Armor Manufacturers (Mostly) Deflect FCA Claims Again Post-Escobar: District Court Finds Implied, Extra-Contractual Duties Not Bargained For and Thus Not Material
In related cases U.S. ex. rel. Westrick v. Second Chance Body Armor, Inc. and U.S. v. Toyobo Company, Ltd., the D.C. district court recently determined on a motion to reconsider post-Escobar that implied “extra-contractual” requirements, not included in the language of the contract with the government, may nevertheless form the basis of an implied certification claim. No. 1:07-cv-01144 (D.D.C. Mar. 31, 2017). But, the court found that since the government in Westrick and Toyobo presented no evidence that it in fact contracted or bargained for the alleged extra-contractual obligations, the obligations were not material to payment and affirmed its previous grant of summary judgment for defendants on their FCA claims based on a violation of those obligations.
The government alleged that the defendants—manufacturers of bullet proof vests and of the Kevlar-like material used to make those vests—submitted false claims by knowingly providing defective and insufficiently durable bulletproof vests to the government, among other related allegations. The government pointed to six contractual and “extra-contractual considerations” as the legal basis for FCA liability: Three express terms of the contract warrantying quality and durability for a period of time, one statement about quality from marketing materials (called the “catalog guarantee”) that were formally incorporated into the contract, and two non-mandatory industry and government quality standards and certifications mentioned nowhere in the contract or in extrinsic evidence about the contracting process.
In 2015, the district court had held that because the catalog guarantee
was incorporated into the contract, it could fairly serve as the basis for an
implied certification claim. The court denied
the government’s motion for summary judgment on this theory, however, because
it concluded that the meaning of this “catalog guarantee” was ambiguous and
would need to be decided by a jury. The
court granted summary judgment for the defendants on the government’s other
theories. It concluded that providing
products that failed inside of the warranty period in the contract was not a
false claim; rather, warranties are provided to account for failures. The court also granted summary judgment for
defendants as to the government’s allegations about the alleged extra-contractual
obligations, explaining that the purported guarantees of compliance with
certifications and industry standards had no basis in the contract or in extrinsic
evidence about the bargain, and so could not support a false claim.
After Escobar, the government moved for reconsideration, arguing that Escobar established that extra-contractual terms could form the basis of implied certification claims. The court agreed that Escobar expanded FCA liability to include “extra-contractual considerations” and that reconsideration was appropriate. But, the court again found that there was no evidence that the extra-contractual requirements were part of the government’s bargain in contracting with the defendants. Reaffirming the court’s previous grant of summary judgment for the defendants, the court explained, “It is plain to the Court that, if neither [extra-contractual term] was material to the United States’ contracting decisions . . . , then those [terms] were similarly not material to the United States’ payment decisions.” The Court also reaffirmed its other rulings, granting summary judgment regarding the express contractual terms, and again holding that the ambiguous “catalog guarantee” remained an issue for the jury. (We can’t help but wonder whether Safeco might offer relief to the contractors on the catalog guarantee theory, since it will be challenging for the government to prove a knowing violation of a contract term that the Court has concluded is ambiguous, but it appears this argument was not mentioned in the defendants’ briefing.)
Westrick’s and Toyobo’s limitations on the use of extra-contractual terms as bases for FCA liability should provide FCA defendants some comfort that courts will limit the reach of the essence of the bargain standard that permeated the Escobar case on remand in the First Circuit and that made another appearance in the Quicken case we wrote about last week. Courts that employ the Westrick and Toyobo reasoning should find that without some evidence that extra-contractual requirements, such as industry standards, played a role in the solicitation, offer, or award or contract—or were mandated by law—the so-called requirements are not material to the government’s decision to pay under Escobar. We will continue to monitor Westrick and Toyobo as they head toward trial.