Second Circuit Says Lower Court Erred in Considering Government Audits Outlining AECOM Billing Issues; United States Court of Appeals for the Second Circuit No. 20-2756-cv, U.S. ex rel. Hassan Foreman v. AECOM Government Services Inc.

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The Second Circuit revived a portion of a qui tam complaint alleging that AECOM submitted fraudulent invoices for labor hours to the Army. The court found the district court erred in considering a DCAA audit that outlined the agency’s findings about AECOM’s improper billing practices, because the relator’s complaint did not reference the report nor rely on it to make its allegations. Absent that audit report, the district court could not find that the government had knowledge of the fraud and therefore that the alleged conduct was not material. The circuit panel held that the district court should have converted the motion to dismiss to a motion for summary judgment prior to making this call. However, the court affirmed the district court’s holding on whether the reports amounted to public disclosures. AECOM argued that the government audit reports publicly disclosed the relator’s allegations, but both courts noted that the reports were minimally distributed and were marked confidential. Because the persons to whom the reports were provided had an obligation to keep them secret, the courts concluded they had not been publicly disclosed.

Relator Hassan Foreman appealed the district court’s dismissal of his qui cam complaint alleging that AECOM, AECOM Government Services Inc., AC First LLC, and AECOM/GSS Ltd. violated their obligations under the Army’s Maintenance and Operational Support contract, and retaliated against him for his protected conduct.

In his complaint, Foreman alleged that AECOM: (1) improperly billed for labor, (2) inflated reports of man-hour utilization rate, (3) improperly purchased, tracked, and returned government property, (4) entered into a “crony” contract with Bluefish, a payroll processing company, and (5) committed travel violations. The district court dismissed Foreman’s case, finding he had failed to plead that the alleged conduct was material. The court also denied Foreman’s request for reconsideration and a motion for leave to amend.

The details of Foreman’s original complaint are outlined here. In regards to the billing fraud, Foreman alleged that AECOM provided incomplete or fraudulent labor timesheets to support its invoices. According to Foreman, timesheets often listed incorrect total hours, did not identify employees by employee number, and were not signed by a supervisor. He also alleged that AECOM’s policies supported this conduct. For example, he alleged that AECOM told employees to submit and sign timesheets before the two-week pay period was over, reporting work that had not yet been performed. Further, he asserted that AECOM billed the government for 154 hours per each two-week period regardless of the actual number of hours worked, and billed for labor of untrained and uncertified employees when it was required to employ qualified and certified operators to properly track materials and inventory.

Finally, Foreman alleged that AECOM provided fraudulent man-hour utilization reports that included labor hours never actually performed. According to Foreman, AECOM’s internal timekeeping review showed that the company owed the government more than $140 million due to improper labor hour billing over a four-year period. Foreman asserted that AECOM avoided this obligation to repay the government for this overpayment.

In his appeal, Foreman argued that the district court error by: (1) improperly importing a materiality requirement onto Foreman’s express false claims, factually false claims, and fraudulent inducement claims; (2) improperly relying on extrinsic evidence outside of the complaint in conducting its materiality analysis; and (3) incorrectly dismissing the claims for lack of materiality.

Application of the Materiality Element

First, Foreman argued that Escobar established a materiality requirement only for implied false claims, not express false claims. The Second Circuit rejected this argument. While Escobar involved an implied false certification claim, the court found nothing to suggest the Supreme Court intended its holding to apply only to such case.

Consideration of Material Outside the Complaint

Next, Foreman argued that the district court improperly considered material outside of his complaint: (1) a September 2014 DCAA audit that reported on AECOM’s labor billing practices to the Department of Defense; and (2) documents related to Work Order 6HN26S603914, including an Army memorandum.

AECOM conceded that the DCAA report was not referenced in the complaint, but was properly considered by the district court, because it was integral to the complaint. According to AECOM, the report established that the government had knowledge of the alleged violations underlying Foreman’s labor billing claims. Because the government’s knowledge was material to the consideration of materiality, AECOM argued the district court properly considered the report. AECOM also argued that the complaint made reference to various DCAA audits and that the government had provided him with this specific audit during its investigation.

The circuit panel was unpersuaded, finding that the complaint did not rely heavily on this report, did not allude to it, and did not use it as a basis for the allegations. According to the court, the fact that the report demonstrated the government’s knowledge of some of the alleged violations did not render it integral to the complaint itself. While the complaint stated that AECOM was subject to periodic audits and suggested that AECOM sought to conceal its violations from auditors, those allegations did not render the audit process or its work product integral to the complaint.

Turning to the district court’s consideration of the work order, the Second Circuit found the court properly considered the contents of the Work Order, as the complaint explicitly referenced the order by number and quoted from it to support the allegations. However, the district court improperly went beyond the work order to consider various documents submitted by AECOM. Although AECOM’s submissions referenced the work order, those documents were not identified in the complaint.

The circuit court held that the district court erred in relying on these documents without first converting the motion to dismiss into a motion for summary judgment.

The Merits of the Materiality Analysis

Foreman argued that the complaint clearly showed that the alleged fraud was material to the government’s decision to pay AECOM’s invoices for labor hours. Foreman argued that the contract incorporated by reference and required compliance with the performance work statements and numerous FAR provisions that AECOM allegedly violated. AECOM argued that Foreman failed to identify any provision that specifically identified any of the contractual or regulatory requirements that AECOM allegedly violated as an express condition of payment.

