispute. However, “recklessness” under the FCA requires the application of an objective standard. The court found no objective observer could conclude that KBR had leased all 50 truck-trailer units for an additional three months beyond the subcontract’s original expiration date. Accordingly, in generating the change order, KBR took an “unjustifiably high risk” that they would cause KBR to present a false claim for payment. Likewise, KBR acted recklessly in creating and using false records (the change order and associated requisition forms and invoices) in connection with such a claim. The court found that the recklessness of KBR’s employees should be imputed to KBR because they acted in the scope of their authority and to benefit KBR.

Next, the court considered the materiality of the claim, finding in favor of the government. The court noted the contract allowed for the reimbursement of allowable and reasonable costs. The court noted that KBR’s best information suggested it owed FKTC $176,625, yet it billed the government $2.6 million, a difference that was far from reasonable. The court found it mere common sense that the government would not have paid this claim had it known that the amount was so excessive. Additionally, KBR provided no information that the government knew the voucher contained false information when it made the payment decision. The court granted the government summary judgement on the change order claim, but granted summary judgment in favor of KBR on the conspiracy count and breach of contract claim.

Next, the government considered a claim related to a second subcontract. KBR employee Jeff Mazon issued a request for proposals to prospective subcontractors for a six-month lease of 17 storage tankers, to be used by the Army in Kuwait. Mazon initially estimated the cost of fulfilling this item at $603,900, and later at $685,080. Nonetheless, the winning subcontractor, La Nouvelle, submitted a bid for approximately $1,673,100, and Mazon ultimately awarded the subcontract at a price of $5,521,230.00. Mazon produced the final price by unnecessarily applying an additional currency conversion formula to the bid amount in a bid tabulation form.

In an internal memo regarding the award, Mazon stated that the final bids included additional fees associated with the transfer of the tankers from another contract to support the government. Mazon attributed the vast disparity between the estimated price and the final contract price to those penalties, and justified the cost by citing the urgent and compelling need of the request. Mazon testified in deposition that, at the time he prepared the memorandum, he was unaware of his double currency conversion and believed, without verifying, that the fees associated with the transfer of tankers from another contract accounted for the significant price increase.

Mazon’s memo also stated that the additional funds were communicated to the project manager, who approved the subcontract. However, in a plea agreement, Mazon acknowledged that he knew he had not communicated the additional costs to the project manager. While the project manager and supervisor approved the award, the final bid tabulation form did not indicate that the final award price was more than eight times the estimated cost. Subsequently, the subcontractor submitted and KBR paid invoices based on the $5.5 million contract price.

The parties disputed whether KBR rebilled those amounts to the government after May 9, 2004. The government alleged KBR was liable under the FCA for billing the government for the inflated amount. The court found the threshold question was whether, after May 9, KBR submitted vouchers to the government for this subcontract that were “claims” within the meaning of the FCA.

The government alleged that on June 30, 2004 and August 31, 2005, respectively, KBR resubmitted additional vouchers seeking reimbursement for invoices under this subcontract, invoices for which KBR had already sought reimbursement prior to May 9, 2004. The June 2004 and August 2005 vouchers contained line-item summaries that included the inflated costs billed by the subcontractor, totaling approximately the final $5.5 million award price. The government also cited a “billing summary” prepared by KBR that allegedly shows that on June 30, 2004 and August 31, 2005, KBR submitted vouchers for the inflated costs.

KBR argued that these vouchers were not actual billings and therefore were not claims for payment under the FCA. According to KBR, these vouchers represented accounting transactions that simply reassigned costs to one task order that were previously assigned to another. A KBR representative testified that the company merely rebooked costs to a different internal job number and that the change did not impact the amount billed to the government. KBR asserted the government was billed for the costs at the time the costs were booked under the original task order. The court found this testimony consistent with the results of a DCAA audit launched after these allegations were originally raised. The audit report did not state that KBR sought payment on those dates.

Based on the evidence, the government had not established that KBR submitted claims for payment on June 30, 2004, and August 31, 2005. Accordingly, the court granted summary judgment in favor of KBR on this claim. The court also granted summary judgment on the breach of contract claim related to this subcontract.

