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March 19, 2020 |
The Defense Production Act and COVID-19: What Industry Needs to Know

Click for PDF On March 18, 2020, President Trump announced that he was invoking the Defense Production Act (“DPA”) in order to allow the administration to marshal American industry to prioritize production of medical supplies and pharmaceuticals that are in short supply to fight the coronavirus pandemic. Notably, the President stated that he was invoking the DPA authority “just in case we need it,” but did not say whether he planned to issue orders pursuant to that authority for the time being. The President’s announcement on Wednesday followed public urging by Senate Democrats to invoke the authority granted by the DPA to address medical supply shortages.[1] The powers granted to the Government under the DPA are unique and broad. In this Client Alert, we summarize the requirements of the DPA and its implications for contractors performing under contracts issued pursuant to the Government’s authority under this statute, or private industry companies that may be directed to prioritize production based on the same authority. Below, we address the scope of the DPA, contractors’ rights and responsibilities under it, and special actions that the Government may direct industry and businesses to take in order to support the national interest. Scope of the Defense Production Act Enacted in 1950 in response to the start of the Korean War,[2] the DPA, 50 U.S.C. §§ 4501 et seq., ensures that the domestic industrial base is mobilized and prepared to support the national defense both during national emergencies and peacetime. Since its enactment, the DPA has been reauthorized over 50 times, most recently in 2018.[3] The term “national defense” as defined in the DPA has been expanded over time, and currently includes:

programs for military and energy production or construction, military or critical infrastructure assistance to any foreign nation, homeland security, stockpiling, space, and any directly related activity. Such term includes emergency preparedness activities conducted pursuant to title VI of The Robert T. Stafford Disaster Relief and Emergency Assistance Act [42 U.S.C. §§5195 et seq.] and critical infrastructure protection and restoration.[4]
The Stafford Act, in turn, states that “emergency preparedness”:
means all those activities and measures designed or undertaken to prepare for or minimize the effects of a hazard upon the civilian population, to deal with the immediate emergency conditions which would be created by the hazard, and to effectuate emergency repairs to, or the emergency restoration of, vital utilities and facilities destroyed or damaged by the hazard.[5]
Given the breadth of “national defense” activities, the DPA can apply to a wide variety of companies providing goods or services deemed essential to the national interest. The authorities granted by the DPA are generally afforded to the President, who has in turn delegated these authorities to department and agency heads by Executive Order.[6] The DPA empowers the Government to ensure availability of essential items by: (1) requiring contractors to accept and perform high priority contracts, or be subject to civil or criminal penalties or an injunction requiring performance; (2) requiring contracts issued pursuant to the DPA (called “rated orders”) deemed necessary to the national defense be prioritized over other contracts that are not essential to the national defense, subject to certain limited exceptions; (3) allocating the distribution of essential items;[7] (4) guaranteeing loans from contractors or their subcontractors performing contracts deemed necessary to the national defense; and (5) establishing special action plans to ensure the sufficiency of the defense industrial base during national emergencies.[8] Contractor Rights and Responsibilities Under Rated Orders The Department of Commerce, which is delegated authority through Executive Order 13603 to implement the DPA’s priorities and allocations provisions for industrial resources, established a priority allocation system known as the Defense Priorities and Allocations System (“DPAS”) to prioritize national defense-related contracts and orders throughout the U.S. supply chain in order to support military, energy, homeland security, emergency preparedness, and critical infrastructure requirements.[9] Commerce, in turn, has delegated authority to the Department of Defense, the Department of Energy, the Department of Homeland Security, and the General Services Administration to place priority ratings on contracts or orders necessary or appropriate to promote the national defense.[10] The DPAS includes two priority allocations for rated orders. DX is the highest priority rated order, and all DX orders are of equal priority with each other and take priority over DO rated orders or non-rated orders. DO rated orders are of equal priority with each other, and take priority over non-rated orders. Every rated order contract must reflect: (1) the appropriate priority ranking; (2) required delivery date(s); (3) the signature of an authorized customer representative; and (4) a statement reflecting the substance that “this is a rated order certified for national defense use, and you are required to follow the provisions of the DPAS regulation.” Contractors must accept or reject a DX or DO rated order within 10 working days or 15 working days after receipt of the request, respectively.[11] With limited exception, contractors must accept and perform contracts as directed under the DPA.[12] Contractors must offer a similar price and terms and conditions for rated orders as they would offer for comparable non-rated orders,[13] and must flow down to their subcontractors and suppliers the requirement to grant similar priority to necessary components throughout the acquisition supply chain[14]. Failure to adhere to these requirements could result in civil or criminal liability, or an injunction requiring specific performance.[15] There are exceptions where a contractor may, and in some cases must, nonetheless reject a rated order. A contractor must reject a rated order if it is unable to fill the order by the requested delivery date. If a contractor is required to reject a rated order, the contractor must notify the customer of the earliest date on which delivery can be made, and offer to accept the order based on that delivery date. A contractor is also required to reject a DX rated order where acceptance would conflict with performance of any previously accepted DX rated order, and to reject a DO rated order that would conflict with performance of any previously accepted DO or DX rated order. In each instance, the contractor must offer to accept the conflicting order as of the earliest practicable date on which delivery could be made.[16] Where a contractor receives two or more requests for rated orders of equal priority on the same day, the contractor must accept, on the basis of the earliest delivery dates, only those orders it can fill and must reject the others.[17] A contractor may reject a rated order under the following five circumstances: (1) the customer is unwilling or unable to meet regularly established terms of sale or payment; (2) the order is for an item not supplied or for a service not performed; (3) the order is for an item produced, acquired, or provided only for the supplier’s own use for which no orders have been filled for two years prior to the date of receipt of the rated order; (4) the person placing the rated order, other than the U.S. Government, makes the item or performs the service being ordered (e.g., if a contractor in receipt of a rated order is placing a rated order with a subcontractor); or (5) acceptance of a rated order or performance against a rated order would violate any other regulation, official action, or order of the DPAS.[18] Any rejection of an order, whether mandatory or permissive, must provide the reason for rejection in writing.[19] Performance of DPA contracts and rated orders can have significant impacts on the non-priority work – unrated Government contracts or private industry commitments – that contractors may be required to back-burner in the interest of the national defense. Neither the DPA nor the standard DPAS rated order contract provision compensates contractors for potential lost profits associated with abandoning lower priority, but higher profit, work during fulfillment of priority contracts and orders. However, in circumstances where the contractor’s financial stability becomes jeopardized as a result of complying with the DPA, contractors may request that the Government invoke its authority to grant extraordinary relief to contractors providing goods and services essential to the national interest when needed to keep the contractor operational.[20] And although the DPA excuses contractors and businesses from breach of contract (whether government or commercial) or other claims involving failure to perform other contracts because it was required to prioritize a rated order or DPA contract, the protection does not indemnify against claims relating to products manufactured or services provided under a DPA contract.[21] Industry Rapid Response, Voluntary Agreements & Special Action Plans In the event of a national emergency, including the current novel coronavirus pandemic, the President is authorized to establish special rules to ensure a rapid response from domestic industry to meet the critical needs of the country. For example, the President could direct industry to focus on production of scarce or critical materials.[22] In the context of the current novel coronavirus pandemic, non-medical product manufacturers may be asked or required to shift production to medical supplies. Former FDA Commissioner Robert Califf is urging U.S. manufacturers, regardless of industry, to do so,[23] and the UK Prime Minister has requested that non-medical manufacturers shift production to the manufacturing of ventilators.[24] French conglomerate LVMH, the company behind Louis Vuitton and other luxury brands, announced this week that it is converting its cosmetics factories to produce hand sanitizer.[25] The DPA authorizes the President to create, maintain, protect, expand, or restore domestic industrial base capabilities essential to the national defense through a variety of mechanisms, such as purchasing or making purchase commitments of industrial resources or critical technology items, and making subsidy payments for domestically produced materials.[26] The Act also authorizes the President to issue loan guarantees and direct loans to reduce current or projected shortfalls for essential materials necessary for national defense purposes.[27] Although the Government has not used the DPA loan authorities in more than 30 years, the Government has used purchases and purchase commitments with relative frequency.[28] For example, the Department of Defense used DPA authorized funding for a portfolio of 32 projects as of the end of 2018, including to address key industrial base shortfalls in the production of metal castings for critical rotorcraft applications and trusted advanced photomasks for microelectronics.[29] The DPA also authorizes the President, upon a determination that a “condition exists which may pose a direct threat to the national defense or its preparedness programs,” to consult with industry and business representatives and establish voluntary agreements, preparedness programs, and plans of action to provide for the national defense and expand production capacity of essential resources.[30] Although voluntary agreements or plans of action between competing private industry entities could be subject to legal ramifications under the antitrust statutes or by contract, the DPA affords such parties a special legal defense if their actions under such a voluntary agreement or plan would otherwise violate antitrust or contract laws – but they do not grant blanket immunity.[31] It remains to be seen to what extent the Administration will invoke these provisions of the DPA. For example, Section 708 of the DPA creates a defense to any civil or criminal action brought under federal antitrust laws or any similar law of any state.[32] The requirements to invoke the defense are stringent, and its coverage is narrow. Only actions taken in the course of developing or carrying out agreements or plans of action initiated by the President or by individuals to whom he has delegated his power to initiate such agreements are within the scope of the defense.[33] Moreover, the party invoking the defense must prove that it complied with all statutory and regulatory requirements of Section 708 and acted in accordance with the terms of the voluntary agreement or plan of action at issue. The defense further requires that, except for actions taken to develop a voluntary agreement or plan of action, the defendant must prove that the action taken was specified in, or within the scope of, an approved voluntary agreement initiated by the President or a plan of action adopted under such an agreement, and that the President or his designee authorized and actively supervised the agreement or plan of action. It remains to be seen to what extent the Administration will invoke these provisions of the DPA. Absent express Presidential or governmental approval of collaborative agreements to respond to orders issued under the DPA, companies responding to such orders should exercise caution and seek advice about any business practice in advance to minimize risk. Impact on Foreign Corporate Mergers, Acquisitions, or Takeovers Critically, the U.S. Committee on Foreign Investment in the United States (“CFIUS”) also operates pursuant to the DPA. CFIUS is an inter-agency committee authorized to review the national security implications of investments made by foreign companies and persons in U.S. businesses and to block transactions or impose measures to mitigate any threats to U.S. national security. National security and supply chain issues—including with respect to DPAS priority contracts—are considered by CFIUS in the course of a review. On February 13, 2020, final regulations were implemented to expand the scope of inbound foreign investment subject to CFIUS review to include the unique risks posed by foreign investments in U.S. businesses involved in critical technologies, critical infrastructure, or sensitive personal data of U.S. citizens. Supply chain risks associated with the coronavirus crisis are likely to shift the immediate focus of the Committee with respect to foreign investments in U.S. businesses involved in key sectors. Current Government contractors, as well as companies in a position to assist with the production of essential materials necessary for the national defense in light of the current novel coronavirus national emergency, should be aware of the Government’s authorities and industry’s responsibilities under the DPA. _____________________    [1]   See, e.g., https://www.nytimes.com/2020/03/17/us/politics/trump-coronavirus-plan.html.    [2]   Congressional Research Service, The Defense Production Act of 1950: History, Authorities, and Considerations for Congress, updated March 2, 2020, available at https://fas.org/sgp/crs/natsec/R43767.pdf (last accessed March 18, 2020).    [3]   Sec. 791 of P.L. 115-232.    [4]   50 U.S.C. § 4552(14).    [5]   42 U.S.C. § 5195(a)(3).    [6]   Executive Order 13603, National Defense Resource Preparedness (2012).    [7]   Although the DPA allows the President to allocate the distribution of materials, services, and facilities, no allocation action has been taken pursuant to the DPA since the end of the Cold War. Congressional Research Service, supra, n.2 (citing Department of Homeland Security, The Defense Production Act Committee Report to Congress, Calendar Year 2017 Report to Congress, June 18, 2019, p. 11).    [8]   50 U.S.C. §§ 4501 et seq.    [9]   .https://www.bis.doc.gov/index.php/other-areas/strategic-industries-and-economic-security-sies/defense-priorities-a-allocations-system-program-dpas; see also generally DPAS Regulations, 15 C.F.R. Part 700. [10]   Id. [11]   15 C.F.R. § 700.13(d). [12]   15 C.F.R. § 700.13(a). [13]   Id. [14]   15 C.F.R. § 700.15. [15]   15 C.F.R. § 700.74. [16]   15 C.F.R. § 700.14(c). [17]   15 C.F.R. § 700.13(b). [18]   15 C.F.R. § 700.13(c). [19]   15 C.F.R. § 700.13(d). [20]   50 U.S.C. §§ 1431-36 [21]   50 U.S.C. § 4557. [22]   See 50 U.S.C. § 4517 [23]   See Twitter, Robert M. Califf, @califf001, Mar. 16, 2020, “The Defense Production Act gives FEMA the power to immediately rev up the production and distribution system for PPE. This should be done now” available at https://twitter.com/califf001/status/1239684030980751360. See also https://medtech.pharmaintelligence.informa.com/MT126396/Former-FDA-Chief-Urges-Manufacturers-To-Shift-Gears-In-Coronavirus-Efforts. [24]   See BBC News, “Coronavirus: PM urges industry to help make NHS ventilators,” Mar. 16, 2020, available at https://medtech.pharmaintelligence.informa.com/MT126396/Former-FDA-Chief-Urges-Manufacturers-To-Shift-Gears-In-Coronavirus-Efforts. [25]   CBSNews, “LVMH, which owns luxury brands like Louis Vuitton and Christian Dior, will use perfume production lines to make hand sanitizer,” Mar. 16, 2020, available at https://www.cbsnews.com/news/lvmh-hand-sanitizer-french-luxury-brands-perfume-production-lines-france-louis-vuitton-company/. [26]   50 U.S.C. §4533. [27]   50 U.S.C. §4531(a)(1). [28]   See Department of Homeland Security, The Defense Production Act Committee: Report to Congress, Calendar Year 2010 Report, August 2011, p. 10; Department of Defense, Annual Industrial Capabilities, Fiscal Year 2017 Report to Congress, March 2018, p. 33, at https://www.businessdefense.gov/Portals/51/Documents/Resources/2017%20AIC%20RTC%2005-17-2018%20-%20Public%20Release.pdf?ver=2018-05-17-224631-340. [29]   Department of Defense, Annual Industrial Capabilities, Fiscal Year 2018 Report to Congress, May 2019, p. 8, available at https://www.businessdefense.gov/Portals/51/Documents/Resources/2018%20AIC%20RTC%2005-23-2019%20-%20Public%20Release.pdf?ver=2019-06-07-111121-457. [30]   50 U.S.C. § 4558(c)(1). [31]   50 U.S.C. §4558. [32]   50 U.S.C. § 4558(j). [33]   For an example of a voluntary agreement initiated and approved under Section 708 of the Defense Production Act, see generally Renewal of the Voluntary Tanker Agreement Program, 84 Fed. Reg. 58824, 58825 (Nov. 1, 2019).
Gibson Dunn's lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact any member of the firm's Coronavirus (COVID-19) Response Team. The following Gibson Dunn lawyers prepared this client update: Joseph West, Lindsay Paulin, Stephanie Connor, Michael Bopp, Stuart Delery, Kristen Limarzi, and Charlotte Lawson. Gibson Dunn’s lawyers have hands-on experience with DPA issues and are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. Please also feel free to contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the Government Contracts, National Security or Antitrust and Competition practice groups: Government Contracts Group:   Joseph D. West - Washington, D.C. (+1 202-955-8658, jwest@gibsondunn.com) Karen L. Manos - Washington, D.C. (+1 202-955-8536, kmanos@gibsondunn.com) Lindsay M. Paulin - Washington, D.C. (+1 202-887-3701, lpaulin@gibsondunn.com) Erin N. Rankin - Washington, D.C. (+1 202-955-8246, erankin@gibsondunn.com) National Security Group: Michael D. Bopp - Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com) Stuart F. Delery - Washington, D.C. (+1 202-887-3650, sdelery@gibsondunn.com) Judith Alison Lee - Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com) Christopher T. Timura - Washington, D.C. (+1 202-887-3690, ctimura@gibsondunn.com) Stephanie L. Connor - Washington, D.C. (+1 202-955-8586, sconnor@gibsondunn.com) Antitrust and Competition Group: Kristen C. Limarzi - Washington, D.C. (+1 202-887-3518, klimarzi@gibsondunn.com) Daniel G. Swanson - Los Angeles (+1 213-229-7430, dswanson@gibsondunn.com) Rachel S. Brass - San Francisco (+1 415-393-8293, rbrass@gibsondunn.com) Scott D. Hammond - Washington, D.C. (+1 202-887-3684, shammond@gibsondunn.com) Charlotte A. Lawson - Washington, D.C. (+1 202-887-3568, clawson@gibsondunn.com) © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 30, 2020 |
Nine Gibson Dunn Partners Named as Thought Leaders in Construction and Competition by Who’s Who Legal

Who’s Who Legal named nine Gibson Dunn partners Thought Leaders in their respective fields. Washington, D.C. partner Joseph West was recognized for Construction. Brussels partners Peter Alexiadis and David Wood, London partner Ali Nikpay, Los Angeles partner Daniel Swanson, San Francisco partner Trey Nicoud, and Washington, D.C. partners D. Jarrett Arp, Scott Hammond, and Richard Parker were recognized for Competition. The 2019 Construction guide was published in November 2019, and the 2020 Competition guide was published in December 2019.

November 6, 2019 |
Who’s Who Legal Practice Guides Recognize Six Gibson Dunn Attorneys in Capital Markets, Government Contracts, and Environment in 2019

Six Gibson Dunn attorneys were recognized by Who’s Who Legal in their respective fields. The Who’s Who Legal Capital Markets 2019 guide recognized Dallas partner Douglas Rayburn.  The Who’s Who Legal Government Contracts 2019 guide recognized Washington, DC partners Karen Manos and Joseph West. The Who’s Who Legal Environment and Climate Change 2019 guide recognized Los Angeles partner Patrick Dennis, San Francisco partner Peter Modlin and Washington, DC partner Raymond Ludwiszewski. These guides were published in September and October 2019.

July 16, 2019 |
2019 Mid-Year False Claims Act Update

Click for PDF As we progress through the Trump Administration’s third year, robust False Claims Act (“FCA”) enforcement continues. At the same time, the Administration has continued to signal a greater openness to tempering overly aggressive FCA theories. In the past six months, the Department of Justice (“DOJ”) issued long-awaited guidance about cooperation credit in FCA cases and also continued to seek dismissal of some declined cases pursued by whistleblowers (albeit with mixed success). Aside from these efforts, however, DOJ has not evidently relaxed its approach to enforcement: the first half of the year saw DOJ announce recoveries of nearly three-quarters of a billion dollars in settlements, largely from entities in the health care and life sciences industries. The next year should provide insight as to whether the Administration’s policy refinements are the vanguard of a more meaningful shift by DOJ away from its historical enforcement efforts. But even if that were the case, enterprising relators and aggressive state enforcers may end up filling any gaps. In just the past half year, several states took steps to enact or strengthen existing FCA statutes. Regardless of what direction DOJ and the Trump Administration head, federal courts’ FCA decisions from the last six months serve as a reminder that FCA litigation remains hard-fought, given the enormous stakes. At the highest level, the U.S. Supreme Court weighed in on the FCA again this year, resolving a circuit split about the FCA’s statute of limitation in favor of whistleblowers. This marked the third time in four years the land’s highest court interpreted the FCA. Meanwhile, lower courts also remained active in FCA jurisprudence, issuing a number of notable opinions that we have summarized herein. Below, we begin by addressing enforcement activity at the federal and state levels, turn to legislative developments, and then analyze significant court decisions from the past six months. As always, Gibson Dunn’s recent publications regarding the FCA may be found on our website, including in-depth discussions of the FCA’s framework and operation, industry-specific presentations, and practical guidance to help companies avoid or limit liability under the FCA. And, of course, we would be happy to discuss these developments—and their implications for your business—with you.

I.  NOTEWORTHY DOJ ENFORCEMENT ACTIVITY DURING THE FIRST HALF OF 2019

DOJ has announced more than $750 million in settlements this year, a slight uptick from this point in 2018, but somewhat down from half-year highs set in recent years. The dollar totals tell only part of the story, however, as neither DOJ nor qui tam relators have scaled back FCA investigations or whistleblower complaints considerably. As in recent years, DOJ secured the lion’s share of its FCA recoveries from enforcement actions involving health care and life sciences entities. Although DOJ’s recoveries came from cases reflecting a wide variety of theories of FCA liability, cases involving alleged violations of the Anti-Kickback Statute (“AKS”) and the Stark Law, which generally prohibit various types of remunerative arrangements with referring health care providers, continued to predominate. This year, DOJ’s AKS enforcement activity includes several large recoveries, totaling nearly $250 million, from pharmaceutical companies accused of unlawfully covering Medicare copays for their own products through charitable foundations. Further, DOJ backed up its statements regarding its plans to combat the opioid epidemic as it recovered more than $200 million from an opioid manufacturer accused of paying kickbacks. Below, we summarize these and some of the other most notable settlements thus far in 2019.

A.  Health Care and Life Science Industries

  • On January 28, a hospital and six of its owners agreed to pay the federal government $8.1 million to settle claims that it violated the FCA by submitting false claims to Medicare and Medicaid programs in violation of the AKS and Stark Law. DOJ alleged that the hospital, its subsidiary, and at least two affiliates recruited a medical director in order to secure his referrals of patients by offering the physician compensation that exceeded fair market value for his services. The whistleblower will receive $1.6 million from the federal government.[1]
  • On January 30, a pathology laboratory agreed to pay $63.5 million to settle allegations that it violated the FCA by engaging in improper financial relationships with referring physicians. The settlement resolves allegations that the company violated the AKS and the Stark Law by providing subsidies to referring physicians for electronic health records (“EHR”) systems and free or discounted technology consulting services. The allegations stem from three whistleblower lawsuits, and the whistleblowers’ share of the settlement had not been determined at the time the settlement was announced.[2]
  • On February 6, a Florida-based developer of EHR software agreed to pay $57.25 million to resolve allegations that it caused its users to submit false claims to the government by (1) misrepresenting the capabilities of its EHR product (thereby enabling them to seek meaningful use incentive payments) and (2) violating the AKS (by financially incentivizing its client health care providers to recommend its product to prospective customers).[3]
  • On February 6, a Georgia-based hospital agreed to pay $5 million to resolve allegations that it violated the FCA by engaging in improper financial relationships with referring physicians between 2012 and 2016. DOJ alleged that the hospital compensated the physicians in amounts that were above fair market value or in a manner that took into account the volume or value of the physicians’ referrals.[4]
  • On February 27, a Tennessee-based health care company and its related companies agreed to pay more than $18 million to resolve a lawsuit brought by DOJ and Tennessee alleging they billed the Medicare and Medicaid programs for substandard nursing home services. The settlement also resolves claims brought by DOJ against the company’s majority owners and CEO, as well as the LLC’s former director of operations, who agreed to pay $250,000 toward the settlement.[5]
  • On March 11, a medical technology company agreed to pay more than $17.4 million to resolve allegations that it violated the FCA by providing free or discounted practice development and market development support, allegedly amounting to “in-kind” payments to induce physicians in California and Florida to purchase the company’s ablation products. Under the settlement, the company also will pay approximately $1.4 million to California and approximately $1.0 million to Florida for claims paid for by the states’ Medicaid programs. The two whistleblowers, former company employees, will receive approximately $3.1 million as their share of the federal recovery.[6]
  • On March 21, a Maryland-based health care company and its affiliates agreed to pay $35 million to settle allegations under the FCA that it paid kickbacks to a Maryland cardiology group in exchange for referrals, through a series of contracts with two Maryland hospitals. The settlement resolved two whistleblower lawsuits brought by cardiac surgeons and former patients, who alleged that the company and its affiliates performed medically unnecessary cardiac procedures for which they submitted false claims to Medicare. The whistleblowers’ share had not been disclosed yet.[7]
  • In April, several pharmaceutical companies reached settlements with DOJ over allegations involving charitable funds. For example:
    • As part of a string of investigations by the U.S. Attorney’s Office for the District of Massachusetts, three pharmaceutical companies agreed to pay a total of $122.6 million to resolve allegations that they violated the FCA by illegally paying the Medicare or Civilian Health and Medical Program copays for their own products through purportedly independent foundations that were allegedly used as mere conduits. The government contended that the companies’ payments of the copays were kickbacks aimed at inducing patients to use the companies’ drugs. In all three matters, the government alleged that the foundations were used to generate revenues from prescriptions for patients who would have otherwise been eligible for the companies’ free drug programs. One company agreed to pay $57 million; the second company agreed to pay $52.6 million, and the third company agreed to pay $13 million.[8]
    • On April 30, a Kentucky-based pharmaceutical company agreed to pay $17.5 million to resolve allegations that it violated the FCA and AKS by paying kickbacks to patients and physicians to induce prescriptions of two of its drugs. DOJ alleged that the company increased the drugs’ prices in January 2012, which increased Medicare patients’ copays. Then, DOJ asserted, the company paid these patients’ copays through a third-party Parkinson’s Disease fund, thereby providing illegal inducements to patients to purchase the drugs. The allegations underlying the settlement were originally raised by whistleblowers, who will receive $3.15 million as their share of the recovery.[9]
  • On April 12, a California-based health care services provider and several affiliated entities agreed to pay $30 million to resolve allegations that the affiliated entities submitted false information about the health status of beneficiaries enrolled in Medicare Advantage plans, which purportedly resulted in overpayments to the provider.[10]
  • On May 6, a West Virginia-based health care company agreed to pay $17 million to resolve allegations of a billing scheme that allegedly defrauded Medicaid of $8.5 million. This represented the largest health care fraud settlement in the history of West Virginia, and the state will collect $2.2 million from the settlement. DOJ alleged that the company, acting through a subsidiary and several of its drug treatment centers, sent blood and urine samples to outside laboratories for testing, and then submitted reimbursement claims to West Virginia Medicaid as if the treatment centers had performed the tests themselves. According to the government, since the company paid the outside laboratories a lower rate than its requested reimbursement to Medicaid, the company wrongfully collected $8.5 million.[11]
  • On May 30, a Kansas-based cardiologist agreed to pay $5.8 million to resolve allegations that he and his medical group violated the FCA by improperly billing federal health care programs for medically unnecessary cardiac stent procedures. This marked the DOJ’s third False Claims settlement with the cardiologist and his medical group, who concurrently agreed with U.S. Department of Health and Human Services (“HHS”) to be excluded from participation in federal health programs for three years. The settlement announcement resolves allegations in a whistleblower lawsuit filed by another cardiologist, who will receive approximately $1.16 million from the settlement.[12]
  • On May 31, a New Jersey-based pharmaceutical company was charged under the Sherman Act for conspiring with competitors to fix prices, rig bids, and allocate customers. In a separate civil resolution, the company agreed to pay $7.1 million to resolve allegations under the FCA related to the alleged price fixing conspiracy. DOJ asserted that between 2012 and 2015, the company paid and received remuneration through arrangements on price, supply, and allocation of customers with other pharmaceutical manufacturers for certain generic drugs, in violation of the AKS, and that its sale of such drugs resulted in claims submitted to or purchases by federal health care programs.[13]
  • On June 5, an opioid manufacturing company agreed to a $225 million global resolution to settle the government’s criminal and civil investigations. DOJ alleged that the company paid kickbacks and engaged in other unlawful marketing practices to induce physicians and nurse practitioners to prescribe its opioid to patients. As part of the criminal resolution, the company entered into a deferred prosecution agreement with the government, and its subsidiary pleaded guilty to five counts of mail fraud. The company also agreed to pay a $2 million criminal fine and a $28 million forfeiture. As part of the civil resolution, the company agreed to pay $195 million. The allegations stem from five whistleblower lawsuits, and the whistleblowers’ share of the settlement has yet to be determined.[14]
  • On June 30, the nation’s largest operator of inpatient rehabilitation centers agreed to pay $48 million to resolve allegations that its centers provided medically unnecessary treatment, and also submitted false information to Medicare to achieve higher levels of reimbursement. The settlement involved allegations across multiple facilities and was part of DOJ’s broader efforts to target inpatient treatment facilities nationally.

B.  Government Contracting

  • On January 28, a corporation that provides information and technology services agreed to pay $5.2 million to resolve allegations that it violated the FCA by falsely billing labor under its contract with the United States Postal Service (“USPS”). Under the contract, the company would bill the USPS for personnel performing services at rates established by certain billing categories. DOJ alleged that the corporation knowingly billed the USPS for certain personnel services at higher category rates, even though the personnel did not have the education and/or experience to be in these categories.[15]
  • On March 25, a private university in North Carolina agreed to pay the government $112.5 million to resolve allegations that it violated the FCA by submitting applications and progress reports that contained purportedly falsified research on federal grants to the National Institutes of Health (“NIH”) and to the Environmental Protection Agency. Among other allegations, DOJ asserted that the university fabricated research results related to mice to claim millions of grant dollars from the NIH. The allegations stem from a whistleblower lawsuit brought by a former university employee, who will receive $33.75 million from the settlement.[16]
  • On May 13, a California-based software development company agreed to pay $21.57 million to resolve allegations that it caused the government to be overcharged by providing misleading information about its commercial sales practices, which was then used in General Services Administration (“GSA”) contract negotiations. DOJ alleged that the company knowingly provided false information concerning its commercial discounting practices for its products and services to resellers. These resellers then allegedly used that information in negotiations with GSA for government-wide contracts. DOJ alleged this caused GSA to agree to less favorable pricing, which led the government purchasers to be overcharged. The allegations stemmed from a whistleblower lawsuit filed by a former company employee, who will receive over $4.3 million from the resolution.[17]

II.  LEGISLATIVE AND POLICY DEVELOPMENTS

A.  Federal Developments

1.  Guidance Regarding Cooperation Credit

The first half of 2019 did not witness major legislative developments at the federal level pertaining to the FCA. But DOJ has advanced its recent efforts to more publicly and transparently articulate its approach to FCA cases, as evidenced by the May 2019 release of long-awaited guidance regarding cooperation credit in FCA investigations.[18] We covered this development in detail in our May 14, 2019 alert entitled “Cooperation Credit in False Claims Act Cases: Opportunities and Limitations in DOJ’s New Guidance.” Several key points regarding the guidance bear mention here. The guidance is the latest chapter in a broader effort by DOJ to scale back the “all or nothing” approach to cooperation credit set forth in the 2015 Yates Memorandum. This initiative stems from a belief that that approach, in the words of former Deputy Attorney General Rod J. Rosenstein, had been “counterproductive in civil cases” because it deprived DOJ attorneys of the “flexibility” they needed “to accept settlements that remedy the harm and deter future violations.”[19] In keeping with Mr. Rosenstein’s statements, the new DOJ guidance—codified at Section 4-4.112 of the Justice Manual[20]—provides that defendants may receive varying levels of cooperation credit depending on their efforts across ten non-exhaustive categories of cooperation.[21] These include:
  • “[i]dentifying individuals substantially involved in or responsible for the misconduct”;
  • making individuals available who have “relevant information”;
  • “[a]dmitting liability or accepting responsibility for the relevant conduct”; and
  • “[a]ssisting in the determination or recovery” of losses.[22]
The guidance also notes that cooperation must have value for DOJ, as measured by the “timeliness and voluntariness” of the cooperation, the “truthfulness, completeness, and reliability” of the information provided, the “nature and extent” of the cooperation, and the “significance and usefulness of the cooperation” to DOJ. Under the guidance, DOJ’s determination of cooperation credit will consider remediation undertaken by the defendant, including remediation focused on root causes and discipline of relevant individuals.[23] The guidance states that to receive full credit, entities should “undertake a timely self-disclosure that includes identifying all individuals substantially involved in or responsible for the misconduct, provide full cooperation with the government’s investigation, and take remedial steps designed to prevent and detect similar wrongdoing in the future.”[24] Unlike DOJ’s guidance regarding cooperation in criminal cases, the new FCA guidance does not provide for percentage reductions in penalties (or damages) for various levels of cooperation. Instead, the guidance focuses on DOJ’s “discretion . . . [to] reduc[e] the penalties or damages multiple sought by the Department,” and provides that no defendant may receive cooperation credit so great as to result in the payment of an amount less than single damages (including relator’s share, plus lost interest and costs of investigation).[25] The new guidance provides a measure of clarity regarding DOJ’s overall approach to cooperation credit, and the flexible standards the guidance sets forth provide opportunities for defendants to formulate creative negotiation and litigation strategies. On the other hand, the guidance lacks specificity regarding several critical issues (e.g., what constitutes cooperation and how to assess the value that cooperation provides to DOJ).

2.  Application of the Granston Memorandum

As we have previously discussed, DOJ signaled last year that it will increasingly consider moving to dismiss some FCA qui tam actions. Specifically, in January 2018, Michael Granston, the Director of the Fraud Section of DOJ’s Civil Division, issued a memorandum (the “Granston Memo”) stating that “when evaluating a recommendation to decline intervention in a qui tam action, attorneys should also consider whether the government’s interests are served, in addition, by seeking dismissal pursuant to section 3730(c)(2)(A).”[26] The Granston Memo established a list of non-exhaustive factors for DOJ to evaluate when considering whether to dismiss a case under section 3730(c)(2)(A), which states that the government may dismiss an FCA “action notwithstanding the objections of the person initiating the action if the person has been notified by the Government of the filing of the motion and the court has provided the person with an opportunity for a hearing on the motion.”[27] The Granston Memo’s release prompted cautious optimism among FCA observers that DOJ would step in to dismiss unmeritorious cases, but the Memo also left many open questions regarding exactly how DOJ would exercise its discretion. Since the Memo’s release, FCA defendants routinely have pushed DOJ to dismiss cases, and in some cases, DOJ has done just that. But a little more than a year after the Memo’s release, there are signs that DOJ is continuing to calibrate its approach, in response both to defendants’ insistent entreaties and scrutiny by the courts (which must approve any dismissal). First, the memorandum’s namesake, DOJ Civil Fraud Section Director Michael Granston, recently elaborated on how DOJ will apply the Granston Memo’s principles. In remarks at the Federal Bar Association’s FCA Conference in March, Mr. Granston explained that DOJ will not be persuaded to dismiss qui tam actions “[j]ust because a case may impose substantial discovery obligations on the government.”[28] The decision to seek dismissal, he said, will instead be evaluated on a case-by-case basis, with the cost-benefit analysis focusing on the likelihood that the relator can prove the allegations brought on behalf of the government.[29] Mr. Granston cautioned that defendants “should be on notice that pursuing undue or excessive discovery will not constitute a successful strategy for getting the government to exercise its dismissal authority,” and that “[t]he government has, and will use, other mechanisms for responding to such discovery tactics.”[30] Overall, Mr. Granston stated, “dismissal will remain the exception rather than the rule.”[31] Second, Deputy Associate Attorney General Stephen Cox delivered remarks at the 2019 American Conference Institute’s Advanced Forum on False Claims and Qui Tam Enforcement that explained DOJ’s approach to dismissals.[32] Regarding the Granston Memo, Mr. Cox characterized the relationship between qui tam relators and the government as a “partnership,” formed on the belief that relators “are often uniquely situated to bring fraudulent practices to light.”[33] He emphasized, however, that DOJ plays a “gatekeeping role” in ensuring that when a relator prosecutes a non-intervened FCA case, it does not do so in a way that harms the government’s financial interests or creates bad law for the government.[34] Mr. Cox stated that the Granston Memo “is not really a change in the Department’s historical position,” but he acknowledged that DOJ’s use of its dismissal authority has increased since 2017.[35] Mr. Cox told listeners that while DOJ “will remain judicious,” it “will use this tool more consistently to preserve our resources for cases that are in the United States’ interests.”[36] In more recent remarks, Mr. Cox has added that DOJ’s “more consistent[]” use of its dismissal authority will aim at “reign[ing] in overreach in whistleblower litigation.”[37] With DOJ’s increased use of its statutory dismissal authority has come greater judicial scrutiny of the scope of that authority and the standards to be applied in determining whether dismissal is appropriate. In the wake of the Granston Memo, lower courts have been forced to analyze the standard that courts should apply when the government moves to dismiss qui tam cases. These cases have pitted two competing standards against each other, with mixed results. Previously, in United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139 (9th Cir. 1998), the Ninth Circuit held that the government’s dismissal is first examined for: (1) an identification of a valid government purpose by the government; and (2) a rational relation between the dismissal and accomplishment of the government’s purpose. Id. at 1145. If the government’s dismissal meets the two-step test, the burden shifts to the relator to show that the “dismissal is fraudulent, arbitrary and capricious, or illegal.” Id. (quoting United States ex rel. Sequoia Orange Co. v. Sunland Packing House Co., 912 F. Supp. 1325, 1353 (E.D. Cal. 1995)). The Tenth Circuit adopted the Sequoia standard and also applies the above test. Ridenour v. Kaiser-Hill Co., 397 F.3d 925, 936, 940 (10th Cir. 2005). In contrast, in Swift v. United States, 318 F.3d 250, 253 (D.C. Cir. 2003), the D.C. Circuit rejected the Ninth Circuit’s Sequoia standard, holding that nothing in section 3730(c)(2)(A) “purports to deprive the Executive Branch of its historical prerogative to decide which cases should go forward in the name of the United States.” The court observed that the purpose of the hearing provided for in section 3730(c)(2)(A) “is simply to give the relator a formal opportunity to convince the government not to end the case.” Id. Therefore, the D.C. Circuit held that the government has “an unfettered right to dismiss” FCA actions, and so government dismissals are basically “unreviewable” (with a possible exception for dismissals constituting “fraud on the court”). Id. at 252-53. However, the remainder of the federal circuit courts have not weighed in on the standard for government dismissals of qui tam actions thus far. In the meantime, several district courts have confronted this issue, with some following Sequoia, while others followed Swift. Among the courts following Sequoia were the following:
  • In United States v. EMD Serono, Inc., 370 F. Supp. 3d 483 (E.D. Pa. 2019), the U.S. District Court for the Eastern District of Pennsylvania adopted the Ninth Circuit’s Sequoia standard after critiquing the D.C. Circuit’s approach in Swift. The court then held that the government’s dismissal had met the Sequoia standard because the government had “articulated a legitimate interest” when it argued that the “allegations lack merit, and continuing to monitor, investigate, and prosecute the case will be too costly and contrary to the public interest.” at 489. Id. at 489.
  • In United States ex rel. CIMZNHCA, LLC v. UCB, Inc., No. 17-CV-765-SMY-MAB, 2019 WL 1598109 (S.D. Ill. Apr. 15, 2019), the U.S. District Court for the Southern District of Illinois adopted the Ninth Circuit’s Sequoia standard and rejected the D.C. Circuit’s approach in Swift. Applying the Sequoia standard, the court found that the government’s “decision to dismiss this action is arbitrary and capricious, and as such, not rationally related to a valid governmental purpose.” Id. at *4. Although the government had identified a valid interest of avoiding litigation costs, the court found the government had failed to conduct the requisite “minimally adequate investigation” because it collectively investigated the eleven claims that the relator’s group filed without specifically investigating the relator’s claim against the defendants in this case. Id. at *3.
Other district courts have been persuaded by Swift’s “unfettered” dismissal standard.
  • In United States ex rel. Davis v. Hennepin County, No. 18-CV-01551 (ECT/HB), 2019 WL 608848 (D. Minn. Feb. 13, 2019), the U.S. District Court for the District of Minnesota stated that the Swift standard was more consistent with section 3730(c)(2)(A)’s text and with the Constitution, but did not decide the issue because the government was entitled to dismissal under both the Swift and Sequoia standards. According to the court, the government could dismiss because “the Relators were notified of the motion and received the opportunity for a hearing.” Id. at *7. However, the court then observed that the government would still be entitled to dismissal even under Sequoia. Id. The court credited the government’s rationale of avoiding the cost and burden of a case that would likely result in no recovery, and also noted that the relators had put forth no factual evidence that the government was acting capriciously by ignoring evidence. Id.
  • In United States ex rel. Sibley v. Delta Reg’l Med. Ctr., No. 17-CV-000053-GHDRP, 2019 WL 1305069 (N.D. Miss. Mar. 21, 2019), the U.S. District Court for the Northern District of Mississippi indicated its agreement with the Swift standard, but then observed that the government was entitled to dismissal under either standard. There, the government declined to intervene, then moved to dismiss her action, arguing that the action would interfere with the government’s efforts to enforce the Emergency Medical Treatment Act, would use scarce government resources, and that the complaint did not allege any viable claims. Id. at *2-*3. Aligning with Swift, the court explained that the government “possesses the unfettered discretion to dismiss a qui tam [FCA] action” and therefore that the court must grant the government’s motion. Id. at *7. Regardless, the government was entitled to dismissal even under Sequoia, as the government had stated a “valid reason for dismissal” that the relator could not refute. Id. at *8.
  • In United States ex rel. De Sessa v. Dallas Cty. Hosp. Dist., No. 3:17-CV-1782-K, 2019 WL 2225072 (N.D. Tex. May 23, 2019), the U.S. District Court for the Northern District of Texas also echoed Swift’s reasoning, while concluding that the government was entitled to dismissal under either standard. In a short decision, the court cited to Swift and granted the government’s motion to dismiss the relator’s FCA fraud claim. Id. at *2. The court then explicitly noted that its holding did not dismiss the relator’s FCA retaliation claim, as that claim was not brought on behalf of the U.S. government. Id.

