United States ex rel. Vavra v. Kellogg Brown & Root, Inc.
Docket: Civil Action No. 1:04-CV-42
Court: District Court, E.D. Texas; February 7, 2011; Federal District Court
Defendant Kellogg Brown & Root, Inc. (KBR) filed a motion to dismiss the United States' claims, invoking Federal Rules of Civil Procedure 9(b), 12(b)(1), and 12(b)(6). The court reviewed KBR’s motion, the parties' submissions, the complaint, and relevant law, resulting in a decision to grant the motion in part and deny it in part.
The background reveals that on January 21, 2004, Relators David Vavra and Jerry Hyatt initiated a qui tam action against KBR and other defendants, alleging KBR engaged in kickback schemes related to subcontracts under the LOGCAP III government contract. From January 2002 to April 2005, KBR employees purportedly accepted various kickbacks from subcontractors Eagle Globe Logistics (EGL) and Panalpina, Inc. in exchange for awarding contracts for transporting military supplies into Iraq.
On May 5, 2010, the United States intervened, asserting claims against KBR for violations of the False Claims Act (FCA), Anti-Kickback Act (AKA), breach of contract, unjust enrichment, and mistaken payments. KBR's motion to dismiss, filed on October 1, 2010, argues that the United States’ complaint is deficient in linking the alleged kickbacks to false claims, lacks specific details of KBR's scheme, and fails to establish the necessary intent. KBR contends the United States improperly claims an AKA violation and asserts that common law claims fall under the jurisdiction of the Armed Services Board of Contract Appeals or the Court of Federal Claims due to the Contract Disputes Act. KBR also argues that quasi-contract claims should be dismissed since an express contract exists.
The court's analysis indicates that jurisdictional challenges under Rule 12(b)(1) should be addressed before any merits-based challenges under Rule 12(b)(6), as per established precedent. If both jurisdictional and merits issues are present, dismissal should occur on jurisdictional grounds first.
A court lacking jurisdiction cannot dismiss a case with prejudice prematurely. KBR contends that the court lacks subject matter jurisdiction over the United States' claims for breach of contract, unjust enrichment, and payment by mistake, asserting these claims are under the exclusive jurisdiction of the ASBCA and the Court of Federal Claims due to the CDA. The United States argues these claims involve fraud, thereby falling within the court's jurisdiction.
A motion to dismiss under Rule 12(b)(1) challenges the federal district court's subject matter jurisdiction, which is limited and must be established by statute or the Constitution. A dismissal for lack of subject matter jurisdiction occurs when the court cannot legally adjudicate the case. Jurisdiction cannot be created by waiver or consent, and the burden of proof rests on the party invoking federal jurisdiction, which is presumed against.
In reviewing a Rule 12(b)(1) motion, the court may consider the complaint alone, supplemented by undisputed facts, or by disputed facts resolved by the court. The district court must accept all factual allegations in the plaintiff's complaint as true when making its determination.
The Contract Disputes Act (CDA) governs contracts between U.S. executive agencies and contractors, stipulating that federal district courts lack jurisdiction over claims covered by the Act. Instead, such claims must be initially addressed by the contracting officer, with subsequent appeals to an agency board or the Court of Federal Claims. An exception exists for claims involving fraud, which are subject to federal district court jurisdiction. The CDA's fraud exception applies broadly to all claims involving fraud, allowing cases where underlying events relate to fraud to bypass CDA restrictions.
The United States alleges that KBR breached its obligations under the LOGCAP III agreement by failing to prevent and report employee kickbacks, which also form the basis for False Claims Act (FCA) and Anti-Kickback Act (AKA) claims. Since these contractual claims arise from the same events as the fraud allegations, the CDA fraud exception applies, granting jurisdiction to the court.
In the first count of its complaint, the United States accuses KBR of violating the FCA by billing for services associated with kickbacks. KBR contends that the FCA claims should be dismissed due to a lack of linkage between the kickbacks and inflated claims, insufficient fraud detail, absence of necessary intent (scienter), and inadequate support for vicarious liability for employee actions. The FCA enables the government or its representatives to seek recovery for fraudulent claims made to obtain payments.
Liability under the False Claims Act (FCA) is established for individuals who knowingly present false claims or create false records to secure government payment or approval (31 U.S.C. 3729(a)(1) and (a)(2)). To prove civil liability, a relator must demonstrate: 1) a false or fraudulent act; 2) that was performed with the requisite intent (scienter); 3) that was material; and 4) that caused the government to pay out or forfeit money (United States ex rel. Longhi v. Lithium Power Techs. Inc.). Claims must adhere to the heightened pleading standard set forth in Rule 9(b) of the Federal Rules of Civil Procedure, which requires specificity in fraud allegations. This rule serves multiple purposes, including ensuring defendants have sufficient notice to formulate a defense, protecting against frivolous lawsuits, preventing discovery-based fraud claims, and safeguarding defendants' reputations. The standard under Rule 9(b) contrasts with the more general pleading requirements of Rule 8(a), reflecting the need to reduce the risk of harm to defendants' reputations from unsubstantiated fraud claims.
