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False Claims Act Statistics, News & Analysis

Keep Your Friends Close and Your Subcontractors Even Closer: Prime and Sub Mostly Win Motion to Dismiss Against Second-Tier Sub

The D.C. District Court recently dove headfirst into the complexities of government contracting (and subcontracting) and dismissed most of a hydra-headed 77-page FCA complaint against a prime contractor and first-tier subcontractor brought by executives of a second-tier subcontractor. United State ex rel. Keaveney v. SRA Int’l, Inc., No. 13-855, 2016 WL 6988787 (D.D.C. Nov. 29, 2016). That a subcontractor’s executives brought an FCA action against the contractors that hired them is by itself worth noting. But the opinion, too, offers a mixed bag of assuaging certain worries for government contractors while highlighting new ones.

Relators have a laundry list of allegations that are worth reading to appreciate the relative sophistication a subcontractor can bring to the table as a relator against its prime contractor. But take a deep breath first—the complaint alleges a lengthy mishmash of perceived improprieties that the prime and first-tier sub were called on to defend. First, relators alleged that defendants fraudulently induced the contract’s award by misrepresenting that the defendants’ own employees, rather than the second-tier subcontractor’s employees, would perform the work; that the relators were the defendants’ own employees, when they were not; and that defendants’ financial solvency satisfied Defense Security Service requirements, when it did not. Second, relators claimed defendants billed for inflated overtime hours, for travel costs not allowed under the contract, for the relators’ labor on bills that mislabeled it as defendants’ labor, and for pass-through fees on top of the relators’ costs that exceeded allowable amounts under the FAR. Relators also alleged defendants submitted these bills on invoices that were insufficiently detailed. Third, relators alleged that defendants submitted false monthly status reports that omitted negative commentary, mislabeled expenditures, failed to disclose rates for subcontractors, and included other omissions and alterations; that defendants also submitted false projections that misidentified who would work on the contract; and that these false statements were material to false claims for payment. Fourth, relators alleged there was a kickback scheme between the prime and first-tier sub to treat the relators' work under the contract as work performed by the first-tier sub, when it was not.

The good news is that all but two of these theories—the inflated overtime billing and the false monthly status reports—were dismissed as too speculative or unsupported claims to survive Rule 12(b)(6) or Rule 9(b). Putting aside the allegations dismissed for case-specific reasons, there are a number of holdings relevant to contractors. Contractors seeking to avoid Escobar’s “half-truths” through simplified invoices received some comfort from the court’s holding that it is not apparent “how the supposed sparsity of detail in [defendant’s] invoices constitutes a false claim.” Contractors can also appreciate that the court made clear that new FAR provisions do not retroactively transform old claims into false claims; that rules designed for one type of contract (e.g., classified contracts) will not presumptively apply to other types of contracts; and that not every FAR provision (e.g., requirements to disclose subcontractors) is per se material. Prime contractors will also be happy to learn that they will not always be held responsible for the acts of their subcontractors. The prime contractor here escaped allegations of inflated overtime billing by its first-tier subcontractor because relators failed to allege the prime had knowledge of the sub’s conduct. Lastly, FCA defendants generally can cite this case for the proposition that the mere existence or allegation of a kickback scheme does not necessarily cause an FCA violation. Here, the kickback allegations were dismissed because the relators did not connect their kickback allegations to a specific false claim.

The opinion contains its share of cautionary notes, however. First, it is a reminder that contractors should take care in drafting status reports to the government. Here, relators’ allegations of false monthly status reports material to false billings survived the motion to dismiss despite defendants’ arguments that the status reports were neither false nor material. Second, contactors should avoid ambiguity in the descriptions of line items on their invoices. Relators’ inflated overtime claims survived the motion to dismiss, despite defendants’ arguments that relators were misinterpreting defendants’ invoices to bill by individual when they actually billed by labor category, because the court found that relators’s allegations were made with sufficient particularity (for example that an individual billed for 748.32 hours, but defendants billed the government 1,438 hours). The court did note, however, that “[d]iscovery may yet reveal which interpretation of [defendant’s] invoices is correct,” which is a small consolation for the defendants who must now embark on discovery – a long and expensive process.

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Ryan D. Stalnaker Associate