B.  State Developments

As detailed in our 2018 Mid-Year and Year-End False Claims Act Updates, Congress created financial incentives in 2005 for states to enact their own false claims statutes that are as effective as the federal FCA in facilitating qui tam lawsuits, and that impose penalties at least as high as those imposed by the federal FCA.[38] States passing review by HHS’s Office of Inspector General (“OIG”) may be eligible to “receive a 10-percentage-point increase in [their] share of any amounts recovered under such laws” in actions filed under state FCAs.[39] As of June 2019, HHS OIG has approved laws in twenty states (California, Colorado, Connecticut, Delaware, Georgia, Illinois, Indiana, Iowa, Massachusetts, Montana, Nevada, New York, North Carolina, Oklahoma, Rhode Island, Tennessee, Texas, Vermont, Virginia and Washington), while nine states are still working towards FCA statutes that meet the federal standards (Florida, Hawaii, Louisiana, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, and Wisconsin).[40] Five approvals have occurred in 2019 to date (California, Delaware, Georgia, New York, and Rhode Island).[41] While HHS OIG did not publicly state the reasons for these approvals, they likely stemmed at least in part from the fact that all five states recently amended their false claims statutes to peg their civil penalties to those imposed by the federal FCA, including as adjusted for inflation under the Federal Civil Penalties Inflation Adjustment Act of 1990.[42] Some states have continued to consider (or implement) revisions to their false claims acts after federal approval. Most notably, in May 2019, the California Assembly passed Assembly Bill No. 1270, which would amend the California False Claims Act’s definition of materiality, for purposes of the “false record or statement” prong of the statute, to consider only “the potential effect of the false record or statement when it is made, not . . . the actual effect of the false record or statement when it is discovered.”[43] This change could mark a significant pro-plaintiff limiting of the concept of materiality in the wake of Escobar, which held that materiality is a matter of the “effect on the likely or actual behavior of the recipient of an alleged misrepresentation.”[44] The California bill also would expand the state false claims act to apply to certain claims, records, or statements made under the California Revenue and Taxation Code. Specifically, the bill extends the California false claims act to tax-related cases where the damages pleaded exceed $200,000, and where the state-taxable income or sales of any person or corporation against whom the action is brought exceeds $500,000.[45] The new law would require the state Attorney General or prosecuting authority, prior to filing or intervening in any false claims act case related to taxes, to consult with the relevant tax authority.[46] Under the bill, the state Attorney General or prosecuting authority, but not a qui tam relator, would be authorized to obtain from state government agencies otherwise confidential records relating to taxes, fees, or other obligations under California’s Revenue and Taxation Code.[47] The amendment would prohibit the state government authorities from disclosing federal taxation information to the state Attorney General or prosecuting authority without IRS authorization. The amendment would also prohibit disclosure by the state Attorney General or prosecuting authority of any taxation information it does receive, “except as necessary to investigate and prosecute suspected violations” of the California false claims act.[48] The bill is currently being considered by committees in the California Senate.[49] Other states lack false claims statutes and have moved in fits and starts towards enacting them. For example, as of June 2019, a bill to enact the South Carolina False Claims Act remained pending in the state’s legislature after being referred to the state senate’s judiciary committee in January.[50] The bill is nearly identical to the last false claims act bill introduced in South Carolina’s Senate, which died in that body’s judiciary committee after being referred in January 2015.[51] Other states that lack broad false claims acts have nonetheless moved incrementally towards endowing themselves with robust enforcement powers. West Virginia, for example, lacks a false claims statute broadly defined, but does prohibit Medicaid fraud through a statute that in some ways resembles the FCA.[52] Until early 2019, the state’s Medicaid Fraud Control Unit (“MFCU”), which holds the power to investigate possible violations of the statute, sat within the state department of health and human services. However, a bill was passed on March 7, 2019, which will relocate the MFCU to the Office of the Attorney General.[53] Once effective on October 1, 2019, the new law will give primary prosecution authority to the Office of the Attorney General; only if that office declines prosecution will attorneys employed or contracted by the state department of health and human services have authority to take the case forward.[54] This consolidation of power in the Office of the Attorney General could be the first step in a push for enactment of broader false claims enforcement powers.

III.  NOTABLE CASE LAW DEVELOPMENTS

With a U.S. Supreme Court decision, more than a dozen notable circuit court decisions, and a handful of important district court decisions too, the first half of 2019 was an active period on the case law front (as detailed below).

A.  U.S. Supreme Court Extends the Statute of Limitations in Cases Where the Government Does Not Intervene

The FCA provides two different limitations periods for “civil action[s] under section 3730”—(1) six years after the statutory violation occurs, or (2) three years “after the United States official charged with the responsibility to act knew or should have known the relevant facts, but not more than [ten] years after the violation.” 31 U.S.C. § 3731(b). Whichever period is longer applies. In Cochise Consultancy, Inc. v. United States ex rel. Hunt, 139 S. Ct. 1507 (2019), the Supreme Court resolved a circuit split regarding the FCA’s statute of limitations for qui tam actions pursued only by a whistleblower, without government participation. Specifically, the question that had split the circuit courts is whether a relator—pursuing a case where the government has declined to intervene—can take advantage of the longer statute of limitations period of up to ten years. In Cochise, the relator conceded that more than six years had elapsed before he filed his suit from when the alleged FCA violations occurred. Id. at 1511. However, the relator argued that fewer than three years had elapsed between when the relator had revealed the alleged FCA violations to federal agents and when the relator filed his suit. Id. Thus, the relator argued that he should be able to take advantage of the longer statute of limitations period, triggered from when he had disclosed his allegations to the government. Id. The district court initially dismissed the suit, holding that section 3731(b)(2)’s three-year period does not apply to relator-initiated suits in which the government declines to intervene. Id. But the Eleventh Circuit reversed, and held that the longer period could apply to relator-initiated suits in which the government declines to intervene. Id. The Supreme Court, looking to resolve a circuit split, unanimously affirmed the Eleventh Circuit’s ruling. Id. at 1510. The Court reasoned that, because section 3731(b)’s two statute of limitations periods apply to “civil action[s] under section 3730” and because both government and relator-initiated FCA suits constitute “civil action[s] under section 3730,” the statute’s plain text made both of the limitations periods applicable to both types of suits. Id. at 1511-12 (quoting section 3731(b)). The Court also held that private relators in non-intervened suits do not constitute “the official of the United States charged with responsibility to act in the circumstances” under section 3731(b)(2). Id. at 1514. In other words, section 3731(b)(2)’s three-year period does not begin when a private relator who initiates the suit knows or should have known about the fraud. Id. Thus, because section 3731(b)(2)’s three-year period is available in relator-initiated non-intervened suits and because the private relator’s learning of the facts does not begin this three-year period, dismissal of the relator’s suit was not warranted on statute-of-limitations grounds. Id.

B.  Courts Continue to Interpret the FCA’s Materiality Requirement Post-Escobar

As we have previously discussed, courts continue to wrestle with the implications of the Supreme Court’s decision in Universal Health Services v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), the landmark decision that addressed the implied certification theory of liability, and in the process gave renewed emphasis to the concepts of materiality and government knowledge under the FCA.

1.  The Fifth Circuit Applies Escobar in Analyzing Materiality

In United States ex rel. Lemon v. Nurses To Go, Inc., 924 F.3d 155 (5th Cir. 2019), the Fifth Circuit, reviewing a district court’s dismissal of claims, engaged in a thorough application of Escobar, articulating three non-exhaustive “factors” for determining materiality. First, the court asked whether the government expressly conditioned payment on meeting the statutory or regulatory requirements at issue. Second, the court considered whether the government would have denied payment if it had known of the violations, a factor which the court referred to as “government enforcement.” And third, the court asked whether the defendant’s noncompliance was substantial or minor. In Lemon, the relators alleged that a hospice provider submitted claims affirming it had complied with various Medicare statutory and regulatory requirements, despite allegedly violating several requirements related to certifications, face-to-face physician patient encounters, and writing plans of care. Id. at 157. They also alleged that the hospital billed for ineligible services and patients, such as billing for already deceased patients. Id. at 157-58. Applying each of its articulated Escobar factors in turn, the Fifth Circuit began by addressing conditions of payment. The court acknowledged that Escobar held that violating a requirement which is labeled a condition of payment does not alone “conclusively establish materiality.” Id. at 161. Nevertheless, conditioning payment on a requirement is “certainly probative evidence of materiality.” Id. (quoting United States ex rel. Rose v. Stephens Institute, 909 F.3d 1012, 1020 (9th Cir. 2018)). Because the Medicare statute expressly noted that payment can only be made if the certification, face-to-face encounter, and plan-of-care requirements that the defendants allegedly violated were met, the court held that the defendants’ allegedly fraudulent certifications that they had complied with the statutory and regulatory requirements violated the government’s express conditions of payment. Id. Second, the court turned to government enforcement. Id. at 161-62. Here, the relators alleged in their complaint that HHS OIG had previously pursued enforcement actions against other hospice providers that had committed violations similar to the defendants’ alleged violations—namely submitting bills for ineligible services and patients and failing to conduct the required certifications. Id. at 162. Because of these past enforcement actions, the Court held that the relators here had created a reasonable inference that the government would have denied payment had it known of the defendants’ violations. Id. The Court found additional support for this conclusion in the Sixth Circuit’s holding in United States ex rel. Prather v. Brookdale Senior Living Communities, Inc., 892 F.3d 822 (6th Cir. 2018) (previously discussed here and here). There, the Sixth Circuit concluded that Escobar does not require relators to allege specific previous government prosecutions for claims similar to the relator’s. Id. Third, the Fifth Circuit analyzed whether the noncompliance was substantial or minor. Id. at 163. Citing Escobar, the court noted that a violation is material either when a reasonable person would “attach importance” to the noncompliance or when the defendant knew or had reason to know that the false representation’s recipient would attach importance to it, even though a reasonable person would not. Id. Because the court had determined in its government enforcement analysis that the government would have denied payment had it known of the defendants’ violations, the court therefore held that government would have attached importance to the violations. Id. Thus, the relators had also satisfied the third factor, showing that the noncompliance was substantial. Id. Given that all three factors were satisfied, the court held that the relators had sufficiently alleged material violations to survive the motion to dismiss. Id.

2.  The Third Circuit Analyzes Post-Escobar Materiality Standards on Summary Judgment

In United States ex rel. Doe v. Heart Solutions, PC, 923 F.3d 308 (3d Cir. 2019), the Third Circuit explored materiality and causation in light of Escobar. There, the government filed an FCA claim alleging that the defendants, an individual and her health care company, had violated Medicare regulations requiring all diagnostic testing to be performed under the proper level of physician supervision. Id. at 311. Specifically, the government alleged that the defendants had falsely represented that a licensed neurologist performed all their company’s neurological testing as required by regulation, when their testing allegedly was not supervised by a neurologist in reality. Id. Applying Escobar to the government’s motion for summary judgment, the Third Circuit found that the government met its initial summary judgment burden to show materiality by submitting evidence that Medicare would not have paid the testing claims without a supervising neurologist’s certification, per regulation. Id. 318. When the defendants failed to introduce any evidence to rebut this, the court held that the government had met its materiality burden. Id. Notably, the court also held that by establishing materiality, the government also had adequately demonstrated causation. Id. According to the court, “because these misrepresentations were material, they caused damage to Medicare,” and therefore “but for the misrepresentations, Medicare would never have paid the claims.” Id. This ruling, which appears to conflate the separate elements of causation and materiality by hinging causation entirely on materiality, will be one to watch in future decisions.

C.  Courts Continue to Analyze Rule 9(b)’s Particularity Requirement in FCA Claims

In last year’s year-end update, we noted that the circuit courts continue to struggle with how to apply Rule 9(b)’s particularity requirement in FCA cases. Rule 9(b) heightens the pleading standard required in fraud claims, stating that a party alleging fraud “must state with particularity the circumstances constituting fraud or mistake.” This year, several circuits further analyzed Rule 9(b)’s application to FCA cases.

1.  The Ninth Circuit Discusses the Relationship between Rule 9(b)’s Particularity Standard and the FCA’s Materiality Requirement

In United States ex rel. Mateski v. Raytheon Co., 745 F. App’x 49 (9th Cir. 2018), cert. denied sub nom. Mateski v. Raytheon Co., No. 18-1312, 2019 WL 1643040 (U.S. May 13, 2019), the Ninth Circuit elaborated on Rule 9(b)’s particularity standard and, in particular, the effect of a lack of particularity on meeting the materiality requirement. In Mateski, the relator filed a qui tam action against his employer, a defense contractor, alleging that it falsely claimed compliance with contract requirements for a satellite system sensor. Id. at *50. The case had been to the Ninth Circuit once before, under the public disclosure bar, at which point the Ninth Circuit reversed the district court’s dismissal of the complaint. Id. This time, however, the Ninth Circuit affirmed dismissal of the case. Id. First, the court held that the complaint failed to meet Rule 9(b)’s particularity requirement with regard “to the ‘what,’ ‘when,’ and ‘how’ of the allegedly false claims.” Id. For example, the relator alleged the defendant failed to comply with its contractual requirements to complete tests and retests on component parts, but never specified which parts, which tests, whether the tests were never done or whether they were instead done incompletely, as well as failing to name approximate dates of these tests. Id. Without these details, the court held that the defendant did not have enough information to defend against the claims, and so the complaint failed to meet Rule 9(b)’s particularity requirement. Id. The Ninth Circuit also concluded that because of this lack of particularity regarding the false claims, the complaint also inadequately pleaded the materiality requirement. Id. Noting that the materiality requirement is a “demanding” standard pursuant to Escobar, the court found itself unable to assess whether the noncompliance was material or minor because of the lack of particularity regarding the false claims. Id.

2.  The Eighth Circuit Provides Further Guidance on Rule 9(b)’s Particularity Requirement

In United States ex rel. Strubbe v. Crawford County Memorial Hospital, 915 F.3d 1158 (8th Cir. 2019), the Eighth Circuit elaborated on its prior holding in United States ex rel. Thayer v. Planned Parenthood of the Heartland, 765 F.3d 914, 918 (8th Cir. 2014), in which the court concluded that relators in FCA cases can meet Rule 9(b)’s particularity requirement either by: (1) pleading representative examples of false claims; or (2) pleading the “particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.” Strubbe, 915 F.3d at 1163 (quoting Thayer, 765 F.3d at 918). In Strubbe, the relators, emergency medical technicians and paramedics, filed an FCA qui tam action against a hospital, alleging that it submitted false claims for Medicare reimbursement, made false statements to get false claims paid, and conspired to violate the AKS. Id. at 1162. The district court dismissed the claims for failure to plead with the required particularity, finding that the complaint did not allege facts showing any false claims were submitted or show how the relators acquired their information. Id. Over a dissent, the Eighth Circuit affirmed, holding that the complaint did not plead the fraud with the particularity required by Rule 9(b). Id. at 1166. First addressing the relator’s allegation that the hospital submitted false claims, the court found that the relators had not met Thayer’s first prong of submitting representative examples of false claims. Id. at 1164. For example, while they had alleged that the hospital made a false claim for an unnecessary treatment, they failed to include the requisite particularity because they did not identify the date of this incident, the provider, any specific information about the patient, what money was obtained, and crucially, whether the hospital actually submitted a claim for this specific patient. Id. Nor had relators met Thayer’s second prong, according to the court. Id. The court held that the complaint lacked sufficient indicia of reliability to create a strong inference that claims were actually submitted, because the complaint did not provide any details about the hospital’s billing practices. Id. at 1164-65. Moreover, the relators did not identify the basis for their allegations regarding billing; this was especially problematic given the relators lack of personal knowledge about the hospital’s billing due to their lack of access to the hospital’s billing department as EMTs and paramedics. Id. at 1165-66. The relators’ second claim that the hospital made false statements failed to meet Rule 9(b)’s particularity requirement for similar reasons as their first—namely, the complaint did not connect the false statements to claims submitted to the government and did not provide the basis on which the relators’ assertions were founded. Id. at 1166. Finally, their third claim, that the hospital conspired to violate the AKS, failed because they did not provide any details about the conspiracy, and so failed to plead with particularity. Id. Therefore, the court affirmed the complaint’s dismissal. Id. at 1170.

3.  Under Rule 9(b), the Fourth Circuit Requires Allegations Regarding a Sub-Contractor’s Billing and Payment Structure

In United States ex rel. Grant v. United Airlines Inc., 912 F.3d 190 (4th Cir. 2018), the Fourth Circuit held that a relator failed to meet Rule 9(b)’s particularity requirement where his complaint alleged a fraudulent scheme without detailing the billing and payment structure. Because of this omission, the court found that relator’s allegations did not foreclose the possibility that the government was never billed or that the alleged fraud was remedied before billing or payment. The case involved allegations by a relator against his former employer, an airline, alleging that the airline violated the FCA by certifying airplane repairs that did not comply with various aviation regulations and contract requirements in the airline’s work as a sub-sub-contractor for the U.S. Air Force. Id. at 194. Specifically, the relator alleged that the defendant: (1) certified uncompleted work as completed; (2) certified repairs performed by uncalibrated and uncertified tools, in violation of the subcontract’s requirements; and (3) allowed inspectors to continue certifying repairs after their training and eye exams had expired. Id. at 194-95. Affirming dismissal of the claims, the Fourth Circuit held that Rule 9(b)’s “stringent” pleading standard requires the complaint to “provide ‘some indicia of reliability’ to support the allegation that an actual false claim was presented to the government.” Id. (quoting United States ex rel. Nathan v. Takeda Pharm. N. Am., Inc., 707 F.3d 451, 457 (4th Cir. 2013)). Relators can meet this standard either by: (1) alleging with particularity that specific false claims were actually submitted to the government or (2) alleging “a pattern of conduct that would ‘necessarily have led[ ] to submission of false claims’ to the government for payment.” Id. (quoting Nathan, 707 F.3d at 457). Over a dissent, the court concluded that the relator had not pleaded specific claims, and also failed to allege a pattern of conduct that would necessarily have led to the submission of false claims, because he had only particularly alleged that the defendant engaged in fraudulent conduct without connecting the fraudulent conduct to the necessary presentment of false claims to the government. Id. The court reasoned that the complaint failed “to allege how, or even whether, the bills for these fraudulent services were presented to the government and how or even whether the government paid [the defendant] for the services.” Id. at 198. Because the complaint alleged only an umbrella payment without describing the billing or payment structure, the court held that the complaint left open the possibility that no payments were ever made. The court held that alleging a link between the false claims and government payment is especially necessary to meet Rule 9(b)’s requirements where, as here, the defendant is several levels removed from the government because it is a sub-sub-contractor. Id. at 199.

D.  Estoppel and the FCA

As DOJ increasingly pursues parallel criminal and civil investigations in cases involving fraud on the government, the interplay between criminal and FCA charges becomes increasingly important. Several decisions during the first half of the year discussed issues relevant to this interplay.

1.  The Third Circuit Finds That a Company Is Not Estopped by an Individual Employee’s Criminal Conviction

In United States ex rel. Doe v. Heart Solution, PC, 923 F.3d 308 (3d Cir. 2019) (discussed previously in relation to materiality), the Third Circuit held that, although an individual defendant was collaterally estopped from denying the falsity and knowledge elements of a civil FCA claim by her criminal conviction and plea colloquy regarding the same conduct, her employer was not. Id. at 316-17. The case involved an individual defendant who was convicted criminally of defrauding Medicare after having admitted at her plea colloquy that Medicare paid her company for diagnostic neurological testing that she falsely represented was supervised by a licensed neurologist. Id. at 312. After her conviction, the government intervened in a civil qui tam FCA case against her and her health care company regarding the same fraudulent neurologist certifications. Id. In granting summary judgment against the defendant company, the district court had relied on the individual defendant’s criminal conviction and plea colloquy. Id. at 313. But the Third Circuit held that the district court erred in finding that the health care company had conceded all of the essential elements of the FCA claim through the individual defendant’s plea. Id. at 316-17. In so holding, the court relied on the fact that collateral estoppel does not apply unless the party against whom the earlier decision is asserted previously had a “full and fair opportunity to litigate that issue.” Id. at 316 (internal quotation marks omitted) (quoting Allen v. McCurry, 449 U.S. 90, 95 (1980)). Here, the defendant company did not have any opportunity, let alone a “full and fair opportunity,” to contest the fraud claim at the individual’s separate criminal proceedings. Heart Sol., 923 F.3d at 317. Additionally, some of the elements of the FCA claim against the company, as opposed to the individual, were neither actually litigated nor determined by a final judgment in the individual’s criminal case, both of which are required for collateral estoppel to apply. Id. at 317.

2.  The Fourth Circuit Holds That Non-Intervened Qui Tam Actions Decided in Favor of the Defendant Do Not Collaterally Estop the Government from Pursuing Criminal Proceedings

In United States v. Whyte, 918 F.3d 339 (4th Cir. 2019), the Fourth Circuit considered whether the government is collaterally estopped from pursuing its own criminal case by a prior qui tam FCA action in which it did not intervene. See id. at 344. There, the defendant, the owner of a company that supplied armored vehicles to multinational forces in Iraq, was indicted for criminal fraud in July 2012. Id. at 342-43. Then, in October 2012, a relator filed a civil FCA suit, in which the government declined to intervene, against the defendant. Id. at 343. The defendant ultimately prevailed at trial in his FCA civil suit, but then, over two years later, a jury convicted the defendant in the criminal case. Id. at 344. The defendant argued that the government was collaterally estopped in its criminal case by the defendant’s victory in the prior qui tam civil case, but the courts were not convinced. The Fourth Circuit affirmed the district court, holding as a matter of first impression that “the Government is not a party to an FCA action in which it has declined to intervene,” and so is not collaterally estopped by a prior FCA action in which it did not intervene. Id. at 345, 350. In so holding, the court first reasoned that collateral estoppel cannot bar a criminal prosecution when the government did not “have a full and fair opportunity to litigate the issue in the prior proceeding.” Id. at 345 (citation and internal quotation marks removed). Whether the government had that opportunity in turn depends on whether the government was a party to that prior proceeding. Id. Citing precedent, the FCA’s language and structure, and the government’s different interests in intervened versus non-intervened cases, the court held that the government is not a party to an FCA action in which it has not intervened. Id. at 345-49. Therefore, the court concluded that “the Government cannot be considered to have been a party with a full and fair opportunity to litigate” in a prior FCA action in which it declined to intervene, and so the government’s criminal prosecution was not collaterally estopped by a prior, nonintervened FCA qui tam action. Id. at 349-50.

E.  The First Circuit Holds That Unsealing an FCA Complaint Begins the Statute of Limitations for Related Claims

As we previously discussed, RICO suits mirroring FCA suits that challenge off-label drug marketing continue to appear. A recent First Circuit case held that the unsealing of an FCA complaint regarding off-label drug marketing begins the running of RICO’s four-year statute of limitations in these kinds of cases. In In re Celexa & Lexapro Marketing & Sales Practices Litigation, 915 F.3d 1 (1st Cir. 2019), the First Circuit addressed the relationship between FCA claims and the statute of limitations for RICO claims (as well as state consumer fraud claims). There, the government intervened in a qui tam FCA claim alleging that the defendant pharmaceutical companies engaged in illegal off-label drug marketing schemes intended to fraudulently induce doctors to prescribe their drugs for off-label uses. Id. at 5-6. The unsealing of the complaint led to more than a dozen consumers and entities that had paid for these drugs filing suit, including the suits in this case, alleging RICO and state consumer fraud violations related to the defendant’s alleged illegal off-label marketing schemes. Id. at 7. The First Circuit held that, as a matter of law, the unsealing of the government’s FCA complaint put the plaintiffs on notice that the defendants allegedly had been promoting off-label uses of their products. Id. at 15. Therefore, the unsealing of the government’s FCA complaint began the running of the four-year statute of limitations on the plaintiffs’ RICO claims related to the off-label marketing schemes alleged in the FCA complaint. Id. at 15-16.

F.  The Ninth Circuit Upholds an FCA Settlement Agreement’s Confidentiality Provisions

For companies involved in negotiations with DOJ about the terms of settlement agreements under the FCA, there was a bit of good news from the Ninth Circuit. In Brunson v. Lambert Firm PLC, 757 F. App’x 563 (9th Cir. 2018), the Ninth Circuit upheld the confidentiality provisions of an FCA settlement agreement, over objection from the relator. See id. at 566. In that case, the relator entered into an FCA settlement agreement with the defendants and the government, but later filed several post-settlement motions that put at issue the settlement agreement’s confidentiality provisions. See id. at 565. The Ninth Circuit held that the settlement agreement’s confidentiality provisions were not void on public policy grounds, because the settlement did not impede any whistleblower’s ability to bring information to the government, and so did not violate the public interest underlying the FCA’s provisions encouraging disclosures of fraud. Id. at 566. Additionally, the court held that the confidentiality provisions did not interfere with the public’s right to information, given that the entire qui tam complaint was still publicly available. Id. Finally, the Ninth Circuit held that the district court had not abused its discretion in maintaining the seal over the settlement agreement, because the settlement agreement was a “private agreement reached without court assistance” and was only in the judicial record through the relator’s efforts to void its confidentiality provisions. Id.

G.  The Public Disclosure Bar and Its Original Source Exception

The public disclosure bar, as amended in 2010 by the Affordable Care Act, requires courts to dismiss a relator’s FCA claims “if substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed,” unless that relator “is an original source of the information.” § 3730(e)(4)(A). One of the statute’s definitions of an original source is an individual “who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions.” § 3730(e)(4)(B) (emphasis added). Although the “materially adds” language has been in effect for nearly a decade, the new language did not apply retroactively, and due to the long timeframe for many FCA cases, it is therefore just in recent years getting serious attention from the appellate courts. In April of this year, the Tenth Circuit became the latest court to opine on the meaning of the original source exception’s “materially adds” language. In United States ex rel. Reed v. KeyPoint Government Solutions, 923 F.3d 729 (10th Cir. 2019), the Tenth Circuit explored what a relator must allege to meet the original source exception by materially adding to publicly disclosed information. In defining the “materially adds” language in the original source exception, the Tenth Circuit cited United States ex rel. Winkelman v. CVS Caremark Corp., 827 F.3d 201 (1st Cir. 2016), and held that a relator satisfies the materially-adds requirement when she “discloses new information that is sufficiently significant or important that it would be capable of” influencing the government’s behavior, as contrasted with a relator who provides only background information or details about a previously disclosed fraud. Reed, 923 F.3d at 757. Under this standard, the court noted that a relator who merely identifies a new specific actor engaged in fraud usually would not materially add to public disclosures of alleged widespread fraud in an industry with only a few companies. Id. at 758. Ultimately, however, the court concluded that the relator here had materially added to the public disclosures about a specific program at her company. Id. at 760-63. Thus, the court held she met the original source exception’s materially-adds requirement, but remanded on whether her knowledge was “independent” and whether her claims should otherwise survive scrutiny under Rule 12(b)(6) and Rule 9(b). Id. at 763.

H.  The First Circuit Holds That the First-to-File Bar Is Not Jurisdictional

The First Circuit joined the D.C. and Second Circuits in holding that the FCA’s first-to-file bar is not jurisdictional, such that arguments under the first-to-file bar do not implicate the court’s subject matter jurisdiction, even if they are a cause for dismissal. This distinction can affect how, and when, arguments under the first-to-file bar may be made, and also the standard of review a court applies. In United States v. Millennium Laboratories, Inc., 923 F.3d 240 (1st Cir. 2019), Relator A, who filed first, alleged that the defendant used inexpensive point-of-care tests to induce physicians into excessive testing, including confirmatory testing, which was then billed to the government. Id. at 245-46. Another relator, Relator B, later filed a complaint against the same defendant related to confirmatory testing, not point-of-care testing, allegedly induced through improper custom profiles and standing orders. Id. at 246-47. The government intervened in Relator B’s action (but not Relator A’s) and pursued an FCA case focused on excessive confirmatory testing induced through improper custom profiles and standing orders. Id. at 247-48. The government and the defendant eventually settled for $227 million plus interest, without resolving which relator was entitled to the relator’s share. Id. at 247. The district court dismissed Relator B’s crossclaim for the relator’s share of the settlement, holding that Relator A was the first to file. Id. at 248. As Relator A was the first to file, the district court therefore held that it did not have subject matter jurisdiction over Relator B’s crossclaim, because the first-to-file bar was jurisdictional. Id. On appeal, the First Circuit reversed, and held that the first-to-file bar is not jurisdictional, overturning its prior precedent, for three reasons. Id. at 248-49. First, the First Circuit pointed to Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter, 135 S. Ct. 1970 (2015), in which the Supreme Court addressed a first-to-file issue in an FCA qui tam action on “decidedly non-jurisdictional terms,” implying that the Supreme Court did not consider the first-to-file rule a jurisdictional one. Millennium Labs., 923 F.3d at 249 (internal quotation marks removed) (quoting United States ex rel. Heath v. AT&T, Inc., 791 F.3d 112, 121 n.4 (D.C. Cir. 2015)). Second, the First Circuit noted that its prior cases all predated Carter and also did not substantively analyze whether the first-to-file rule was jurisdictional, but rather assumed it was. Millennium Labs., 923 F.3d at 250. Third, applying the Supreme Court’s “bright line rule” in Arbaugh v. Y & H Corp., 546 U.S. 500 (2006), which held that provisions are only jurisdictional when Congress clearly states that they are, the First Circuit held that the first-to-file bar’s statutory text, context, and legislative history did not describe the bar in jurisdictional terms. Millennium Labs., 923 F.3d at 250-51. For these reasons, the First Circuit held that the first-to-file bar is not jurisdictional. Id. at 251. Therefore, the court held that it had jurisdiction over Relator B’s crossclaim. Id. Next, the First Circuit turned to the issue of whether Relator A or B was the first to file for purposes of the relator’s share of the government’s settlement. Id. at 252-53. To determine whether Relator A was the first to file in the action in which the government intervened, the court analyzed whether Relator A’s complaint contained “all the essential facts” of the fraud that Relator B alleged, on a claim-by-claim basis, looking at the specific mechanisms of fraud alleged. Id. at 252-53. Because Relator A’s complaint never alleged the specific mechanisms of fraud that Relator B alleged—custom profiles and standing orders in the confirmatory, not point-of-care, stage—Relator A’s complaint did not cover the essential facts of the fraud that Relator B and the government alleged. Id. at 254. Thus, as Relator A alleged a different fraud than the fraud that the government pursued, he was not the first to file in this case; Relator B was. Id.

I.  The Second Circuit Holds That a Relator Who Previously Voluntarily Dismissed His FCA Action Is Not Entitled to the Relator’s Share of the Government’s Subsequent Action

In United States v. L-3 Communications EOTech, Inc., 921 F.3d 11 (2d Cir. 2019), the Second Circuit joined several other circuits in holding that a relator who previously voluntarily dismissed his qui tam action and had no other qui tam actions pending at the time the government pursued its own FCA claim is not entitled to the relator’s share of a later government settlement. Specifically, the court examined the FCA’s provision in section 3730(c)(5), which states that, notwithstanding the section of the FCA allowing qui tam actions, the government may pursue an “alternative remedy,” but if the government pursues an alternative remedy, then “the person initiating the action shall have the same rights in such proceeding as such person would have had if the action had continued under this section.” Id. at 24 (quoting § 3730(c)(5)). The court held that section 3730(c)(5) only applied if that relator had a pending qui tam action in which the government could intervene when the government initiated its own FCA action. Id. at 26. Thus, where, as here, the relator had no FCA action pending because the relator had voluntarily dismissed his FCA suit fourteen months before the government commenced its own FCA suit, the relator is not entitled to the relator’s share of the government’s action. Id.

J.  FCA Retaliation Claims

There were also a number of decisions from the courts of appeal that addressed issues under the FCA’s anti-retaliation provision, which protects would-be whistleblowers from retaliation based on certain protected activity undertaken in furtherance of a potential FCA claim. We very briefly summarize these decisions below. In United States ex rel. Reed v. KeyPoint Government Solutions, 923 F.3d 729 (10th Cir. 2019) (previously discussed regarding the public disclosure bar), the Tenth Circuit affirmed the district court’s dismissal of the relator’s retaliation claim, holding that the facts she pleaded were inadequate to show that the defendant was on notice that she was engaged in FCA-protected activity. Id. at 741, 764. Because the relator was a compliance officer, the court explained that she must plead facts to overcome the presumption that she was just doing her job in reporting fraud internally to her employer. That is, she must plead that the actions she took to report the alleged fraud internally went beyond what was required to fulfill her compliance job duties. Id. at 768-69. In that case, the relator did not adequately allege that her employer was on notice she was trying to stop FCA violations, and so the court affirmed the dismissal of her retaliation claim. Id. at 772. In United States ex rel. Strubbe v. Crawford County Memorial Hospital, 915 F.3d 1158 (8th Cir. 2019) (previously discussed regarding Rule 9(b)), the Eighth Circuit limited liability for FCA retaliation claims by affirming the district court’s ruling that relators’ retaliation claim was barred because the complaint did not allege that relators ever told their employer (a hospital) that its practices were fraudulent or potentially violated the FCA. Id. The court found that complaining about the hospital’s finances and changes the hospital made to certain treatments does not provide the hospital notice that the relators are taking action to stop an FCA violation or in furtherance of a qui tam action. Id. In addition, as a matter of first impression for FCA retaliation claims before the Eighth Circuit (but not whistleblower claims more generally), the court held that when there is no direct evidence of retaliation, the McDonnell Douglas framework—from McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973)—applies to FCA retaliation claims. Id. at 1168. Thus, for FCA retaliation claims, the plaintiff must show that: “(1) she engaged in protected conduct, (2) [her employer] knew she engaged in protected conduct, (3) [her employer] retaliated against her, and (4) ‘the retaliation was motivated solely by [the plaintiff’s] protected activity.’” Id. at 1167-68 (quoting Schuhardt v. Washington University, 390 F.3d 563, 566 (8th Cir. 2004)). If the plaintiff establishes a prima facie retaliation claim, then the burden shifts to the employer to “articulate a legitimate reason for the adverse action.” Id. at 1168 (quoting Elkharwily v. Mayo Holding Co., 823 F.3d 462, 470 (8th Cir. 2016)). Then, the burden again shifts back to the plaintiff to show that the employer’s reason was “merely a pretext and that retaliatory animus motivated the adverse action.” Id. (quoting Elkharwily, 823 F.3d at 470). In Guilfoile v. Shields, 913 F.3d 178 (1st Cir. 2019), the First Circuit explored the link between FCA retaliation claims and the AKS. The relator alleged that he was fired in retaliation for internally reporting that his employer, which provides specialty pharmacy services to chronically ill patients, was violating the AKS and making false representations in its contracts with hospitals. Id. at 182-83. The First Circuit affirmed dismissal with respect to his contract violation-based retaliation claim, but vacated the district court’s holding dismissing the plaintiff’s AKS-based retaliation claim, over a dissent. Id. at 195. In so doing, the First Circuit held that for FCA retaliation claims, plaintiffs do not need to meet Rule 9(b)’s particularity requirement, plead the submission of false claims, or plead that compliance with the AKS was material. Id. at 190. Instead, FCA retaliation plaintiffs “need only plead that their actions in reporting or raising concerns about their employer’s conduct ‘reasonably could lead to an FCA action.’” Id. at 189 (quoting United States ex rel. Booker v. Pfizer, Inc., 847 F.3d 52, 59 (1st Cir. 2017)). Under this standard, the court held that the plaintiff had plausibly pleaded that he was engaged in FCA-protected conduct, because by reporting his concerns about paying a consultant to secure contracts at hospitals at which the consultant worked, he was engaging in conduct that could reasonably lead to an FCA action based on the submission of claims resulting from an AKS violation. Id. at 193. Finally, in United States ex rel. Grant v. United Airlines Inc., 912 F.3d 190 (4th Cir. 2018) (discussed previously regarding Rule 9(b)), the Fourth Circuit held that an objective reasonableness standard applies to FCA retaliation claims’ new protected activity category, added in 2010, of “other efforts to stop 1 or more” FCA violations. Prior Fourth Circuit precedent applied a “distinct possibility” standard to evaluate protected activity under § 3730(h), which related to retaliation for actions taken “in furtherance” of an FCA action, meaning employees engage “in protected activity when ‘litigation is a distinct possibility, when the conduct reasonably could lead to a viable FCA action, or when . . . litigation is a reasonable possibility.’” Id. at 200 (quoting Mann v. Heckler & Koch Def., Inc., 630 F.3d 338, 344 (4th Cir. 2010)) (emphasis added). However, the court rejected the “distinct possibility” standard for “other efforts to stop 1 or more” FCA violations, and instead adopted an “objective reasonableness” standard. Id. at 201. Under the second category’s “objective reasonableness” standard, “an act constitutes protected activity where it is motivated by an objectively reasonable belief that the employer is violating, or soon will violate, the FCA.” Id. (emphasis added).

