The Sixth Circuit held that a contractor’s work estimate could have fraudulently induced the government into agreeing to firm-fixed price contracts. In this case, the agency did not create its own cost estimates for the projects and issued the contracts in the exact amount of the estimates. The district court said work estimates are not claims for payment, but the circuit panel reversed and remanded.
United States Court of Appeals for the Sixth Circuit No. 20-4246; U.S. ex rel. USN4U LLC v. Wolf Creek Federal Services Inc., Anthony Santillo, Christopher Logan, Timothy Tesch
In Brief
The Sixth Circuit reversed a lower court’s decision to dismiss a qui tam case alleging that NASA relied on fraudulently inflated work estimates when it paid the defendants for facilities maintenance projects on firm-fixed price work orders. The district court held that project estimates were not claims for payment under the FCA and found no evidence NASA solely relied on these estimates when contracting with the defendants. The circuit court disagreed, finding that the defendants’ estimates could be used to demonstrate that NASA was fraudulently induced to enter into these contracts, in part because there was no evidence NASA created its own independent cost estimates but relied entirely on the defendants’. The court also noted that the resulting contracts were always issued in the exact amount of the estimates.
The court also found the relator adequately alleged the defendants submitted grossly inflated work hour estimates for work that on its face should have taken only a few hours. The relator’s submission of recorded conversations in which the defendants’ employees discussed how they inflated their work estimates was particularly persuasive. The court also gave little weight to NASA’s decision to continue contracting with the defendant, noting that alleged fraud is not proven fraud.
Background
USN4U sued Wolf Creek Federal Services and several of its employees under the False Claims Act, alleging they provided NASA with falsely inflated estimates for facilities maintenance projects, which resulted in fraudulently induced, exorbitant contract prices.
NASA awarded Wolf Creek a contract to operate and maintain the facilities at the NASA Glenn Research Center. The contract included an IDIQ portion that contemplated award of certain projects on a firm-fixed price basis. USN4U alleged that Wolf Creek falsely inflated its labor cost estimates for these projects and that NASA relied on this false information when negotiating the final price of each project. In other words, the relator alleged NASA paid Wolf Creek for work hours that were never performed.
As an example, the relator alleged that Wolf Creek estimated that work to renovate a laboratory would require 80 carpenter hours, 20 HVAC mechanic hours, and 16 plumber hours, while in reality this project required only 7 carpenter hours, 6 HVAC mechanic hours, and no plumber work at all. USN4U identified other projects for which Wolf Creek allegedly inflated the type of work and number of hours required.
The relator alleged that Wolf Creek directed union employees to falsely report their labor hours to justify the inflated labor estimate. According to the relator, the software used to track labor hours had no mechanism to verify whether an employee worked on a specific work order or require supervisors to sign off on their employees’ reported time. The complaint identified several employees allegedly involved in the scheme as defendants. The complaint asserted that about one third of union employees in various departments participated in the scheme and received higher wages as a result. Managers also received additional compensation based on the billed labor hours.
The district court dismissed the complaint, holding that the work order proposals submitted to NASA were not claims under the FCA. According to the court, because the work proposals were merely estimates, they did not fall within the FCA’s definition of a claim as a demand for money. The court also held that USN4U failed to present evidence of falsity because it only used “industry standards” as a comparison to demonstrate that Wolf Creek’s quotes were inflated. Finally, the court held that USN4U did not state a claim for fraud in the inducement because it did not sufficiently plead that the inflated quotes were material to NASA’s payment decision or that they caused NASA to pay more than it would have, had it known of the true labor costs.
USN4U appealed to the Sixth Circuit.
The Appeal
The Sixth Circuit reversed and remanded the case back to district court. Similar to its holding in United Technologies, the court agreed that a company is subject to FCA liability if it uses false cost estimates to fraudulently induce the government to enter into a contract.
The court held that USN4U asserted its claims with the required particularity, noting that the complaint described four specific examples of fraudulently inflated work hour estimates, including examples in which NASA paid thousands of dollars for a few hours of painting or plumbing work.
Falsity
Wolf Creek argued that the work estimate in one of the relator’s examples was accurate. It also argued that the relator unreasonably relied on “industry standards” to allege that work estimates were inflated. However, the court held that plausible industry standards could be used to allege that certain labor estimates were dramatically higher than Wolf Creek’s proposed hours.
Further, the court noted the relator submitted additional evidence, including timesheets showing that employees who participated in the overbilling scheme earned significantly more double time hours and compensation than those who did not. The relator also identified an incident in which Wolf Creek quoted NASA for plumbing work when none was required. The complaint also documented conversations with employees discussing their false estimates. The court found this sufficient.
Scienter
The court also held that USN4U adequately alleged that Wolf Creek knew that it was making false representations to NASA. USN4U submitted a recorded conversation in which Wolf Creek employees allegedly discussed their knowledge of the falsely inflated cost estimates and labor hours. In the conversation, one department lead discussed inflating estimated overtime hours by more than 25 percent. The court found this sufficient.
Materiality and Causation
Contrary to the district court’s holding, the Sixth Circuit found the inflated estimates material. The court noted that NASA did not create its own independent project estimates but relied on Wolf Creek’s proposals. Further, when NASA awarded a project, it always did so for the amount of Wolf Creek’s estimate. Wolf Creek argued that NASA’s reliance on the defendant’s estimates was based on its own research and consideration, but the court found it equally plausible that NASA trusted and relied exclusively on Wolf Creek’s proposals. Therefore, it was reasonable to allege that NASA ultimately paid Wolf Creek based on its induced belief that the quoted prices were reasonably accurate.
The court also concluded that NASA’s reliance on Wolf Creek’s estimates demonstrated a causal link between the alleged fraud and the payment of invoices. The court found it plausible that NASA would not have agreed to pay the defendant’s invoices had it known that the labor hours were grossly inflated.
The court also declined to read too much into NASA’s decision to continue contracting with Wolf Creek or the government’s decision not to intervene in the case. While continued payment in light of regulatory non-compliance is generally considered strong evidence that requirements are not material, the court drew a line between that scenario and one in which the government pays for labor that was never performed. The court suggested NASA might have various reasons for continuing to contract with Wolf Creek, including a lack of other sources for labor or a willingness to allow Wolf Creek to defend itself against the allegations before making a conclusion. However, the allegations themselves went to the essence of the bargain between the government and Wolf Creek, which the court found sufficient to show materiality.
The court also flatly rejected the argument that the government’s decision not to intervene implied that the alleged conduct was not material. For the above reasons, the court reversed and remanded the matter back to district court.