Rule 9(b) of the Federal Rules of Civil Procedure mandates particularity in fraud claims, requiring plaintiffs to provide simple, concise, and direct allegations of the circumstances constituting fraud. The Fifth Circuit emphasizes that this rule is applied rigorously yet allows for flexibility, particularly in cases arising under the False Claims Act (FCA). A plaintiff must specify the fraudulent statements, identify the speaker, and detail when and where the statements were made. However, the level of detail can vary based on the case's specifics. While traditionally, the “who, what, when, where, and how” standard is required, courts may allow for a broader interpretation in FCA cases. A complaint can survive even if it does not detail specific false claims, as long as it provides particular details of a fraudulent scheme and reliable indicators suggesting that false claims were submitted. This flexibility aims to fulfill the remedial purpose of the FCA, allowing claims based on a general scheme to defraud, including relevant mechanics and descriptions of how claims were false. Overall, while the specifics of individual false claims are not always necessary, the plaintiff must still set forth sufficient details to provide defendants with proper notice of the allegations.
The standard set by Rule 9(b) requires plaintiffs to provide specific details regarding fraudulent statements or omissions, including who made them, when, why, and the reasons they are considered fraudulent. While the pleading requirements may be relaxed when the facts are primarily within the perpetrator's knowledge, allegations cannot be based on mere speculation or conclusory assertions. The rule permits general allegations concerning states of mind, such as intent or knowledge, but simple claims of fraudulent intent are insufficient without specific supporting facts. Under Fifth Circuit precedent, a failure to plead fraud with particularity can lead to dismissal for failure to state a claim. Courts must focus on the facts in the complaint and any attached documents when evaluating motions to dismiss. To avoid dismissal, the complaint must present facts that substantiate the plaintiff's claims. The Supreme Court's ruling in Twombly emphasizes that while claims must be adequately stated, they must also be backed by specific facts rather than conclusory allegations. In this context, KBR argues for the dismissal of the United States’ complaint, claiming it fails to meet the particularity requirements of the False Claims Act (FCA) and Rule 9(b) by lacking factual connections between accepted gratuities and false claims for government payment.
KBR argues for the dismissal of the United States' complaint, claiming it lacks specific facts illustrating how its payment claims were inflated, as mandated by Rule 9(b). The United States contends that the acceptance of kickbacks inherently supports a False Claims Act (FCA) claim, asserting its allegations about KBR’s kickback scheme are sufficient. The court finds these positions unconvincing, stating that FCA liability is attached to the claim for payment, not merely the fraudulent activity. Services rendered in violation of a statute do not automatically equate to false claims under the FCA unless there is a knowingly false certification of compliance with a payment condition, which the United States' complaint lacks.
The court identifies a failure in the complaint to establish that compliance with the Anti-Kickback Act (AKA) was a condition for payment under the LOGCAP III contract. Additionally, it notes the absence of facts linking KBR's acceptance of kickbacks to its claims for payment. While the complaint describes KBR’s alleged kickback scheme, it does not provide sufficient reliable indicia to infer that false claims were submitted. The court deems the claim that the costs of subcontracts were inflated by kickbacks as too vague and lacking detail about the billing from EGL or Panalpina to KBR.
Regarding the intent element of the FCA, KBR argues that the United States fails to adequately plead this aspect, relying on a conclusory statement about intent. The United States defends its position by suggesting that KBR's employees' knowledge of the kickbacks can be attributed to the corporation. Ultimately, the court concludes that the United States has not met the requirements of Rule 9(b) concerning its FCA claim.
KBR asserts it cannot be held vicariously liable for employee actions since the complaint lacks allegations that the kickbacks were intended to benefit the corporation. The False Claims Act (FCA) mandates a defendant must "knowingly" submit false claims to the government, as defined in 31 U.S.C. 3729(a). While specific intent to defraud is not required, mere negligence does not satisfy the FCA's mens rea standard. To establish a violation, the United States must prove KBR either had actual knowledge of the falsity, acted with deliberate ignorance, or displayed reckless disregard regarding the truth of the information provided.
Allegations of fraudulent intent must be specific, as outlined in Federal Rule of Civil Procedure 9(b); general assertions are insufficient. Failure to plead fraud with particularity may result in dismissal under Rule 12(b)(6) for failure to state a claim. Courts evaluating such motions focus solely on the facts in the complaint and related documents. To avoid dismissal, the complaint must present sufficient facts to establish entitlement to relief. The federal rules encourage liberal amendments to complaints to ensure substantive claims are evaluated on their merits, allowing for dismissal without prejudice.
Additionally, KBR argues that the second count in the United States' complaint regarding violations of the Anti-Kickback Act (AKA) should also be dismissed under Rule 12(b)(6), claiming it incorrectly alleges a knowing violation of the statute.
KBR contends that the complaint filed against it, based on 41 U.S.C. § 55(a)(1), is improperly pleaded, asserting that a prime contractor cannot be held liable for a knowing violation solely due to the actions of its employees. KBR references 41 U.S.C. § 55(a)(2) regarding vicarious liability, which the United States did not invoke in its complaint. The United States counters that the complaint is valid because KBR's employees allegedly engaged in fraudulent activities and their knowledge can be attributed to the company.
Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a motion to dismiss for failure to state a claim evaluates the formal sufficiency of the complaint, focusing on whether a legally cognizable claim is presented, rather than on factual disputes or the merits of the case. The court must assume the truth of the complaint's factual allegations, interpret them favorably for the plaintiff, and ensure the claim is articulated clearly enough for the court and opposing party to ascertain its sufficiency. The allegations must surpass a speculative threshold to warrant relief. Generally, the court does not consider information beyond the complaint's text, except for public records or documents referenced in the complaint that are central to the claim.
The excerpt also notes that the Anti-Kickback Act (AKA), amended in 1986, aims to enhance the government's capacity to combat and prosecute kickback practices related to federal contracts. The AKA prohibits both the acceptance and payment of kickbacks and their inclusion in contract costs.
A kickback, as defined under the Act, includes any form of compensation, such as money or gifts, provided to contractors or their employees to improperly gain favorable treatment regarding prime contracts or subcontracts (41 U.S.C. 52(2)). In civil actions, the United States can recover penalties for violations of section 53, which can amount to twice the kickback involved and up to $10,000 for each instance of prohibited conduct (41 U.S.C. 55(a)(1)). Additionally, penalties can be assessed against individuals whose employees or subcontractors engage in kickback violations, equal to the amount of the kickback (41 U.S.C. 55(a)(2)).
In this case, it is acknowledged that the items potentially provided by EGL and Panalpina to KBR qualify as kickbacks under the law. KBR contends that if found liable, it should only face penalties corresponding to the amount of the kickbacks, as stated in 55(a)(2), rather than the larger penalties cited by the United States under 55(a)(1). The court agrees with KBR, emphasizing principles of statutory interpretation that aim to give effect to all statutory terms and avoid rendering any part of the statute superfluous. The court notes that if penalties for violations by a prime contractor’s employee were subject to the larger penalties in 55(a)(1), the more limited fines in 55(a)(2) would be unnecessary. Historical context supports this interpretation, as prior to the 1986 amendment of the Act, penalties were solely directed at subcontractors and individual kickback recipients rather than prime contractors.
The amendment to the statute allows the government to sue a prime contractor or a higher-tier subcontractor for violations by a lower-tier subcontractor based on vicarious liability, with penalties limited to the amount of the kickback. The United States contends that the knowledge of KBR's employees can be attributed to the corporation, potentially increasing fines. However, knowledge or intent not aimed at benefiting the employer cannot be imputed, leading to the dismissal of the United States' claim without prejudice due to insufficient allegations regarding the employees' actions.
KBR argues that the United States' quasi-contractual claims for unjust enrichment and payment by mistake should be dismissed because an express contract, LOGCAP III, governs the dispute. The United States asserts that federal rules permit alternative pleading for recovery theories. While alternative theories are allowed, quasi-contractual claims are impermissible when an express contract exists. The court confirms that since LOGCAP III governs, the United States cannot pursue quasi-contractual claims. Consequently, counts four and five are dismissed with prejudice. The court dismisses counts one and two without prejudice, while KBR's motion to dismiss on other grounds is denied.
All claims against the other defendants in this case have been dismissed, leaving KBR as the sole defendant. KBR is the primary contractor for the Logistics Civil Augmentation Program (LOGCAP III), which involves private contractors providing non-combat support services for military operations. The allegations against KBR are outlined in the Relators' Second Amended Complaint, which is similar to prior complaints but omits certain claims and defendants. Notably, Smoot and Bennett have pleaded guilty to violations of the Anti-Kickback Act related to these allegations.
The United States has intervened in the Relators' claim against KBR, effectively substituting itself as the party in the action, per 31 U.S.C. § 3730(b)(4). This intervention amends the Relators' Third Amended Complaint, making it the operative pleading. KBR challenges the fraud claims brought by the United States under Rules 9(b) and 12(b)(6), but this does not impact the court’s jurisdiction under the Contract Disputes Act (CDA). Previous rulings demonstrate that while fraud claims may be dismissed for pleading deficiencies, jurisdiction over common law claims remains intact.
The United States cites various cases to argue that acceptance of kickbacks by a contractor's employees implicates the False Claims Act (FCA), although these cases do not directly support that principle. Legal precedents clarify that violations of the Anti-Kickback Act can result in FCA claims if compliance is a prerequisite for payment under the government contract. The United States' complaint asserts that LOGCAP III mandates KBR to ensure compliance with all applicable Department of Defense directives by itself and its subcontractors.
The key issue at hand is the "certification of compliance," rather than the payment or acceptance of remuneration, with no certification alleged in this case. The United States cited only one relevant case, Morse Diesel Int’l, Inc., where a prime contractor was held liable under specific statutes, but this case is not binding precedent and deemed unpersuasive by the court. Both parties acknowledge the validity of the express contract, with the United States referencing LOGCAP III as the basis for its claims and KBR affirming that LOGCAP III governs their relationship. Additionally, unjust enrichment and payment by mistake are identified as quasi-contractual claims under Texas law.