IV.  CONCLUSION

We will monitor these developments, along with other FCA legislative activity, settlements, and jurisprudence throughout the year and report back in our 2019 False Claims Act Year-End Update, which we will publish in January 2020. _________________________ [1] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Avanti Hospitals LLC, and Its Owners Agree to Pay $8.1 Million to Settle Allegations of Making Illegal Payments in Exchange for Referrals (Jan. 28, 2019), https://www.justice.gov/opa/pr/avanti-hospitals-llc-and-its-owners-agree-pay-81-million-settle-allegations-making-illegal. [2] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Pathology Laboratory Agrees to Pay $63.5 Million for Providing Illegal Inducements to Referring Physicians (Jan. 30, 2019), https://www.justice.gov/opa/pr/pathology-laboratory-agrees-pay-635-million-providing-illegal-inducements-referring. [3] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Electronic Health Records Vendor to Pay $57.25 Million to Settle False Claims Act Allegations Charges (Feb. 6, 2019), https://www.justice.gov/opa/pr/electronic-health-records-vendor-pay-5725-million-settle-false-claims-act-allegations. [4] See Press Release, U.S. Atty’s Office for the N. Dist. of GA., Union General Hospital to Pay $5 Million to Resolve Alleged False Claims Act Violations (Feb. 6, 2019), https://www.justice.gov/usao-ndga/pr/union-general-hospital-pay-5-million-resolve-alleged-false-claims-act-violations. [5] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Vanguard Healthcare Agrees to Resolve Federal and State False Claims Act Liability (Feb. 27, 2019), https://www.justice.gov/opa/pr/vanguard-healthcare-agrees-resolve-federal-and-state-false-claims-act-liability. [6] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Covidien to Pay Over $17 Million to The United States for Allegedly Providing Illegal Remuneration in the Form of Practice and Market Development Support to Physicians (Mar. 11, 2019), https://www.justice.gov/opa/pr/covidien-pay-over-17-million-united-states-allegedly-providing-illegal-remuneration-form. [7] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, MedStar Health to Pay U.S. $35 Million to Resolve Allegations that it Paid Kickbacks to a Cardiology Group in Exchange for Referrals (Mar. 21, 2019), https://www.justice.gov/opa/pr/medstar-health-pay-us-35-million-resolve-allegations-it-paid-kickbacks-cardiology-group. [8] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Three Pharmaceutical Companies Agree to Pay a Total of Over $122 Million to Resolve Allegations That They Paid Kickbacks Through Co-Pay Assistance Foundations (Apr. 4, 2019), https://www.justice.gov/opa/pr/three-pharmaceutical-companies-agree-pay-total-over-122-million-resolve-allegations-they-paid. [9] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Pharmaceutical Company Agrees to Pay $17.5 Million to Resolve Allegations of Kickbacks to Medicare Patients and Physicians (Apr. 30, 2019), https://www.justice.gov/opa/pr/pharmaceutical-company-agrees-pay-175-million-resolve-allegations-kickbacks-medicare-patients. [10] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Medicare Advantage Provider to Pay $30 Million to Settle Alleged Overpayment of Medicare Advantage Funds (Apr. 12, 2019), https://www.justice.gov/opa/pr/medicare-advantage-provider-pay-30-million-settle-alleged-overpayment-medicare-advantage. [11] See Press Release, U.S. Atty’s Office for the S. Dist. of W.V., United States Attorney Announces $17 Million Healthcare Fraud Settlement (May 6, 2019), https://www.justice.gov/usao-sdwv/pr/united-states-attorney-announces-17-million-healthcare-fraud-settlement. [12] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Kansas Cardiologist and His Practice Pay $5.8 Million to Resolve Alleged False Billings for Unnecessary Cardiac Procedures (May 30, 2019), https://www.justice.gov/opa/pr/kansas-cardiologist-and-his-practice-pay-58-million-resolve-alleged-false-billings. [13] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Pharmaceutical Company Admits to Price Fixing in Violation of Antitrust Law, Resolves Related False Claims Act Violations (May 31, 2019), https://www.justice.gov/opa/pr/pharmaceutical-company-admits-price-fixing-violation-antitrust-law-resolves-related-false. [14] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Opioid Manufacturer Insys Therapeutics Agrees to Enter $225 Million Global Resolution of Criminal and Civil Investigations (Jun. 5, 2019), https://www.justice.gov/opa/pr/opioid-manufacturer-insys-therapeutics-agrees-enter-225-million-global-resolution-criminal. [15] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Northrop Grumman Systems Corporation Agrees to Pay $5.2 Million to Settle Allegations of False Labor Charges (Jan. 28, 2019), https://www.justice.gov/opa/pr/northrop-grumman-systems-corporation-agrees-pay-52-million-settle-allegations-false-labor. [16] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Duke University Agrees to Pay U.S. $112.5 Million to Settle False Claims Act Allegations Related to Scientific Research Misconduct (Mar. 25, 2019), https://www.justice.gov/opa/pr/duke-university-agrees-pay-us-1125-million-settle-false-claims-act-allegations-related. [17] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Informatica Agrees to Pay $21.57 Million for Alleged False Claims Caused by Its Commercial Pricing Disclosures (May 13, 2019), https://www.justice.gov/opa/pr/informatica-agrees-pay-2157-million-alleged-false-claims-caused-its-commercial-pricing. [18] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Department of Justice Issues Guidance on False Claims Act Matters and Updates Justice Manual (May 7, 2019), https://www.justice.gov/opa/pr/department-justice-issues-guidance-false-claims-act-matters-and-updates-justice-manual. [19] Deputy Attorney General Rod J. Rosenstein Delivers Remarks at the American Conference Institute’s 35th International Conference on the Foreign Corrupt Practices Act (Nov. 29, 2018), https://www.justice.gov/opa/speech/deputy-attorney-general-rod-j-rosenstein-delivers-remarks-american-conference-institute-0. [20] See U.S. Dep’t of Justice, Justice Manual, Section 4-4.112. [21] Id. [22] Id. [23] Id. [24] Id. [25] Id. [26] See Memorandum, U.S. Dep’t of Justice, Factors for Evaluating Dismissal Pursuant to 31 U.S.C. 3730(c)(2)(A) (Jan. 10, 2018), https://assets.documentcloud.org/documents/4358602/Memo-for- Evaluating-Dismissal-Pursuant-to-31-U-S.pdf. [27] Id. at 2–3. [28] See Jeff Overly, DOJ Warns FCA Targets On Discovery Tactics, Law360 (Mar. 2, 2019), https://www.law360.com/articles/1134479/doj-atty-warns-fca-targets-on-discovery-tactics. [29] Id. [30] Id. [31] Id. [32] Press Release, U.S. Dep’t of Justice, Deputy Associate Attorney General Stephen Cox Delivers Remarks at the 2019 Advanced Forum on False Claims and Qui Tam Enforcement (Jan. 28, 2019), https://www.justice.gov/opa/speech/deputy-associate-attorney-general-stephen-cox-delivers-remarks-2019-advanced-forum-false. [33] Id. [34] Id. [35] Id. [36] Id. [37] Press Release, U.S. Dep’t of Justice, Deputy Associate Attorney General Stephen Cox Gives Remarks to the Cleveland, Tennessee, Rotary Club (Mar. 12, 2019), https://www.justice.gov/opa/speech/deputy-associate-attorney-general-stephen-cox-gives-remarks-cleveland-tennessee-rotary. [38] State False Claims Act Reviews, Dep’t of Health & Human Servs.—Office of Inspector Gen., https://oig.hhs.gov/fraud/state-false-claims-act-reviews/index.asp. [39] Id. [40] Id. Wisconsin repealed its false claims act in 2015. Assembly Bill 1021 would have reinstated the statute, but failed to pass in March 2018. See Wisconsin State Legislature, Assembly Bill 1021, http://docs.legis.wisconsin.gov/2017/proposals/reg/asm/bill/ab1021. [41] Id. [42] See Cal. Gov’t Code § 12651 (West 2018); Ga. Code Ann. § 49-4-168.1 (2018); Del. Code Ann. tit. 6, § 1201 (2018); N.Y. State Fin. Law §§ 189-190-b; 2018 R.I. Gen. Laws § 9-1.1-3 (2018). [43] Cal. AB-1270, 2019 Leg. Reg. Sess. (Cal. 2019). [44] Escobar, 136 S. Ct. at 2002 (emphasis added) (citation and internal quotation marks removed). [45] Cal. AB-1270, 2019 Leg. Reg. Sess. (Cal. 2019). [46] Id. [47] Id. [48] Id. [49] AB-1270 False Claims Act, California Legislative Information (July 9, 2019), http://leginfo.legislature.ca.gov/faces/billStatusClient.xhtml?bill_id=201920200AB1270. [50] See S. 40, A Bill to Amend Title 15 of the 1976 Code, by Adding Chapter 85, to Enact the “South Carolina False Claims Act” (123d Session), https://www.scstatehouse.gov/sess123_2019-2020/bills/40.htm. [51] See S. 223, A Bill to Amend the South Carolina Code of Laws, 1976, by Adding Chapter 85 to Title 15, so as to Enact the “South Carolina False Claims Act” (121st Session), https://www.scstatehouse.gov/sess121_2015-2016/bills/223.htm. [52] Notably, though, the statute covers claims a defendant “reasonably should have known” were false, thereby creating potential liability for mere negligence (unlike the federal FCA, which requires at least reckless disregard). The West Virginia law also lacks a qui tam provision. See W.Va. Code § 9-7-6 (2018). [53] See 2019 W.Va. Laws S.B. 318 (2019 Regular Session). [54] See id. at § 9-7-6.

The following Gibson Dunn lawyers assisted in preparing this client update: F. Joseph Warin, Charles Stevens, Stuart Delery, Benjamin Wagner, Timothy Hatch, Joseph West, Robert Walters, Robert Blume, Andrew Tulumello, Karen Manos, Monica Loseman, Geoffrey Sigler, Alexander Southwell, Reed Brodsky, Winston Chan, John Partridge, James Zelenay, Jonathan Phillips, Ryan Bergsieker, Sean Twomey, Reid Rector, Allison Chapin, Michael Dziuban, Jillian N. Katterhagen Mills, and summer associate Marie Zoglo.

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February 14, 2019 |
2018 Year-End Government Contracts Litigation Update

Click for PDF In this year-end analysis of government contracts litigation, Gibson Dunn examines trends and summarizes key decisions of interest to government contractors from the second half of 2018.  This publication covers the waterfront of the opinions most important to this audience issued by the U.S. Court of Appeals for the Federal Circuit, U.S. Court of Federal Claims, Armed Services Board of Contract Appeals (“ASBCA”), and Civilian Board of Contract Appeals (“CBCA”). The last six months of 2018 yielded five government contracts-related opinions of note from the Federal Circuit.  From July 1 through December 31, 2018, the U.S. Court of Federal Claims issued 23 notable non-bid protest government contracts-related decisions, and the ASBCA and CBCA published 62 and 37 substantive government contracts decisions, respectively.  As discussed herein, these cases address a wide range of issues with which government contractors should be familiar, including matters of cost allowability, jurisdictional requirements, contract interpretation, terminations, and the various topics of federal common law that have developed in the government contracts arena.  Before addressing each of these areas, we briefly provide background concerning the tribunals that adjudicate government contracts disputes.

I.    THE TRIBUNALS THAT ADJUDICATE GOVERNMENT CONTRACT DISPUTES

Under the doctrine of sovereign immunity, the United States generally is immune from liability unless it waives its immunity and consents to suit.  Pursuant to statute, the government has waived immunity over certain claims arising under or related to federal contracts through the Contract Disputes Act (“CDA”), 41 U.S.C. §§ 7101 - 7109, and through the Tucker Act, 28 U.S.C. § 1491.  Under the CDA, any claim arising out of or relating to a government contract must be decided first by a contracting officer.  A contractor may contest the contracting officer’s final decision by either filing a complaint in the U.S. Court of Federal Claims or appealing to a board of contract appeals.  The Tucker Act, in turn, waives the government’s sovereign immunity with respect to certain claims arising under statute, regulation, or express or implied contract, and grants jurisdiction to the Court of Federal Claims to hear such claims. The Court of Federal Claims thus has jurisdiction over a wide range of monetary claims brought against the U.S. government including, but not limited to, contract disputes and bid protests pursuant to both the CDA and the Tucker Act.  If a contractor’s claim is founded on the Constitution or a statute instead of a contract, there is no CDA jurisdiction in any tribunal, but the Court of Federal Claims would have jurisdiction under the Tucker Act as long as the substantive source of law grants the right to recover damages.  Thus, the Court of Federal Claims’ jurisdiction is broader than that of the boards of contract appeals. In addition to establishing jurisdiction for certain causes of action in the Court of Federal Claims, the CDA establishes four administrative boards of contract appeals:  the Armed Services Board, the Civilian Board, the Tennessee Valley Authority Board, and the Postal Service Board.  See 41 U.S.C. § 7105.  The ASBCA hears and decides post-award contract disputes between contractors and the Department of Defense and its military departments, as well as the National Aeronautics and Space Administration (“NASA”).  In addition, the ASBCA adjudicates contract disputes for other departments and agencies by agreement.  For example, the U.S. Agency for International Development has designated the ASBCA to decide disputes arising under USAID contracts.  The ASBCA has jurisdiction pursuant to the CDA, its Charter, and certain remedy-granting contract provisions.  The CBCA hears and decides contract disputes between contractors and civilian executive agencies under the provisions of the CDA.  The CBCA’s authority extends to all agencies of the federal government except the Department of Defense and its constituent agencies, NASA, the U.S. Postal Service, the Postal Regulatory Commission, and the Tennessee Valley Authority.  In addition, the CBCA has jurisdiction, along with federal district courts, over Indian Self-Determination Act contracts. The U.S. Court of Appeals for the Federal Circuit hears and decides appeals from decisions of the Court of Federal Claims, the ASBCA, and the CBCA, among numerous other tribunals outside the area of government contract disputes.  Significantly, the Federal Circuit has a substantial patent and trademark docket, hearing appeals from the U.S. Patent and Trademark Office and federal district courts that by volume of cases greatly exceeds its government contracts litigation docket.  Of 1,444 cases pending before the Federal Circuit as of December 31, 2018, 13 were appeals from the boards of contract appeals and 117 were appeals from the Court of Federal Claims—cumulatively comprising just over 9% of the appellate court’s docket.  Only 4% of the appeals filed at the Federal Circuit in FY 2018 were Contracts cases.  Nevertheless, the Federal Circuit is the court of review for most government contracts disputes. In our 2018 Mid-Year Government Contracts Update, we reported the appointment of Judge Lis B. Young to the ASBCA.  Joining her on the bench in the latter half of 2018 was Judge Stephanie Cates-Harman, who was appointed to the ASBCA in June.  Judge Cates-Hartman served as a Trial Attorney and the Assistant Director Government Contracts in the Department of the Navy, Office of the General Counsel, Naval Litigation Office before her appointment to the ASBCA in 2018. Judge Margaret M. Sweeney, who has served as a Judge of the Court of Federal Claims since 2005, was designated Chief Judge of the Court on July 12, 2018. The CBCA issued new rules of procedure, which are published at 83 Fed. Reg. 41009 (Aug. 17, 2018), and became effective on September 17, 2018.  The final rules establish a preference for electronic filing, increase conformity between the Board’s rules and the Federal Rules of Civil Procedure, and clarify current rules and practices.  Under the new rules, the time for filing is amended from 4:30 p.m. to midnight Eastern Time.

II.    COST ALLOWABILITY

The ASBCA issued several important decisions during the second half of 2018 addressing cost allowability issues under the Federal Acquisition Regulation (“FAR”).  Pursuant to FAR 31.202, a cost is allowable if it (1) is reasonable; (2) is allocable; (3) complies with applicable accounting principles; (4) complies with the terms of the contract; and (5) complies with any express limitations set out in FAR Subpart 31.

A.    Cost Allowability in Termination Settlements

Phoenix Data Solutions LLC f/k/a Aetna Government Health Plans, ASBCA No. 60207 (Oct. 2, 2018)
The Defense Health Agency (“DHA”) awarded a TRICARE managed care support contract to Aetna Government Health Plans (“AGHP”) in 2009.  Six months after the GAO sustained the incumbent contractor’s protest of the award to AGHP, DHA terminated AGHP’s contract for the convenience of the government.  Pursuant to FAR 49.201, when the government terminates a contract for convenience, the contracting officer should negotiate a settlement with the contractor that fairly compensates the contractor for the work performed, including profit.  DHA refused to negotiate, and instead, as observed by the ASBCA, “slow-rolled” AGHP for over five years, and then refused to compensate AGHP for any amount.  AGHP appealed from a deemed denial of its termination settlement claim. The ASBCA (D’Alessandris, A.J.) held that AGHP was entitled to almost all of its claimed costs.  Most notably, the ASBCA found that AGHP was entitled to its pre-contract costs under FAR 31.205-32, rejecting the government’s argument that pre-contract costs are unallowable unless agreed to by the government.  Moreover, the ASBCA rejected the government’s argument that AGHP’s claim should be reduced because AGHP was responsible for the circumstances leading to the protest and termination.  However, the ASBCA did find that a loss ratio applied, discussing in a case of first impression the language in FAR 52.249-2(g)(iii), which provides that “if it appears that the Contractor would have sustained a loss on the entire contract had it been completed” (emphasis added), profit is unallowable and the termination settlement should be reduced accordingly.  The ASBCA held that the reference to “entire contract” includes all of the awarded line items, including those that have not been performed, but does not include unexercised option years.  Therefore, because the record showed that AGHP would not have earned a profit until the unexercised option years, the ASBCA applied a loss ratio.

B.    Cost Reasonableness

Parsons Evergreene, LLC, ASBCA No. 58634 (Sept. 5, 2018)
In a lengthy decision, the ASBCA (Clarke, A.J.) clarified the parties’ respective burdens when the government challenges the reasonableness of costs under FAR 31.201-3(a).  The dispute arose under a “design-build plus” contract between Parsons Evergreene, LLC (“PE”) and the Air Force.  PE submitted a $28.8 million claim for Air Force-caused delay, disruption, and constructive changes.  In a decision written by Judge Clarke, the ASBCA sustained in part and denied in part PE’s appeal, and awarded PE $10.5 million. Most notably, Administrative Judge Craig Clarke found that FAR 31.201-3(a) “unambiguous” in that it “requires two actions by the government: (1) it must perform an ‘initial review of the facts,’ and (2) that review results in a ‘challenge’ to ‘specific costs.’  It is the contractor’s burden to prove the reasonableness of the challenged specific costs.”  Judge Clarke discussed the holding in Kellogg Brown & Root, ASBCA No. 58081, 17-1 BCA ¶ 36,595, that the government’s general or blanket assertion that all costs are unreasonable is insufficient to require the contractor to do more to prove reasonableness.  Judge Clarke then held that in this case, the Air Force had not satisfied FAR 31.201-3(a) because although the Defense Contract Audit Agency’s (“DCAA”) audit satisfied the requirement for an “initial review of the facts,” neither DCAA nor the Air Force challenged the reasonableness of any “specific costs” in the claims.  Concluding that “[s]uch a blanket challenge to all costs is insufficient to satisfy FAR 31.201-3(a),” Judge Clarke held that PE satisfied its burden to prove that its claimed costs were reasonable. In a brief concurring opinion joined by Administrative Judge J. Reid Prouty, ASBCA Vice Chairman Richard Shackleford concurred in the result, but not in the analysis of Judge Clarke’s opinion.  The concurring judges agreed with the amounts awarded but took “great issue with that portion of the damages analysis which leads up to the conclusion that PE has satisfied its burden to prove its claimed costs were reasonable when the government challenged all costs but failed to challenge the reasonableness of any specific cost in the claim.”  The concurring opinion reasoned, “[o]nce a CO’s final decision is appealed to this Board, the parties start with a clean slate and the contractor bears the burden of proving liability and damages de novo,” and “‘[t]he claimant bears the burden of proving the fact of loss with certainty, as well as the burden of proving the amount of loss with sufficient certainty so that the determination of the amount of damages will be more than mere speculation.’”  However, the concurring opinion found that “[n]otwithstanding FAR 31.201-2 and -3, which direct[] how COs and the DCAA should evaluate costs, our review of the record leads us to conclude that for the damages awarded by Judge Clarke, appellant proved liability on the part of the government, proved the costs were incurred and were reasonable with ‘sufficient certainty’ such that the amount of damages awarded is ‘more than mere speculation.’”
Kellogg Brown & Root Services, Inc., ASBCA Nos. 57530, 58161 (Nov. 19, 2018)
In another decision discussing cost reasonableness, the ASBCA (Melnick, A.J.) held that Kellogg Brown & Root Services, Inc. (“KBR”) failed to show that its subcontractor costs were reasonable.  The disputed costs involved the settlement of requests for equitable adjustment (“REA”) submitted by a subcontractor for providing housing for military personnel in Iraq under the LOGCAP III contract.  The subcontract was fixed price, but entitled the subcontractor to an equitable adjustment in the event of delays caused by the government’s failure to perform the prime contract.  The subcontractor alleged that U.S. military-imposed convoy schedules caused delays in transporting materials from Kuwait into Iraq, creating delay costs for the subcontractor (such as storage, double-handling, repairs, and idle-truck time).  After some negotiation on the REAs, KBR settled with the subcontractor for approximately $50 million, then sought reimbursement from the government, which the government eventually denied in a final decision. The ASBCA denied recovery because KBR had not established the reasonableness of the costs, explaining that: (1) the subcontract allowed delay costs only if the government failed to perform the prime contract, and KBR did not make that determination before settling the REAs; (2) the delay model employed by the subcontractor was based on an unrealistic assumption that trailers arriving at the Iraqi border would be placed in convoys the next day; and (3) KBR awarded the REAs based on market prices without requesting evidence of actual costs, despite requirements in the FAR and DFARS (and incorporated into the subcontract) requiring such cost data to support equitable adjustments.  With regard to the lack of cost data, the ASBCA rejected KBR’s argument that the subcontract was for commercial items, and therefore in accordance with FAR subpart 15.4 (pertaining to contract pricing), KBR was prohibited from seeking information about its subcontractor’s costs.

C.    Applicability of Cost Principles to Fixed-Price Level-of-Effort Contracts

Tolliver Grp., Inc. v. United States, 140 Fed. Cl. 520 (Oct. 26, 2018)
Tolliver Group, Inc. (“Tolliver”) had an Army contract to produce technical manuals, and it filed suit at the Court of Federal Claims (“COFC”) seeking reimbursement of legal fees totaling $195,889.78.  Tolliver incurred the legal fees in successfully defending its contract performance against a qui tam relator who alleged that Tolliver violated the False Claims Act (“FCA”).  The government declined to intervene in the FCA case, and Tolliver succeeded in having the case dismissed, which was affirmed on appeal.  Tolliver then submitted a claim for reimbursement of 80% of its attorneys’ fees, the maximum allowed by FAR 31.205-47 for a successful defense of an FCA suit.  The contracting officer denied the claim because the contract was firm fixed price.  However, the contract was initially awarded as a fixed-price level-of-effort, and was not converted to firm-fixed price until modification 8.  The government moved to dismiss Tolliver’s complaint for failure to state a claim upon which relief could be granted. The COFC (Lettow, J.) found as an initial matter that the FAR cost principles applied to the contract before Modification 8.  The COFC observed that “unlike other fixed-price contracts, a firm-fixed-price, level-of-effort contract requires (a) the contractor to provide a specified level of effort, over a stated period of time, on work that can be stated only in general terms and (b) the [g]overnment to pay the contractor a fixed dollar amount.  FAR § 16.207-1.  The government pays the contractor for effort expended, akin to actual costs incurred.”  Curiously, the COFC further found that the FAR cost principles applied to the contract by operation of law under the Christian doctrine.  The COFC concluded that Tolliver had “pled sufficient facts to satisfy the requirements of FAR § 31.205-47, and the remainder of FAR Subpart 31.2 does not otherwise prohibit reimbursement of the costs sought by Tolliver.”  Having concluded that Tolliver thus “sufficiently pleads the requirements for allowability,” the COFC denied the government’s motion to dismiss.

D.    Penalties for Expressly Unallowable Costs

Energy Matter Conversion Corp., ASBCA No. 61583 (Dec. 18, 2018)
Energy Matter Conversion Corp. (“EMC2”) entered into settlements with the government regarding alleged mischarges under its government contracts.  Following the settlement, EMC2 included the legal costs it incurred in connection with the government’s investigations in its final indirect cost rate proposals.  The contracting officer assessed a penalty for claiming expressly unallowable legal costs, and denied EMC2’s request to waive the penalty.  Following EMC2’s appeal, the ASBCA (Sweet, A.J.) held that the government was entitled to summary judgment, because there was no genuine issue of material fact that the legal costs were incurred in connection with “proceedings [that] could have led to debarment” making them unallowable under FAR 31.205-47.  The ASBCA rejected EMC2’s argument that it would have prevailed on the merits had it not settled, explaining that “the government merely must show that the investigations ‘could have led to debarment’ not that it would have done so.”  Thus, the government met its burden to show that it was unreasonable under all circumstances for a person in the contractor’s position to conclude that the cost was allowable.  Likewise, the ASBCA upheld the denial of waiver because EMC2 did not have established accounting policies at the time it claimed the expressly unallowable costs; the contracting officer’s decision to waive similar costs in prior years is not binding on future waiver decisions; and the waiver cannot be apportioned to the legal costs attributable to the “successful” portion of the proceeding (i.e., the amount by which the settlements reduced EMC2’s liability).

III.    JURISDICTIONAL ISSUES

As is frequently the case, jurisdictional issues accounted for a substantial portion of the key government contracts decisions issued during the second half of 2018.

A.    Requirement for a Valid Contract

In order for there to be Contract Disputes Act jurisdiction over a claim, there must be a contract from which that claim arises.  See FAR 33.201 (defining a “claim” as “a written demand or written assertion by one of the contracting parties seeking . . . relief arising under or relating to this contract”).  The CDA applies to contracts made by an executive agency for: (1) the procurement of property, other than real property in being; (2) the procurement of services; (3) the procurement of construction, alteration, repair, or maintenance of real property; and (4) the disposal of personal property.  41 U.S.C. § 7102(a)(1)-(4). The Federal Circuit, COFC, and ASBCA considered issues relating to whether valid implied-in-fact contracts existed to confer CDA or Tucker Act jurisdiction.
Lee v. United States, 895 F.3d 1363 (Fed. Cir. 2018)
Individuals who entered into individual purchase order vendor (“POV”) contracts with the Broadcasting Board of Governors (“BBG”), a U.S. government-funded broadcast service that oversees Voice of America, filed a putative class action suit against the United States seeking additional compensation they would have received if their contracts had been classified as personal services contracts or if they had been appointed to civil service positions.  The Federal Circuit (Bryson, J.) affirmed the Court of Federal Clams’ dismissal of plaintiffs’ first amended complaint.  The court concluded that the POV contracts did not violate the prohibition against personal services contracts at FAR 37.104.  Thus, failing to void the express contracts, plaintiffs could not recover under implied-in-fact contracts that dealt with the same subject matter.  The court held that even if a contract was inconsistent with a statutory or regulatory requirement—such as a high degree of government supervision making the contract closer to a prohibited personal services contract—such inconsistency does not ipso facto render the contract void.  Instead, the court stressed, invalidation of a contract must be considered in light of the statutory or regulatory purpose, “with recognition of the strong policy of supporting the integrity of contracts made by and with the United States.” Am. Tel & Tel. Co. v. United States, 177 F.3d 1368, 1374 (Fed. Cir. 1999) (en banc).  Moreover, the court noted, because of the disruptive effect of retroactively invalidating a government contract, the “invalidation of a contract after it has been fully performed is not favored.”  Id. at 1375.
Interaction Research Institute, Inc., ASBCA No. 61505 (Nov. 5, 2018)
Interaction Research Institute, Inc. (“IRI”) claimed to have performed training services for the I Marine Expeditionary Force without receiving payment.  The government investigated and concluded that there was no such express or implied contract for the alleged training, although the government did ratify some services as “unauthorized commitments,” leaving the remaining services in dispute.  The ASBCA (Woodrow, A.J.) held that IRI had sufficiently made a non-frivolous allegation that an implied-in-fact contract existed and that, while the government could not locate any contract with IRI or documentation supporting an implied-in-fact contract, the existence of a contract goes to the merits of the appeal, and did not affect  jurisdiction.
C & L Grp., LLC, et al. v. United States, No. 18-536 C (Fed. Cl. Nov. 28, 2018)
Plaintiffs entered into contracts with Hospital Santa Rosa, Inc. (“HSR”), a private party, for the construction of various portions of a hospital in Puerto Rico.  The contracts required approval from the U.S. Department of Agriculture (“USDA”) in the form of “Concurrences,” as HSR expected that construction would be funded in part by USDA.  USDA signed the Concurrences, and ultimately issued five payments to HSR to pay for work completed by the plaintiffs.  HSR sometime thereafter filed for Chapter 11 bankruptcy, and plaintiffs filed a complaint seeking payment from USDA for the work it performed under its contracts with HSR. The government filed a motion to dismiss on the basis that the court had no jurisdiction under the Tucker Act, and the court (Braden, J.) granted the motion.  The court found that plaintiffs had failed to allege any facts indicating that they were in privity of contract with USDA.  USDA was not a party to the plaintiffs’ contracts with HSR, and the contracts expressly stated that neither the United States nor any agency was a party to the contract.  The court also found that the USDA Concurrences could not establish privity, “because they d[id] not displace the . . . Contracts’ express language to the contrary that plainly state[d] [the government] assumed no liability nor guaranteed any payment.”  The court also found that plaintiffs had failed to allege the existence of an implied-in-fact contract, because they had failed to allege any facts “to support a ‘meeting of minds.’”  To the contrary, the court found that the “express language” of the parties’ contracts with HSR and the Concurrences “affirmatively state[d] that [USDA] did not intend to contract with Plaintiffs.”

B.    Adequacy of the Claim

Another common issue arising before the tribunals that hear government contracts disputes is whether the contractor appealed a valid CDA claim.  FAR 33.201 defines a “claim” as “a written demand or written assertion by one of the contracting parties seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising under or relating to this contract.”  Under the CDA, a claim for more than $100,000 must be certified.  In the second half of 2018, the boards considered whether a valid claim had been presented to and decided upon the contracting officer to confer CDA jurisdiction.
Hartchrom, Inc., ASBCA No. 59726 (July 26, 2018)
Hartchrom, Inc. had a lease with a private party allowing Hartchrom to use space at an Army manufacturing facility (the “Arsenal”).  The government was not a party to the lease.  Hartchrom later entered into a contract with the Army for chrome electroplating services, which Hartchrom performed at the Arsenal.  The lessor directed Hartchrom to remove hazardous waste that Hartchrom had discharged into the industrial wastewater treatment plant while performing its Army contract.  Hartchrom submitted a claim to the Army contracting officer for the hazardous waste removal costs, which the contracting officer denied in a final decision.  The ASBCA (Osterhout, A.J.) held that it had jurisdiction over the appeal because the claim was made pursuant to the Army contract and appealing a valid final decision.  However, the ASBCA dismissed the appeal for failure to state a claim upon which relief may be granted, because any relief to which Hartchrom could be entitled would have been under the terms of its lease with the private party.  Indeed, the clause Hartchrom relied upon was a provision in the lease, not in the Army contract.  Thus, the ASBCA had no way to grant Hartchrom any relief, even if it was so entitled under the lease.
Parsons Evergreene, LLC, ASBCA No. 58634 (Sept. 5, 2018),
In a decision issued separately from the Parsons Evergreene decision discussed in Section II.B, supra, the ASBCA (Clarke, A.J.) denied the Air Force’s motion to dismiss Claim V of PE’s complaint for lack of jurisdiction because the modified total cost claim lacked sufficient information and detail for the contracting officer to consider.  The contracting officer’s final decision denied Claim V of PE’s complaint in its entirety on the ground that “PE has not established that it has met the prerequisites for use of the modified total cost method.”  The ASBCA began its analysis by noting that the central issue was whether PE gave “adequate notice of the basis and amount of the claim” when it was submitted.  Although agreeing that a contracting officer cannot waive a jurisdictional requirement, the ASBCA found that the contracting officer apparently believed he had adequate notice because he requested and received a detailed technical analysis, and then issued a detailed 142-page final decision.  Stating that it was “exercising [its] discretion and applying common sense to the facts of this case,” the ASBCA found that the contracting officer was given sufficient information to engage in a “meaningful review” of the claim, which, in fact, the contracting officer did.
Centerra Grp., LLC f/k/a The Wackenhut Services, Inc., ASBCA No. 61267 (Nov. 16, 2018)
Centerra Group, LLC (“Centerra”) had a cost-reimbursement contract to provide fire protection services for NASA.  The contract required compliance with the Service Contract Act, 41 U.S.C. §§ 6701-6707, and incorporated a collective bargaining agreement (“CBA”) with the unionized firefighters.  After the finalization of an arbitration over the union’s grievance involving back pay of overtime and related costs, Centerra sought reimbursement from NASA for the arbitration award, which NASA denied.  NASA then moved to dismiss Centerra’s appeal on the ground that the Department of Labor has exclusive jurisdiction over labor standards requirements disputes under the Service Contract Act, in accordance with FAR 52.222-41(t). The ASBCA (Woodrow, A.J.) denied the motion to dismiss, agreeing with Centerra that the Service Contract Act did not apply to the underlying union’s grievance, which was based instead on an alleged violation of the Fair Labor Standards Act.  In any event, even if the SCA applied, the ASBCA still had jurisdiction because the appeal concerned NASA’s contractual obligation to reimburse Centerra for costs incurred pursuant to the arbitration award.  Although the underlying labor dispute formed part of the “factual predicate” for Centerra’s claim, the instant dispute did not concern labor standards requirements under the SCA and as such, the Department of Labor did not have jurisdiction.

1.    Defective Certification

For claims seeking more than $100,000, the contractor must certify that: (a) the claim is made in good faith; (b) the supporting data are accurate and complete to the best of the contractor’s knowledge and belief; (c) the amount requested accurately reflects the contract adjustment for which the contractor believes the Federal government is liable; and (d) the certifier is authorized to certify the claim on behalf of the contractor.  41 U.S.C. § 7103(b)(1); FAR 52.233-1.  A defective certification that is not correctable deprives the Boards of jurisdiction.
Development Alternatives, Inc. v. United States Agency for International Development, CBCA 5942 et al. (Sept. 27, 2018)
Development Alternatives, Inc. (“DAI”) appealed the deemed denial by the Agency for International Development (“USAID”) of claims submitted on behalf of its subcontractor for reimbursement of fines paid to the Afghanistan Government.  The CBCA (Somers, A.J.) dismissed DAI’s appeal for lack of jurisdiction for failure to properly certify the claims.  The CBCA analyzed whether the purported certification was correctable by first discussing whether the defect was only technical in nature.  The CBCA held that the defect was more than technical because it bore “no resemblance to a CDA certification.”  Specifically, instead of certifying that “the claim is made in good faith” as required by the CDA, DAI stated only that it “believes there is sound basis for these claims,” and none of the other prerequisites for proper certification were present.  The CBCA then discussed whether the purported certification was made with intentional, reckless, or negligent disregard for the CDA’s certification requirements, therefore making it not correctable.  The CBCA concluded that DAI’s submission was “reckless” because the contracting officer informed DAI on two separate occasions that its certifications did not comply with CDA requirements, thus putting DAI on notice that its certification had substantial defects prior to filing the appeal.  Finally, although DAI submitted a properly certified claim after initiating the instant appeals, the CBCA concluded that the later certification had no legal bearing on the CBCA’s jurisdiction over the case, nor could it cure a lack of jurisdiction.
WIT Assocs., Inc., ASBCA No. 61547 (Dec. 19, 2018)
The contractor certified its claim by identifying its parent company instead of the contractor.  On the government’s motion to dismiss for defective certification, the ASBCA (McIlmail, A.J.) held that such an error was correctable and did not deprive the ASBCA of jurisdiction.

2.    Requirement for a Sum Certain

For jurisdiction under the CDA, the claim must either assert a “sum certain” or be a nonmonetary claim seeking the interpretation of a contractual provision.
Hensel Phelps Constr. Co. ASBCA No. 61517 (July 18, 2018)
In a construction contract, the government revoked its prior acceptance of a portion of the contractor’s work, and issued a final decision directing the contractor to replace the allegedly defective work.  The final decision stated that the government intended to assert a demand for the costs to replace the work, “currently estimated at” $2.9 million, if the contractor did not comply.  The contractor appealed, seeking a declaratory judgment that it had already fulfilled its contractual obligations.  The ASBCA (McIlmail, A.J.) held that the final decision lacked a sum certain because it was contingent on future events, and merely “an effort to motivate [the contractor] to get back to work.”  However, the ASBCA held that it had jurisdiction over the contractor’s request for a non-monetary declaratory judgment.
Elkton UCCC, LLC v. Gen. Servs. Admin., CBCA 6158 (July 25, 2018)
Elkton UCCC, LCC (“Elkton”) leased space to the General Services Administration (“GSA”) for a Social Security Administration office.  In 2017, the parties began to dispute whether Elkton was fulfilling its duties as the landlord, and GSA began partially withholding rent.  In response to a letter from Elkton about the disagreement, the GSA contracting officer sent Elkton a letter itemizing Elkton’s lease violations and threatened to—but did not state that he actually did or would—deduct $21,000 from GSA’s rent payment.  The letter concluded that it was “the final decision of the Contracting Officer” and advised Elkton of its appeal rights.  The CBCA (Chadwick, A.J.) dismissed the appeal for lack of jurisdiction, noting that even when, as here, the contracting officer has issued a document styled as a final decision, it lacks CDA jurisdiction without a qualifying CDA claim.  Neither Elkton’s initial letter nor GSA’s response quantified a dollar amount then in dispute, thus lacking a sum certain necessary to satisfy the CDA’s requirements for a claim.  The CBCA further held that neither letter constituted a nonmonetary claim seeking interpretation of a contractual provision, because neither letter identified any specific provisions for interpretation.  Notably, the CBCA dismissed the appeal despite neither party asking it to do so.
ECC CENTCOM Constructors, LLC, ASBCA No. 60647 (Sept. 4, 2018)
ECC CENTCOM Constructors (“ECC”) appealed the default termination of its construction contract.  The ASBCA (O’Connell, A.J.) found that the government met its burden of proof that the default was justified because ECC did not perform in a timely manner.  The burden then shifted to ECC to show excusable delay.  However, the ASBCA held that it lacked jurisdiction to sustain any alleged excusable delays, because ECC never submitted a certified claim as required for CDA jurisdiction.  The ASBCA explained that “consideration of these delays would be contrary to the statutory purpose of encouraging resolution of disputes at the contracting officer level and beyond the limited waiver of sovereign immunity in the CDA, citing to M. Maropakis Carpentry, Inc. v. United States, 609 F.3d 1323 (Fed. Cir. 2010), as recently upheld by Securiforce International America, LLC v. United States, 879 F.3d 1354 (Fed. Cir. 2018).  The ASBCA also rejected ECC’s argument that the ASBCA had jurisdiction because the contracting officer had actual knowledge of the alleged delays based on ECC’s extension requests.  Actual knowledge is insufficient to confer jurisdiction, and in any event, the extension requests were “estimated” delays lacking a sum certain and were not certified as required by the CDA.
Northrop Grumman Sys. Corp. v. United States, 12-286C (Fed. Cl. Oct. 31, 2018)
In a case involving numerous claims and counterclaims in connection with a contract for the provision of mail-processing machines, the court (Bruggink, J.) dismissed one of the contractor’s claims and one of the government’s claims.  The court dismissed the contractor’s claim for reformation of the contract based on a cardinal change, because the claim lacked the requisite sum certain.  In so doing, the court rejected the contractor’s argument that its claim was nonmonetary and therefore required no sum certain.  The court held that the claim was principally a monetary claim, because the ultimate remedy to the contractor for the alleged cardinal change would be to grant contractual damages, explaining that parties “may not circumvent the requirement to state a sum certain in its claim by camouflaging a monetary claim as one seeking only declaratory relief.” The court also partially dismissed one of the government’s counterclaims that exceeded the scope of the contracting officer’s final decision.  The final decision had identified a number of spare parts that the contractor allegedly failed to provide.  The counterclaim, however, identified entirely different parts, quantities, and prices than what the final decision identified.  The court held that although the legal theories and type of relief requested were “identical,” the counterclaim went beyond a mere correction of specifics or adjustment to quantum; it would require the government to prove up an entirely different set of facts.  Thus, the court dismissed the counterclaim to the extent the same parts did not appear in the final decision.

3.    Premature Claims

The ASBCA and the CBCA each issued decisions declining to dismiss appeals in the face of government allegations that the appeals were premature.
Delta Indus., Inc., ASBCA No. 61670 (Dec. 17, 2018)
Delta Industries Inc. (“Delta”) filed a notice of appeal of a deemed denial of its claim only 20 days after submission of the claim to the contracting officer—well before any final decision was due under the CDA.  The government moved to dismiss the appeal for lack of jurisdiction, contending that Delta’s notice was premature.  The ASBCA (D’Alessandris, A.J.) disagreed, explaining that it can retain jurisdiction if, at the time it considers a motion to dismiss, no useful purpose would be served by dismissing an appeal and requiring an appellant to refile.  In this case, the ASBCA determined that dismissing the appeal for prematurity would be inefficient and “an elevation of form over substance.”  The ASBCA also rejected the government’s contention that the ASBCA lacked jurisdiction for the additional reason that the claim involved the withdrawal of a unilateral purchase order, because the contractor had sufficiently alleged the existence of a bilateral contract.  Accordingly, the ASBCA refused to dismiss the appeal for lack of jurisdiction.
Eagle Peak Rock & Paving, Inc. v. Dep’t of Transp., CBCA No. 6198 (Oct. 23, 2018)
At the time Eagle Peak Rock & Paving, Inc. (“Eagle Peak”) filed the instant appeal of the deemed denial of its claim for termination for convenience costs, Eagle Peak’s appeal of the termination for default of its contract was still pending.  The government therefore moved to dismiss the termination for convenience appeal, arguing that it was premature because the CBCA had not decided whether to convert the default termination into one for the convenience of the government.  The CBCA (Russel, A.J.) departed from ASBCA precedent and held that the termination for convenience claim (on the issue of quantum) may proceed concurrently with the termination for default claim (on the issue of entitlement).  The CBCA explained that neither its own rules nor the Federal Rules of Civil Procedure required dismissal in these circumstances, and that it would not dismiss an appeal solely for the purpose of judicial efficiency.  Rather, efficiency is better addressed through proper case management.