The court found this factor weighed neutrally on the analysis, as the contract’s blanket statement requiring compliance with various FAR provisions did not show that the specific conduct alleged in the complaint was material. The court found that Foreman’s citations to manuals and guidance similarly unpersuasive, as they required blanket compliance with a variety of requirements without singling out any single one as an express condition of payment.

Next, Foreman argued that the government initiated civil and criminal cases against other contractors alleged to have engaged in similar conduct, resulting in multi-million dollar settlements. AECOM argued that the facts of these cases were different and therefore irrelevant to this matter. However, the circuit panel disagreed, finding the cases reasonably similar. The court found that both cases alleged the contractor billed for a full two-weeks’ worth of labor hours per employee, regardless of the number of hours worked.

However, the fact that the government pursued recovery in other cases was less relevant than nonpayment in the current case. While the government could have pursued recovery against AECOM once it learned of the alleged fraud, it did not. The court found that the allegations in the complaint, coupled with the reports incorporated by reference, put the government on notice of AECOM’s conduct. However, the government did not seek to recoup payments, but merely reduced staffing hours. Further, the government continued to extend AECOM’s contract. Therefore, the court concluded that the allegedly fraudulent man-hour utilization reports were not material to the government’s payment decision.

For similar reasons, the court also agreed that the alleged property violations were not material to the government’s decision to pay AECOM’s claims. Foreman argued that the government had plausible reasons not to stop payment or terminate the contract, due to the ongoing operations in Afghanistan. However, the court found the cases cited by Foreman to be distinguishable, as the government’s knowledge here was more explicit.

Finally, with respect to the labor billing allegations, the Second Circuit held, as noted, that the district court improperly relied on extraneous material for its analysis of the government’s knowledge. Absent any evidence suggesting that the government regularly pays this type of claim despite actual knowledge that the contractor submitted fraudulent timesheets, the court found Foreman alleged more than the mere possibility that the government would be entitled to refuse payment.

The Substantiality Factor

Foreman argued that the billing fraud went to the heart of the government’s bargain, but the court disagreed. The court reasoned that AECOM’s timesheet violations, failure to properly input labor hours and MHU data into the requisite tracking systems, and failure to properly log and track government property – in the abstract – did not necessarily undermine the Contract’s core purpose of providing management and support services for the Army.

Nonetheless, the court concluded that the nature of the allegations weighed modestly in Foreman’s favor. Foreman alleged that the labor billing and timesheet fraud led to an estimated $140 million in overpayments and liability. In addition, he alleged that AECOM noted in an internal corrective action report that it could face “significant liability” due to its failure to properly track property and credit the government. The court reasoned that the significant financial costs to the government suggested that the alleged violations might affect the government’s payment decision.

However, the court found nothing to suggest that the alleged man-hour utilization fraud resulted in significant financial loss to the government. While it may have led to inefficiency and some waste, there was no evidence this affected AECOM’s ability to provide maintenance and management support services to the Army or deprived the Army of its expected benefits under the contract.

In sum, the court concluded that the district court erred in dismissing the claims based on AECOM’s improper billing practices, generally because the court should not have considered the DCAA report at the motion to dismiss stage. Without that report, the court would have had no evidence demonstrating the government’s knowledge of the alleged fraud. In contrast, the court held that the district court correctly dismissed the claims premised on the man-hour utilization reports and property tracking violations, as the relator had not made a strong case for their materiality.

The court came to a similar conclusion on the count alleging false records or statements, finding the district court erred in dismissing the claims relating to the labor billing fraud.

The Reverse False Claims and Conversion Claim

The Second Circuit affirmed the dismissal of the count asserting reverse false claims premised on AECOM’s failure to repay the government money that it had retained by fraud. The court found the claims based on the same conduct as alleged in the count of express false claims.

The court also affirmed the dismissal of the conversion claim, which was based on AECOM’s failure to identify and return excess property to the government. The court agreed that Foreman failed to identify any specific piece of property obtained through those work orders that was not delivered to the government, but instead relied on general statements about AECOM’s alleged retention of property.

The Public Disclosure Bar

Alternatively, AECOM argued that the district court erred in finding that Foreman’s claims were not barred by the public disclosure bar. AECOM argued the claims were publicly disclosed in reports issued and otherwise disclosed by various federal agencies. The circuit panel disagreed.

The circuit court affirmed the district court’s finding that most of the reports cited by AECOM were not disclosed outside government, and therefore were not public. A final report was clearly publicly disclosed, but failed to disclose the material elements of Foreman’s complaint.

AECOM argued the public disclosure bar applies because the information in the reports became public as soon as the government released the reports to AECOM employees. AECOM noted that Foreman himself was able to access these disclosures for his complaint and therefore they were accessible to “strangers to the fraud.” However, the Second Circuit found that the reports were labeled confidential, for official use only, and FOIA exempt, meaning their recipients had an obligation to keep the information close. Because it was not clear that Foreman was an outsider to the fraud, neither court could find that the information had been publicly disclosed.

The court reasoned that under AECOM’s interpretation, a relator who had personally observed and investigated fraud would be barred from bringing a FCA claim merely because he obtained access to a confidential government report describing the fraud. This would also bar a qui tam complaint if the government had knowledge of the fraud and sought corrective action in connection with a confidential audit. The court found the public disclosure bar was not so restrictive.

FCA - Foreman v AECOM