However, the court denied KBR’s motion for summary judgment on the conspiracy count to this claim. According to the government, Mazon left KBR not long after awarding the highly-inflated subcontract. Not long after, the owner of La Nouvelle loaned Mazon $1 million to start his own business. While Mazon insisted that this arrangement be documented as a loan, the government alleged that La Nouvelle’s owner informed Mazon that he did not expect repayment. The court found that a reasonable jury could infer that Mazon’s “accidental” double-conversion of the original bid, his failure to inform his supervisors about the price increase, and his acceptance of a $1 million loan meant that he had entered into a kickback arrangement in exchange for his help winning the contract. Because Mazon acted within his authority at KBR and to benefit KBR, the court found that a reasonable jury could impute Mazon’s scienter to KBR.

Next, the court considered claims related to another subcontract awarded by Stephen Seamans, a KBR procurement, materials, and property manager, to La Nouvelle for cleaning services at Camp Arifjan. Although La Nouvelle was not the lowest bidder, Seamans justified the award in an memorandum, stating that he disqualified the lowest bidder because its bid contained miscalculations and did not comply with all requirements in the RFP.

Seamans later disavowed these statements as “self-serving” in a subsequent declaration, and again during his deposition in this case. Once La Nouvelle had submitted its bid, Seamans asked another company, Tamimi Global Company Limited, to submit a bid that would be too high for the work performed, which would allow him to justify awarding the subcontract to La Nouvelle. Around this time, Seamans solicited and received a $5,000 kickback from La Nouvelle. Seamans also accepted a job with La Nouvelle with an annual salary of $1.2 million, and a $300,000 advance. In his deposition, Seamans acknowledged that the employment offer was a quid pro quo for awarding KBR business to La Nouvelle.

The government alleged that KBR submitted vouchers for costs related to this subcontract in June 2004 and August 2005, which KBR disputed. The government asserted two theories: (1) that, in submitting vouchers to the government, KBR knowingly sought reimbursement of kickback amounts received by Seamans; and (2) that KBR sought reimbursement of payments to La Nouvelle for cleaning services at Camp Arifjan at higher prices than were authorized at the time the costs were billed to KBR.

KBR objected to both theories. The government did not contest the motion as to the second theory and the court granted summary judgment to KBR on that theory. The court also granted summary judgment to KBR on the second theory, finding that the government actions suggested that it did not consider the conduct to be material.

The court noted that between December 2010 and August 2011, DCAA audited costs related to the subcontract, including those for the relevant period of performance. An August 2011 draft audit report indicated that DCAA became aware of the facts of Seaman’s guilty plea in connection with the contract. However, in a March 2015 memorandum regarding the audit, DCAA stated that it was closing the assignment because it had determined that the concerns raised in the audit “were not material enough to the respective incurred cost submission(s) to warrant additional efforts to issue the report and negotiate the costs.”

DCAA reached this decision after learning that KBR’s vouchers under the subcontract may have included the costs of Seamans’ kickbacks, in violation of the underlying contract’s prohibition on kickbacks. Because the government continued to pay KBR’s claims and did not attempt to claw back any previous payments on this subcontract, the court concluded the government did not consider the conduct to be material to the claims. Accordingly, the court granted summary judgment in favor of KBR on the counts related to this subcontract.

However, the court denied summary judgment on the related conspiracy claim, finding the government had raised issues of material fact. The court found that a reasonable jury could find that Seamans and La Nouvelle’s owner had entered into a tacit agreement to defraud the government, based on: Seamans’ solicitation and receipt of a bribe from La Nouvelle around the time of the subcontract award; Seamans’ “poisoning” of the bidding process through Tamimi; the job offer to Seamans’ following Seamans’ resignation from KBR; and Seamans’ deposition and affidavit statements that the job offer was a “sham.” A jury could also conclude that Seamans and La Nouvelle formed the agreement while Seamans was acting in the scope of his authority and to benefit KBR, such that Seamans’ scienter should be imputed to KBR.

The court also denied summary judgment on the government’s breach of contract claim related to this subcontract. The government alleged that KBR resubmitted reimbursement vouchers for La Nouvelle invoices under subcontract, again citing to the billing summary that allegedly showed that KBR submitted vouchers for the inflated costs and that the government paid those vouchers. KBR again argued that those vouchers represented accounting transactions that rebooked costs from one task order to another, and were not new claims that accrued within the statute of limitations. However, the court found there existed a genuine issue of material fact as to whether the transactions at issue were claims for payment submitted by KBR under the subcontract.

 

FCA - Conyers v Halliburton