C.     Requirement for a Contracting Officer’s Final Decision

The tribunals that hear government contracts disputes dealt with two cases addressing the CDA’s requirement that a claim have been “the subject of a contracting officer’s final decision.”
Planate Mgmt. Grp., LLC v. United States, 139 Fed. Cl. 61 (2018)
Planate Management Group, LLC (“Planate”) brought action against United States, alleging that the Department of the Army Expeditionary Contracting Command breached a contract for Planate to provide professional support services throughout Afghanistan.  Planate alleged that the Army failed to reimburse it for the cost of arming its in-theater personnel in the face of increasing security threats to its personnel performing the contract.  The government moved to dismiss two counts for lack of subject-matter jurisdiction, arguing that the two counts were not first presented to the contracting officer for decision. For one count, Planate alleged that the government breached the implied duty of good faith and fair dealing.  The government argued that the count involved an “entirely distinct” legal theory than the constructive change and mutual mistake claims the contractor had presented to the contracting officer.  The court (Sweeney, J.) disagreed, finding that although Planate “did not specifically articulate a breach of the covenant of good faith and fair dealing in its certified claim, the factual recitations therein described the Army’s alleged failure to engage in reasonable contract administration.”  In a separate count, Planate alleged that the dramatically deteriorated security situation in Afghanistan amounted to a cardinal change to the contract. Although the claim before the contracting officer did not include the term “cardinal change,” the court determined that the issue was properly before the officer, as the contractor “discussed the change in risk posture; noted that, at the beginning of contract performance, the [government] advised plaintiff to arm its personnel; and described the increased costs it incurred to arm its personnel.”
Charles F. Day & Associates LLC, ASBCA Nos. 60211, 60212, 60213 (Nov. 29, 2018)  
Charles F. Day & Associates LLC (“CFD”) contracted to perform services for the Army in Iraq.  The personnel supplied by CFD performed work outside the scope of the written requirements of CFD’s contract in support of their customer, and later sought additional compensation for those efforts.  CFD submitted a Request for Equitable Adjustment delineating three separate requests for payment, which the Board characterized as “claims,”observing in a footnote that a request for equitable adjustment can be considered a claim under the CDA, regardless of its title, if it otherwise meets the requirements of a claim.  The contracting officer denied CFD’s claims, arguing that there had been no constructive change to the contract and that CFD thus had no entitlement to additional compensation. The government argued that the Board lacked jurisdiction to consider a portion of the case presented by CFD at the hearing, alleging that the basis of that claim (essentially a superior knowledge claim) was so different from that presented to the contracting officer that it should be dismissed.  The Board granted the government’s request to dismiss the additional issue raised at the hearing, noting that while the board is “relatively liberal in permitting appellants to present additional evidence and arguments not presented to the CO and to alter the legal bases for claims on the amount of damages,” “a claim on one matter does not support jurisdiction over an appeal on another” and “a claim must be specific enough and provide enough detail to permit the CO to enter into dialogue with the contractor.”  Although the Board agreed with CFD that the legal theory for the claim presented at trial was the same as in its claim—seeking recovery for out of scope work—the Board nevertheless found that the claim did not arise from the same underlying facts, and thus the factual basis for the claim presented at trial was not brought before the CO in CFD’s written claims.

D.    Jurisdictional Filing Deadlines

The CDA mandates that an appeal of a contracting officer’s final decision must be filed at the Boards of Contract Appeals within 90 days of the contractor’s receipt of the decision, or must be filed at the Court of Federal Claims within 12 months.  41 U.S.C. § 7104.  These deadlines are jurisdictional, and a number of Board decisions during the last half of 2018 serve as cautionary tales to would-be appellants.
Aerospace Facilities Grp., ASBCA No. 61026 (July 19, 2018)
The government terminated Aerospace Facilities Group (“AFG”)’s contract for cause, and AFG filed its notice of appeal at the ASBCA 91 days after receipt of the termination decision by email.  However, following its termination decision, the government engaged in numerous communications with AFG inviting the contractor to discuss proposals to resolve the termination, including the potential delivery of items under the contract that the government had purported to terminate.  The ASBCA (Shackleford, A.J.) denied the government’s motion to dismiss for lack of jurisdiction based on the alleged untimeliness of the notice of appeal (which the ASBCA also questioned sua sponte).  The ASBCA held that the government’s post-termination actions “created a cloud of uncertainty as to the status of the … termination.”  As such, the government led AFG to reasonably believe that it was reconsidering the termination decision, thereby vitiating the finality of the “final” decision.
Piedmont-Independence Square, LLC v. Gen. Servs. Admin., CBCA 5605 (Aug. 6, 2018)
Piedmont-Independence Square, LLC (“Piedmont”) filed an appeal arising from Piedmont’s claim for costs incurred in its work to refurbish space leased to the General Services Administration (“GSA”).  Piedmont had submitted an uncertified Request for Equitable Adjustment (“REA”) to the contracting officer in February 2015.  In response, the contracting officer issued a final decision in August 2016 determining that GSA owed Piedmont a portion of the amount requested in the REA, but offset that amount for costs for IT equipment that GSA alleged Piedmont was responsible to provide under the terms of the lease.  Instead of appealing the final decision, Piedmont asserted it was invalid because the underlying REA was not certified.  In October 2016, Piedmont submitted a certified claim that included the IT equipment costs offset by GSA in its August 2016 final decision.  Piedmont then appealed the deemed denial of its certified claim on January 18, 2017.  GSA sought summary relief arguing, inter alia, that the portion Piedmont’s appeal relating to the offset costs was filed more than 90 days after GSA’s August 2016 final decision.  The CBCA (Sullivan, A.J.) held that GSA’s August 2016 final decision triggered the 90 day statutory filing deadline, notwithstanding the fact that the decision was in response to Piedmont’s uncertified REA.  The CBCA explained that the contractor could not appeal the portion of the decision addressing the uncertified REA, but the offset amount was a Government claim asserted in a final decision with a sum certain that sufficiently notified Piedmont of its appeal rights.
Eur-Pac Corp., ASBCA Nos. 61647, 61648 (Nov. 13, 2018)
The contractor filed its notice of appeal of the government’s termination decision more than 90 days after receipt of the final decision.  The ASBCA (Wilson, A.J.) raised sua sponte the question of jurisdiction, and ultimately dismissed the appeal as untimely filed.  Although in certain limited circumstances, written correspondence to the contracting officer may satisfy the ASBCA’s notice requirement, those circumstances were not present here, because the contractor did not clearly express its intent to appeal the final decision in its emails to the contracting officer.  Moreover, the ASBCA noted that the contractor had numerous other appeals pending before the ASBCA, and therefore was familiar with ASBCA procedure.
Hof Constr., Inc. v. Gen. Servs. Admin., CBCA No. 6306 (Dec. 12, 2018)
The General Services Administration (“GSA”) terminated the contract for default in a contracting officer’s final decision, and HOF Construction, Inc. (“HOF”) filed its notice of appeal at the CBCA 11 months later.  HOF argued that its appeal was timely because the final decision failed to include the notice of appeal rights required by FAR 33.211(a)(4)(v).  Noting that government’s claim of termination for default was “imperfect” because it did not include the statement of appeal rights that FAR 33.211(a)(4)(v) says “shall” accompany a contracting officer’s decision on a claim, the CBCA (Chadwick, A.J.) held that where the notice of appeal rights in a contracting officer’s final decision is defective – but not completely lacking – the contractor must show detrimental reliance on the defective notice of appeal rights to preclude the start of the jurisdictional timeline to appeal the decision.  The CBCA identified conflicting precedent between two of its predecessor boards regarding whether a contractor is required to show detrimental reliance upon receipt of a defective notice of appeal rights.  Notably, the CBCA held, for the first time, how it would reconcile such conflicting precedent: “the panel will apply what it deems our better precedent and the panel decision will be the Board’s precedent on the issue.” The CBCA found that GSA’s communications were not unclear or misleading and that Hof could not show it reasonably relied on the defective notice to its detriment.  Thus, the CBCA ruled that Hof’s appeal was untimely.

E.    Contract Disputes Act Statute Of Limitations

Under the Contract Disputes Act, “[e]ach claim by a contractor against the Federal Government relating to a contract and each claim by the Federal Government against a contractor relating to a contract shall be submitted within 6 years after the accrual of the claim.”  41 U.S.C. § 7103(a)(4)(A).  Failure to meet the CDA’s six year statute of limitations is an affirmative defense, and, unlike the 90 day window to appeal a final decision at the appropriate board of contract appeals, it does not impact the Boards’ of jurisdiction over an appeal.  The CBCA and ASBCA each issued a notable decision discussing when a claim accrues.
United Liquid Gas Co. d/b/a United Pacific Energy, CBCA No. 5846 (July 12, 2018)
United Pacific Energy (“UPE”) had a multiple award schedule (“MAS”) contract with the General Services Administration (“GSA”) to provide propane gas at prices set forth in the schedule. The Fort Irwin Contracting Command (“Ft. Irwin”) issued four task orders against the MAS contract for propane gas during fiscal years 2011, 2012, 2013 and 2014, which UPE fulfilled.  In 2016, GSA determined that UPE overbilled and Ft. Irwin overpaid on the task orders.  UPE moved for partial summary relief with respect to $279,029.64 in overpayments that allegedly occurred prior to 2011, arguing that this portion of the claim was untimely under the CDA six year statute of limitations.  The CBCA granted partial summary relief, concluding that the claim began to accrue on January 5, 2011, when Ft. Irwin overpaid the first task order 1 invoice submitted for payment under the MAS contract.  The CBCA noted that, at that point in time, the terms of the MAS contract clearly put both Ft. Irwin and GSA on notice that UPE was overbilling the government, and all events that fixed the alleged liability, specifically, in this case, overpayments in a “sum certain,” were known or should have been known.  Furthermore, government claims continued accruing each time Ft. Irwin overpaid a task order 1 invoice under the MAS contract, because every time a payment was made on an invoice, the government knew or should have known of the overpayment and the “sum certain” it was overpaying.
DRS Global Enter. Sols., Inc., ASBCA No. 61368 (August 30, 2018)
The government sought repayment from DRS Global Enterprise Solutions, Inc. (“DRS”) for over $8.6 million, mostly for other direct costs that the administrative contracting officer determined to be unallowable based on the alleged lack of supporting documentation, including the lack of an invoice for the costs, proof of payment, and a signed purchase order.  DRS moved for summary judgment, arguing that the government’s claim was untimely because it accrued more than six years before the September 11, 2017 final decision.  DRS identified three alternative claim accrual dates. First, DRS argued that for direct costs, the government’s claim accrued no later than December 15, 2006, when it paid the last of the invoices at issue.  Second, for indirect costs, DRS argued that the government’s claim accrued when DRS submitted its annual incurred cost proposals (“ICPs”).  Third, DRS argued that the government’s claim accrued no later than July 17, 2009, when the Defense Contract Audit Agency (“DCAA”) conducted the entrance conference for its audit of DRS’ ICPs.  The government argued that interim vouchers by their very nature do not contain supporting documentation, and that there was no way the government could have known that DRS could not substantiate the amounts billed until it failed to provide DCAA with requested supporting documentation in October 2013. The Board denied DRS’s motion, finding that DRS’s contention that the government should have known of its claim in 2006 was undermined by letters DRS wrote to DCAA and DCMA in 2013 and 2014, and that generally, DRS’s sweeping statements with respect to the level of knowledge possessed by the government in 2006 were not supported by the current record.  For those reasons, the Board decided the best course of action was to allow further development of the record to determine when the government should reasonably have known of its claim.

F.    Consolidation of Appeals

Collecto, Inc. dba EOS CCA and Transworld Systems Inc., CBCA Nos. 6049, 6001 (July 26, 2018)
In Collectco Inc., the Department of Education filed motions seeking to consolidate the appeal docketed as Transworld Sys. Inc. v. Dep’t of Ed., CBCA 6049, with the appeal docketed as Collecto, Inc. d/b/a EOS CCA v. Dep’t of Ed., CBCA 6001, asserting that the task orders underlying both appeals were essentially the same and that the issues to be decided in the two appeals were the same.  The government had filed claims with both appellants seeking reimbursement of allegedly overpaid amounts on certain invoices under contracts to perform student loan debt collection services as a result of a new debt management collection system that disrupted the invoicing process. The CBCA denied without prejudice the Agency’s request to consolidate the two appeals of the Agency’s claim for reimbursement of overpaid invoices, concluding that the matters did not constitute “complex litigation” warranting such consolidation.  Complex litigation, as it is traditionally defined, generally involves multiple related cases, extensive pretrial activity, extended trial times, difficult or novel issues, or post-judgment judicial supervision.  The Board noted that consolidation might be warranted were there a multitude of vendors with identical task orders challenging the same type of refund demand.  Here, however, the Board was presented with only two rather than multiple appellants, and the agency had not indicated that there were likely to be any other related appeals.  Further, only minimal discovery was anticipated and the Board found it possible that the issues could be resolved through dispositive motions rather than a hearing on the merits.  The Board noted, however, that the Agency could renew its motion if the cases could not be resolved through dispositive motions.

IV.    DEFAULT TERMINATIONS

The ASBCA issued three noteworthy decisions during the second half of 2018 arising from default terminations, in each case upholding the termination for default.
Coastal Environmental Grp., Inc., ASBCA No. 60410 (July 17, 2018)
The parties contracted for Coastal Environmental Group, Inc. (“Coastal”) to make repairs to the Security Boat Marina at Naval Weapons Station Earle, Leonardo, New Jersey.  With 50 days remaining before the contract completion deadline, the contracting officer terminated the contract for default, citing “continued lack of progress thereby endangering completion. . . ”  The Board declined to convert the default termination into a terminate for convenience because, despite evidence Coastal presented that it had a plan to complete the work on time, because there was no evidence that the government was actually aware of any such plan at the time of the termination.  As such, it was reasonable for the government to conclude that there was no reasonable likelihood that Coastal would complete the work on time.  The Board also rejected Coastal’s claim for excusable delay because it had released that claim in a bilateral modification which stated that the modification constituted an “accord an satisfaction…for delays and disruptions arising out of, or incidental to, the work as herein revised.”
LKJ Crabbe Inc., ASBCA No. 60331 (Oct. 29, 2018)
This appeal arose out of a commercial item contract between LKJ Crabbe Inc. (“LKJ”) and the Army Mission and Installation Contracting Command (“Army”) for custodial services at buildings located in two different locations at Ft. Polk, Louisiana.  LKJ appealed the Army’s termination for cause, contending that the Army’s termination was unjustified and that the Army breached the contract by failing to reform the contract after learning of an alleged mistake in LKJ’s bid.  LKJ also alleged that the Army breached the contract by violating its duty of good faith and fair dealing. The ASBCA (Woodrow, A.J.) denied the appeal, finding that LKJ’s failure to provide reasonable assurances of its ability to perform in response to the cure notice supported the Army’s decision to terminate for cause.  Instead, LKJ indicated that it “had failed to appreciate the level of service it would be required to perform” under the contract, and that it was suffering losses that it could absorb only through November.  The ASBCA found that this was an unequivocal statement that LKJ could not perform past November.  Further, the ASBCA concluded that LKJ’s statements were tantamount to an anticipatory repudiation of the contract, which justified the termination for cause on that basis as well.  Finally, the testimony and evidence at the hearing demonstrated that LKJ’s losses on the contract fundamentally were the result of faulty pricing throughout the contract.
Ballistic Recovery Systems, Inc., ASBCA No. 61333 (Dec. 13, 2018)
In 2016, Ballistic Recovery Systems, Inc. (“BRSI”) entered into a fixed-price contract for the supply of parachute deployment sleeves.  Pursuant to the contract, BRSI was supposed to deliver two test units for inspection, as part of the first article test (“FAT”).  Prior to the award of the contract, BRSI sought a FAT waiver based on a prior contract for the same item, however, the waiver was denied because no inspections had been performed on BRSI’s deployment sleeves for almost two years.  After delivery of the two test units, the government found numerous major deficiencies and recommended disapproval.  After BRSI submitted two subsequent test units, the government found further major deficiencies, and issued a show cause notice for BRSI to state any excusable causes of defects.  Rather than address any of the major deficiencies in the test units, BRSI referred to its earlier contract and argued that its units were “production standard.”  In 2017, the government terminated the contract for default as a result of the multiple FAT disapprovals. Upon the government’s motion for summary judgment, the ASBCA (Paul, A.J.) determined that the government met its initial burden of proving that the termination was reasonable and justified, and evidence that the contractor did not attempt to correct major and critical defects constituted a reasonable basis for default termination.  The ASBCA reasoned that the government had provided ample evidence of the major and critical failures of BRSI’s test units, and had submitted declarations in support thereof, thus, the lack of any substantive attempt by BRSI to address the faulty units constituted a reasonable basis for default termination.  Accordingly, the ASBCA denied BRSI’s appeal.

V.    CONTRACT INTERPRETATION

A number of noteworthy decisions from the second half of 2018 articulate broadly applicable contract interpretation principles that should be considered by government contractors.
First Kuwaiti Trading & Contracting W.L.L. v. Dep’t of State, CBCA Nos. 3506, 6167 (Dec. 3, 2018)
First Kuwaiti Trading & Contracting W.L.L. (“FKTC”) contracted with the Department of State (“DOS”) to build an embassy compound in Baghdad.  First Kuwaiti claimed that it was underpaid for costs associated with building in a war zone, and asserted 200 claims totaling $270 million against DOS.  DOS moved for summary judgment on thirteen of FKTC’s cost claims, challenging FKTC’s reliance upon the War Risks clause, the superior knowledge doctrine, the Changes clause, and the implied duty of good faith and fair dealing as the basis for these claims The CBCA (Sullivan, A.J.) rejected FKTC’s invocation of the War Risks clause as to each of the thirteen claims, applying various canons of contractual interpretation to find that the contract did not contemplate that DOS would compensate FKTC for all losses attributable to wartime conditions.  The CBCA granted DOS’s motion as to seven counts based on the superior knowledge doctrine, finding that DOS did not have “specific and vital” information that First Kuwaiti lacked in negotiating the contract to support its superior knowledge claim.  The CBCA denied DOS’s motion on six other counts where FKTC sought to recover costs in reliance upon the Changes clause, finding there were disputed issues of fact regarding responsibility over security and that DOS did not provide sufficient evidence to support a sovereign acts defense.  To successfully assert a sovereign acts defense, the government must prove that its action is “public and general,” meaning that its action has an impact on public contracts that is “merely incidental to the accomplishment of a broader governmental objective.”  The CBCA found that the government failed to provide specific evidence of the “public and general” nature of the government’s actions over objections by DOS that such evidence was unavailable because the Army kept poor records during the Iraq War.
OMNIPLEX World Services Corp. v. Dep’t of Homeland Security, CBCA No. 5971 (Nov. 27, 2018)
OMNIPLEX World Services Corporation (“OMNIPLEX”) contracted with the Department of Homeland Security to provide guard services.  OMNIPLEX’s contract contained clauses permitting the government to take deductions from payment for instances where the contractor fails to satisfy contract requirements, and a dispute arose concerning the applicability of the deduction provisions.  OMNIPLEX argued that the deduction clauses were ambiguous.  The CBCA (Vergilio, A.J.) rejected OMNIPLEX’s arguments, finding that (1) the provisions were not ambiguous and (2) even if the provisions were ambiguous, the ambiguity was patent.  Patent ambiguity occurs when “facially inconsistent provisions place a reasonable bidder or offeror on notice and prompt it to rectify the inconsistency by inquiry,” whereas latent ambiguity occurs when “the ambiguity is neither glaring nor substantial nor obvious.”  Though not explicitly stated in the CBCA decision, latent ambiguities are construed against the drafter of the agreement, whereas patent ambiguities are construed against the party later attempting to assert the ambiguity.  See, e.g.,  K-Con, Inc. v. Secretary of the Army, No. 2017- 2254 (Fed. Cir. Nov. 5, 2018).  Accordingly, the CBCA denied the appeal.
Parsons Evergreene, LLC, ASBCA No. 61784 (Sept. 5, 2018)
In an unusual five-judge decision, the ASBCA held that Parsons Evergreene, LLC (“PE”) was not entitled to compensation resulting from the government’s failure to engage in a “prompt” review of Davis-Bacon Act payrolls, which PE argued was in violation of FAR 22.406‑1 (which describes the government’s policy of “prompt” enforcement of labor standards).  The decision explained in a footnote that because the two judges who reviewed Judge Clarke’s original opinion in ASBCA No. 58634 (discussed in Sections II.B. and III.B., supra) came to a different conclusion, the remaining two judges in Judge Clarke’s division were asked to consider it, consistent with ASBCA practice and procedure.  The result was a four-to-one split, with Judge Clarke issuing a dissenting opinion.  For reasons of clarity and judicial efficiency, the ASBCA issued a separate opinion under a new appeal number.  The ASBCA accepted PE’s position that the Air Force’s delay in commencing payroll reviews until 2008, when the contract was almost over, caused additional expense to PE.  However, citing Freightliner Corp. v. Caldera, 225 F.3d 1361, 1365 (Fed.  Cir. 2000), the ASBCA stated that to have a cause of action against the government for violation of a regulation, a contractor must prove that the regulation exists for the benefit of the contractor.  The ASBCA thus concluded that FAR 22.406-1 does not provide a remedy to a contractor for the government’s untimely investigation of complaints relating to labor standards, and therefore denied the appeal. Judge Clarke’s dissenting opinion reasoned that because FAR 22.406-1 requires that if a problem is found during payroll reviews, on-site inspections or employee interviews, there will be “prompt initiation of corrective action,” “Prompt investigation and disposition of complaints,” and “Prompt submission of all reports required by this subpart,” the payroll reviews themselves must also be prompt, or the entire regulatory scheme becomes meaningless.

A.    Course of Dealing

Two ASBCA cases addressed the circumstances under which a prior course of dealing between the government and a contractor can give rise to an implied contractual right.
ECC Int’l, LLC, ASBCA No. 60484 (Nov. 16, 2018)
ECC International, LLC (“ECC”) entered into a contract with the U.S. Army Corps of Engineers (“USACE”) for the construction of a compound expansion in Afghanistan.  During performance, an access route to the construction site referred to as “Friendship Gate” was closed by the U.S. military due to a security incident, which resulted in delay and additional costs to ECC.  ECC sought to recover these costs, arguing that continued access through Friendship Gate was an implied warranty in the contract, the closure of which was a constructive change. The ASBCA (Woodrow, A.J.) denied the appeal and rejected ECC’s argument that a prior course of dealing between ECC and various Department of Defense agencies created an implied contractual right to access through Friendship Gate in its contract with the USACE.  The ASBCA explained that prior course of dealing can be established where there is justifiable reliance and proof of the same contracting agency, the same contractor, and essentially the same contract provisions over an extended period of time.  ECC could not establish these elements because its previous contracts with the USACE were performed concurrently with the subject contract, beginning only months before.  Moreover, the ASBCA found it notable that a prior course of dealing could not “change the fact that, in a war, security considerations could change over time.”
TranLogistics LLC, ASBCA No. 61574 (Aug. 29, 2018)
TranLogistics LLC had a contract with the Marine Corps to move ammunition lockers to locations in Honduras, Guatemala, Belize, and El Salvador.  TransLogistics claimed extra costs caused by delayed customs documentation.  The ASBCA (Kinner, A.J.), in a succinct decision, agreed with TransLogistics’ interpretation of the contract that the government was obligated to provide the customs documentation.  Although the Marines argued in briefing that the contract required TransLogistics to provide a customs broker, the parties’ course of dealing, both in the subject contract and in prior contracts, was consistent with TransLogistics’ interpretation.  The ASBCA found that the delay was therefore excusable, but only partially granted the appeal because the contractor did not offer direct proof of the amounts it incurred from the delay.

B.    Release of Claims

Penna Grp., LLC, CBCA No. 6155 (Sept. 27, 2018)            
Penna Group, LLC sought $146,048.85 for costs incurred after performing under an expanded scope of work for a roofing contract with the Federal Bureau of Prisons.  The contracting officer denied the claim, relying upon a release of claims signed by the contractor’s president, which released the United States from any and all claims arising under the contract without exception.  The agency moved for summary judgment, contending that the contractor could not pursue the claim or prevail given the release.  The contractor asserted that the release was of no force or effect because it was completed by one without the actual or apparent authority to do so, and that material facts are in dispute so as to preclude summary judgment.  The contractor further argued that the release can be invalidated because of economic duress and because of mutual mistake. The CBCA rejected the contractor’s arguments and denied the claim, concluding that the release was enforceable.  Here, the release bore the signature of the contractor’s president.  While the individual who completed the release on behalf of the contractor was not the president, the president was aware that said individual had his signature stamp.  Thus, he had endowed her with actual or apparent authority, or both, to execute the release with his signature.
Expresser Transport Corp., ASBCA No. 61464 (Dec. 7, 2018)
In 1983, Expresser Transport Corporation (“Expresser”) and the United State entered into a time charter contract for a vessel to support the prepositioning of military equipment and supplies.  The contract allowed the government to place civilian contractors aboard the vessel, and also indemnified Expresser for liability arising from the carriage of such civilian contractors.  However, the contract also included a “waiver of claims” clause that stated that “all claims whatsoever for moneys due the Contractor” must be submitted within two years of the date of “redelivery of the Vessel[.]”  Upon termination for convenience of the charter contract on July 15, 2009, the parties considered the vessel “redelivered” on that date.  In 2007, a civilian contractor aboard suffered paraplegic injuries, which led to a settlement with Expresser of $2.5 million in 2011.  In 2017, Expresser submitted a claim seeking indemnity of the settlement amount.  The government denied the claim on the basis that the waiver of claims clause was unambiguous and that the claim was not submitted within two years of the redelivery of the vessel.  Expresser countered that the clause produced an unacceptable result, in that there could be claims that arose more than two years after redelivery and a cognizable claim cannot accrue until a sum certain is known or should have been known. The ASBCA (Melnick, A.J.) considered the charter contract as a whole and determined that the government’s indemnity obligations were expressly and unambiguously limited by the waiver of claims clause.  Simply because Expresser found the clause unacceptable with the benefit of hindsight did not release Expresser from the agreement it entered into.  The ASBCA likened the clause to a statute of repose, which cuts off a cause of action after a certain amount of time, irrespective of the time of accrual.
United Facility Services Corporation dba Eastco Building Services, CBCA No. 5272 (July 7, 2018)           
United Facility Services Corporation dba Eastco Building Services (“Eastco”) was awarded a task order under a GSA Schedule contract for operations and maintenance services at three federal buildings.  Eastco alleged that it found thousands of additional inventory pieces to be maintained that were not captured on the task order solicitation’s inventory list, and submitted to GSA a certified claim seeking a contract adjustment for servicing the additional equipment.  GSA denied the claim, and Eastco appealed.  On cross-motions for summary judgment, GSA claimed it was not responsible for any unanticipated performance costs incurred by Eastco because two provisions in the contract – a clause requiring the contractor to make a pre-bid site visit and inspection, and a disclaimer indicating that the list may contain some errors – placed upon the contractor the risk of any defects in the equipment list.  Eastco argued that GSA’s inclusion of the equipment list in the solicitation constituted a warranty regarding the facility’s equipment quantities that overrode the contract’s disclaimer and pre-bid site visit obligations. The CBCA (Lester, A.J.) described the factors used to determine whether and to what extent a tribunal will enforce an exculpatory disclaimer, noting (1) that exculpatory clauses are narrowly construed because they are drafted by the government and shift to the contractor risks that would otherwise be borne by the government; (2) the clearer the disclaimer language and the more narrowly tailored it is, the more likely it is to be held effective and enforceable as written; (3) exculpatory language disclaiming representations about latent conditions that a contractor would be unable to detect through a reasonable site inspection are less likely to be enforced; and (4) disclaimers are more likely to be found ineffective if the government possesses the only information by which the contractor might have learned the truth, and the government denies the contractor access to the data prior to entering into the contract.  Applying these criteria to the facts at hand, the CBCA denied the cross-motions for summary judgment based on the undeveloped record on factual issues.

C.    Rights in Commercial and Noncommercial Computer Software & Rights in Technical Data

CiyaSoft Corp., ASBCA Nos. 59519, 59913 (June 27, 2018)
The ASBCA (McNulty, A.J.) held that the government breached the contract by violating the commercial “shrinkwrap” and “clickwrap” license agreements that were shipped with the contractor’s software, specifically by permitting installation of a copy of the software onto more than one computer, and failing to provide the contractor with a list of registered users.  Importantly, the ASBCA expressly held that the “government can be bound by the terms of a commercial software license it has neither negotiated nor seen prior to the receipt of the software, so long as the terms are consistent with those customarily provided by the vendor to other purchasers and do not otherwise violate federal law.”  In addition, much like the implied duty of good faith and fair dealing, with respect to commercial software licenses, “an implied duty exists that the licensee will take reasonable measures to protect the software, to keep it from being copied indiscriminately, which obviously could have a deleterious effect on the ultimate value of the software to the licensor.”
The Boeing Co., ASBCA No. 60373 (July 17, 2018)
The ASBCA (D’Alessandris, A.J.) held that software developed with costs charged to technology investment agreements (“TIAs”) pursuant to 10 U.S.C.A. § 2358 constitutes software developed “exclusively at private expense” as it is defined in Defense Federal Acquisition Regulation Supplement (“DFARS”) clause 252.227-7014, Rights in Noncommercial Computer Software and Noncommercial Computer Software Documentation.  The ASBCA also held that the TIAs at issue did not make a blanket grant of government purpose rights in nondeliverable software developed with costs charged to the TIAs.  The dispute arose under a low-rate initial production (“LRIP”) contract, after Boeing delivered software marked with restrictive rights and asserted that the software had been developed exclusively at private expense pursuant to the TIAs.  The government challenged Boeing’s assertion of restricted rights in the software, and asserted that it possessed government purpose rights because the software was developed with mixed funding.  The ASBCA found that a TIA is a cooperative agreement, and not a “contract” as defined in FAR 2.101.  Accordingly, to the extent that the software was funded by the TIAs, the costs were not allocated to a government contract and satisfy the definition of “developed exclusively at private expense” under DFARS 252.227-7014.  For the same reason, the ASBCA found that the expenditures do not satisfy the definition of “developed with mixed funding” because the costs charged to the TIAs were not charged directly to a government contract.
The Boeing Co., ASBCA Nos. 61387, 61388 (Nov. 28, 2018)
The ASBCA (O’Connell, A.J.) denied Boeing’s motion for summary judgment seeking the ASBCA’s interpretation as to whether the contracts at issue allowed Boeing to place certain marking legends on technical data, or whether the only authorized legends for marking technical data under the contracts were those found in DFARS 252.227-7013(f).  The Air Force contracting officer had concluded that because the legends used by Boeing to mark its data did not conform with DFARS 252.227-7013(f) that Boeing must remove them at its own expense and re-submit the data.  Boeing argued that the DFARS clauses, as interpreted by the Air Force, failed to protect its intellectual property rights, whereas the Air Force claimed it would be harmed by use of Boeing’s non-DFARS proposed legends. In denying Boeing’s motion, the ASBCA agreed with the government’s interpretation of DFARS 252.227-7013(f), finding that the legends authorized by that clause were the only permissible legends for limiting data rights under the contract.  However, the ASBCA also noted that the issue of whether those clauses adequately protect Boeing’s property rights could not be resolved based on the record developed to date.  Accordingly, the Board directed the parties to submit a joint status report proposing further proceedings.
CANVS Corp., ASBCA Nos. 57784, 57987 (Sept. 6, 2018)
CANVS Corporation (“CANVS”) appealed the denial of its claim for $100 million asserting breach of contract for the unauthorized disclosure of allegedly proprietary information regarding night vision color goggles.  CANVS had contracts under the Small Business Innovation Research (“SBIR”) program to develop and deliver color night vision technology, and alleged that the government displayed its technical data containing its proprietary information at industry conferences.  CANVS had delivered the technical data to the government under the SBIR contracts, but the parties disputed the rights conferred upon the government under DFARS 252.227-7018, including whether CANVS’s restrictive markings conformed and whether the data was first generated under the contract.  The ASBCA (Peacock, A.J.) declined to decide those issues, however, because even if the government did not comply with 252.227-7018 in disclosing its data, ultimately CANVS did not establish that it suffered any harm—much less $100 million in harm—caused by the government’s disclosure.  The fact that CANVS did not receive a follow-on production contract is insufficient, particularly when CANVS did not show that any competitors had produced a night-vision goggle using its technology, and when CANVS took no steps to mitigate any potential damages.  The ASBCA also held that CANVS did not demonstrate that the disclosed information was proprietary in any event; the disclosure did not enable a “a person of ordinary skill in the art to assemble an exact replica” of the goggle, and CANVS had previously voluntarily disclosed the information and thus lost any protectable interest.

VI.    COMMON LAW PRINCIPLES

The boards of contract appeals and Court of Federal Claims addressed a number of issues during the second half of 2018 arising out of the body of federal common law that has developed in the context of government contracts.
Pros Cleaners, CBCA No. 6077 (Aug. 30, 2018)
The CBCA (Sheridan, A.J.) considered whether an indefinite delivery, indefinite quantity (“IDIQ”) contract that does not set forth a minimum quantity is invalid for lack of consideration.  Pros Cleaners, sought damages totaling $750,000 on the basis that the Federal Emergency Management Agency (“FEMA”) breached its IDIQ contract.  FEMA moved for summary relief, asserting that its agreement with Pros Cleaners did not constitute a valid ID/IQ contract.  Pros Cleaners’ contract differed from the solicitation, which stated it was an RFP for a five-year IDIQ contract, in three aspects: it omitted the indefinite quantity clause; it did not state that it was an IDIQ contract; and it defined the period of performance as one “base year + four (4) option years.”  Further, although, the contract stated the value was not to exceed $150,000 and the contract contained a schedule establishing the unit price for labor at $25 per hour, it did not list a minimum quantity of labor.  The CBCA granted the Agency’s motion and denied the appeal finding that where, as here, a contract does not set forth a minimum quantity, it is defective and invalid for lack of consideration.

A.    Christian Doctrine

Under the Christian doctrine, a mandatory contract clause that expresses a significant or deeply ingrained strand of procurement policy is considered to be included in a contract by operation of law.  G.L. Christian & Assocs. v. United States, 312 F.2d 418 (Ct. Cl. 1963).
K-Con, Inc. v. Secretary of the Army, 908 F.3d 719 (Fed. Cir. 2018)
The dispute in this case arose from two contracts for pre-engineered metal buildings.  K-Con, Inc. (“K-Con”) claimed additional costs it said were caused by the Army’s two-year delay in imposing performance and payment bond requirements in FAR 52.228-15 that were not part of the original contracts.  The ASBCA held that bonding requirements were included in the contracts by operation of law at the time they were awarded, pursuant to the Christian doctrine.  The Federal Circuit (Stoll, J.) affirmed. The Federal Circuit first found that there was a patent ambiguity in the contracts because they were awarded as commercial-item acquisitions, but plainly required construction.  Because there was a patent ambiguity, K-Con was required to seek clarification from the contracting officer before award, which it failed to do.  Accordingly, the Federal Circuit concluded that K-Con could not now argue that the contracts should be for commercial items.  The Federal Circuit further held that FAR 52.228-15 satisfied both criteria necessary for the Christian doctrine to apply: (1) the clause is mandatory, and (2) it represents a deeply ingrained strand of public policy.  Bonding requirements, the court observed, which are meant to ensure a project is completed and that subcontractors and suppliers are paid, are a standard part of federal construction contracts under the 1935 Miller Act.  Because they are both mandatory and a “deeply ingrained strand of public procurement policy,” the court found they satisfy the Christian doctrine.  Therefore, because the clause was incorporated in the contracts at the time of award, there was no basis for K-Con to recover cost increases resulting from the two-year delay in obtaining the bonds.

B.    Good Faith & Fair Dealing

North American Landscaping, Construction and Dredge, Co., Inc., ASBCA Nos. 60235 et al. (Aug. 9, 2018)
North American Landscaping, Construction and Dredge, Co., Inc. (“NALCO”) contracted with the U.S. Army Corps of Engineers (COE) for maintenance dredging of the Scarborough River. NALCO filed a claim for the unpaid contract balance, unabsorbed overhead, differing site conditions, and a time extension, most of which the ASBCA (Clarke, A.J.) sustained.  Most notably, the ASBCA found that the COE breached the implied duty of good faith, fair dealing and noninterference by: abusing its discretion to invoke DFARS 252.236-7004(b), which authorizes the contracting officer to require the contractor to furnish mobilization cost data; improperly denying NALCO funds that the COE knew it needed to perform; insisting on a more expensive dredge at the same price; maintaining a “disturbing attitude” toward NALCO, including mocking its legitimate concerns; and coercing NALCO into signing a “take it or leave it” modification by threatening to terminate for default if it was not signed.  The ASBCA observed that, “[a]t every point where an important decision had to be made, the COE chose to protect itself rather than act to successfully complete the contract or redress NALCO’s legitimate claims.”  In addition, the ASBCA held that the release of claims was unenforceable because NALCO signed it under coercion, because the COE threatened to terminate the contractor for default, without a good faith belief that the contractor was in default. Administrative Judge Prouty, joined by Administrative Judge Shackleford, disagreed that the COE abused its discretion and that the COE breached its duty of good faith, but concurred in the result because such findings were not necessary to award damages to NALCO (which were based on finding a constructive change).  However, the concurrence noted that it found “the government’s general behavior throughout the award and performance of the contract to be abhorrent.”

C.    Sovereign Acts Doctrine

Another important common law limitation on a contractor’s ability to obtain damages from the government is the sovereign acts doctrine, which insulates the government from liability for acts taken in its sovereign (not contractual) capacity.
ANHAM FZCO, LLC, ASBCA No. 58999 (Nov. 13, 2018)
ANHAM FZCO, LLC (“Anham”) had a contract with the Defense Logistics Agency – Troop Support for the supply and delivery of food and other items to military customers in Kuwait, Iraq and Jordan.  During performance of the contract, the government directed ANHAM to alter its delivery operations from Kuwait to Iraq by utilizing a certain commercial entry point instead of the contractually-required U.S. military controlled crossing, known as the K-Crossing.  ANHAM subsequently submitted a claim for the resulting increased costs, which the government denied. The ASBCA (Woodrow, A.J.) rejected the government’s argument that the closure of the K-Crossing was a sovereign act that insulated it from contractual liability.  The ASBCA held that while the closing of the crossing was a sovereign act, two exceptions to the defense applied here, because:  (1) the contracting officer issued instructions or orders to implement the sovereign act which exceeded contract requirements; and (2) the government expressly or impliedly agreed to pay the contractor’s losses resulting from the sovereign act.  In making that determination, the board found that the government had ordered appellant to develop a transition plan to accommodate the new delivery method, and had also expressly agreed to compensate appellant for the additional costs.  To support this, the board further found that the government was aware of the costs associated with changing the border crossing location and was open and willing to modify the contract to address the costs.  Further, the government continued to be involved directly in approving the operational changes. 

D.    Accord & Satisfaction

Ruby Emerald Constr. Co., ASBCA No. 61096 (Nov. 6, 2018)
The Army and Ruby Emerald Construction Company (“Ruby”) entered into an arrangement for the purchase of crushed gravel.  The Army contended that there was never a contract because it cancelled the purchase order prior to acceptance by Ruby, notwithstanding the fact that the Army issued a notice to proceed, and the parties had executed a bilateral modification.  The Army also contended that if there were a contract, the bilateral modification cancelled the contract at no cost to the Army, therefore, summary judgment should be granted in favor of the Army. The ASBCA (Woodrow, A.J.) could not determine whether a contract existed due to contradictory and incomplete aspects of the record and denied summary judgment on this ground.  However, the ASBCA granted summary judgment based on accord and satisfaction, which operates to discharge a claim when some performance other than that which was claimed is accepted as full satisfaction of the claim.  To establish this, the government must show (1) proper subject matter; (2) competent parties; (3) consideration; and (4) a meeting of the minds of the parties.  The ASBCA held that the Army established all four elements.  In particular, there was sufficient consideration because the modification of the contract cancelled it at no cost to the Army, and Ruby in turn would not be required to perform.  The ASBCA also held that there was a meeting of the minds because Ruby sought termination of the contract, then signed the modification which explicitly provided for cancellation of the contract at no cost to the Army, confirmed that Ruby had not incurred any costs, and did not reserve any rights for Ruby to assert a claim.

VII.    DAMAGES

Avant Assessment, LLC v. Secretary of the Army, No. 2018-1235, (Fed. Cir. Nov. 9, 2018)
Avant appealed from a decision of the ASBCA, challenging the Board’s decision to exclude evidence Avant offered regarding test items for which it argues it should have been paid under a contract with the Department of Army to deliver language testing materials to the Defense Language Institute.  The contract required that the test items be of “high quality,” and authorized the Army to reject unacceptable items.  The solicitation explained that the contract would carry a “potentially high rejection rate,” and noted that the historical rejection rate was about 33 percent.  Avant therefore built a 30 percent rejection rate into its bid. Avant claimed that the Army improperly rejected many of the test items based on “subjective and indefinite specifications.”  Avant sought compensation for all “test items rejected in excess of 30 percent . . . [,]”  demanding an equitable adjustment of approximately $1.9 million for the alleged breach.  Following the ASBCA’s denial, Avant appealed to the Federal Circuit. The Federal Circuit (Bryson, J.) rejected Avant’s contention that it was entitled to damages for all rejections over the 30 percent figure in the solicitation.  The court explained that that figure was an estimate and it not a promise by the Army to not exceed a certain rejection rate or to reimburse the contractor for items rejected over that rate.  Instead of seeking a blanket 30 percent recovery, Avant had to actually establish which items were improperly rejected, then the burden would shift to the government to show that the rejected items were nonconforming.  In so holding, the court also upheld the ASBCA’s exclusion of Avant’s untimely submission of approximately 40,000 pages of evidence relating to the rejected items.  The court suggested that had Avant timely submitted the evidence, it could have provided expert testimony; attempted to demonstrate breach by presenting a sample of the rejected items; or Avant could have submitted a summary of the documents under Federal Rule of Evidence 1006.  Having failed to show actual breach, Avant could not rely on an estimate in the solicitation.

