Army Contractor Case Kicked Back to CFC Over Kickbacks - Federal Circuit
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Army Contractor Case Kicked Back to CFC Over Kickbacks

Contractors, subcontractors, and kickbacks. Is anyone even mildly surprised here?

During Operation Iraqi Freedom, the United States Army contracted with Halliburton subsidiary Kellogg Brown & Root, now known simply as KBR, to provide dining services. KBR, despite previous difficulties with the subcontractor, handed over operations of Camp Anaconda to Tamini Global Company.

After years of bills, adjustments, negotiations, and renegotiations, an Army audit found that KBR billed $41.1 million in unreasonable expenses, and refused to pay.

It was later discovered that Tamini's Vice President, Shabbir Khan, had given plane ticks to two KBR employees, Terry Hall and Luther Holmes, for trips to Dubai and Jordan, as well as $38,000 in cash, including a large sum meant for "exploratory research" on opening a Golden Corral franchise (which, surprisingly enough, was never actually opened).

The Court of Federal Claims awarded KBR $11.5 million of its claim, using the final renegotiated price between KBR and Tamini, multiplied by the six months in dispute, and minus the amount already paid. It also awarded the government $38,000 on its Anti-Kickbacks Act (41 U.S.C. §§ 51-58) counterclaim, though it did not impute the "low level" employees' conduct to the company, nor did it accept the government's common-law fraud claims.

Forfeiture Statute and False Claims Act

The government argued that the entire claim should be forfeited, pursuant to the Forfeiture statute, as the claims were based on a contract that was based on fraud. However, the clear text of the statute states:

A claim against the United States shall be forfeited to the United States by any person who corruptly practices or attempts to practice any fraud against the United States in the proof, statement, establishment, or allowance thereof.

The CFC and the Federal Circuit agreed -- the plain text of the statute addresses fraud "in the proof, statement, establishment, or allowance" of claims, not fraudulent conduct in the execution of the contract itself.

Both courts also rejected the government's False Claims Act (31 U.S.C. §§ 3729-3733) arguments, as the government had failed to "allege facts showing that the costs actually inflated the contract price."

Imputation Error

Where the CFC erred, however, was in not imputing the two employees' acts upon the company, as they were not sufficiently senior to justify such a holding. The government argued that respondeat superior was the proper standard to apply.

The Federal Circuit sided with the government, stating, "Corporations act through their employees; the general rule is that an agent's knowledge is imputed to the principal when employees are acting with the scope of their authority or employment, absent special circumstances."

The case was remanded with instructions to calculate punitive damages based on the Anti-Kickbacks Act. The court also noted that the Fifth Circuit issued a similar holding against KBR earlier this year.

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