War Dogs Brings the False Claims Act to the Silver Screen, Offers Lessons to Government Contractors
While we here at LLB toiled away at our FCA map, FCA statistics, and FCA case law analysis in preparation for our August launch, we did poke our heads out of our cave long enough to notice that the FCA had just hit the big screen! No, we are not talking about the highly acclaimed FCA video that now appears on LLB. In August, mere weeks before we launched, the movie War Dogs hit theatres across the U.S., recounting the (highly-)dramatized but true tale of two twenty-somethings who cashed in on enormous profits by contracting to support military operations in Afghanistan and Iraq. Operating as AEY, Inc., the unlikely duo, working from their Miami apartment, won a $300 million ammunitions contract for the U.S. Army, and—allegedly—violated the FCA along the way.
AEY contracted to supply ammunition to the Afghan National Army and National Police. The contract expressly incorporated a provision of the Defense Federal Acquisition Regulation Supplement (DFARS) that prohibited AEY from acquiring ammunition from a communist Chinese military company. AEY sought to fulfill the contract with ammunition purchased from Albania’s Military Export and Import Company, but upon inspection of the ammunition, AEY discovered Chinese characters printed across the packing materials revealing that the ammunition was originally manufactured in the People’s Republic of China.
After the State Department informed AEY that no exception would be allowed, these young, inexperienced international arms dealers allegedly concealed the ammunition’s origin by repackaging the ammunition in cardboard boxes and disposing of any materials containing Chinese characters. AEY fulfilled the delivery with the Chinese ammunition and certified (expressly, not impliedly) that the ammunition “conform[ed] in all respects with the contract requirements.” (A harbinger of FCA troubles to come!)
The U.S. government issued two subsequent delivery orders to AEY under the contract, but shortly after issuance, executed a search warrant on AEY’s Miami office based on suspicions that the earlier order involved Chinese-made ammunition. The day the two subsequent orders were shipped (with non-Chinese manufactured ammunition), the Army temporarily suspended AEY from future contracting with the government. AEY and its officers were ultimately indicted, one of the two friends went to jail, and AEY pleaded guilty to conspiring to make false statements, commit major fraud against the United States, and commit wire fraud.
Not surprisingly, the government refused to pay for the two later orders. Undeterred by fraud convictions, AEY sought payment on the orders, filing a complaint in the Court of Federal Claims to recover on the invoices. The government counterclaimed, asserting claims for forfeiture under 28 U.S.C. § 2514 and for violations of the FCA for making false claims and false statements.
AEY moved to dismiss the government’s FCA counterclaims, arguing that they were compulsory counterclaims that should have been brought in the prior civil case, AEY, Inc. v. United States, 99 Fed. Cl. 300 (2011), in which AEY challenged the Army’s termination of the contract for default and the government moved to dismiss. The United States Court of Federal Claims held that the government’s earlier motion was not a “pleading” within the rules, and thus, the government had not waived its right to raise the FCA counterclaim. AEY, Inc. v. United States, 114 Fed. Cl. 619, 633 (2014). With that legal skirmish past and War Dogs' run in theaters winding down, the government and AEY continue to engage in settlement negotiations, now two years’ strong.
Lest you think this is all popcorn and puff, the AEY saga presents some interesting FCA lessons. War Dogs, while far afield from the typical government contractor’s experience, underlines some key risks for government contractors: (1) Failure to comply with export and import regulations, and the government’s sourcing requirements—especially in defense contracts—can create serious FCA liability. (2) Government contractors, and especially new and less experienced contractors, should honestly self-evaluate their capabilities to perform all requirements of the contract or risk more than a breach of contract claim. (3) Certifications, whether expressly made as in War Dogs or otherwise, are a relatively ripe area for the government to invent FCA liability, as most government contracts contain numerous compliance requirements, often incorporated by simple reference to regulations found outside of the contracts. (4) Raising a breach claim against the government in the Court of Federal Claims can invite an FCA counterclaim (a counterclaim the government could not raise in a Board of Contract Appeals).