VIII.    OTHER CASES OF NOTE

Palantir USG Inc. v. United States, 904 F.3d 980 (Fed. Cir. 2018)
In our Mid-Year Update, we highlighted Palantir as a pending bid protest case to watch for the wide reaching impacts the decision would have on the procurement community and the deference afforded the government’s market research in developing its solicitation requirements.  Palantir argued that the Army violated the Federal Acquisition Streamlining Act (“FASA”) when it decided to develop a new data-management platform (“DCGS-A2”) from scratch without undertaking market research to determine whether its needs could be met by a commercially available product.  In September, Gibson Dunn secured a victory for Palantir in the case when the Federal Circuit (Stoll, J.) rejected the Army’s argument that the claims court should have deferred to its original choice to go with a custom solution for the disputed data platform. FASA requires that federal agencies, to the maximum extent practicable, procure commercially available technology to meet their needs.  Noting that that FASA achieves its preference for commercial items in part through preliminary market research, the court concluded that the Army’s procurement actions in this case were arbitrary and capricious and in violation of FASA.  Key to that holding was the fact that the Army was on notice of both the desirability of hybrid options that used commercial solutions and that Palantir claimed to have a commercial item that could meet or be modified to meet the Army’s needs.  The decision should cause federal agencies to take their market research obligations under FASA more seriously. The court also rejected the government’s argument that the trial court wrongly discarded the presumption of regularity in determining that the Army’s actions were arbitrary and capricious.  The court stressed that under the presumption of regularity, the agency is not required to provide an explanation unless that presumption has been rebutted by record evidence suggesting that the agency decision was arbitrary and capricious, which in this case had been amply satisfied.  In affirming the judgment of the lower court, the court stated that only after the Army complied with the requirements of FASA should it proceed with awarding a contract to meet its DCGS-A2 requirement.
PDS Consultants v. United States, Nos. 2017-2379, 2017-2512 (Fed. Cir. Oct. 17, 2018)
In our 2016 Mid-Year Update, we reported on the Supreme Court’s ruling in  Kingdomware Techs. v. United States, 136 S. Ct. 1969 (2016), which held that the Veterans Benefits, Health Care, and Information Technology Act of 2006 unambiguously requires the Department of Veteran’s Affairs (“VA”) to apply the so-called Rule of Two – a provision specifying that, “for purposes of meeting [veteran-owned business participation] goals,” the VA must restrict bidding to such businesses when there is a “reasonable expectation that two or more” veteran-owned businesses will make reasonable bids, with limited exceptions.  In PDS, the Federal Circuit affirmed an earlier Court of Federal Claims’ decision, applying Kingdomware and holding that the more specific nature of the Rule of Two overrides the more general preference to provide employment opportunities for the blind as set forth in the Javits-Wagner-O’Day Act of 1938, and as effectuated by the AbilityOne Program, despite the mandatory nature of both.  The Court of Federal Claims held that the VA must apply the Rule of Two analysis before procuring the work through a non-Veteran Owned Small Business set-aside, including set-asides through the AbilityOne Program.  In affirming the decision, the Federal Circuit “consider[ed] the plain language of the more specific, later enacted” Veteran’s Benefits, Health Care, and Information Technology Act of 2006, “as well as the legislative history and Congress’s intention in enacting it….”

IX.    CONCLUSION

We will continue to keep you informed on these and other related issues as they develop.

The following Gibson Dunn lawyers assisted in preparing this client update: Karen L. Manos, John W.F. Chesley, Erin N. Rankin, Lindsay M. Paulin, Melinda R. Lewis, Ryan Comer, Shannon Han, Pooja Patel, Sydney Sherman, and Casper J. Yen.

Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding the issues discussed above.  Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following:

Washington, D.C. Karen L. Manos (+1 202-955-8536, kmanos@gibsondunn.com) Joseph D. West (+1 202-955-8658, jwest@gibsondunn.com) John W.F. Chesley (+1 202-887-3788, jchesley@gibsondunn.com) Michael Diamant (+1 202-887-3604, mdiamant@gibsondunn.com) Michael K. Murphy(+1 202-995-8238, mmurphy@gibsondunn.com) Jonathan M. Phillips (+1 202-887-3546, jphillips@gibsondunn.com) Justin Paul Accomando (+1 202-887-3796, jaccomando@gibsondunn.com) Ella Alves Capone (+1 202-887-3511, ecapone@gibsondunn.com) Michael R. Dziuban (+1 202-887-8252, mdziuban@gibsondunn.com) Melissa L. Farrar (+1 202-887-3579, mfarrar@gibsondunn.com) Melinda R. Lewis (+1 202-887-3724, mrlewis@gibsondunn.com) Lindsay M. Paulin (+1 202-887-3701, lpaulin@gibsondunn.com) Laura J. Plack (+1 202-887-3678, lplack@gibsondunn.com) Erin N. Rankin (+1 202-955-8246, erankin@gibsondunn.com) Jeffrey S. Rosenberg (+1 202-955-8297, jrosenberg@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Jeremy S. Ochsenbein (+1 303-298-5773, jochsenbein@gibsondunn.com)

Los Angeles Marcellus McRae (+1 213-229-7675, mmcrae@gibsondunn.com) Maurice M. Suh (+1 213-229-7260, msuh@gibsondunn.com) James L. Zelenay, Jr. (+1 213-229-7449, jzelenay@gibsondunn.com) Dhananjay S. Manthripragada (+1 213-229-7366, dmanthripragada@gibsondunn.com) Sean S. Twomey (+1 213-229-7284, stwomey@gibsondunn.com)

© 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 9, 2019 |
The Most Notable Government Contract Cost and Pricing Decisions of 2018

Washington, D.C. partner Karen Manos is the author of "The Most Notable Government Contract Cost and Pricing Decisions of 2018," [PDF] published in Thomson Reuters’ The Government Contractor on January 9, 2019.

November 29, 2018 |
Five Gibson Dunn Attorneys Named Among Washingtonian Magazine’s 2018 Top Lawyers

Washingtonian magazine named five DC partners to its 2018 Top Lawyers, featuring “[t]he area’s star legal talent” in their respective practice areas:

  • Karen Manos was named a Top Lawyer in Government Contracts – Karen is Chair of the firm’s Government Contracts Practice Group.  She has nearly 30 years’ experience on a broad range of government contracts issues, including civil and criminal fraud investigations and litigation, complex claims preparation and litigation, bid protests, qui tam suits under the False Claims Act, defective pricing, cost allowability, the Cost Accounting Standards, and corporate compliance programs
  • Eugene Scalia was named a Top Lawyer in Employment Defense – Co-Chair of the Administrative Law and Regulatory Practice Group, Gene has a national practice handling a broad range of labor, employment, appellate, and regulatory matters. His success bringing legal challenges to federal agency actions has been widely reported in the legal and business press
  • Jason Schwartz was recognized as a Top Lawyer in Employment Defense – Jason’s practice includes sensitive workplace investigations, high-profile trade secret and non-compete matters, wage-hour and discrimination class actions, Sarbanes-Oxley and other whistleblower protection claims, executive and other significant employment disputes, labor union controversies, and workplace safety litigation
  • F. Joseph Warin is a Top Lawyer in Criminal Defense, White Collar – Co-chair of the firm’s global White Collar Defense and Investigations Practice Group. His practice includes complex civil litigation, white collar crime, and regulatory and securities enforcement – including Foreign Corrupt Practices Act investigations, False Claims Act cases, special committee representations, compliance counseling and class action civil litigation
  • Joseph West was named a Top Lawyer in Government Contracts – Joe concentrates his practice on contract counseling, compliance/enforcement, and dispute resolution.  He has represented both contractors and government agencies, and has been involved in cases before various United States Courts of Appeals and District Courts, the United States Court of Federal Claims, numerous Federal Government Boards of Contract Appeals, and both the United States Government Accountability Office and Small Business Administration
The list was published in the December 2018 issue.

July 30, 2018 |
2018 Mid-Year Government Contracts Litigation Update

Click for PDF In this mid-year analysis of government contracts litigation, Gibson Dunn examines trends and summarizes key decisions of interest to government contractors from the first half of 2018.  This publication covers the waterfront of the opinions most important to this audience issued by the U.S. Court of Appeals for the Federal Circuit, U.S. Court of Federal Claims, Armed Services Board of Contract Appeals ("ASBCA"), and Civilian Board of Contract Appeals ("CBCA"). The first six months of 2018 yielded 4 government contracts-related opinions of note from the Federal Circuit, excluding decisions related to bid protests.  From January 1 through July 30, 2018, the U.S. Court of Federal Claims issued 7 notable non-bid protest government contracts-related decisions (and one bid-protest decision with wider-reaching implications we address here), and the ASBCA and CBCA published 54 and 64 substantive government contracts decisions, respectively.  As discussed herein, these cases address a wide range of issues with which government contractors should be familiar, including matters of cost allowability, jurisdictional requirements, terminations, contract interpretation, remedies, and the various topics of federal common law that have developed in the government contracts arena.  For background on the tribunals that adjudicate government contracts disputes, please see our 2017 Year-End Update. Of 1,502 cases pending before the Federal Circuit as of June 30, 2018, 12 were appeals from the boards of contract appeals and 132 were appeals from the Court of Federal Claims ("COFC")—cumulatively comprising just under 10% of the appellate court's docket. Only 4% of the appeals filed at the Federal Circuit in FY 2017 were governments contracts cases, which is consistent with previous years. On May 13, 2018, Judge Lis B. Young was appointed to the ASBCA after over 25 years of public service with the Federal Government, holding various positions with the former General Services Board of Contract Appeals and  the Department of the Navy, including most recently as Associate Counsel, Navy Acquisition Integrity Office, where she worked on suspension and debarment actions. On March 28, 2018, the CBCA proposed to amend its rules of procedure for cases arising under the CDA. The Board's current rules were issued in 2008, and were last amended in 2011. The proposed revisions establish a preference for electronic filing, are designed to "increase[e] conformity" between the Board's rules and the Federal Rules of Civil Procedure by cross-referencing and incorporating the FRCP standards, and streamlines and clarifies the Board's current rules and practices. Notably, a proposed change to CBCA Rule 6, which governs pleadings, would require the opposing party's consent to amend a pleading once without permission of the Board. Comments on the Proposed Rule were due on May 29, 2018.

I.    COST ALLOWABILITY & COST ACCOUNTING STANDARDS

The Court of Federal Claims issued one decision during the first half of 2018 addressing the merits of cost allowability issues under the Federal Acquisition Regulation ("FAR").  Pursuant to FAR 31.201-2, a cost is allowable only if it (1) is reasonable; (2) is allocable; (3) complies with any applicable Cost Accounting Standards, or otherwise with generally accepted accounting principles appropriate in the circumstances; (4) complies with the terms of the contract; and (5) complies with any limitations in FAR subpart 31.2.
Bechtel Nat'l, Inc. v. United States, No. 17-757C (Fed. Cl. Apr. 3, 2018)
In Bechtel, the Court of Federal Claims considered whether the Department of Energy's disallowance of litigation costs breached Bechtel's contract. Two former employees of Bechtel sued Bechtel for sexual and racial harassment and discrimination. Bechtel ultimately settled both suits and sought reimbursement of litigation costs from the government for each suit, which the contracting officer denied in a final decision. In disallowing the costs, the contracting officer relied in part on the Federal Circuit's decision in Geren v. Tecom, Inc., 566 F.3d 1037 (Fed. Cir. 2009), which held that costs incurred in the defense of an employment discrimination suit settled before trial are unallowable unless the contracting officer determines that the plaintiff had "very little likelihood of success on the merits." Bechtel argued that Tecom had no bearing on the allowability of its litigation costs because, unlike in Tecom, the contract here included a Department of Energy Acquisition Regulation ("DEAR") clause that "explicitly allocat[ed] the risk of third party claims to the Government." The Court (Kaplan, J.) rejected this argument, finding that an exception in the DEAR clause prohibiting reimbursement of liabilities "otherwise unallowable by law or the visions of this contract" applied. Employing the principles in Tecom, the COFC found the "provisions of the contract," including the contract's anti-discrimination provision, rendered Bechtel's costs of defending against and settling the discrimination complaints unallowable. However, the COFC stated that the holding in Tecom "was a limited one" that did not necessarily extend to breaches of contractual obligations other than anti-discrimination provisions. Bechtel's appeal to the Federal Circuit is pending.

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The COFC also considered two questions relating to the allocation of pension assets and liabilities for the purpose of a segment closing under Cost Accounting Standard ("CAS") 413.
United States Enrichment Corp. v. United States, No. 15-68C (Fed. Cl. Jan. 16, 2018)
United States Enrichment Corporation ("USEC") became a private entity in 1998 pursuant to the 1996 USEC Privatization Act.  Post-privatization, USEC continued to operate uranium enrichment facilities for the government at Portsmouth, Ohio and Paducah, Kentucky.  In 2010, DOE wound down all enrichment work at USEC's Portsmouth facility, and on January 1, 2011, USEC divided what had been a single cost accounting segment for Paducah and Portsmouth into two separate segments. USEC announced it would close the Portsmouth segment on September 30, 2011, which triggered its obligation to perform a segment closing adjustment under CAS 413-50(c)(12). First, rejecting USEC's argument that CAS 413-50(c)(5) requires the use of historical "data of the segment," the COFC (Firestone, J.) determined that USEC had applied CAS 413 incorrectly when it failed to use data from the earliest date that USEC had data for employees associated with Portsmouth to allocate pension assets and liabilities to the new segment.   Instead, the Court agreed with the Government's argument that the allocation must be based on historic data for the workers employed at the closed segment from the earliest period when that data is available and readily determinable – including the period before USEC became a private enterprise. Second, the COFC considered whether USEC could recover any deficit for under-funded post-retirement benefit obligations ("PRB") from the Government in the CAS 413 segment closing adjustment, or whether the PRB obligations at issue should be excluded from the closing adjustment. Applying the holding from Raytheon Co. v. United States, 92 Fed. Cl. 549 (2012), the COFC found that while some of the PRBs at issue were not vested or integral because USEC's Plan provided that USEC could terminate or modify its obligation to pay PRBs, others were protected by the Privatization Act such that they should be factored into the segment closing adjustment, and granted-in-part and denied-in-part both parties' cross motions for summary judgment on the issue.

II.  JURISDICTIONAL ISSUES

As is frequently the case, jurisdictional issues dominated the landscape of key government contracts decisions during the first half of 2018.

A.  Requirement for a Valid Contract

In order for there to be Contract Disputes Act jurisdiction over a claim, there must be a contract from which that claim arises.  See FAR 33.201 (defining a "claim" as "a written demand or written assertion by one of the contracting parties seeking . . . relief arising under or relating to this contract").  The CDA applies to contracts made by an executive agency for: (1) the procurement of property, other than real property in being; (2) the procurement of services; (3) the procurement of construction, alteration, repair, or maintenance of real property; and (4) the disposal of personal property.  41 U.S.C. § 7102(a)(1)-(4). Additionally, claims under the Contract Disputes Act must be brought by a contractor in privity of contract with the government. The Federal Circuit and the ASBCA addressed these issues in the first half of 2018.
Agility Logistics Servs. Co. KSC v. Mattis, No. 2015-1555 (Fed. Cir. Apr. 16, 2018)
In Agility, the Federal Circuit affirmed the Armed Services Board of Contract Appeals' dismissal for lack of jurisdiction of Agility's claim arising from a contract originally awarded by the Coalition Provisional Authority ("CPA") in Iraq. The COFC (Prost, C.J.) found that the CPA did not constitute an "executive agency" so as to invoke jurisdiction under the Contracts Disputes Act. The court relied primarily on the plain language of the agreement, which made clear that the CPA, which was not an executive agency, awarded the contract.  The COFC also rejected Agility's argument that the government became the contracting party after the CPA dissolved because the Iraqi Interim Government's Minister of Finance had properly taken responsibility for the contract after the dissolution of the CPA.  The COFC also rejected Agility's argument that each individual task order issued was a discrete contract, finding that "even if an executive agency issued the Task Orders, it did so as a contract administrator and not as a contracting party."  The COFC additionally found that it had no jurisdiction to review the Board's decision regarding jurisdiction under the Board's charter.
Cooper/Ports America, LLC, ASBCA No. 61461 (May 2, 2018)
After Cooper/Ports America LLC ("CPA") entered into a novation agreement with the government and the original contractor, Shippers, CPA filed a claim for unilateral mistake based, in part, on the fact that Shippers' bid was 63% below that of the next lowest bidder and contained mistakes that should have been apparent to the government. The government moved to dismiss, claiming that CPA lacked the required privity of contract to qualify as a "contractor" with standing to pursue a claim that accrued when it was not a party to the contract (i.e., pre-novation). More specifically, the government asserted that there must have been an express assignment of that claim to which the government consented in order for the Board to find a valid government waiver of the statutory prohibition against assignment of claims. The ASBCA (O'Sullivan, A.J.) denied the government's motion to dismiss because the government expressly recognized CPA as the "contractor" in the novation agreement. Moreover, the novation agreement recognized CPA as "entitled to all rights, titles and interests of the Transferor in and to the contracts as if the Transferee were the original party to the contracts," and the Board found that a narrow interpretation of the novation would fly in the face of the plain language of the agreement.

B.  Adequacy of the Claim

Another common issue arising before the tribunals that hear government contracts disputes is whether the contractor appealed a valid CDA claim.  FAR 33.201 defines a "claim" as "a written demand or written assertion by one of the contracting parties seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising under or relating to this contract."  Under the CDA, a claim for more than $100,000 must be certified.  In the first half of 2018, the boards considered the elements of an adequate claim under the CDA.
Meridian Eng'g Co. v. United States, 2017-1584 (Fed. Cir. Mar. 20, 2018)
Meridian Engineering Company appealed the Court of Federal Claims' dismissal of its claims arising from its 2007 contract to build flood control structures.  Meridian's initial suit in the COFC alleged breach of contract, breach of the duty of good faith and fair dealing, and violation of the CDA as an independent claim. Meridian argued that the COFC erred when it "reasoned that only Meridian's breach of contract and breach of good faith and fair dealing claims presented a viable cause of action" because its claims should have been "analyzed under the framework contemplated by the CDA, and not under the rubric of a 'breach' claim." The Federal Circuit (Wallach, J.) affirmed the dismissal, finding that Meridian had not submitted a valid claim because the CDA did not itself provide a cause of action. Rather, "it is the claim asserted pursuant to the CDA that is the source of potential damages and review by the trier of fact."  The court concluded that the COFC had not erred in finding jurisdiction under the CDA to evaluate the breach of contract claims, but found that the COFC had erred with respect to the substantive merits of certain claims.

1.  Claim Accrual

Under the CDA, a claim must be submitted within six years after the claim accrues. FAR 33.201 defines accrual of a claim as the date when all events that fix alleged liability and permit assertion of the claim are known or should be known.
Green Valley Co., ASBCA No. 61275 (Feb. 13, 2018)
Green Valley held a blanket purchase agreement to supply life support services to the Army.  In 2006, Green Valley began invoicing the government for services it performed under the BPA, but it did not submit a certified claim for those unpaid invoices until 2017.  The contracting officer denied the claim, and Green Valley appealed.  The government sought to dismiss the claim because it had not been submitted within six years of accrual of the claim, as required by the CDA's statute of limitations. The ASBCA (Melnick, A.J.) found that Green Valley's claim accrued in 2006 after it submitted its invoices for payment, and that the ten-year delay in submitting the claim rendered it time-barred.  The Board explained that while an invoice is not necessarily a claim, it can be converted into one within a reasonable time if it is not acted upon or paid.  The Board considered Green Valley's argument that the statute of limitations should be equitably tolled, noting that tolling might be appropriate if a litigant has been pursuing its rights diligently, and some extraordinary circumstance stood in its way and prevented the timely filing of the claim.  However, the Board found that Green Valley had not proven such circumstances, and dismissed the appeal as untimely.

2.  Sum Certain

Fluor Fed. Sols., LLC, ASBCA No. 61353 (May 30, 2018)
Fluor submitted a certified claim to the Navy for the estimated additional cost of performing work  under a unilateral modification to the contract.  The Navy argued that the claim was complex and, thus, refused to issue a final decision until it received an audit report from the Defense Contract Audit Agency ("DCAA").  Fluor notified the Navy that it would treat the claim as a deemed denial and subsequently appealed to the ASBCA on this basis.  The Board asked the parties to respond whether the claimed amount qualified as a sum certain since it was based on estimated costs. Both parties agreed that Fluor's claim satisfied the sum certain requirement.  The Navy argued, however, that the claim was complex and required a DCAA audit before the CO could issue a final decision. Without a final decision, the Navy argued, the claim was premature and the Board lacked jurisdiction. The Board (Clarke, A.J.) denied the Navy's motion to dismiss for lack of jurisdiction, holding that the desired DCAA audit does not change the status of a contractor's claim because it is not needed to assess entitlement, only quantum. The Board affirmed previous decisions that the use of estimated or approximate costs in determining the value of a claim is permissible so long as the total overall demand is for a sum certain.

3.  Claim Certification

Horton Constr. Co., Inc., ASBCA No. 61085 (Feb. 14, 2018)
Horton requested an equitable adjustment to its contract for the crushing of a concrete stockpile because the amount of concrete stockpile was smaller than originally anticipated. When Horton appealed from the contracting officer's denial of its equitable adjustment claim, the government moved to dismiss for lack of jurisdiction, claiming Horton had not shown that it possessed the legal capacity to initiate or continue the appeal because the company's status had been administratively terminated by the state of Louisiana, and that any attempt to ratify the appeal was too late. The ASBCA (Osterhout, A.J.) rejected the government's first argument that Horton did not have the capacity to continue the appeal because Louisiana had subsequently reinstated the company.  The Board also rejected the government's argument that the signatory to the claim was not authorized to certify the claim.  The CDA requires that a certified claim be executed by an individual authorized to bind the contractor with respect to the claim.  The test is one of authorization, and the signatory here was appointed as executrix to the estate of Mr. Horton Sr., who owned the company, and thus had power to bind the company. Moreover, the Board held, even if the executrix had not been authorized to bind the company, a defective certification under the CDA may be corrected prior to the entry of final judgment by the Board.  Accordingly, because the appeal was timely filed and the claim was properly certified and prosecuted, the Board denied the government's motion to dismiss.
Mayberry Enters., LLC v. Department of Energy, CBCA No. 5961 (Mar. 13, 2018)
The Western Area Power Administration ("WAPA"), acting through the Department of Energy, filed a motion to dismiss Mayberry's appeal from a contracting officer's decision denying its monetary claims because Mayberry's claim letter was uncertified. Under the CDA, while a defective certification can be corrected, a complete failure to certify may not and the Board must dismiss for lack of jurisdiction. In light of the Federal Circuit's caution that tribunals should be wary of automatically applying claim certification to a single claim letter containing multiple claims that do not arise out of the same operative facts, Placeway Construction v. United States, 920 F.2d 903 (Fed. Cir. 1990), the CBCA reviewed the letter to determine whether the "claims" should be interpreted as a single claim or multiple claims. Because the Board (Lester, A.J.)found that each claim arose from different and unrelated problems during contract performance, each claim was analyzed for certification independently. The Board dismissed one of the three claims for lack of jurisdiction because it was in excess of $100,000 and had not been certified.
Areyana Grp. of Constr. Co., ASBCA No. 60648 (May 11, 2018)
Areyana Group of Construction Co. ("AGCC") timely appealed a CO's final decision denying a request for a time extension and the return of liquidated damages withheld by the government. The government filed a motion to dismiss, contending that AGCC failed to certify its request and that, accordingly, the ASBCA lacked jurisdiction to review its allegations. The Board (Paul, A.J.) agreed with the government and dismissed the AGCC's claim, affirming prior holdings that absence of a certification bars the Board's exercise of jurisdiction and is not considered a "defect." Additionally, the Board noted that the CO's purported issuance of a final decision does not remedy this problem.

C.  Requirement for a Contracting Officer's Final Decision

A number of decisions from the tribunals that hear government contracts disputes dealt with the CDA's requirement that a claim have been "the subject of a contracting officer's final decision."
Hejran Hejrat Co., ASBCA No. 61234 (Apr. 23, 2018)
After HHL's contract was suspended pending a bid protest, HHL informed the contracting officer that it incurred additional costs due to the time necessary for the government's corrective action and delay in the issuance of the notice to proceed. There was no evidence that the government considered HHL's concerns regarding additional costs. Instead, the government issued a unilateral modification that lifted the prior award suspension; decreased the contract price; revised the performance work statement to reflect delays in government furnished equipment; and declared that an equitable adjustment due to the suspension was not required and the government was absolved of any claims due to that suspension. The ASBCA (Kinner, A.J.) dismissed HHL's appeal for lack of jurisdiction because HHL's purported claim was not certified and failed to request a final decision from the contracting officer.  The Board noted that the CO's statements promising to send a final decision and, in fact, sending a document labeled final decision did not cure HHL's failure to request a final decision.  The Board stated: "There can be no contracting officer's final decision on a claim if the contractor has not requested that decision from the contracting officer."
H2Ll-CSC, JV, ASBCA No. 61404 (June 14, 2018)
H2Ll-CSC, JV ("HCJ") appealed a CO's decision denying HCJ's claim arising from an indefinite-delivery, indefinite-quantity type contract with firm-fixed-price task orders for design/build construction, and incidental service projects. The ASBCA sua sponte directed the parties to brief the issue of the Board's jurisdiction. Specifically, the Board noted that HCJ had requested telephonically, but not in writing, that its request for an equitable adjustment be treated as a claim under the CDA. The Board (Paul, A.J.) dismissed the appeal for lack of jurisdiction, holding that a request for a final decision, like the totality of a claim submission, must be in writing and the CO cannot waive this requirement by issuing a final decision.
OCCI, Inc., ASBCA No. 61279 (May 29, 2018)
OCCI sought remission of liquidated damages that the government claimed for late completion of contract work, arguing that it was entitled to time extensions for government-caused and/or concurrent delay and that its failure to timely complete work under the contract was excusable. The ASBCA (Shackleford, A.J.) dismissed the appeal, holding that OCCI was precluded from raising the issue that its delay was excusable and that it was entitled to time extensions because OCCI never filed a proper CDA claim asserting entitlement to the time extensions as required by M. Maropakis Carpentry, Inc. v. United States, 609 F.3d 1323 (Fed. Cir. 2010), which held that "a contractor seeking an adjustment of contract terms [such as an extension of time] must meet the jurisdictional requirements and procedural prerequisites of the CDA, whether asserting the claim against the government as an affirmative claim or as a defense to a government action" (emphasis added).
Walker Dev. & Trading Grp., Inc., CBCA No. 5907 (June 6, 2018)
The Department of Veterans Affairs ("VA") moved to strike certain counts of Walker Development & Trading Group Inc.'s complaint, asserting that the CBCA lacks jurisdiction to decide those portions of the complaint because they were not included in its claims submitted to the contracting officer. The Board (Beardsley, A.J.) observed that, while it may not consider new claims that a contractor failed to present to the contracting officer, a claim before the Board is not required to rigidly adhere to the exact language or structure of the original administrative CDA claim presented to the contracting officer.  The Board denied the motion to dismiss, finding that "the allegations in the complaint arise from the same operative facts and are not materially different."

D.  Filing Deadlines

The boards of contract appeals heard cases concerning two different types of timing deadlines – the CDA's six-year statute of limitations, and the requirement that a claim for equitable adjustment be filed before final payment is made on the contract.
Khenj Logistics Grp., ASBCA No. 61178 (Feb. 15, 2018)
In 2009, the government awarded KLG a contract to construct a facility in Afghanistan.  After commencing work on the contract, the government issued a stop-work order.  Shortly thereafter, the parties executed a bilateral contract modification which terminated the contract for convenience, and the government agreed to reimburse KLG for the cost of maintaining insurance, while KLG in turn released further claims against the government.  KLG finally submitted a termination claim in 2017. After KLG appealed, the government filed a motion for summary judgment based on KLG's release and on the basis that KLG's claim was untimely.  The ASBCA (Kinner, A.J.) held that KLG's claim was time-barred due to the six-year CDA statute of limitations, concluding that KLG should have known that the government's payment would not be forthcoming when the government failed to make a last payment in accordance with promises made by the contracting officer.  The Board also found there was no basis for equitable tolling because KLG had not diligently pursued its rights and there were no extraordinary circumstances that would have prevented the timely filing of the claim.
Merrick Constr., LLC, ASBCA No. 60906 (Mar. 22, 2018)
Merrick appealed a contracting officer's decision denying its claim for rental costs on a bypass pumping system installed pursuant to a government change order.  The government moved for summary judgment, arguing that Merrick's claim was precluded by the general release, and that there was an accord and satisfaction based upon a modification to the contract. The ASBCA (D'Alessandris, A.J.) explained that a release is a type of contract that grants the release of any claim or right that could be asserted against the other.  After interpreting the plain language of the release, the Board found that as a rule, a general release which is not qualified on its face bars any claims based upon events occurring before the execution of the release, and thus the government had met its burden of establishing that the general release applied.  The Board went on to note that there can be exceptions to a release, such as fraud, mutual mistake, economic duress, or consideration of a claim after release.  In this instance, the Board found that there was no mistake because Merrick's argument was entirely speculative and no evidence was presented that would have shown that there was mistake.  The Board also held that Merrick's claim was barred because it was submitted after final payment.  Pursuant to the Changes clause, FAR 52.243-4(f), no proposal by a contractor for an equitable adjustment can be allowed if asserted after final payment under the contract.  Because Merrick could not establish that the contracting officer knew or should have known of Merrick's claim prior to the final payment, the Board held that Merrick's claim was barred by final payment.  Accordingly, the Board granted the government summary judgment.
Michaelson, Connor & Boul, CBCA 6021 (May 29, 2018)
In February 2010, HUD awarded MCB a contract to serve as HUD's mortgagee compliance manager to ensure lender compliance with the property conveyance requirements of HUD's real-estate portfolio.  After the contract ended, MCB submitted a claim to the contracting officer requesting payment in the amount of $661,312.81, which MCB stated was incurred "in connection to" "extra-contractual work" allegedly requested by HUD.  The contracting officer denied MCB's claim and MCB timely appealed to the CBCA.  HUD challenged the Board's jurisdiction over the claim, alleging that because MCB's claim arose after the contract ended, it did not arise out of the same operating facts as the contract and thus precluded the Board's jurisdiction over the matter. The Board (Russell, A.J.) raised concerns about whether the claim presented to the contracting officer is the same claim that MCB presented on appeal, and ordered MCB to clarify whether it was seeking relief (1) under the contract identified in the notice of appeal, (2) under no contract, or (3) under a different contract. The Board held that it did have jurisdiction to hear MCB's appeal because MCB's appeal filings were "fundamentally the same" as those asserted in its claim to the contracting officer. Judge Chadwick dissented, noting that while the case presented the "closest 'same claim/new claim' issue" he had come across, the controlling question is whether MCB intends to litigate the operative facts of its certified claim, which according to Judge Chadwick MCB had abandoned because while the appeal sounded in contract, the certified claim was not based on any "provision, clause, or even a single word of the written contract."

E.  Amending the Complaint

John C. Grimberg Co., Inc., ASBCA No. 60371 (Feb. 15, 2018)
Grimberg held a contract to construct an advanced analytical chemistry wing for work with toxic agents.  After a dispute arose regarding contract terms, Grimberg filed a claim and an appeal of the contracting officer's deemed denial when a year passed without a final decision on the claim.  Three weeks prior to the scheduled hearing date, Grimberg filed an amended complaint adding a new count based on the government's failure to disclose superior knowledge of contract requirements.  The hearing was subsequently rescheduled by the Board to a date several months after the original hearing date.  Grimberg filed a motion for reconsideration after the Board rejected the amended complaint due to the absence of a motion for leave to amend. The ASBCA (Woodrow, A.J.) held that it had jurisdiction to hear the new count in the amended complaint because a new legal theory of recovery asserted in an amended complaint does not constitute a new claim if based upon the same operative facts as the original claim, and the new count would require review of the same evidence as the original counts.  Therefore, the Board concluded that it possessed jurisdiction to hear the new count.  The Board then determined that the proposed amendment to the complaint would be fair to both parties, as required by Board Rule 6, because the rescheduling of the hearing allowed the government additional time to address concerns raised by the new count.  Thus, the Board granted Grimberg leave to file its amended complaint.

F.  Availability of Declaratory Relief

The Federal Circuit and boards of contract appeals considered the availability of declaratory relief in an action brought pursuit to the CDA.
Securiforce Int'l Am., LLC v. United States, Nos. 2016-2589, 2016-2633 (Fed. Cir. Jan. 17, 2018)
Securiforce International America, LLC ("Securiforce") supplied fuel to eight locations in Iraq under a contract with the Defense Logistics Agency ("DLA"). DLA partially terminated the contract for convenience with respect to two of the sites, but subsequently placed oral orders for small deliveries to those sites.  When Securiforce's deliveries to the remaining sites were late, the government sent a show cause notice, in response to which Securiforce claimed the delays were due in part to the allegedly improper termination for convenience. The government terminated the remainder of the contract for default.  In 2012, Securiforce filed a complaint in the COFC claiming that the termination for default was improper, and then requested a final decision from the contracting officer ("CO") that the termination for convenience had been improper. After the CO denied the request for final decision, Securiforce amended its COFC complaint to include a request for declaratory judgment that the government's termination for convenience had been improper.  The COFC found jurisdiction over both claims and held that the partial termination for convenience of the contract had been an abuse of discretion and thus a breach of the contract, but found the termination for default proper and rejected Securiforce's claim that its nonperformance was excused by the improper termination for convenience. On appeal, the Federal Circuit (Dyk, J.) found that the COFC lacked jurisdiction to adjudicate the declaratory relief claim regarding the validity of the government's termination for convenience.  While contractors may seek declaratory relief in some cases, the Federal Circuit stated they may not "circumvent the general rule requiring a sum certain by reframing monetary claims as nonmonetary."  The Federal Circuit characterized Securiforce's declaratory relief claim as a claim for monetary relief because the default remedy for a breach of contract would be damages, and that Securiforce had failed to state a sum certain as required by the CDA.  The court further held that there would have been no jurisdictional impediment to Securiforce invoking the improper termination for convenience as an affirmative defense for its default without presenting the defense to the CO because Securiforce was neither seeking the payment of money nor attempting to change the terms of the contract.  However, under the facts at hand, the Federal Circuit concluded that the termination for convenience did not, in fact, amount to an abuse of discretion or breach of the contract. 
Duke University, CBCA No. 5992 (Apr. 6, 2018)
Duke University appealed a contracting officer's final decision on what Duke referred to as a "non-monetary claim" that it had submitted to the National Institute of Allergy and Infectious Diseases ("NIAID").  Duke did not specify a sum of monetary payment in its claim, instead seeking a declaratory judgment regarding the parties' rights and obligations under the contract.  Applying the Federal Circuit's recent decision in Securiforce, and upon a joint motion by the parties to dismiss the appeal without prejudice, the CBCA (Lester, A.J.) dismissed the appeal for lack of jurisdiction on the ground that Duke's claim was one contemplated by Securiforce, requiring Duke to state a sum certain.
Mare Solutions, Inc., CBCA Nos. 5540, 5541, 6037 (May 16, 2018)
Mare Solutions, Inc. ("Mare") was awarded a contract from the Department of Veterans Affairs ("VA") for the construction of a two-story parking garage at the VA Medical Center in Erie, Pennsylvania.  When the project was nearly complete, two disputes arose – one involving bucked metal conduit on the first floor ceiling of the garage and the other regarding which party was responsible for purchasing "head-end" equipment for the video surveillance system.  Mare appealed the contracting officer's final decisions and sought declaratory relief absolving it of liability for the buckled conduit and for the purchase of head-end equipment. At the time the appeals were filed, the ASBCA found its jurisdiction was proper because both appeals involved live performance disputes that could be resolved by declaration of the Board. At the hearing, however, the Board learned that, in addition to seeking declaratory relief, Mare had procured and installed the head-end equipment and was seeking reimbursement for those costs. Accordingly, Mare submitted a related monetary claim to the CO, which was also denied and which Mare appealed.  While there were no jurisdictional issues with the first appeal for declaratory relief relating to the metal conduit, the ASBCA (O'Rourke, A.J.) found that it no longer had jurisdiction over the head-end equipment claim for declaratory relief because the issues had been subsumed within the monetary claim.  Thus, the Board's jurisdiction to issue declaratory relief can be obviated by the filing of a related monetary claim. Based on its interpretation of the contract, the Board ruled that Mare was not liable for the buckled conduit, but denied Mare's monetary claim.

G.  Election Doctrine

A decision from the COFC highlights the issues that can arise from bringing proceedings before more than one tribunal that hear government contracts disputes.
ACI-SCC JV et al v. United States, No. 17-1749C (Fed. Cl. Mar. 12, 2018)
In what it described as a "conundrum of a case," the COFC dismissed a suit against the Army Corps of Engineers brought by Plaintiff Arwand Road and Construction Company ("Arwand"), acting as Trustee for Plaintiff-Intervenors ACI-SCC JV, ACI-SCC JV LLC (together, "the JV"), and Plaintiff Advance Constructors International LLC ("ACI"). Arwand was a subcontractor to the JV, which held a number of construction contracts in Afghanistan. However, the JV did not pay Arwand on time for its work, claiming it had not yet been paid by the government. The contracting officer terminated the government's contracts with the JV, and the JV and ACI appealed the terminations separately to the ASBCA. Both parties settled their claims and the ASBCA dismissed their appeals with prejudice. Arwand sued both the JV and ACI in the United States District Court for the District of Delaware for damages due under its subcontract with the JV, and the court awarded judgment in Arwand's favor later that year. Arwand then filed a "petition" before the ASBCA asserting breach of contract claims against the government, which Arwand later voluntarily dismissed without prejudice. After the Delaware Court of Chancery appointed Arwand as trustee for the JV and ACI, Arwand filed suit against the Corps before the COFC in its capacity as trustee to recover unpaid fees on the JV's contracts. The JV intervened and filed a motion to dismiss. The COFC (Wheeler, J.) dismissed the case as moot as a result of the settled ASBCA cases that had been dismissed with prejudice, at which time Arwand was merely a subcontractor with no rights, privity, or standing to sue the Government over the prime contract. Second, the COFC also held that by first filing suit at the ASBCA, Arwand lost its right to file in the COFC because courts have interpreted the CDA to impose an "either-or choice" of forum, meaning that a contractor is barred from filing in one forum if it chooses to file in the other forum first. Even though Arwand may not have had standing to file a "petition" before the ASBCA and  voluntarily dismissed the suit, he was precluded from litigating the same claim in the COFC under the CDA.

III.  TERMINATIONS

In two noteworthy decisions during the first half of 2018 arising from contract terminations, the ASBCA strictly construed the one-year time limit to submit a termination settlement proposal in accordance with the FAR's termination for convenience clause.
Am. Boys Constr. Co., ASBCA No. 61163 (Jan. 9, 2018)
In 2013, the government awarded a contract for the construction of a prime power overhead cover to American Boys Construction Company ("American Boys").  More than three and a half years after receiving notice of the government's termination of the contract for convenience, American Boys submitted a termination settlement agreement proposal as a certified claim to the contracting officer.  The contracting officer denied the claim because American Boys did not file a settlement proposal within one year of the termination.  American Boys timely appealed the CO's final decision and the government filed a motion for summary judgment requesting that the Board deny the appeal. The Board (Osterhout, A.J.) granted the government's motion and denied the appeal because American Boys did not file its termination settlement claim until 2017 – nearly four years after the contract termination – in violation of FAR 52.249-2.
Abdul Khabir Constr. Co., ASBCA No. 61155 (Apr. 6, 2018)
Abdul Khabir Construction Co. appealed a contracting officer's denial of a claim seeking settlement costs resulting from the government's termination for convenience of its construction contract.  The government filed a motion for summary judgment, arguing that Abdul failed to submit its termination settlement proposal within a year of the effective date of termination, and did not submit its certified claim until more than seven years after termination. Abdul countered that the government never asked for a settlement proposal, and never told it where to file a claim. The Board (Osterhout, A.J.) found no evidence that the contracting officer extended the FAR's one-year time period to file a termination claim.  Because no extension was granted and the parties did not dispute that Abdul Khabir did not submit a proposal or contact the government until over 18 months after the due date, the Board found the claim untimely and denied the appeal.

IV.  CONTRACT INTERPRETATION

A number of noteworthy decisions from the first half of 2018 articulate broadly applicable contract interpretation principles that should be considered by government contractors.
CB&I AREVA MOX Servs., LLC v. United States, No. 16-950C, 17-2017C, 18-80C, 18-522C, 18-677C, 18-691C, 18-701C (Fed. Cl. June 11, 2018)
In 1999, the Department of Energy awarded a cost reimbursement contract to the predecessor in interest of CB&I AREVA MOX Services, LLC ("MOX Services") to construct a Mixed Oxide Fuel Fabrication Facility ("MFFF") at a site in South Carolina. The original target completion date was in 2016, but was extended until 2029 and the estimated cost more than doubled. Under the contract, MOX Services was eligible to receive quarterly incentive fees pursuant to a vesting schedule for making progress towards completion of the construction of the MFFF beginning in 2008. Although the entire fee was provisional for at least the first year after it was invoiced, the incentive fee became 50% vested if MOX Services' performance remained within the schedule and cost parameters for the subsequent four quarters. The government paid MOX incentive fees, of which a portion was provisional. The government suspended further incentive fee payments in 2011 when it determined that MOX Services was no longer performing within the applicable cost and schedule parameters. In 2016, MOX Services submitted a certified claim to the government for the suspended incentive fees that the company did not receive from 2011 through 2015. In response, the contracting officer not only denied the certified claim suspended payments, but also demanded that MOX Services refund the provisional incentive fee payments already made. The government argued that MOX Services has no hope of meeting the project's parameters on cost and schedule and thus will not be entitled to retain any incentive fees at project completion. The Court of Federal Claims (Wheeler, J.) rejected this position, noting that "the contract provisions taken together unambiguously provide that the incentive fee [paid] to MOX Services is to remain in the custody of MOX Services until the MFFF construction is completed." The court also criticized the CO's demand for a refund of $21.6 million "as a way to gain leverage over MOX Services through baseless retaliation." The court granted plaintiff's partial motion for summary judgment, effectively requiring the government to return the provisional incentive fees to MOX Services until the project is completed.
ABB Enter. Software, Inc., f/k/a/ Ventyx, ASBCA No. 60314 (Jan. 9, 2018)
Tech-Assist, the corporate predecessor to ABB Enterprise Software, Inc., provided software and licenses to support naval maintenance requirements.  Pursuant to a master license agreement, the Navy was only allowed to install one copy of ABB's software on ships and Navy bases, but ABB alleged that the Navy breached its licensing agreement by allowing two copies of the software to be installed on certain aircraft carriers.  After the Board granted the Navy's motion to amend its answer to include an affirmative defense for equitable estoppel, ABB moved for summary judgment on its claim for entitlement based on its contention that the licensing agreement's plain language only allowed for one copy of the software to be installed. The ASBCA (Kinner, A.J.) determined that the plain language of the licensing agreement controlled, and was explicitly clear that only one installation of software for each location would be allowed.  The Board also found that the Navy had not shouldered its burden to establish equitable estoppel by demonstrating that (1) the party to be stopped knew the facts; (2) the government intended that the conduct alleged to have induced continued performance will be acted on, or the contract must have a right to believe the conduct in question was intended to induce continued performance; (3) the contract must not be aware of the true facts; and (4) the contractor must rely on the government's conduct to its detriment.  Thus, the Board granted ABB's motion for summary judgment.
Name Redacted, ASBCA No. 60783 (Feb. 8, 2018)
In 2016, the government awarded a firm-fixed-price contract to Appellant for enhanced force protection and facility upgrades in Afghanistan.  The contract provided for a certain exchange rate between Afghani currency and U.S. dollars.  Following the contract's termination for default, the contractor submitted a certified claim for additional costs, which the CO denied and the contractor appealed. In a subsequent modification converting the termination to one for convenience, the government agreed to pay over $93,000 to settle the pending appeal at the agreed upon exchange rate.  After some delay, the government paid Appellant, but Appellant countered that due to the delay there had been a change in the exchange rate, and that it was entitled to an additional $4,300.  The government moved to dismiss on the ground that the claim had been settled and Appellant had agreed to its dismissal. The Board (Melnick, A.J.) found that Appellant was not entitled to any additional costs because nothing in the modification allowed for additional compensation if the exchange rate fluctuated, and Appellant had released its claim when it agreed to the modification. Accordingly, the Board dismissed the appeal.
UNIT Co., ASBCA No. 60581 (Feb. 12, 2018)
The government awarded a contract for the construction of a battle command training center to UNIT.  During the course of the contract, UNIT subcontracted with other companies to perform certain mechanical work.  Due to various interpretations of design requirements, one of the subcontractors, Klebs Mechanical ("Klebs") submitted "request for information" ("RFI") forms to UNIT to pose questions to the government.  After some disagreement, UNIT submitted a claim for damages and costs for defective specifications, which the contracting officer denied.  The CO found that UNIT did not provide contractually required notice of the defective specifications and that its recovery was therefore barred. UNIT appealed the CO's final decision and the government moved for summary judgment. The ASBCA (Newsom, A.J.) relied on FAR 52.236-21(a), Specifications and Drawings for Construction (Feb 1997) to find that UNIT had provided sufficient notice to the government in its RFI forms, or at the very least, that UNIT had created a disputed issue of material fact on whether or not sufficient notice was provided, and the Board accordingly denied summary judgment.
MW Builders, Inc. v. United States, No. 13-1023C (Fed. Cl. Mar. 5, 2018)
In our 2017 Year-End Update, we covered the Court of Federal Claims' grant of partial judgment in favor of MW Builders, Inc. ("MW Builders") on its claims that the Army Corps of Engineers breached its contract for electrical utility services and violated the duty of good faith and fair dealing. In a portion of the decision not covered in our Year-End Update, the COFC (Braden, C.J.) also determined that the claims of MW Builders' subcontractor, Bergelectric, were waived as the result of a lien waiver in its subcontract providing that Bergelectric waived "any other claim whatsoever in connection with this Contract…" MW Builders moved for reconsideration of Bergelectric's pass-through claims, arguing  that the precedent relied upon in the initial decision was inapplicable because that case was about a settlement dispute, whereas Bergelectric and MW agree that the contract does not evidence their intent. In the alternative, MW Builders claimed that the court should reform the release language. The court rejected both arguments. First, it held that the terms of the contractual release were unambiguous and that the court was therefore precluded from considering the extrinsic evidence regarding the parties' intent even though the scope of the release included in the contract was unintentionally broad. Second, the COFC held that it does not have jurisdiction to reform an agreement between a contractor and its subcontractor, citing the Severin doctrine. Accordingly, the court denied the motion for reconsideration.

V.  DAMAGES

John Shaw LLC d/b/a/ Shaw Bldg. Maint., ASBCA No. 61379 (Mar. 8, 2018)
In 2010, John Shaw LLC was awarded a contract to provide janitorial services at an Air Force base.  After the contract expired, Shaw presented a claim for "punitive damages" to the contracting officer, which was denied. Shaw appealed, and requested punitive damages and "missed opportunities" damages stemming from contracts allegedly not obtained due to the government's handling of its contract.  The government moved to dismiss the claims for punitive and "missed opportunities" damages. The ASBCA (McIlmail, A.J.) dismissed Shaw's damages claims, finding the connection between the government's administration of the contract and the allegedly lost contracts with third parties was a claim for consequential damages, which were too remote and speculative to be recovered.  The Board further noted that it has no authority to award punitive damages, and dismissed both claims.
Green Bay Logistic Servs. Co.,  ASBCA No. 61063 (Apr. 12, 2018)
Green Bay appealed the Defense Contract Management Agency ("DCMA")'s termination for convenience of its lease of two stakebed or flatbed trucks. Green Bay argued that it was owed twice the value of the contract because it attempted to deliver the vehicles twice. The ASBCA (Osterhout, A.J.) denied Green Bay's appeal, finding that Green Bay failed to prove that it was entitled to any amount it presented to the government in its termination settlement proposal. Upon a termination for convenience of a commercial item contract, FAR 52.212-4(1) directs the government to pay the contractor: (1) a percentage of the contract price reflecting the percentage of the work performed prior to the notice of termination; and (2) reasonable charges the contractor can demonstrate to the satisfaction of the government using its standard record keeping system, have resulted from the termination. The Board concluded that because Green Bay delivered non-compliant vehicles, it did not complete any percentage of the contract, and that Green Bay did not present any reasonable charges that imposed upon the government a requirement to pay.
Entergy Nuclear Generation Co. v. United States, No. 14-1248C (Fed. Cl. June 19, 2018)
Entergy Nuclear Generation Company ("Entergy") operates a nuclear power station. In 1983, Entergy's predecessor, Boston Edison Company entered into a contract authorized by the Nuclear Waste Policy Act of 1982 for the disposal of spent nuclear fuel generated at the station to begin by January 31, 1998, but the Department of Energy ("DOE") breached the contract and did not dispose of the spent fuel. In 2012, Entergy was awarded damages for the additional costs incurred in operating the plant due to the breach through December 31, 2008. In this second lawsuit, Entergy sought to recover damages allegedly incurred between December 31, 2008 and June 30, 2015 because Entergy could not recover future damages in the first suit. Because the government did not contest two-thirds of the damages sought by Entergy, Entergy sought partial summary judgment on liability and entry of partial final judgment on the uncontested amount. The court granted Entergy's motion for partial summary judgment on liability for the uncontested amount, but found that the entry of partial final judgment as to the uncontested amount was improper under COFC Rule 54(b), which allows the court to direct final judgment "as to one or more, but fewer than all, claims" in an action. Here, where the COFC determined that Entergy is only alleging one "claim"—partial breach of contract—granting partial final judgment on some but not all of the harms arising out of a single claim "would be to enter judgment on less than one claim, violating Rule 54(b)." The government cross-moved for summary judgment as to Entergy's claim for storage fees paid to the Nuclear Regulatory Commission ("NRC"). The court rejected the government's argument that Entergy was foreclosed from proving causation between the breach and the increased fees because it had already presented such evidence, and the government's argument had been rejected in a prior Federal Circuit case. The COFC denied the Government's motion, finding that Entergy's intent to present substantially different evidence from that considered in the prior Federal Circuit case created genuine dispute as to causation. Although not briefed by the parties, the court also found that because the COFC determined in a prior suit for damages brought by the Boston Edison Company that DOE's breach was a but-for cause of the NRC fee change at the Pilgrim Nuclear Power Station, and the causation issue was not raised on appeal, issue preclusion may have provided an alternate basis to deny the Government's motion. But the COFC had an opportunity to prohibit re-litigation of this same issue based on collateral estoppel in another case, discussed infra in Section VI(C).

VI.  COMMON LAW PRINCIPLES

The boards of contract appeals and COFC addressed a number of issues during the first half of 2018 arising out of the body of federal common law that has developed in the context of government contracts.

A.  Application of Common Law in Government Contracts Cases

Assessment and Training Solutions Consulting Corp., ASBCA No. 61047 (Mar. 6, 2018)
ATSCC sought reconsideration of the ASBCA's earlier decision sustaining ATSCC's appeal, arguing that the Board erroneously applied a common law of bailment presumption of negligence and that the written contract should be enforced over the common law.  The Board (Clarke, A.J.) explained that the common law of bailment imposes upon the bailee the duty to protect property by exercising ordinary care and to return said property in substantially the same condition.  Thus, when the government receives property in good condition and returns it in damaged condition, there is a presumption that the cause of the damage was due to the government's failure to exercise ordinary care.  The government argued that the presumption did not apply, and that where there was a written bailment contract, the contract should apply, not common law.  However, the Board noted that this was only true if the written contract and the common law differed.  Because the written contract and common law were the same in this instance, the Board concluded that the common law bailment presumption would apply.  Accordingly, the Board held, the prior decision's reliance on the common law presumption was not legal error.

B.  Fraud

We have been following in our recent publications developments in the law of whether and to what extent the boards of contract appeals may exercise jurisdiction over claims and defenses sounding in fraud when the alleged fraud affects the administration of government contracts.  For example, in our 2016 Year-End Government Contracts Litigation Update, we covered the Federal Circuit's decision in Laguna Construction Company, Inc. v. Carter, 828 F.3d 1364 (Fed. Cir. 2016), which held that as long as the ASBCA can rely upon prior factual determinations from other tribunals (such as through a guilty plea), the Board has jurisdiction to adjudicate legal defenses based upon those prior determinations of fraud.  In the first half of 2018, the ASBCA considered one case addressing the impact of Laguna on its jurisdiction, and another that evaluated the validity of a contracting officer's final decision based partially on a decision of fraud.
Int'l Oil Trading Co., ASBCA Nos. 57491, 57492, 57493 (Jan. 12, 2018)
IOTC sought partial judgment on the pleadings or, alternatively, renewed its motion to strike the Government's affirmative defense that IOTC obtained its contracts for fuel delivery to the government in Iraq through fraud or bribery, claiming that the Federal Circuit's decision in Laguna abrogated the Board's previous ruling denying IOTC's initial motion to strike by preventing the Board from hearing the fraud-based affirmative defense. Citing ABS Development Corp., which we discussed in our 2017 Year-End Government Contracts Litigation Update, the ASBCA (Melnick, A.J.) held that Laguna did not impact its prior ruling that it was not precluded from considering fraud related claims based because the CDA's statutory bar did not apply to an affirmative defense that a contract is void under the common law for fraud or bribery in its formation. The Board noted that the Federal Circuit's decision did not restrict the Board's power to determine the validity of a contract when the government has lodged an affirmative defense that the contract is void  ab initio due to fraud or bribery, as opposed to when the government is asserting a fraud claim (such as a claim under the False Claims Act) that the Board does not have jurisdiction to entertain. Accordingly, the Board denied IOTC's motion.
PROTEC GmbH, ASBCA Nos. 61161, 61162, 61185 (Mar. 20, 2018)
The government moved to dismiss for lack of jurisdiction PROTEC's appeals from the Army's denials of its claims for unpaid invoices, arguing that the contracting officers' final decisions were invalid because denials were based on  suspicion of fraud. None of the final decisions mentioned any suspicion of fraud; however, the U.S. Army Criminal Investigation Command was conducting an investigation into allegations of fraud at the time the final decisions were issued and at the time of the appeal. Under the FAR, a contracting officer's authority to decide or resolve claims does not extend to settlement, compromise, payment, or adjustment of any claim involving fraud.  The COFC and CBCA have held that a final decision is therefore invalid if it is based upon a suspicion of fraud.  However, the Federal Circuit has clarified that a final decision is invalid only if the decision rests solely upon a suspicion of fraud.  Because the decisions issued to PROTEC were not based upon a suspicion of fraud and the decisions also relied upon other rationales,  it did not matter for jurisdictional purposes  that there was an ongoing criminal investigation into fraud allegations.  The Board (Sweet, A.J.) therefore denied the motion to dismiss.

C.  Good Faith & Fair Dealing

Ala. Power Co. v. United States, No. 17-1480, Ga. Power Co. v. United States, Nos.  17-1492C, 17-1481C (Fed. Cl. Mar. 26, 2018)
In a pair of cases arising from ongoing litigation regarding the government's failure to collect spent nuclear fuel ("SNF") from the plaintiffs' facilities pursuant to its contracts, the Government  sought to dismiss two claims—the first relating to the recovery of certain fees levied by the Nuclear Regulatory Commission ("NRC"), and the second to plaintiffs' claim for breach of the covenant of good faith and fair dealing. In 2004, the COFC granted summary judgment in plaintiffs' favor on their initial breach of contract suit. The plaintiffs sued again in 2010 to recover the damages accrued from the government's continued breach by failing to remove the material between 2005 and 2010, including fees collected by the NRC. During that second phase of litigation, the COFC held that although the plaintiffs were entitled to recovery, they could not recover the additional NRC fees because they did not sufficiently prove the breach of contract caused the increase in the fees. The plaintiffs sued a third time to recover all costs incurred after 2011, at which point the COFC granted partial summary judgment for the government on the issue of the NRC fees as barred by the doctrine of collateral estoppel. This fourth case, based upon nearly identical facts, is framed as both a breach of contract claim and a breach of the implied covenant of good faith and fair dealing. The Government moved dismiss the breach claims related to the recovery of the NRC fees based on collateral estoppel and to dismiss the good faith and fair dealing claim as duplicative of the breach of contract claim for which liability had been established in the 1998 case. The COFC (Campbell-Smith, J.) granted the motion to dismiss the NRC fees because the allegations in the complaint were virtually identical to those in the previous complaint and there had been no change in the law between the two suits. The COFC also found that the good faith and fair dealing claim was duplicative of the breach of contract claim. To state a separate claim for breach of the implied covenant of good faith and fair dealing,  a plaintiff must allege some kind of subterfuge—evasion that goes against the spirit of the bargain, lack of diligence, willful rendering of imperfect performance, abuse of power, or interference with performance—founded upon different allegations than the breach of contract claim. The COFC found no alleged facts that even arguably support plaintiff's conclusion that defendant was attempting to avoid its obligations, and therefore granted the motion to dismiss.
Raytheon Co., ASBCA Nos. 60448, 60785 (Apr. 9, 2018)
Raytheon appealed from the CO's denial of two claims relating to additional services rendered under its "Lot 27" contract with the Air Force. About two months before the hearing, the government moved to amend its answer to add an additional "unclean hands" affirmative defense based on the latest round of government depositions of Raytheon personnel, which the government claimed revealed that Raytheon had an undisclosed pre-award plan to complete the Lot 27 contract work with future appropriated funds siphoned away from future missile production contracts that Raytheon hoped to obtain on an annual basis. Raytheon moved to dismiss the additional defense, arguing the ASBCA did not have jurisdiction to entertain the defense because it had not been submitted as  claim to the CO, and that the government did not justify the defense or the delay in raising it. The ASBCA (Scott, A.J.) granted the government's motion to amend its answer. Although the Board recognized that the government's amendment was filed only shortly before the hearing, there was insufficient information for the Board to conclude that the government delayed unduly in raising the defense. The Board also concluded that there was insufficient evidence to establish bad faith on the part of the government or for the Board to decide the futility of the amendment. The ASBCA did, however, allow Raytheon additional discovery and/or submissions both before and after the scheduled hearing.

VII.  CASES TO WATCH

While the Government Contracts Litigation Update does not typically analyze bid protest cases from the GAO or the Court of Federal Claims, two recent cases—a decision from the Court of Federal Claims, and a case still pending before the Federal Circuit— have wide-reaching implications of which government contractors should be aware.

A.  Trade Agreements Act

Acetris Health, LLC v. United States, No. 18-433C (Fed. Cl. May 8, 2018)
The Court of Federal Claims considered Acetris Health, LLC's challenge to the Department of Veterans Affairs' reliance on a determination by Customs and Border Patrol that the pharmaceuticals Acetris provided under contract to the VA and the Department of Defense were considered a product of India because the active ingredient in the drug was not "substantially transformed" in the United States. The VA determined that Acetris was required to supply "only U.S.-made or designated country end products" under the contract because it was subject to the Trade Agreements Act of 1979 ("TAA"). Acetris claimed that the pharmaceuticals it provide were TAA compliant because the foreign ingredients were processed into the final product in the U.S. Acetris challenged CBP's country of origin determination at the Court of International Trade ("CIT") in March 2018. Before the COFC, Acetris lodged a pre-award bid protest challenge to the VA's reliance on CBP's determination in interpreting its solicitation. After receiving the CBP determination, the VA notified Acetris that it could no longer fulfill the relevant contract using the existing pharmaceutical supply, and solicited new proposals to supply a TAA-compliant version of the product. Acetris submitted a proposal that was rejected by the VA. The VA expressed its intention to "rely entirely" on the findings of CBP for the purpose of country of origin determinations for TAA compliance. Acetris challenged both the VA's substantive interpretation of the TAA and its reliance on CBP to make the country of origin determination. The COFC (Sweeney, J.) denied the government's motion to dismiss, finding that  "all of plaintiff's claims are aimed at the actions (or inaction) of the VA" and thus are "properly the subject of a preaward bid protest." The COFC also determined that 28 U.S.C. §1500 does not divest the COFC of jurisdiction because the court determined that the challenge to CBP's country-of-origin determination pending before the CIT was not based on substantially the same operative facts, and that Acetris' claims were ripe for review and stated claims upon which relief could be granted. After oral argument earlier this month, the COFC granted declaratory judgment in favor of Acetris. The COFC found that the VA misconstrued the Trade Agreements clause included in the solicitation as preventing the purchase of products that qualify as domestic end products under relevant FAR provisions. The COFC also held that the VA's reliance on CBP's country of origin determination, rather than independently assessing TAA compliance, was arbitrary and capricious.

B.  Commercial Item Contracting

Palantir USG Inc. v. United States, No. 17-1465 (Fed. Cir. Feb. 8, 2018)
In February, Gibson Dunn argued before the Federal Circuit on behalf of its client Palantir Technologies to uphold a 2016 Court of Federal Claims ruling (Horn, J.) that the Army violated the Federal Acquisition Streamlining Act ("FASA") when it decided to develop a new data-management platform from scratch without undertaking market research to determine whether its needs could be met by a commercially available product. The COFC found that Palantir was wrongly excluded from a $206 million intelligence software procurement when the Army refused to consider procuring its platform on a firm fixed price, commercial item basis, and instead issued a solicitation calling for developmental solutions on a cost-plus basis. On appeal, the Government argued that the COFC erroneously added a requirement to FASA that government market research must "fully investigate" whether commercial items could meet all or part of the agency's requirements, and that the COFC wrongly substituted its judgment in determining that the Army's market research was inadequate. Palantir argued that reversal of the COFC decision would "flout" the FASA procedures requiring that agencies acquire commercial items "to the maximum extent possible," which were designed to prevent federal agencies from "wasting taxpayer funds by developing products that are already available in the commercial marketplace." The Federal Circuit's impending decision in this case will have wide reaching impacts on the procurement community and the deference afforded the Government's market research in developing its solicitation requirements.

VIII.  CONCLUSION

We will continue to keep you informed on these and other related issues as they develop.

The following Gibson Dunn lawyers assisted in preparing this client update: Karen L. Manos, Lindsay M. Paulin, Melinda Biancuzzo, Jessica Altman, Sydney Sherman, and Casper J. Yen.

Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding the issues discussed above.  Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following:

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July 9, 2018 |
2018 Mid-Year FCPA Update

Click for PDF The steady clip of Foreign Corrupt Practices Act ("FCPA") prosecutions set in 2017 has continued apace into the first half of 2018, largely quieting any questions of enforcement of this important statute under the current Administration.  Although this update captures developments through June 30, the enforcers did not have a reprieve for the July 4th holiday, because they announced two corporate enforcement actions in the first week of the month.  From our perspective, all signs point to business as usual at the U.S. Department of Justice ("DOJ") and Securities and Exchange Commission ("SEC"), the two regulators charged with enforcing the FCPA. This client update provides an overview of the FCPA as well as domestic and international anti-corruption enforcement, litigation, and policy developments from the first half of 2018.

FCPA OVERVIEW

The FCPA's anti-bribery provisions make it illegal to corruptly offer or provide money or anything else of value to officials of foreign governments, foreign political parties, or public international organizations with the intent to obtain or retain business.  These provisions apply to "issuers," "domestic concerns," and those acting on behalf of issuers and domestic concerns, as well as to "any person" who acts while in the territory of the United States.  The term "issuer" covers any business entity that is registered under 15 U.S.C. § 78l or that is required to file reports under 15 U.S.C. § 78o(d).  In this context, foreign issuers whose American Depository Receipts ("ADRs") are listed on a U.S. exchange are "issuers" for purposes of the FCPA.  The term "domestic concern" is even broader and includes any U.S. citizen, national, or resident, as well as any business entity that is organized under the laws of a U.S. state or that has its principal place of business in the United States. In addition to the anti-bribery provisions, the FCPA also has "accounting provisions" that apply to issuers and those acting on their behalf.  First, there is the books-and-records provision, which requires issuers to make and keep accurate books, records, and accounts that, in reasonable detail, accurately and fairly reflect the issuer's transactions and disposition of assets.  Second, the FCPA's internal controls provision requires that issuers devise and maintain reasonable internal accounting controls aimed at preventing and detecting FCPA violations.  Prosecutors and regulators frequently invoke these latter two sections when they cannot establish the elements for an anti-bribery prosecution or as a mechanism for compromise in settlement negotiations.  Because there is no requirement that a false record or deficient control be linked to an improper payment, even a payment that does not constitute a violation of the anti-bribery provisions can lead to prosecution under the accounting provisions if inaccurately recorded or attributable to an internal controls deficiency.

FCPA ENFORCEMENT STATISTICS

The following table and graph detail the number of FCPA enforcement actions initiated by DOJ and the SEC during each of the past 10 years.

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018 (as of 7/06)

DOJ

SEC

DOJ

SEC

DOJ

SEC

DOJ

SEC

DOJ

SEC

DOJ

SEC

DOJ

SEC

DOJ

SEC

DOJ

SEC

DOJ

SEC

26

14

48

26

23

25

11

12

19

8

17

9

10

10

21

32

29

10

11

6

Number of FCPA Enforcement Actions Per Year

2018 MID-YEAR FCPA ENFORCEMENT ACTIONS

The first half of 2018 saw a diverse mix of FCPA enforcement activity, from relatively modest to very large financial penalties, the first-ever coordinated U.S.-French bribery resolution, and numerous criminal prosecutions of individual defendants, particularly for non-FCPA charges arising out of foreign corruption investigations.

Corporate FCPA Enforcement Actions

There have been 11 corporate FCPA enforcement actions in 2018 to date.

Elbit Imaging Ltd.

The year's first corporate FCPA enforcement action involved an aggressive interpretation of the FCPA's accounting provisions resulting in a relatively modest financial penalty.  On March 9, 2018, Israeli-based holding company and issuer Elbit Imaging settled an SEC-only cease-and-desist proceeding for alleged FCPA books-and-records and internal controls violations.  According to the SEC's order, between 2007 and 2012 Elbit and an indirect subsidiary paid $27 million to two consultants and one sales agent in connection with real estate projects in Romania and the United States.  Without making direct allegations, the SEC intimated corruption in the Romanian projects by asserting that the two consultants were engaged without any due diligence to facilitate government approvals and were paid significant sums of money without any evidence of work performed.  In connection with the U.S. project, the SEC again asserted that the sales agent was retained without due diligence and paid significant sums of money without evidence of work performed, but in this case concluded that the majority of those funds were embezzled by Elbit's then-CEO. Without admitting or denying the allegations, Elbit consented to the cease-and-desist proceeding and agreed to pay a $500,000 civil penalty.  The SEC acknowledged Elbit's self-reporting to U.S. and Romanian authorities, as well as the fact that Elbit is in the process of winding down its operations as factors in setting the modest penalty and lack of any post-resolution monitoring or reporting obligations.  This resolution marks the lowest monetary assessment in a corporate FCPA enforcement action since June 2016 (Nortek, Inc., covered in our 2016 Mid-Year FCPA Update, in which the company paid just more than $320,000 in disgorgement and prejudgment interest).

Transport Logistics International, Inc.

The first criminal corporate FCPA resolution of 2018 stems from an investigation that we have been following for several years.  On March 12, 2018, Maryland transportation company Transport Logistics International ("TLI") reached a deferred prosecution agreement with DOJ arising from an alleged scheme to make more than $1.7 million in corrupt payments to an official of JSC Techsnabexport ("TENEX")—a Russian state-owned supplier of uranium and uranium enrichment services—in return for directing sole-source uranium transportation contracts to the company.  We first reported on this in our 2015 Year-End FCPA Update in connection with guilty pleas by former TLI Co-President Daren Condrey, wife Carol Condrey, TENEX official Vadim Mikerin, and businessman Boris Rubizhevsky.  Rounding out the charges, on January 10, 2018 the other former TLI Co-President Mark Lambert was indicted on 11 counts of FCPA, wire fraud, and money laundering charges. To resolve the charges of conspiracy to violate the FCPA's anti-bribery provisions, TLI entered into a deferred prosecution agreement and agreed to pay a $2 million criminal penalty, as well as self-report to DOJ on the state of its compliance program over the three-year term of the agreement.  Notably, the $2 million penalty represents a significant departure from the DOJ-calculated fine of $21.4 million, based upon an inability-to-pay analysis by an independent accounting firm hired by DOJ that confirmed TLI's representation that a penalty greater than $2 million would jeopardize the continued viability of the company.  After a significant colloquy with government and company counsel concerning whether DOJ was being unduly lenient in deferring prosecution, the Honorable Theodore Chuang of the U.S. District Court for the District of Maryland approved of the resolution.  Trial in the case against remaining defendant Lambert is currently set for April 2019.

Kinross Gold Corporation

On March 26, 2018, the SEC announced a settled cease-and-desist order against Canadian gold mining company Kinross Gold for alleged violations of the FCPA's accounting provisions.  According to the charging document, in 2010, Kinross acquired two subsidiaries that operated mines in Mauritania and Ghana but, despite due diligence identifying a lack of anti-corruption compliance controls, was slow to implement such controls.  Kinross further allegedly failed to respond to multiple internal audits flagging the inadequate controls, and payments continued to be made to vendors and consultants, often in connection with government interactions, without appropriate efforts to ensure that the funds were not used for improper payments.  Notably, however, the SEC did not allege any specific corrupt payments made by or on behalf of Kinross. Without admitting or denying the allegations, Kinross agreed to pay a $950,000 penalty to resolve the charges.  The SEC's order does not allege that the company realized profits tied to the misconduct and therefore did not order disgorgement.  The SEC acknowledged Kinross's remedial efforts, which the company will continue to self-report to the SEC on for one year.  Kinross has stated that DOJ has closed its investigation without taking any enforcement action.

The Dun & Bradstreet Corporation

On April 23, 2018, the business intelligence company Dun & Bradstreet agreed to settle FCPA accounting charges arising from allegations of improper payments to acquire confidential data in China.  According to the SEC, between 2006 and 2012 two Chinese subsidiaries made payments to Chinese officials and third parties to obtain non-public information that was not subject to lawful disclosure under Chinese law.  One of the subsidiaries and several of its officers were prosecuted and convicted in China for the unlawful procurement of this data. Without admitting or denying the allegations, Dun & Bradstreet consented to the entry of a cease-and-desist order and agreed to disgorge $6.08 million of profits, plus $1.14 million in prejudgment interest, and pay a $2 million civil penalty.  The SEC's order did not impose ongoing reporting requirements on Dun & Bradstreet and credited the company's self-disclosure, which occurred after local police conducted a raid at one of the subsidiaries.  Among other remedial actions, Dun & Bradstreet shuttered one of the subsidiaries.  Citing the FCPA Corporate Enforcement Policy, DOJ issued a public letter declining to prosecute Dun & Bradstreet in light of the SEC resolution and other factors.

Panasonic Corporation

On April 30, 2018, the SEC and DOJ announced the first joint FCPA resolution of 2018, with Japanese electronics company Panasonic and its California-based subsidiary Panasonic Avionics Corporation ("PAC"), respectively.  PAC designs and distributes in-flight entertainment systems and communications services to airlines worldwide.  According to the charging documents, PAC agreed to provide a post-retirement consultancy position to an official at a state-owned airline as PAC was negotiating agreements with the state-owned airline worth more than $700 million.  PAC allegedly paid the official $875,000 for little to no work.  Separately, PAC also allegedly failed to follow its own third-party due diligence protocols in Asia, including by concealing the retention of agents who did not pass screening by employing them as sub-agents to a single qualified agent. To resolve a one-count criminal information charging PAC with causing the falsification of Panasonic's books and records, PAC entered into a deferred prosecution agreement with DOJ and agreed to pay a $137.4 million criminal fine, a 20% discount from the bottom of the applicable Guidelines range based on the company's cooperation but failure to voluntarily disclose.  To resolve civil FCPA anti-bribery and accounting violations, as well as allegations that it fraudulently overstated its income in a separate revenue recognition scheme, Panasonic consented to an SEC cease-and-desist order and agreed to pay $143.2 million in disgorgement and prejudgment interest.  Together, the parent and subsidiary agreed to pay combined criminal and regulatory penalties of more than $280 million. In addition to the monetary penalties, PAC agreed to engage an independent compliance monitor for a period of two years to be followed by one year of self-reporting.  In addition to traditional monitor requirements, such as demonstrated FCPA expertise, the deferred prosecution agreement includes an additional proviso to the list of qualifications for monitor selection—diversity—stating that "[m]onitor selections shall be made in keeping with the Department's commitment to diversity and inclusion."

Société Générale S.A. /Legg Mason, Inc.

Closing out the first half of 2018 corporate enforcement in a big way, on June 4, 2018 DOJ announced two separate but related FCPA enforcement actions with French financial services company Société Générale ("SocGen") and Maryland-based investment management firm Legg Mason, Inc.  Both resolutions stem from SocGen's payment of more than $90 million to a Libyan intermediary, while allegedly knowing that the intermediary was using a portion of those payments to bribe Libyan government officials in connection with $3.66 billion in investments placed by Libyan state-owned banks with SocGen.  A number of those investments were managed by a subsidiary of Legg Mason. To settle the criminal FCPA bribery and conspiracy charges, SocGen entered into a deferred prosecution agreement and had a subsidiary plead guilty.  SocGen also simultaneously resolved unrelated criminal fraud charges of rigging LIBOR rates.  Further, in the first U.S.-French coordinated resolution in a foreign bribery case, SocGen also reached a parallel resolution with the Parquet National Financier ("PNF") in Paris.  After netting out offsets between the bribery resolutions, SocGen agreed to pay $292.78 million to DOJ and $292.78 million to French authorities, in addition to $275 million to resolve DOJ's LIBOR-related allegations.  Adding $475 million paid to the U.S. Commodity Futures Trading Commission in the LIBOR case, the total price tag well exceeds $1.3 billion. Legg Mason had a somewhat lesser role in the alleged corruption scheme, reflected in the fact that it was permitted to enter into a non-prosecution agreement with DOJ with a $64.2 million price tag.  Nearly half of the DOJ resolution amount is subject to a potential credit "against disgorgement paid to other law enforcement authorities within the first year of the [non-prosecution] agreement," a seeming anticipatory nod to a forthcoming FCPA resolution with the SEC. Both companies will self-report to DOJ over the course of the three-year term of their respective agreements.  Neither was required to retain a compliance monitor, although the principal reasoning for lack of monitor in the SocGen case appears to be that the bank will be subject to ongoing monitoring by France's L'Agence Française Anticorruption.

Beam Suntory Inc.

Trailing into the second half of 2018, on July 2, 2018 the SEC announced an FCPA resolution with Chicago-based spirits producer Beam Suntory relating to allegations of improper payments to government officials in India.  According to the SEC, from 2006 through 2012 senior executives at Beam India directed efforts by third parties to make improper payments to increase sales, process license and label registrations, obtain better positioning on store shelves, and facilitate distribution.  The allegations include an interesting cameo by the SEC's 2011 FCPA resolution with Beam competitor Diageo plc (covered in our 2011 Year-End FCPA Update).  The SEC alleged that after the Diageo enforcement action was announced, Beam sent an in-house lawyer to India to investigate whether similar conduct was occurring at Beam India and to implement additional FCPA training.  This review led to a series of investigations culminating in a voluntary disclosure to the SEC. Without admitting or denying the allegations, Beam consented to the entry of a cease-and-desist order to resolve FCPA accounting provision charges and agreed to disgorge $5.26 million of profits, plus $917,498 in prejudgment interest, and pay a $2 million civil penalty.  The SEC's order did not impose ongoing reporting requirements on Beam and acknowledged the company's voluntary self-disclosure, cooperation with the SEC's investigation, and the remedial actions taken by the company, including ceasing operations at Beam India until Beam was satisfied it could operate in a compliant manner.  Beam has announced that it is continuing to cooperate in a DOJ investigation.

Credit Suisse Group AG

Further trailing into the second half of 2018, on July 5 DOJ and the SEC announced the second joint FCPA resolution of 2018 with Swiss-based financial services provider and issuer Credit Suisse.  According to the charging documents, between 2007 and 2013 Credit Suisse's Hong Kong subsidiary hired more than 100 employees at the request of Chinese government officials.  These so-called "relationship hires" were allegedly made to encourage the referring officials to direct business to Credit Suisse and despite the fact that, in many cases, these applicants did not possess the technical skills and qualifications of those not referred by foreign officials. To resolve the criminal investigation, Credit Suisse's Hong Kong subsidiary entered into a non-prosecution agreement and agreed to pay a criminal penalty of just over $47 million.  Notably, Credit Suisse received only a 15% discount from the bottom of the Guidelines range (rather than the maximum 25% available under the FCPA Corporate Enforcement Policy for non-voluntary disclosures) because its cooperation was, allegedly, "reactive and not proactive" and "because it failed to sufficiently discipline employees who were involved in the misconduct."  Credit Suisse will self-report on the status of its compliance program over the three-year term of the agreement. To resolve the SEC investigation, the parent company consented to a cease-and-desist proceeding alleging violations of the FCPA's anti-bribery and internal controls provisions and agreed to pay nearly $25 million in disgorgement plus more than $4.8 million in prejudgment interest.  This brings the total monetary resolution to nearly $77 million. Prior examples of so-called "princeling" FCPA resolutions include JPMorgan Chase & Co. (covered in our 2016 Year-End FCPA Update), Qualcomm, Inc. (covered in our 2016 Mid-Year FCPA Update), and Bank of New York Mellon Corp. (covered in our 2015 Year-End FCPA Update).

Individual FCPA and FCPA-Related Enforcement Actions

The number of FCPA prosecutions of individual defendants during the first half of 2018 was a relatively modest half dozen, including the indictment of former TLI Co-President Mark Lambert discussed above.  But that number masks the true extent of FCPA-related enforcement as DOJ brought twice that many prosecutions in money laundering and wire fraud actions arising out of FCPA investigations.  In large part, these non-FCPA charges are a result of DOJ pursuing the foreign official recipients of bribe payments, who cannot be charged under the FCPA but can be charged with criminal offenses (including money laundering) associated with the receipt of those bribes.

FCPA-Related Charges in Och-Ziff Case

In our 2017 Mid-Year FCPA Update, we covered civil FCPA charges filed by the SEC against former Och-Ziff Capital Management Group LLC executive Michael L. Cohen.  On January 3, 2018, a criminal indictment was unsealed charging Cohen with 10 counts of investment adviser fraud, wire fraud, obstruction of justice, false statements, and conspiracy.  According to the indictment, Cohen violated his fiduciary duties to a charitable foundation client by failing to disclose his personal interest in investments he promoted relating to an African mining operation and then engaged in obstructive acts to cover up the transaction after the SEC began investigating. Cohen has pleaded not guilty to all charges.  No trial date has been set.

Additional FCPA and FCPA-Related Charges in PDVSA Case

We have been reporting on DOJ's investigation of a corrupt pay-to-play scheme involving Venezuela's state-owned energy company, Petróleos de Venezuela S.A. ("PDVSA"), since our 2015 Year-End FCPA Update.  On February 12, 2018, DOJ unsealed and announced charges against five new defendants for their alleged participation in the scheme:  Luis Carolos De Leon Perez, Nervis Gerardo Villalobos Cardenas, Cesar David Rincon Godoy, Rafael Ernesto Reiter Munoz, and Alejandro Isturiz Chiesa.  All five defendants are charged with money laundering; De Leon and Villalobos are additionally charged with FCPA conspiracy. According to the indictment, in 2011 PDVSA found itself in significant financial distress relating to the sharp reduction in global oil prices.  Knowing that the agency would be unable to pay all of its vendors, the five defendants (the three non-FCPA defendants with PDVSA and the two FCPA defendants as brokers) concocted a scheme to solicit PDVSA vendors to obtain preferential treatment in payment only if they agreed to kickback 10% of the payments to the defendants. Four of the five defendants were arrested in Spain in October 2017, whereas Isturiz remains at large.  Cesar Rincon was extradited from Spain in early February and, on April 19, 2018, pleaded guilty to one count of money laundering conspiracy and was ordered to forfeit $7 million, pending a summer sentencing date.  De Leon, a U.S. citizen, has been extradited to the United States and has pleaded not guilty, although pre-trial filings suggest that a plea agreement may be in the works.  Villalobos and Reiter remain in Spanish custody pending extradition proceedings. These charges bring to 15 the number of defendants charged (publicly) in the wide-ranging PDVSA corruption investigation.  With Cesar Rincon, 11 of the 15 have now pleaded guilty.

Additional FCPA Charges in U.N. Bribery Case

We have been reporting on FCPA and non-FCPA charges associated with a scheme to bribe U.N. ambassadors to influence, among other things, the development of a U.N.-sponsored conference center in Macau, since our 2015 Year-End FCPA Update.  On April 4, 2018, Julia Vivi Wang, a former media executive who promoted U.N. development goals, pleaded guilty to three counts of FCPA bribery, conspiracy, and tax evasion in connection with her role in the scheme.  Wang was originally charged in March 2016, but a superseding charging document was filed in 2018.  Wang's sentencing has been set for September 5, 2018.

Additional FCPA and FCPA-Related Charges in Petroecuador Case

In our 2017 Year-End FCPA Update, we reported on the money laundering indictment of Marcelo Reyes Lopez, a former executive of Ecuadorian state-owned oil company Petroecuador.  Lopez pleaded guilty on April 11, 2018 to money laundering conspiracy in connection with his alleged receipt of bribes. On March 28, 2018, another former Petroecuador executive, Arturo Escobar Dominguez, likewise pleaded guilty to one count of conspiracy to commit money laundering.  Then, on April 19, 2018, a grand jury in the Southern District of Florida returned an indictment charging two additional defendants:  Frank Roberto Chatburn Ripalda and Jose Larrea.  Chatburn is charged with FCPA bribery, money laundering, and conspiracy in connection with his alleged payment of $3.27 million in bribes to Petroecuador officials to obtain $27.8 million in contracts for his company.  Larrea is charged with conspiracy to commit money laundering in connection with the scheme.  Chatburn has yet to be arraigned, and Larrea has pleaded not guilty with a current trial date of August 2018.

New FCPA and FCPA-Related Charges in Setar Case

In April 2018, charges against a former Florida telecommunications company executive, Lawrence W. Parker, Jr., and a former official of the Aruban state-owned telecommunications company Servicio di Telecomunicacion di Aruba N.V. ("Setar"), Egbert Yvan Ferdinand Koolman, were unsealed in the U.S. District Court for the Southern District of Florida.  According to the charging documents, Koolman accepted $1.3 million in bribes from Parker and others, for several years, in exchange for providing confidential information concerning Setar business opportunities.  Parker was charged with one count of FCPA conspiracy and Koolman with one count of money laundering conspiracy. Both Parker and Koolman have pleaded guilty and have been sentenced to 35 and 36 months in prison, in addition to $700,000 and $1.3 million in restitution, respectively.

New FCPA-Related Charge in HISS Case

In our 2015 Mid-Year FCPA Update, we covered DOJ's civil action to forfeit nine New Orleans properties—worth approximately $1.5 million—filed in the U.S. District Court for the Eastern District of Louisiana.  On April 27, 2018, a grand jury sitting in the same district returned an indictment criminally charging Carlos Alberto Zelaya Rojas, the nominal owner of those properties, with 12 counts of money laundering and other offenses associated with the impediment of the civil forfeiture proceedings.  According to the indictment, Zelaya is the brother of the former Executive Director of the Honduran Institute of Social Security ("HISS").  The brother, who according to press reports was criminally charged in Honduras, allegedly received millions of dollars in bribes from two Honduran businessmen.  Zelaya then assisted with the laundering of at least $1.3 million of those bribe payments, including through the purchase of the nine properties. On June 27, 2018, Zelaya pleaded guilty to a single count of money laundering conspiracy and has been detained pending an October sentencing date.  As part of this plea, Zelaya consented to the forfeiture of the nine properties.

Additional FCPA-Related Charges in Rolls-Royce Case

In our 2017 Mid-Year FCPA Update, we covered the multi-jurisdictional resolution of criminal bribery charges against UK engineering company Rolls-Royce.  The corporate charges were then supplemented by FCPA and FCPA-related charges against five individual defendants as reported in our 2017 Year-End FCPA Update.  On May 24, 2018, DOJ announced a superseding indictment that charged two new defendants—Vitaly Leshkov and Azat Martirossian—with money laundering charges associated with the Rolls-Royce bribery scheme. According to the indictment, Leshkov and Martirossian were employees of a technical advisor to a state-owned joint venture between the governments of China and Kazakhstan, formed to transport natural gas between the two nations.  In this capacity, they allegedly "had the ability to exert influence over decisions" by the state-owned joint venture and accordingly qualified as foreign officials even though they had no official government positions.  They then participated in a scheme to solicit bribes on behalf of employees of the state-owned joint venture from employees of Rolls-Royce. Neither Martirossian nor Leshkov have made a physical appearance in U.S. court to answer the charges.  Nevertheless, Martirossian already has moved to dismiss the indictment as described immediately below.

2018 MID-YEAR CHECK-IN ON FCPA ENFORCEMENT LITIGATION

Martirossian Motion to Dismiss

As just described, Azat Martirossian was indicted on May 24, 2018 on money laundering charges associated with the alleged Rolls-Royce bribery scheme in China and Kazakhstan.  Although Martirossian reportedly remains in China and has yet to make a physical appearance in U.S. court, he very quickly filed a motion to dismiss the indictment on the grounds that it insufficiently alleges a U.S. nexus.  The motion also contests the "aggressive theory" that Martirossian qualifies as a "foreign official" under the FCPA based on his work as a technical advisor to a state-owned entity. DOJ's initial response briefly contests Martirossian's arguments on the merits, but focuses more on DOJ's contention that the motion should be held in abeyance until Martirossian submits himself to the jurisdiction of the Court pursuant to the fugitive disentitlement doctrine.  The motion remains pending before Chief Judge Edmund A. Sargus of the U.S. District Court for the Southern District of Ohio.

Ho Motion to Dismiss

We reported in our 2017 Year-End FCPA Update on the December 2017 indictment of Chi Ping Patrick Ho, the head of a Chinese non-governmental organization that holds "special consultative status" at the United Nations, on FCPA and money laundering charges associated with his alleged role in corruption schemes involving Chad and Uganda.  After pleading not guilty earlier this year, on April 16 Ho filed a motion to dismiss certain of the counts.  Ho argues, among other things, that the indictment inconsistently charges him with violating both 15 U.S.C. § 78dd-2, which applies to "domestic concerns," and § 78dd-3, which applies to persons who act within U.S. territory in furtherance of a bribe.  Ho additionally contends that the money laundering charges fail because they cannot be based on wires sent from one foreign jurisdiction to another foreign jurisdiction—here Hong Kong to Dubai and Uganda—with no U.S. nexus other than the fact that they passed through a New York bank account.  DOJ, as one would expect, opposed the motion, which remains pending before the Honorable Loretta A. Preska of the U.S. District Court for the Southern District of New York. 

Denial of Ng Seng's Motion for New Trial / Sentencing

We covered in our 2017 Year-End FCPA Update the conviction after trial of Macau billionaire Ng Lap Seng on FCPA, federal programs bribery, and money laundering charges associated with his role in a scheme to pay more than $1 million in bribes to two U.N. officials in connection with, among other things, a plan to build a U.N.-sponsored conference center in Macau.  Seng subsequently filed a Rule 33 motion for a new trial, arguing that DOJ introduced a new theory of liability at trial, constituting an amendment of or prejudicial variance from the indictment, as well as that the Government's key witness, cooperating defendant Francis Lorenzo, committed perjury at trial, which DOJ failed adequately to investigate and correct. On May 9, 2018, the Honorable Vernon S. Broderick of the U.S. District Court for the Southern District of New York denied the motion.  In a lengthy opinion, steeped in the facts of the four-week trial, the Court found that there was no constructive amendment of or prejudicial variance from the superseding indictment based on the evidence adduced at trial, and further that Seng failed to meet his burden of establishing perjury by Lorenzo, and that even if there had been perjury it was not material to the jury's verdict. Judge Broderick subsequently sentenced Seng to 48 months in prison and ordered approximately $1.8 million in forfeiture and restitution.  Seng has appealed to the Second Circuit, which in an early ruling denied Seng's motion for bail pending appeal but ordered his appeal to be expedited. In the same case, on February 28, 2018, Judge Broderick sentenced Seng's co-defendant and former assistant, Jeff Yin, to 7 months in prison and nearly $62,000 in restitution for his tax evasion conviction.

Motion to Intervene in Och-Ziff Sentencing Proceedings

As reported in our 2016 Year-End FCPA Update, New York-based hedge fund Och-Ziff Capital Management Group LLC, together with its investment advisor subsidiary, reached a coordinated FCPA resolution with DOJ and the SEC in September 2016, pursuant to which the entities agreed to pay just over $412 million in total.  After several adjournments of the sentencing hearing, on February 20, 2018 a self-styled victim of Och-Ziff's alleged corruption, Africo Resources Limited, filed a letter with the Court asserting that it is entitled to a share of the proceeds collected by DOJ pursuant to the Mandatory Victim Restitution Act.  Och-Ziff, represented by Gibson Dunn, has filed a submission disputing Africo Resources' claims.  The Honorable Nicholas G. Garaufis of the U.S. District Court for the Eastern District of New York has yet to rule.

SEC Proceedings Against Och-Ziff Defendants Stayed

As reported in our 2017 Year-End FCPA Update, former Och-Ziff executive Michael Cohen and analyst Vanja Baros filed motions to dismiss the civil FCPA proceedings brought against them by the SEC.  After those motions were fully briefed and argued, but pending ruling, DOJ unsealed an indictment that charged Cohen criminally as discussed above. On February 9, 2018, DOJ filed a motion to intervene and stay the SEC civil suit on the grounds that the facts of the civil cases overlap substantially with the criminal case, even though the indictment does not allege FCPA violations.  Cohen and Baros did not object to a stay of the SEC case, but requested that the Court rule on their pending motions to dismiss first.  On May 11, 2018, the Honorable Nicholas G. Garaufis granted DOJ's motion to stay discovery in the SEC's case, but denied the request to stay ruling on the motions to dismiss.  A decision on those motions remains pending.

Khoury's Motion to Unseal Indictment

We reported in our 2017 Year-End FCPA Update on the unorthodox motion filed by Samir Khoury to unseal an indictment against him that may or may not exist.  Khoury, a former consultant named in prior FCPA corporate resolutions as "LNG Consultant," contends that it is likely that there is an indictment pending against him under seal since approximately 2009, waiting for him to travel to the United States or another country with an extradition treaty.  Khoury asserts that the indictment should be unsealed and then dismissed given the prejudicial effect of the passage of time. Oral argument on the motion was heard before the Honorable Keith P. Ellison of the U.S. District Court for the Southern District of Texas on March 22, 2018.  At the hearing, Khoury's counsel presented argument that 12 potential defense witnesses have died since 2009, and that Khoury has been unable to open bank accounts in his native Lebanon and has lost business opportunities because of his perceived affiliation with the Bonny Island scheme.  In response, attorneys for DOJ refused to acknowledge whether Khoury had or had not been indicted, but indicated that if an indictment did exist it could hold the indictment under seal indefinitely. On June 11, 2018, Judge Ellison issued a Memorandum Opinion and Order.  He first pushed aside DOJ's "issue preclusion" arguments that decisions from several years prior resolve this matter, holding that the three years that has passed since that litigation represent a changed circumstance warranting another look.  Similarly, the Court rejected DOJ's "fugitive disentitlement" argument, holding that Khoury is not a fugitive because he did not abscond from the United States but rather has at all relevant times been living in his native Lebanon.  Judge Ellison gave DOJ 20 days to submit to the Court, in camera, any evidence it "wishes to adduce in opposition to Mr. Khoury's Motion to Unseal." DOJ filed a sealed pleading on July 2, 2018.  The next day, Khoury filed a motion to unseal any portion of that pleading that was beyond the contours of what the Court permitted.  This motion, as well as the underlying motion to unseal and dismiss, remain pending.

Guilty Plea in Vietnamese Skyscraper Case

In our 2017 Mid-Year FCPA Update, we reported on the indictment of New Jersey real estate broker Joo Hyun Bahn in connection with a feigned plot to bribe an official of the sovereign wealth fund of a Middle Eastern country (subsequently identified as Qatar) to induce the official to cause the fund to purchase a skyscraper in Hanoi.  The alleged agent of the sovereign wealth fund subsequently admitted that the bribery plot was a sham and that he pocketed the bribe payment. On January 5, 2018, Bahn pleaded guilty to one count of FCPA conspiracy and one count of violating the FCPA in the U.S. District Court for the Southern District of New York.  His sentencing is scheduled for September 6, 2018 before the Honorable Edgardo Ramos.

Guilty Plea in Siemens Case

As reported in our 2017 Year-End FCPA Update, former Siemens executive Eberhard Reichert was extradited to the United States, following his arrest in Croatia, to face a December 2011 indictment charging him and seven others in relation to their alleged roles in a scheme to bribe Argentine officials in connection with a $1 billion contract to create national identity cards. On March 15, 2018, Reichert pleaded guilty in the U.S. District Court for the Southern District of New York to one count of conspiring to violate the anti-bribery, internal controls, and books-and-records provisions of the FCPA and to commit wire fraud.  Reichert awaits a sentencing date before the Honorable Denise L. Cote.

2018 MID-YEAR FCPA-RELATED DEVELOPMENTS

In addition to the enforcement activity covered above, the first six months of 2018 saw DOJ issue important guidance on how it will administer criminal enforcement, as well as a Supreme Court decision with significant ramifications for FCPA whistleblowers.

DOJ Announces "Piling On" Policy

On May 9, 2018, Deputy Attorney General Rod J. Rosenstein introduced a new DOJ "Policy on Coordination of Corporate Resolution Penalties."  Announcing the policy at a New York City Bar event, Rosenstein said that it attempts to discourage "piling on" by different enforcement authorities punishing the same company for the same conduct. Incorporated in Sections 1-12.100 and 9-28.1200 of the U.S. Attorneys' Manual, the new policy directs federal prosecutors to "consider the totality of fines, penalties, and/or forfeiture imposed by all Department components as well as other law enforcement agencies and regulators in an effort to achieve an equitable result."  The policy has four key components:
  • First, prosecutors may not use the specter of criminal prosecution as leverage in negotiating a civil settlement;
  • Second, if multiple DOJ components are investigating the same company for the same conduct, they should coordinate to avoid duplicative penalties;
  • Third, DOJ should coordinate with and consider fines, penalties, and/or forfeiture paid to other federal, state, local, or foreign enforcement authorities investigating the same company for the same conduct; and
  • Fourth, the policy sets forth factors DOJ should consider in determining whether multiple penalties are appropriate, including the egregiousness of wrongdoing, statutory requirements, the risk of delay in achieving resolution, and the adequacy and timeliness of a company's disclosures to and cooperation with DOJ.
In our view, the policy largely reflects pre-existing DOJ practice in the FCPA arena, where DOJ routinely coordinates resolutions with the SEC and, increasingly, participates in cross-border resolutions by, among other things, crediting a company's payments to foreign enforcement authorities in calculating the U.S. criminal fine.  We covered this latter phenomenon in our 2017 Year-End FCPA Update.

Supreme Court Decision Resolves Dispute Over Who is a "Whistleblower"

On February 21, 2018, the U.S. Supreme Court unanimously held in Digital Realty Trust, Inc. v. Somers that the anti-retaliation provision of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act covers only those who report an alleged violation of the federal securities laws to the SEC.  The Court's decision reversed a Ninth Circuit ruling that Dodd-Frank's anti-retaliation provision also covers employees who report such issues internally without reporting them to the SEC.  Although the statutory definition of a "whistleblower" as "any individual who provides . . . information relating to a violation of the securities laws to the [SEC], in a manner established . . . by the [SEC]," appeared to be clear to all nine justices, this issue had sharply divided the lower courts in recent years. The holding in Digital Realty has been interpreted by some as a harbinger of future potential whistleblowers bypassing internal reporting channels and going directly to the SEC to ensure they are protected.  Although we agree that the Court's decision could affect the decision-making calculus of a would-be whistleblower, studies routinely show that the vast majority of employees report their concerns internally first, and that they report externally only after they feel their concerns have not been adequately addressed.  We are not certain that this phenomenon will change, at least dramatically, and we thus advise our clients and friends that it is more important now than ever for companies to scrutinize their internal policies and procedures to ensure that they encourage internal reporting, protect those who do, and robustly investigate the concerns expressed.  For more on the Supreme Court's decision, please see our Client Alert, "Supreme Court Says Whistleblowers Must Report to the SEC Before Suing for Retaliation Under Dodd-Frank."

2018 MID-YEAR KLEPTOCRACY FORFEITURE ACTIONS

We continue to follow DOJ's Kleptocracy Asset Recovery Initiative, spearheaded by DOJ's Money Laundering and Asset Recovery Section.  The initiative uses civil forfeiture actions to freeze, recover, and, in some cases, repatriate the proceeds of foreign corruption.  The first half of 2018 saw continued coordination between attorneys from MLARs and DOJ's FCPA Unit, as they have been frequently appearing in one another's enforcement actions, working hand-in-glove across section lines.  As stated by then-Acting Deputy Assistant Attorney General (now Gibson Dunn partner) M. Kendall Day in his February 6, 2018 testimony before the Senate Committee on the Judiciary, "One of the most effective ways to deter criminals . . . is to follow the criminals' money, expose their activity and prevent their networks from benefitting from the enormous power of [the U.S.] economy and financial system." In our 2016 and 2017 Year-End FCPA Updates, we reported on DOJ's massive civil forfeiture action seeking to recover more than $1 billion in assets associated with Malaysian sovereign wealth fund 1Malaysia Development Berhad ("1MDB").  In February 2018, a 300-foot superyacht allegedly bought with money stolen from 1MDB was impounded on behalf of U.S. authorities off the coast of Bali.  DOJ seeks to bring the yacht to the United States where it can be taken into U.S. government custody and sold.  In March, Hollywood production company Red Granite Pictures (the company that produced The Wolf of Wall Street) agreed to pay $60 million to resolve a civil lawsuit stemming from the DOJ's investigation.  Red Granite was co-founded by the stepson of the Malaysian prime minister, and DOJ alleged that three of Red Granite's productions were funded with money stolen from 1MDB.

2018 MID-YEAR FCPA-RELATED PRIVATE CIVIL LITIGATION

We continue to observe that although the FCPA does not provide for a private right of action, various causes of action are employed by civil litigants in connection with losses allegedly associated with FCPA-related conduct.  A selection of matters with developments in the first half of 2018 follows.

Shareholder Lawsuits

  • Centrais Electricas Brasileiras S.A. ("Eletrobras"):  On May 2, 2018, Eletrobras entered into a $14.75 million settlement agreement with shareholders to resolve claims that the government-controlled utility made misrepresentations in its public filings regarding the company's financials and internal controls in connection with a bid-rigging scheme for service and engineering contracts.  In a press release, Eletrobras stated that it made no admission of wrongdoing or misconduct, but entered into the agreement for the best interests of its shareholders.  A hearing on the proposed settlement is scheduled before the Honorable John G. Koeltl of the U.S. District Court for the Southern District of New York on July 17, 2018.
  • Cobalt International Energy, Inc.:  On April 5, 2018, the U.S. Bankruptcy Court for the Southern District of Texas approved a Chapter 11 plan by Cobalt on the heels of a consolidated class action against the exploration and production company for material misrepresentations regarding an alleged bribery scheme involving Angolan officials and the true potential of the company's Angolan wells.  In June 2017, the Honorable Nancy F. Atlas certified a class of investors who purchased the company's securities between March 2011 and November 2014.  In February 2018, the plaintiffs voluntarily dismissed the class action without prejudice because of the bankruptcy proceedings.
  • Embraer S.A.:  On March 30, 2018, the U.S. District Court for the Southern District of New York dismissed a class action lawsuit against Brazilian-based aircraft manufacturer Embraer, which had contended that Embraer made false statements in its securities filings pertinent to its 2016 FCPA resolution.  In dismissing the suit, the Honorable Richard M. Berman explained that a company's filings need not constitute a wholesale "confession" and that companies "do not have a duty to disclose uncharged, unadjudicated wrongdoing."  The Court found that Embraer properly disclosed that it might have to pay fines or incur sanctions as a result of the investigation, that the company's financial statements were accurate, and that because Embraer's code of ethics was "inherently aspirational," an undisclosed breach of the code was not actionable under the securities laws.
  • Petróleo Brasileiro S.A. – Petrobras:  On June 4, 2018, the U.S. District Court for the Southern District of New York held a final settlement hearing for a securities class action brought against Brazil's state oil company Petrobras.  As previously reported in our 2017 Mid-Year FCPA Update, the class action plaintiffs—purchasers of Petrobras securities in the United States—alleged that Petrobras made materially false and misleading statements about its earnings and assets as part of a far-reaching money laundering and bribery scheme in Brazil.  The settlement, which does not involve any admission of wrongdoing or misconduct by Petrobras and, in fact, includes an express denial of liability, resolves these claims for a total of $2.95 billion paid by Petrobras plus an additional $50 million paid by its external auditor, PricewaterhouseCoopers Auditores Independentes ("PwC Brazil").  In a series of opinions and orders from June 25 to July 2, 2018, the Honorable Jed S. Rakoff approved of the settlement, but reduced counsel fees for the plaintiffs by nearly $100 million, to just over $200 million total.

Civil Fraud / RICO Actions

Bermuda

As reported in our 2017 Mid-Year FCPA Update, the Government of Bermuda filed a Racketeer Influenced and Corrupt Organizations Act ("RICO") lawsuit in U.S. District Court for the District of Massachusetts against Lahey Clinic, Inc., alleging that, for nearly two decades, the defendants conspired with Dr. Ewart Brown—the former Premier of Bermuda, a member of Bermuda's Parliament, and the owner of two private health clinics in Bermuda—to receive preferential treatment.  On March 8, 2018, the Honorable Indira Talwani granted Lahey's motion to dismiss, finding the Government of Bermuda had failed to demonstrate that it had suffered an injury to its U.S.-held business or property as a result of the alleged schemes.

EIG Global Energy Partners Litigation

In our 2017 Mid-Year FCPA Update we covered the civil fraud lawsuit against Petrobras filed by various investment funds, including EIG Global Energy Partners, alleging the funds lost their investment in an offshore drilling project known as "Sete" as a result of the Operation Car Wash scandal.  On March 30, 2017, the U.S. District Court for the District of Columbia largely denied Petrobras's motion to dismiss, finding in relevant part that Petrobras was not immune from civil lawsuit under the Foreign Sovereign Immunities Act ("FSIA") because the suit concerned Petrobras's commercial activities having a "direct effect" in the United States.  Petrobras took an interlocutory appeal of the FSIA ruling. On July 3, 2018, the U.S. Court of Appeals for the District of Columbia Circuit affirmed the judgment of the district court in a 2-1 decision authored by the Honorable Karen L. Henderson.  "Although a foreign state is presumptively immune from the jurisdiction of United States courts," the Court held that the "direct-effect" exception to the FSIA applied on the facts as alleged by EIG in its complaint, while at the same time acknowledging that other "third-party lenders might have also injured EIG" and that the "locus" of the tort was foreign.  The Honorable David B. Sentelle filed a dissenting opinion in which he concluded that the requisite "direct effect" on U.S. commerce had not been established sufficiently to divest Petrobras of its presumptive right to immunity from suit in the U.S. courts. This is not the only RICO litigation initiated by EIG arising out of its failed Brazilian investment.  As summarized in our 2017 Year-End FCPA Update, in December 2017 Keppel Offshore & Marine Ltd. paid more than $422 million in penalties for its alleged bribery scheme with Brazilian government officials, including officials at Petrobras.  On February 6, 2018, EIG funds that had invested with Keppel filed suit in the U.S. District Court for the Southern District of New York seeking more than $660 million in damages for alleged RICO violations.  Plaintiffs allege that Keppel did not disclose its scheme to bribe Brazilian officials to secure contracts for the Sete project, and, after being discovered, the bribery scheme effectively wiped out EIG's $221 million investment.  EIG has since amended its complaint to add additional predicate acts, and a briefing schedule for the motion to dismiss has been issued by the Honorable Paul G. Gardephe.

Harvest Natural Resources

On February 16, 2018, a recently-defunct Texas-based energy company, Harvest Natural Resources, Inc., filed suit in the U.S. District Court for the Southern District of Texas against various individuals and entities affiliated with the Venezuelan government and Venezuela's state oil company, PDVSA.  The complaint alleges that, because Harvest refused to pay four separate bribes to Venezuelan officials in the pay-to-play scheme resulting in criminal prosecutions as described above, the Venezuelan government wrongfully refused to approve the sale of Harvest's energy assets, forcing Harvest to sell the assets to a different buyer at a loss of approximately $470 million.  The complaint further alleges that by requiring bribes to approve sales, Venezuela tainted the market and made it impossible for law-abiding companies to conduct business within the country.  The complaint claims that the defendants violated both the RICO and antitrust laws. On April 30, 2018, the defendants moved to dismiss the suit for failure to state a claim.  On May 11, 2018 Chief Judge Lee H. Rosenthal granted Harvest's motion for jurisdictional discovery to test defendants' jurisdictional ties and contacts.

Setar

On March 3, 2017, Setar, N.V., filed a civil suit in the U.S. District Court for the Southern District of Florida against several individuals and entities, including Lawrence W. Parker, Jr. and former Setar official Egbert Yvan Ferdinand Koolman, who as discussed above pleaded guilty to one count of FCPA conspiracy and one count of money laundering conspiracy, respectively.  In relevant part, an amended complaint filed in February 2018 alleges that Koolman orchestrated a years-long scheme to steal more than $15 million from Setar through kickbacks and other improper means.  According to Setar's amended complaint, when the Panama Papers (covered in our 2016 Mid-Year FCPA Update) became public and linked Koolman to a British Virgin Islands company, this led to an internal investigation that resulted in Koolman's termination and the identification of the scheme.  Various motions to dismiss have been filed, and the proceedings are ongoing.

FCPA-Related FOIA Litigation

100Reporters LLC

We have been covering for several years the Freedom of Information Act ("FOIA") lawsuit filed by media organization 100Reporters against DOJ in the U.S. District Court for the District of Columbia.  100Reporters sought records relating to DOJ's 2008 FCPA resolution with Siemens AG and the monitorship reports prepared by Dr. Theo Waigel and his U.S. counsel, F. Joseph Warin of Gibson Dunn. As discussed in our 2017 Mid-Year FCPA Update, on March 31, 2017, the Honorable Rudolph Contreras granted defendants' motions for summary judgment, in part, and denied in its entirety 100Reporters' cross-motion for summary judgment.  The Court accepted Gibson Dunn's position on behalf of Dr. Waigel that the "consultant corollary" to the deliberative process privilege may extend to communications between a government agency and an independent monitor and thereby shield information from disclosure under FOIA Exemption 5—the first time a court has applied the consultant corollary to a compliance monitor.  Judge Contreras denied summary judgment on these grounds because DOJ did not specifically identify the deliberative process at issue with respect to each type of documents withheld by DOJ, and left the door open for defendants to submit further affidavits to support this argument.  The Court also ordered DOJ to submit a copy of one monitorship work plan and one monitorship report for in camera review to assess whether any of the withheld materials could be segregated from non-exempt material. In response to the Court's order, DOJ submitted two new declarations from DOJ personnel involved in the monitorship, an amended chronology of events supporting the deliberative process privilege, and the materials required for in camera review.  DOJ and 100Reporters filed renewed cross-motions for summary judgment. On June 18, 2018, the Court granted in part and denied in part both sets of cross-motions for summary judgment.  Judge Contreras scrutinized the materials submitted by DOJ and held that DOJ's Exemption 4 withholdings were overbroad and although DOJ had justified withholding certain information under Exemption 5, those withholdings also were overbroad.  Ultimately, the Court determined that certain materials should be produced to 100Reporters; however, the Court determined that DOJ properly withheld the monitorship reports themselves (aside from a single, brief "best practices" subsection of each report), as well as draft work plans, presentations by the Monitor to DOJ, and correspondence among the Monitor, monitorship team, and DOJ.  Thus, the core monitorship materials, including the monitorship reports, will be withheld.  Judge Contreras ordered DOJ to reexamine its withholdings and redactions in light of the Court's guidance and disclose the newly identified non-exempt information to 100Reporters.

Monitor Candidates

As covered in our 2016 Year-End and 2017 Mid-Year FCPA Updates, GIR Just Anti-Corruption journalist Dylan Tokar filed a December 2016 FOIA lawsuit in the U.S. District Court for the District of Columbia seeking disclosure of the names of corporate compliance monitor candidates submitted by 15 companies that settled FCPA charges through agreements that contained a monitorship requirement, as well as information regarding the DOJ committee tasked with evaluating and selecting such candidates.  In 2017, DOJ provided the identity of some of the firms associated with the monitorship candidates and certain information about the DOJ committee—but withheld the names of the candidates who were not selected, citing privacy concerns reflected in FOIA Exemptions 6 and 7(C).  When DOJ refused to answer a second request for the candidate names, the parties cross-moved for summary judgment. On March 29, 2018, the Honorable Rudolph Contreras granted GIR Just Anti-Corruption's motion for summary judgment.  The Court rejected DOJ's contention that the FOIA request would not lead to enhanced public understanding of the monitor selection process, instead concluding that GIR Just Anti-Corruption "sufficiently demonstrated that the public interest will be significantly served by the release of these names."  The Court also rejected DOJ's argument that its refusal to disclose the names of monitorship candidates fell under FOIA exemption 7(C), which traditionally shields individuals from the stigma of being associated with an ongoing investigation.  The Court denied the majority of DOJ's cross-motion for summary judgment with the exception of granting DOJ's argument regarding redaction of information relating to efforts by one of the companies to enhance its compliance program on trade secrets grounds.  DOJ released the names to GIR Just Anti-Corruption in June 2018.

2018 MID-YEAR INTERNATIONAL ANTI-CORRUPTION DEVELOPMENTS

World Bank Integrity Vice Presidency Expands Consideration of Monitor Candidates

In March 2018, the World Bank—through Integrity Vice Presidency ("INT") head Pascale Hélène Dubois—changed course regarding those it will allow to serve as a compliance monitor for companies sanctioned by the World Bank.  Ms. Dubois explained in a written response to GIR Just Anti-Corruption that the World Bank now will consider representatives of law firms with concurrent cases before INT, so long as the individuals proposed as monitors are not currently advising on those cases.  By revising the prior approach of informally disqualifying candidates from firms that had faced INT as adversaries in sanctions proceedings, the World Bank has broadened the pool of potential candidates. Also in March, the World Bank Office of Suspension and Debarment ("OSD") released a 10-year update of metrics regarding OSD's role in World Bank enforcement.  The report illustrates the depth and breadth of efforts by the World Bank to ensure that those who participate in projects financed with World Bank funds play by World Bank rules, but also shows the difficulty of successfully challenging INT allegations of misconduct:  historically, OSD has agreed with the preliminary determinations of INT—agreeing in 96% of cases that INT had presented sufficient evidence for at least one claim set forth, and in 62% of cases that INT had presented sufficient evidence for all claims set forth.

Europe

United Kingdom

As we reported in our 2017 Year-End United Kingdom White Collar Crime Update, last year six individuals were charged by the UK Serious Fraud Office ("SFO") in connection with investigations of Unaoil.  The first half of 2018 brought additional developments in this investigation.  On May 22, 2018, the SFO announced charges against Basil Al Jarah (Unaoil's Iraq partner) and Ziad Akle (Unaoil's territory manager for Iraq) for conspiracy to pay alleged bribes to secure a $733 million contract to build two oil pipelines in Iraq.  And on June 26, 2018, the SFO announced charges against Unaoil Monaco SAM and Unaoil Ltd.  Unaoil Ltd was charged in connection with the same oil pipeline project, while Unaoil Monaco SAM was charged with conspiracy to make corrupt payments to secure the award of contracts for SBM Offshore.  Unaoil has been summoned to appear at the Westminster magistrates court in London on July 18, 2018. In other enforcement developments, following a three-day trial in the High Court in London, in March 2018 the SFO secured recovery of £4.4 million from two senior Chad diplomats to the United States who received bribes from Canadian oil and gas company Griffiths Energy International in exchange for securing oil development rights.  This is the first time that money was returned overseas in a civil recovery case.  As reported in our 2013 Year-End FCPA Update, on January 22, 2013 Griffiths entered a guilty plea in Canada and paid a CAD $10.35 million fine in connection with the alleged bribery. Look for much more on UK white collar developments in our forthcoming 2018 Mid-Year United Kingdom White Collar Crime Update, to be released on July 16, 2018.

France

As discussed above, in June 2018 SocGen entered into a deferred prosecution agreement with DOJ and reached a parallel settlement with the French PNF in the first coordinated enforcement action by DOJ and French authorities in an overseas anti-corruption case.  SocGen will also be subject to ongoing monitoring by the L'Agence Française Anticorruption. In two decisions this year, France's Supreme Court—the Cour de Cassation—limited the use of "international double jeopardy" as a viable defense to criminal prosecution.  French law provides that a criminal conviction in another country will preclude prosecution in France if no act related to the conduct took place in France.  But in March 2018, the French Court ruled that the Swiss company Vitol could be prosecuted for charges related to its involvement in the U.N. Oil-for-Food Program, despite having entered a guilty plea for grand larceny in New York based on the same facts.  The case spent more than five years in French courts before the Supreme Court ruled that the International Covenant on Civil and Political Rights, to which France is a signatory, prevents double jeopardy on similar charges for "unique facts" and applies "only in cases where both proceedings were initiated in the territory of the same State."  The decision thus appears to end the protection against prosecution in France for the same conduct that had given rise to proceedings in the United States. The 2018 Vitol decision resembled another recent ruling in which the French Supreme Court overturned a lower court's refusal to hear the case against British-Israeli lawyer Jeffrey Tesler, who pleaded guilty in the United States to charges of bribing Nigerian officials.  As we reported in our 2017 Mid-Year FCPA Update, the Paris Court of Appeals had previously held that the prosecution of Tesler was precluded by his 2011 plea agreement entered in U.S. court, suggesting that the U.S. plea was essentially involuntary and precluded him from fairly defending himself in France.  On January 17, 2018, the French Supreme Court reversed that ruling, noting that Tesler had not been deprived of his right to a fair trial because his appearance in French courts was not dictated by the terms of the U.S. plea agreement.  Furthermore, because some of the corrupt acts had been committed in France, the U.S. plea deal did not preclude French prosecution.

Germany

In February 2018, the German unit of French aerospace multinational Airbus SE agreed to pay $99 million to resolve a six-year bribery investigation by German prosecutors into a 2003 deal to sell fighter jets to Austria.  Although prosecutors conceded that they had identified no evidence that bribes were used to secure the 2003 contract, they accused Airbus management of supervisory negligence in allowing employees to make large payments linked to the deal for "unclear purposes."  Airbus continues to face ongoing litigation in Austria, where the Austrian government is seeking more than $1 billion in damages from Airbus in connection with the 2003 deal.

Russia

One of Russia's semiautonomous republics, Dagestan, has become embroiled in a major corruption scandal, with the arrest of numerous high-ranking local government officials, including the acting prime minister, his two deputies, and the mayor of Makhachkala (Dagestan's capital).  In Moscow, Alexander Drymanov, a high-level official within Russia's Investigative Committee ("IC") known to be very close to Alexander Bastrykin, the head of the IC, resigned from his position in early June.  His resignation has been widely linked to allegations that Drymanov and other IC officers accepted bribes from the ringleader of a prominent criminal syndicate to ensure the release of a member of this syndicate.  Additionally, in March 2018, Drymanov's former deputy told federal investigators of payments he had made in exchange for favorable treatment from Drymanov.  Drymanov has characterized his departure as retirement; however, news reports suggest his removal is part of a coordinated attack against Bastrykin by other law enforcement agencies, such as the General Prosecutor's Office and the FSB (the KGB's successor).

Ukraine

Ukraine's parliament passed a bill to establish an anti-corruption court on June 7, 2018, which President Petro Poroshenko signed into law four days later.  This court will become the fourth anti-corruption institution launched in Ukraine since 2014, following the establishment of the National Anti-Corruption Bureau of Ukraine ("NABU"), the Specialized Anti-Corruption Prosecutor's Office ("SAPO"), and the National Agency on Corruption Prevention ("NAZK").  There is hope that the new court will address one of the NABU's key complaints:  that, despite investigations into and arrests of corrupt officials, these efforts are being wasted due to corrupt judges who help the officials escape justice.  The newly passed law creates certain mechanisms intended to ensure that the anti-corruption court's judges remain impartial and do not become beholden to political or financial influence.  Most notably, candidates for appointment to this court are subject to vetting by and interviews with a panel of six international experts.  If three of the six raise concerns about a nominee's integrity or background, they may vote to block the candidacy, which result can be reversed only following further deliberations and a repeat vote. Despite the generally positive reaction to this piece of legislation, commentators have voiced concerns over one provision added to the bill at the last moment, whereby regular courts will retain jurisdiction over ongoing corruption cases, and any resulting appeals also will be heard in courts of general jurisdiction, rather than the appellate branch of the anti-corruption court.  Anti-corruption activists have expressed outrage at the furtive way in which this provision became part of the law—it was absent from the version of the law read to members of parliament prior to their vote—and have suggested its purpose is to enable the acquittal of certain indicted individuals, already on (or awaiting) trial, by courts of general jurisdiction.

The Americas

Argentina

A federal magistrate in Argentina has charged former President Cristina Fernández de Kirchner and her children with money laundering and ordered millions in assets seized.  In another enforcement proceeding, the Anticorruption Office is seeking a prison sentence of five-and-a-half years, along with permanent disqualification from public office, against ex-Vice President and former Minister of Finance Amado Boudou after his conviction for "passive bribery" and "transactions incompatible with the exercise of public functions."  The sentencing follows a trial concerning Boudou's purchase of 70% of a then-bankrupt government contractor and his subsequent actions to have the bankruptcy lifted so that the contractor could again participate in federal government contracts. As covered in our Key 2017 Developments in Latin American Anti-Corruption Enforcement client alert, Argentina has passed sweeping new anti-corruption legislation under which legal entities are strictly liable for crimes such as bribery, extortion, or illicit enrichment of public officials that are committed, directly or indirectly, in their name, interest, or benefit.  Punishment for violating the law may result in one or a combination of criminal fines, suspension of state benefits, debarment, and dissolution.  To be exempt from penalties and administrative responsibility under the new law, legal entities must be able to demonstrate that they reported the wrongdoing as a result of a proper internal investigation; implemented a compliance program prior to commission of the act in question; and returned the benefit that was wrongfully obtained.  Companies facing possible sanctions may mitigate their punishment by cooperating in an active investigation.  Such cooperation includes disclosing accurate, actionable information that sheds further light on potential wrongdoing, recovery of assets, or identification of individual offenders. Articles 22 and 23 of the new law outline requirements for compliance or "integrity" programs.  The programs should be designed to prevent, detect, and correct irregularities and illicit acts taken by the corporation, its representatives, or third parties that confer a benefit to the company.  To receive exemption from any penalties under the law, companies must create internal compliance reporting methods and develop procedures to investigate reports.  The law requires that the compliance or integrity program contain at least (1) a code of conduct; (2) rules and procedures to prevent illicit acts in the course of bidding for administrative contracts, or in any other interaction with the public sector; and (3) periodic training programs for directors, administrators, and staff.

Brazil

Despite facing economic and political uncertainty, Brazil remains a driving force in global anti-corruption efforts.  Brazilian law enforcement entities across the country increasingly are cooperating with each other, as well as with dozens of foreign enforcement authorities.  Operation Lava Jato (Car Wash), now in its fifth year, continues to accumulate convictions related to a vast corruption scheme that exploited contracts with Brazil's state-owned oil company, Petrobras.  So far, prosecutors have charged approximately 400 individuals and obtained more than 200 convictions on charges including corruption, money laundering, and abuse of the international financial system.  Building on its previous efforts, the Car Wash Task Force has initiated four new phases of Car Wash in 2018, many of which dig deeper into allegations that came to light in previous phases. We discussed in our 2017 Year-End FCPA Update the conviction of President Luiz Inácio Lula da Silva on corruption and money laundering charges.  Despite his conviction, Lula remained the front-runner for Brazil's October 2018 presidential election.  In April 2018, however, Lula was ordered to turn himself in and begin serving his 12-year prison sentence.  Now in prison and with little hope of successfully appealing his conviction, it is unlikely Lula will be eligible to run for the presidency. Brazilian authorities also have expanded Operation Carne Fraca ("Weak Flesh"), which covers allegations of bribery in the Brazilian meatpacking industry to evade food safety inspections.  After launching the investigation in 2017, authorities carried out a third investigative phase in March 2018.  The new phase focused on Brazilian food processing giant BRF, with police arresting former BRF CEO Pedro de Andrade Faria, former BRF Vice President of Global Operations Helio dos Santos, and other executives.  Meanwhile, authorities have continued to investigate Brazilian meatpacking company JBS and its parent company, J & F Investimentos.  Its former executives and part owners Joesley and Wesley Batista—who were targets of earlier phases of Weak Flesh, as reported in our 2017 Year-End FCPA Update, and had been in prison since 2017—were released from prison after their prison sentences were commuted to house arrest in February 2018.  In May 2018, Brazilian authorities again arrested Joesley Batista, charging him with corruption, money laundering, and obstruction of justice.  Additional charges are expected, particularly as additional Brazilian law enforcement entities join the investigations.

Canada

In February 2018, Public Services and Procurement Canada ("PSPC"), the division of the Canadian government responsible for internal administration, announced that it would introduce legislation to adopt the use of deferred prosecution agreements as a new tool to penalize corporate wrongdoing.  The proposed program, known as the Remediation Agreement Regime, is intended to encourage companies to voluntarily disclose potential misconduct by offering a potential alternative to criminal conviction and debarment.  Legislation to adopt the Regime was introduced in March 2018.  Under the proposed bill, "remediation agreements" would be subject to prosecutorial discretion and, as in the United Kingdom, would require judicial approval and oversight.  Notably, only certain economic crimes—bribery, fraud, insider trading, and books-and-records violations, among others—would be eligible for deferred prosecution under the current draft of the bill. In addition to proposing the adoption of deferred prosecution agreements, PSPC in March further announced it would work to enhance the government-wide "Integrity Regime" debarment program.  Under the current program, companies convicted of certain white collar offenses are banned from bidding on government contracts for a period of 10 years, which can be reduced to a five-year ban in certain circumstances.  According to a March 2018 press release, enhancements to the program will include increasing the number of triggers that can lead to debarment, as well as introducing greater flexibility in debarment decisions.  A detailed description of the Integrity Regime's new provisions will be included in a revised Ineligibility and Suspension Policy to be published on November 15, 2018.  The enhanced program will come into effect on January 1, 2019.

Colombia

As reported in our 2017 Mid-Year FCPA Update, former National Director of Anti-Corruption for Colombia's Office of the Attorney General Luis Gustavo Moreno Rivera was charged in U.S. federal court with conspiracy to commit money laundering and related charges in June 2017.  On May 18, 2018, Moreno was extradited from Bogotá to Miami on charges stemming from an alleged bribery scheme.  Moreno and his purported middleman, Colombian attorney Leonardo Luis Pinilla Gomez, are accused of receiving a $10,000 bribe in a Miami mall bathroom in exchange for confidential information, including witness statements, from Moreno's corruption investigation of former Córdoba governor Alejandro Lyons Muskus.  The exchange allegedly was a down payment for a $132,000 deal, in which Moreno agreed to discredit a witness in a case against Lyons before the IRS.  Recorded conversations purportedly capture Moreno and Pinilla discussing Moreno's ability to control and obstruct the investigation.  Moreno and Pinilla were arraigned in Miami in late May and face wire fraud and money laundering-related charges. In August 2018, Colombia will hold a public referendum allowing citizens to vote on seven proposals aimed at combating graft and corruption.  The referendum will include provisions amending prison sentences and imposing lifelong bans on government employment for individuals found guilty of corruption, lower salaries for legislators and senior government officials, terms limits for holding office in public companies, and greater transparency in the bidding processes for government contracts.

Guatemala

Corruption investigations in Guatemala continued to face obstacles in early 2018.  As noted in our 2017 Year-End FCPA Update, President Jimmy Morales attempted to expel from Guatemala Iván Velásquez, a Colombian prosecutor and head of the International Commission Against Impunity (known by its Spanish acronym "CICIG"), on August 27, 2017.  CICIG is a U.N. commission created in 2006 to investigate corruption in the Guatemalan government.  The attempted expulsion came after Velásquez and Guatemalan Attorney General Thelma Aldana announced an investigation into Morales for illegal campaign financing.  Though the Guatemalan Supreme Court blocked the expulsion and other attempts to prevent investigations into Morales, CICIG remains embattled. In March 2018, the Guatemalan government removed 11 national police investigators from CICIG, disrupting the investigation into Morales and other high-ranking government officials.  Additionally, U.S. Senator Marco Rubio has placed $6 million in U.S. aid to CICIG, which represents a third of its annual budget, on hold, citing suspected manipulation of CICIG by Russian bank VTB to politically persecute a Russian family.  Rubio's concerns stem from CICIG's involvement in the criminal conviction of the Bitkov family, Russian nationals found guilty of purchasing false Guatemalan passports and entering Guatemala illegally after the state-owned Russian bank targeted their paper business. Despite these challenges, CICIG has moved forward with other investigations.  In February, former President Álvaro Colom and nine members of his cabinet were arrested.  Among them is Juan Alberto Fuentes Knight, a former finance minister and current chairman of Oxfam International.  The investigation concerns a $35 million deal for a public bus system in Guatemala City.  Prosecutors allege that nearly a third of the funding was spent on equipment that went unused.

Honduras

The Organization of American States Mission to Support the Fight Against Corruption and Impunity in Honduras (known by its Spanish-language acronym, "MACCIH") has faced a number of setbacks over the past six months.  In December 2017, MACCIH and the Public Ministry (national prosecutors) indicted five outgoing members of the Honduran Congress for misappropriating public funds in a case known as Red de Diputados.  Around the time of the announcement, then-Spokesman and Head of MACCIH Juan Jiménez Mayor said that between 60 and 140 additional legislators were under investigation as part of the corruption probe.  Shortly thereafter, Congress passed a law blocking MACCIH from assisting the Public Ministry, and ordering the Tribunal Superior de Cuentas ("TSC")—a government body dominated by ruling party stalwarts—to engage in an audit of the funds that Congress members have received since 2006.  The new measure shields members of Congress from legal action until the TSC concludes its investigation, which may take several years.  Citing the new law, the judge overseeing the Red de Diputados case released the five indicted congresspersons and postponed their trial.  On February 15, 2018, MACCIH's director, Jiménez Mayor, announced in an open letter that he was resigning from the organization as a result of the challenges of working with the Honduran government and a lack of support from OAS Secretary General Luis Almagro Lemes. In late May 2018, the Honduran Supreme Court partially invalidated an agreement that created the Fiscal Unit Against Impunity and Corruption ("UFECIC"), the entity within the Public Ministry that worked with MACCIH.  The controversial ruling came in response to a legal challenge to MACCIH brought by three individuals accused by prosecutors and MACCIH of embezzling money in connection with the Red de Diputados case.  The plaintiffs argued that MACCIH should be declared unconstitutional because it violated Honduras' sovereignty and the independence of its governmental organizations.  Though the court rejected that argument, it determined that the UFECIC, by serving as MACCIH's investigative arm, impermissibly delegated constitutional functions to MACCIH and thus should be invalidated.  The Supreme Court's decision followed lobbying by members of Honduras's Congress—many of whom were being investigated by MACCIH—to invalidate the entire anti-corruption mission.  The opinion has been criticized by anti-corruption advocates.

Mexico

On May 18, 2018, the Mexican government published new requirements for companies wishing to contract with Petróleos Mexicanos ("PEMEX"), the Mexican state-owned oil company and a subject of numerous FCPA enforcement actions.  The new rules require parties contracting with PEMEX to have compliance programs designed to prevent and detect any instances of corruption.  The compliance program must remain in force for the duration of the contract with PEMEX and PEMEX has the power to verify the program.  The newly published regulations do not specify requirements for the compliance program, though one guidepost may be the Mexican Ministry of Public Administration's Model Program for Company Integrity in the recently passed General Law of Administrative Responsibility ("GLAR").  As discussed in our Key 2017 Developments in Latin American Corruption Enforcement client alert, the Model Program calls for clearly written anti-corruption policies and procedures, training, and avenues for reporting potential misconduct. In October 2017, Santiago Nieto was fired from his post as Special Prosecutor for Electoral Crimes.  Nieto claimed that his firing was politically motivated to halt his investigation into whether funds solicited by Emilio Lozoya Austin—CEO of PEMEX—were used to finance President Enrique Peña Nieto's 2012 campaign.  This May, the Mexican government initiated an investigation against Lozoya, which remains ongoing.  Lozoya is alleged to have requested and received millions of dollars of improper payments from the Brazilian construction firm Odebrecht.  Nevertheless, the Mexican government has thus far not pursued further investigations into whether government officials accepted bribes from Odebrecht.  In April, Mexico issued administrative sanctions against Odebrecht, barring the company from doing business in the country for at least two years and three months.  The Mexican government also has fined Odebrecht $30 million.

Peru

Peruvian President Pedro Pablo Kuczynski resigned on March 21, 2018, the day before a scheduled congressional impeachment vote.  As reported in our 2017 Year-End FCPA Update, Kuczynski has been the subject of an investigation involving former Odebrecht CEO Marcelo Odebrecht's alleged payment of $29 million in bribes to Peruvian officials, including Kuczynski and former presidents Ollanta Humala and Alejandro Toledo.  Kuczsynski's resignation followed quickly after surreptitiously recorded videos purported to show his colleagues, including Peruvian congressman Kenji Fujimori, bribing opponents with public contracts in exchange for voting against his impeachment in the 2018 vote.  Martín Vizcarra, the Vice-President, assumed the Peruvian presidency in Kuczynski's place and will serve out his term through 2021. On June 10, 2018, Peruvian prosecutors formally opened an investigation into Kuczynski, Toledo, and former president Alan García for allegedly accepting bribes from Odebrecht.  The three former Peruvian Presidents are suspected of promising construction contracts in exchange for undeclared campaign contributions.  Humala already was under investigation for similar allegations; he and his wife were arrested in July 2017 but were released in May 2018 because no formal charges had yet been filed against them.  Toledo, who has been living in the United States, continues to fight extradition to Peru.

Asia

Bangladesh

Bangladesh's former two-term Prime Minister, Khaleda Zia, was sentenced to a five-year prison term in February 2018.  Zia had been convicted of embezzling donations meant for an orphanage trust established during her term as Prime Minister.  In March 2018, a Bangladeshi court granted bail to Zia, prompting hopes that she could participate in a December general election.  Despite a decision by the  Bangladeshi Supreme Court upholding a lower court's decision to grant Zia bail, Zia remains imprisoned as her bail related to other charges has been denied.  Zia faces more than 30 separate inquiries into allegations of violence and corruption.

China

China's anti-corruption campaign continues to be a priority as Xi Jinping moves into his second term.  Following the nationwide pilot scheme of the National Supervisory System rolled out in November 2017, in March 2018 the National People's Congress ("NPC") passed the Supervision Law of the People's Republic of China ("PRC Supervision Law") and at the same time amended the Chinese Constitution.  This provided legal and constitutional foundation for the National Supervisory System.  Supervisory Commissions at national and local levels are a new organ of the state and have jurisdiction to investigate corruption by all public servants in China, including those who are not party members.  Supervisory commissions have broad investigative powers to conduct interviews and interrogations, carry out inquiries and searches, freeze assets, obtain, seal/block and seize properties, records and evidence, conduct inquests, inspections and forensic examinations, and to detain individuals under a new mechanism known as "Liu Zhi."  The 2018 NPC also approved a wide ranging reorganization of the Ministries under the State Council.  This means that enforcement of commercial bribery offenses under the Anti-Unfair Competition Law will now be carried out by the new State Administration for Market Regulation and its local counterparts. The first half of 2018 has also seen prosecution and sentencing of a number of high-profile individuals for corruption offenses.  Most notably in May 2018, Sun Zhengcai, a former member of the Politburo, was sentenced to life for bribery.  Sun had served as party chief of Chongqing, succeeding Bo Xilai who was sentenced to life imprisonment for corruption offenses in 2013.  He is the first serving member of the Politburo to be targeted by the campaign.  Xiang Junbo, the former Chairman of China's now-defunct insurance regulator and the highest-ranking finance official snared in China's anti-corruption campaign, has pleaded guilty to taking bribes and is awaiting sentencing.

India

In February 2018, the Central Bureau of Investigation ("CBI") registered a case against executives of the Indian subsidiary of U.S.-based engineering and construction firm CDM Smith, as well as officials of the National Highways Authority of India ("NHAI").  According to the CBI, CDM Smith paid bribes through its Indian subsidiary to various officials of the NHAI to secure infrastructure contracts between 2011 and 2016. The CDM Smith executives that stand accused allegedly disguised their bribes as "allowable business expenses" on their income tax returns.  The CBI enforcement action follows the 2016 Pilot Program declination with CDM Smith (covered in our 2017 Mid-Year FCPA Update) in which CDM Smith agreed to disgorge just over $4 million in profits in connection with the alleged improper payments to the NHAI. On April 4, 2018, the Indian government sought to pass the Prevention of Corruption (Amendment) Bill, 2013 (discussed in our 2016 Year-End FCPA Update) at a parliamentary session held at the Rajya Sabha (otherwise known as the Council of States, the upper house of the Indian Parliament).  The proposed law would introduce specific offenses and fines for commercial organizations engaging in bribery in India, create a specific offense for offering a bribe, and provide for criminal liability for company management of companies engaging in corrupt practices.  However, the Bill failed to be passed.  The Bill's prospects of passage remain unclear.

Korea

The first half of 2018 saw a number of high-profile charges and convictions for corruption-related offenses.  As reported in our 2017 Year-End FCPA Update, then-President Park Geun-Hye was impeached in December 2016 amid allegations of influence peddling and corruption.  In April 2018, Park was convicted of 16 corruption-related offenses, including abuse of power, bribery, and coercion.  She was sentenced to 24 years' imprisonment and a fine of KRW 18 billion (approximately $16 million).  Park decided not to appeal her sentence and is currently serving her jail term.  Choi Soon-Sil, Park's friend and advisor who was accused of coercing Korean conglomerates into donating millions of dollars to charitable organizations connected to the former President, was sentenced in February 2018 to 20 years' imprisonment for influence peddling, abuse of power, and corruption. In March 2018, another former Korean President, Lee Myung-Bak, was arrested on multiple charges of corruption, including bribery, embezzlement, tax evasion, and abuse of power.  Lee allegedly received more than KRW 11 billion (approximately $10 million) in bribes before and during his presidency.  Lee's trial began at the end of May 2018 and is ongoing. As reported in our 2017 Year-End FCPA Update, Samsung Electronics Vice Chairman Lee Jae Yong was convicted of bribery and related charges and sentenced to five years' imprisonment in August 2017.  In an unexpected turn of events, Lee was released from prison in February 2018, after the Seoul High Court halved his jail term to 2.5 years and suspended his sentence on appeal.  In contrast, Lotte Group's Chairman Shin Dong Bin was convicted of bribery and sentenced to 30 months' imprisonment and a fine of KRW 7 billion (approximately $6.5 million) in February 2018.  The court found that he paid KRW 7 billion (approximately $6.5 million) to Choi Soon-Sil's K Sports Foundation in return for Park's support of reissuing Lotte's business permit to operate its duty-free stores.  Shin remains imprisoned while his appeal of the sentence continues.

Middle East and Africa

Israel

In January 2018, the Office of Israel's Tax and Economic Prosecutor announced that it reached a Conditional Agreement with Teva Pharmaceuticals Industries Ltd, the world's largest manufacturer of generic pharmaceutical products.  The agreement arose from alleged corrupt payments made between 2002 and 2012 to high-ranking ministry of health officials in Russia and Ukraine to influence the approval of drug registrations, as well as to state-employed physicians in Mexico to influence the prescription of products.  As part of the agreement with Israeli authorities, Teva agreed to pay a fine of approximately $22 million, on top of the $519 million it paid to resolve FCPA charges arising from the same conduct, as covered in our 2016 Year-End FCPA Update.  This was the second enforcement action brought under Israel's foreign bribery statute and the first involving a Conditional Agreement.  Israeli prosecutors stated that the decision to enter into a Conditional Agreement with Teva was based on various factors, including the large penalty already paid to U.S. authorities, Teva's cooperation and remediation, and recent financial hardships incurred by Teva.

Saudi Arabia

Earlier this year, Saudi officials began taking steps to conclude a large anti-corruption probe initiated in November 2017 by Saudi Arabian Crown Prince Mohammed bin Salman that involved the detainment and questioning of hundreds of influential Saudis (covered in our 2017 Year-End FCPA Update).  According to one prosecutor, the government reached settlements worth $106 billion as a result of the probe.  Although most detainees have been released, some remain in custody pending trial.  Some analysts have viewed the corruption campaign as a power grab by Prince Mohammed, but the Saudi government insists its focus is combating endemic corruption.  In March 2018, Saudi officials announced that new anti-corruption departments were added to the Attorney General's office in furtherance of King Salman and Crown Prince Mohammed's goal to eradicate corruption.

South Africa

In April 2018, South African officials announced the reopening of a corruption investigation involving alleged abuse of public funds for a dairy farm in Vrede.  The investigation initially focused on Ace Magashule, secretary general of the African National Congress, and Mosebenzi Joseph Zwane, the former minister of mineral resources.  According to prosecutors, the dairy farm project was intended to help black farmers but instead funneled $21 million to business allies of the African National Congress.  As part of the investigation, prosecutors seized $21 million from three brothers known to be family friends and political allies of South Africa's former President Jacob Zuma, who was ousted in February 2018 in connection with corruption allegations.

CONCLUSION

As is our semiannual tradition, over the following weeks Gibson Dunn will be publishing a series of enforcement updates for the benefit of our clients and friends as follows:
  • Tuesday, July 10 – 2018 Mid-Year Update on Corporate NPAs and DPAs;
  • Wednesday, July 11 – 2018 Mid-Year False Claims Act Update;
  • Thursday, July 12 – Developments in the Defense of Financial Institutions;
  • Friday, July 13 – 2018 Mid-Year Class Actions Update;
  • Monday, July 16 – 2018 Mid-Year UK White Collar Crime Update;
  • Tuesday, July 17 – 2018 Mid-Year Media and Entertainment Update;
  • Wednesday, July 18 – 2018 Mid-Year Securities Litigation Update;
  • Thursday, July 19 – 2018 Mid-Year Government Contracts Litigation Update;
  • Monday, July 23 – 2018 Mid-Year UK Labor & Employment Update;
  • Tuesday, July 24 – 2018 Mid-Year Shareholder Activism Update;
  • Thursday, July 26 – 2018 Mid-Year Healthcare Compliance and Enforcement Update – Providers;
  • Friday, July 27 – 2018 Mid-Year Securities Enforcement Update; and
  • Wednesday, August 1 – 2018 Mid-Year FDA and Health Care Compliance and Enforcement Update – Drugs and Devices.

The following Gibson Dunn lawyers assisted in preparing this client update: F. Joseph Warin, John Chesley, Richard Grime, Christopher Sullivan, Jacob Arber, Elissa Baur, Josh Burk, Ella Alves Capone, Claire Chapla, Grace Chow, Stephanie Connor, Daniel Harris, William Hart, Patricia Herold, Korina Holmes, Derek Kraft, Miranda Lievsay, Zachariah Lloyd, Lora MacDonald, Andrei Malikov, Michael Marron, Jesse Melman, Steve Melrose, Jaclyn Neely, Jonathan Newmark, Nick Parker, Jeffrey Rosenberg, Rebecca Sambrook, Emily Seo, Jason Smith, Pedro Soto, Laura Sturges, Karthik Ashwin Thiagarajan, Caitlin Walgamuth, Alina Wattenberg, Oliver Welch, Oleh Vretsona, and Carissa Yuk.

Gibson Dunn's lawyers are available to assist in addressing any questions you may have regarding these issues.  We have more than 110 attorneys with FCPA experience, including a number of former federal prosecutors and SEC officials, spread throughout the firm's domestic and international offices.  Please contact the Gibson Dunn attorney with whom you work, or any of the following leaders and members of the FCPA group: Washington, D.C. F. Joseph Warin - Co-Chair (+1 202-887-3609, fwarin@gibsondunn.com) Richard W. Grime (+1 202-955-8219, rgrime@gibsondunn.com) Patrick F. Stokes (+1 202-955-8504, pstokes@gibsondunn.com) Judith A. Lee (+1 202-887-3591, jalee@gibsondunn.com) David P. Burns (+1 202-887-3786, dburns@gibsondunn.com) David Debold (+1 202-955-8551, ddebold@gibsondunn.com) Michael S. Diamant (+1 202-887-3604, mdiamant@gibsondunn.com) John W.F. Chesley (+1 202-887-3788, jchesley@gibsondunn.com) Daniel P. Chung (+1 202-887-3729, dchung@gibsondunn.com) Stephanie Brooker (+1 202-887-3502, sbrooker@gibsondunn.com) M. Kendall Day (+1 202-955-8220, kday@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Adam M. Smith (+1 202-887-3547, asmith@gibsondunn.com) Oleh Vretsona (+1 202-887-3779, ovretsona@gibsondunn.com) Christopher W.H. Sullivan (+1 202-887-3625, csullivan@gibsondunn.com) Courtney M. Brown (+1 202-955-8685, cmbrown@gibsondunn.com) Jason H. Smith (+1 202-887-3576, jsmith@gibsondunn.com) Ella Alves Capone (+1 202-887-3511, ecapone@gibsondunn.com) Pedro G. Soto (+1 202-955-8661, psoto@gibsondunn.com) New York Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Joel M. Cohen (+1 212-351-2664, jcohen@gibsondunn.com) Lee G. Dunst (+1 212-351-3824, ldunst@gibsondunn.com) Mark A. Kirsch (+1 212-351-2662, mkirsch@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Lawrence J. Zweifach (+1 212-351-2625, lzweifach@gibsondunn.com) Daniel P. Harris (+1 212-351-2632, dpharris@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) John D.W. Partridge (+1 303-298-5931, jpartridge@gibsondunn.com) Ryan T. Bergsieker (+1 303-298-5774, rbergsieker@gibsondunn.com) Laura M. Sturges (+1 303-298-5929, lsturges@gibsondunn.com) Los Angeles Debra Wong Yang - Co-Chair (+1 213-229-7472, dwongyang@gibsondunn.com) Marcellus McRae (+1 213-229-7675, mmcrae@gibsondunn.com) Michael M. Farhang (+1 213-229-7005, mfarhang@gibsondunn.com) Douglas Fuchs (+1 213-229-7605, dfuchs@gibsondunn.com) San Francisco Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) Thad A. Davis (+1 415-393-8251, tadavis@gibsondunn.com) Marc J. Fagel (+1 415-393-8332, mfagel@gibsondunn.com) Charles J. Stevens - Co-Chair (+1 415-393-8391, cstevens@gibsondunn.com) Michael Li-Ming Wong (+1 415-393-8333, mwong@gibsondunn.com) Palo Alto Benjamin Wagner (+1 650-849-5395, bwagner@gibsondunn.com) London Patrick Doris (+44 20 7071 4276, pdoris@gibsondunn.com) Charlie Falconer (+44 20 7071 4270, cfalconer@gibsondunn.com) Sacha Harber-Kelly (+44 20 7071 4205, ) Philip Rocher (+44 20 7071 4202, procher@gibsondunn.com) Steve Melrose (+44 (0)20 7071 4219, smelrose@gibsondunn.com) Paris Benoît Fleury (+33 1 56 43 13 00, bfleury@gibsondunn.com) Bernard Grinspan (+33 1 56 43 13 00, bgrinspan@gibsondunn.com) Jean-Philippe Robé (+33 1 56 43 13 00, jrobe@gibsondunn.com) Audrey Obadia-Zerbib (+33 1 56 43 13 00, aobadia-zerbib@gibsondunn.com) Munich Benno Schwarz (+49 89 189 33-110, bschwarz@gibsondunn.com) Michael Walther (+49 89 189 33-180, mwalther@gibsondunn.com) Mark Zimmer (+49 89 189 33-130, mzimmer@gibsondunn.com) Hong Kong Kelly Austin (+852 2214 3788, kaustin@gibsondunn.com) Oliver D. Welch (+852 2214 3716, owelch@gibsondunn.com) São Paulo Lisa A. Alfaro - Co-Chair (+55 (11) 3521-7160, lalfaro@gibsondunn.com) Fernando Almeida (+55 (11) 3521-7095, falmeida@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 20, 2018 |
Acting Associate AG Panuccio Highlights DOJ’s False Claims Act Enforcement Reform Efforts

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On June 14, 2018, Acting Associate Attorney General Jesse Panuccio gave remarks highlighting recent enforcement activity and policy initiatives by the Department of Justice ("DOJ").  The remarks, delivered at the American Bar Association's 12th National Institute on the Civil False Claims Act and Qui Tam Enforcement, included extensive commentary about DOJ's ongoing efforts to introduce reforms to promote a more fair and consistent application of the False Claims Act ("FCA").  While the impact of these policy initiatives remains to be seen, DOJ's continued focus on these efforts, led by officials at the highest levels within DOJ, suggests that FCA enforcement reform is a priority for the Department.

After giving an overview of several FCA settlements from the last eighteen months—apparently designed to demonstrate that this DOJ recognizes the importance of the FCA in a breadth of traditional enforcement areas—Mr. Panuccio discussed two particular priorities: the opioid epidemic and the nation's elderly population.  He emphasized that DOJ would "actively employ" the FCA against any entity in the opioid distribution chain that engages in fraudulent conduct.  He then highlighted the crucial role of the FCA in protecting the nation's elderly from fraud and abuse, citing examples of enforcement against a nursing home management company, hospices, and skilled rehabilitation facilities. The majority of Mr. Panuccio's remarks focused, however, on policy initiatives DOJ is undertaking to ensure that enforcement "is fair and consistent with the rule of law."  Mr. Panuccio alluded to general reform initiatives by the department, such as the ban on certain third-party payments in settlement agreements, before expanding on reforms specific to the FCA.  Mr. Panuccio highlighted that the recent FCA reform efforts have been spearheaded by Deputy Associate Attorney General Stephen Cox; Mr. Cox had delivered remarks at the Federal Bar Association Qui Tam Conference in February of this year that had provided insight into the positions articulated in the Brand and Granston memoranda.  In his speech, Mr. Panuccio described five policy initiatives being undertaken by DOJ to reform FCA enforcement: (i) qui tam dismissal criteria; (ii) the use of guidance in FCA cases; (iii) cooperation credit; (iv) compliance program credit; and (v) preventing "piling on."

Qui tam dismissals

Mr. Panuccio acknowledged the tremendous increase in the number qui tam cases that are filed each year, which includes cases that are not in the public interest.  Recognizing that DOJ expends significant resources to monitor cases even when it declines to intervene, Mr. Panuccio noted that DOJ attorneys have been instructed to consider whether moving to dismiss the action would be an appropriate use of prosecutorial discretion under the FCA.  While DOJ previously exercised this authority only rarely, consistent with the Granston memo, Mr. Panuccio suggested that, going forward, DOJ may use that authority more frequently in order to free up DOJ's resources for matters in the public interest. Although defendants generally may not yet be experiencing significant differences regarding the possibility of dismissal at the DOJ line level, the continued public discussion of the potential use of DOJ's dismissal authority by high-level officials suggests that DOJ appreciates the problems caused by frivolous qui tams and may ultimately be more receptive to dismissal of actions lacking merit.

Guidance

As stated in the Brand Memorandum, DOJ will no longer use noncompliance with agency guidance that expands upon statutory or regulatory requirements as the basis for an FCA violation.  Mr. Panuccio explained that, in an FCA case, evidence that a party received a guidance document would be relevant in proving that the party had knowledge of the law explained in that guidance.  However, DOJ attorneys have been instructed "not to use [DOJ's] enforcement authority to convert sub-regulatory guidance into rules that have the force or effect of law."

Cooperation

With respect to cooperation credit, Mr. Panuccio indicated that DOJ is working on formalizing its practices and that modifications to prior practices should be expected.  That notwithstanding, Mr. Panuccio provided assurances that DOJ will continue to "expect and recognize genuine cooperation" in both civil and criminal matters.  He also noted that the extent of the discount provided when negotiating a settlement would depend on the nature of the cooperation, how helpful it was, and whether it helped identify individual wrongdoers. Though DOJ's new policies on cooperation credit are still forthcoming, Mr. Panuccio's remarks suggest that formal cooperation credit might be expanded to cover situations outside of those in which the defendant makes a self-disclosure.

Compliance

In recognition of the challenges of running large organizations, DOJ will "reward companies that invest in strong compliance measures."  How this may differ, if at all, from current ad hoc considerations remains to be seen.

Piling On

Mr. Panuccio acknowledged that, when multiple regulatory bodies pursue a defendant for the same or substantially the same conduct, "unwarranted and disproportionate penalties" can result. In order to avoid this "piling on," DOJ attorneys will promote coordination within the agency and other regulatory bodies to ensure that defendants are subject to fair punishment and receive the benefit of finality that should accompany a settlement.  Moreover, Mr. Panuccio remarked that DOJ attorneys should not "invoke the threat of criminal prosecution solely to persuade a company to pay a larger settlement in a civil case," which really is simply a restatement of every attorney's existing ethical duty.  Whether DOJ leadership's interest here will result in significant practical developments is uncertain.  Such developments, though perhaps unlikely, could include eliminating the cross-designation of Assistant U.S. Attorneys as both Civil and Criminal; limiting the ability of Civil Division attorneys to invite Criminal Division lawyers to participate in meetings without the request or consent of defendants; or perhaps even somehow inhibiting the Civil Division from using the FCA, with its mandatory treble damages and per-claim penalties, following criminal fines and restitution. We will continue to monitor and report on these important developments.
The following Gibson Dunn lawyers assisted in preparing this client update: Stephen Payne, Jonathan Phillips and Claudia Kraft. Gibson Dunn's lawyers have handled hundreds of FCA investigations and have a long track record of litigation success.  Among other significant victories, Gibson Dunn successfully argued the landmark Allison Engine case in the Supreme Court, a unanimous decision that prompted Congressional action.  See Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123 (2008).  Our win rate and immersion in FCA issues gives us the ability to frame strategies to quickly dispose of FCA cases.  The firm has more than 30 attorneys with substantive FCA expertise and more than 30 former Assistant U.S. Attorneys and DOJ attorneys.  For more information, please feel free to contact the Gibson Dunn attorney with whom you work or the following attorneys. Washington, D.C. F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Joseph D. West (+1 202-955-8658, jwest@gibsondunn.com) Andrew S. Tulumello (+1 202-955-8657, atulumello@gibsondunn.com) Karen L. Manos (+1 202-955-8536, kmanos@gibsondunn.com) Stephen C. Payne (+1 202-887-3693, spayne@gibsondunn.com) Jonathan M. Phillips (+1 202-887-3546, jphillips@gibsondunn.com) New York Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Monica K. Loseman (+1 303-298-5784, mloseman@gibsondunn.com) John D.W. Partridge (+1 303-298-5931, jpartridge@gibsondunn.com) Ryan T. Bergsieker (+1 303-298-5774, rbergsieker@gibsondunn.com) Dallas Robert C. Walters (+1 214-698-3114, rwalters@gibsondunn.com) Los Angeles Timothy J. Hatch (+1 213-229-7368, thatch@gibsondunn.com) James L. Zelenay Jr. (+1 213-229-7449, jzelenay@gibsondunn.com) Palo Alto Benjamin Wagner (+1 650-849-5395, bwagner@gibsondunn.com) San Francisco Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com)
Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 16, 2018 |
Aerospace and Related Technologies – Key Developments in 2017 and Early 2018

Click for PDF This March 2018 edition of Gibson Dunn's Aerospace and Related Technologies Update discusses newsworthy developments, trends, and key decisions from 2017 and early 2018 that are of interest to aerospace and defense, satellite, and drone companies; and new market entrants in the commercial space and related technology sectors, including the private equity and other financial institutions that support and enable their growth. Specifically, this update covers the following areas: (1) commercial unmanned aircraft systems ("UAS"), or drones; (2) government contracts litigation involving companies in the aerospace and defense industry; (3) the commercial space sector; and (4) cybersecurity and privacy issues related to the national airspace.  We discuss each of these areas in turn below.

I.    COMMERCIAL UNMANNED AIRCRAFT SYSTEMS

The commercial drone industry has continued to mature through advancements in technology, government relations, and public perception.  Commercial drones are being used for various sensory data collection, building inspections, utility inspections, agriculture monitoring and treatment, railway inspections, pipeline inspections, mapping of mines, and photography.  New drone applications are being created on a regular basis.  For example, the concept of flying drone taxis was validated in Dubai in September 2017 when an uncrewed two-seater drone successfully conducted its first test flight. Around a year and a half ago, United States regulations governing non-recreational drone operations were finalized.  Since then, the Federal Aviation Administration ("FAA") has issued over 60,000 remote pilot certificates.  The FAA has and continues to make efforts to advance its technology, and it recently released a prototype application to provide operators with automatic approval of specific airspace authorizations.  The national beta test of this system will launch in 2018, and we will be sure to report back with the results. One of the biggest boons for the industry over the past 15 months was the positive public perception stemming from Hurricane Harvey relief efforts.  In the days following the disaster, drones worked in concert with government agencies to support search and rescue missions, inspect roads and railroads, and assess water plants, oil refineries, cell towers, and power lines.  Further, major insurance companies used drones to assess claims in a safer, faster, and more efficient manner.  The aftermath of this disaster demonstrated the value of drone technology and increasingly has driven a positive public perception of the industry.  Indeed, even aside from the disaster relief efforts, media sources continue to carry positive drone stories.  For example, in January 2018, Australian lifeguards were testing a drone with the ability to release an inflatable rescue pod; during its testing, the drone was called into action, and rescued two teenagers from drowning. The future is bright, but there are still many obstacles for the industry to overcome before it fully matures, such as clarity around low altitude airspace, privacy concerns, and the risk to people, property, and other aircraft. To get you caught up on 2017 and early 2018 drone developments, we have briefly summarized below: (A) highlights of drone litigation impacting airspace, including highlights from previous years for context; (B) drone registration; (C) privacy issues related to drones; (D) the United States government's expanded use of drones; (E) drone countermeasures; (F) drone safety studies; and (G) the UAS airspace integration pilot program.

A.    Litigation Highlights Regarding Airspace

Huerta v. Haughwout, No. 3:16-cv-358, Dkt. No. 30 (D. Conn. Jul. 18, 2016)
The latter half of 2016 featured an important decision regarding the FAA's authority over low-level airspace.  The 2016 decision, Huerta v. Haughwout—also known as "the flamethrower drone case," involved two YouTube videos posted by the Haughwouts.  One video featured a drone firing an attached handgun, while a second video showed a drone using an attached flamethrower to scorch a turkey.  After the videos were publicly uploaded, the FAA served the Haughwouts with an administrative subpoena to acquire further information about the activities featured in the videos.  The Haughwouts refused to comply with the FAA's subpoenas, asserting that their activities were not subject to investigation by the FAA.  In response, the FAA sought enforcement of the subpoenas in the District of Connecticut.[1] Judge Jeffrey Meyer found the administrative subpoenas to be valid.  Most importantly, however, his order included dicta casting doubt on the FAA's claim to control all airspace from the ground up:  "The FAA believes it has regulatory sovereignty over every inch of outdoor air in the United States…. [T]hat ambition may be difficult to reconcile with the terms of the FAA's statute that refer to 'navigable airspace.'"  While this dicta addressed the question of where the FAA's authority begins, Judge Meyer also noted that "the case does not yet require an answer to that question."[2]  Judge Meyer further stated:
Congress surely understands that state and local authorities are (usually) well positioned to regulate what people do in their own backyards.  The Constitution creates a limited national government in recognition of the traditional police power of state and local government.  No clause in the Constitution vests the federal government with a general police power over all of the air or all objects that leave the ground.  Although the Commerce Clause allows for broad federal authority over interstate and foreign commerce, it is far from clear that Congress intends–or could constitutionally intend–to regulate all that is airborne on one's own property and that poses no plausible threat to or substantial effect on air transport or interstate commerce in general.[3]
2017 featured the resolution of another lawsuit where the plaintiff attempted to extend the significance of Haughwout in an effort to get the courts to address the question of what "navigable airspace" means in the context of drones (see discussion of Singer v. City of Newton, infra).
Boggs v. Merideth, No. 3:16-cv-00006 (W.D. Ky. Jan. 4, 2016)
In Boggs v. Merideth—better known as "the Drone Slayer case"—a landowner shot down an operator's drone with a shotgun in the Western District of Kentucky.[4]  The plaintiff flew his drone roughly 200 feet above the defendant's property, causing the defendant—the self-anointed "Drone Slayer"—to claim the drone was trespassing and invading his privacy and shoot it down.  The plaintiff believed the airspace 200 feet above the ground was federal airspace and therefore the defendant could not claim the drone was trespassing. Following a state judge's finding that the defendant acted "within his rights," the drone operator filed a complaint in federal court for declaratory judgment to "define clearly the rights of aircraft operators and property owners."[5]  The case had the potential to be a key decision on the scope of federal authority over the use of airspace.  Rather than claiming defense of property, however, the defendant moved to dismiss the complaint on jurisdictional grounds.  The plaintiff unsuccessfully attempted to rely on the decision in Huerta v. Haughwout for the proposition that all cases involving the regulation of drone flight should be resolved by federal courts.  The court rejected the plaintiff's argument, noting that Haughwout only concerned the FAA's ability to exercise subpoena power and enforce subpoenas in federal court.  In fact, the district court noted, the court in Haughwout "expressed serious skepticism as to whether all unmanned aircrafts are subject to FAA regulation."[6]  In his March 2017 order, Senior District Court Judge Thomas B. Russell granted the defendant's motion to dismiss for lack of federal jurisdiction, stating that the issue of whether or not the drone was in protected airspace only arises on the presumption that the defendant would raise the defense that he was defending his property.[7]  Consequently, there was no federal question jurisdiction and the case was thrown out without ever reaching its merits. While the answer to what exactly constitutes "navigable airspace" in the drone context remained unanswered in 2017, the year did mark the beginning of federal courts addressing the overlap between conflicting state, local, and federal drone laws.
Singer v. City of Newton No. 1:17-cv-10071 (D. Mass. Jan. 17, 2017)
On September 21, 2017, a federal judge in the District of Massachusetts held that portions of the City of Newton, Massachusetts's ("Newton") ordinance attempting to regulate unmanned aircraft operations within the city were invalid.[8] The case, Singer v. City of Newton, marks the first time a federal court has struck down a local ordinance attempting to regulate drones.  The court held the following four city ordinance provisions to be unenforceable: (1) a requirement that all owners register their drones with the city; (2) a ban on all drone operations under 400 feet that are over private property unless done with express permission of the property owner; (3) a ban on all drone operations over public property, regardless of altitude, unless done with the express permission of the city; and (4) a requirement that no drone be operated beyond the visual line of sight of its operator.[9] All four of these provisions of the Newton ordinance were found to be preempted by federal regulations promulgated by the FAA. In the course of holding that the four sections of Newton's ordinance were each preempted, the court identified the congressional objectives each section inhibited.  One relevant congressional objective is to make the FAA the exclusive regulatory authority for registration of drones.  The Newton ordinance required the registration of drones with the City of Newton, which impeded Congress's objective; thus, the court found that section to be preempted.[10] The court also identified a congressional objective for the FAA to develop a comprehensive plan to safely accelerate the integration of drones into the national airspace system.  The two sections of the Newton ordinance requiring prior permission to fly above both public and private property within the city effectively eliminated any drone activity without prior permission; thus those sections were held to interfere with the federal objective and were invalidated.[11] Lastly, the court found that the Newton ordinance's provision barring drone usage beyond the visual line of sight of the operator conflicted with a less restrictive FAA rule allowing such usage if a waiver is obtained or if a separate visual observer can see the drone throughout its flight and assist the operator.[12] The Singer ruling marked the long-anticipated beginning of federal courts addressing overlapping state, local, and federal drone laws.  While the ruling is significant for invalidating sections of a local ordinance and thus establishing a framework that federal courts may follow to invalidate state and local drone laws elsewhere, it is important not to overstate the case's current significance.  The court in Singer declined to hold that law relating to airspace was expressly preempted or field preempted, but rather decided it was conflict preempted.  Consequently, the case does not provide support for the assertion that all state and local drone laws related to airspace will be preempted by FAA regulations.  Further, the court did not opine on the lower limits of the National Airspace and whether it goes to the ground, an issue likely to come up in future litigation. The unchallenged portions of the Newton ordinance still stand, and the closing lines in the opinion recognize that Newton is free to redraft the invalidated portions to avoid direct conflict with FAA regulations.  Thus it remains possible, even in the District of Massachusetts, for federal law to coexist with state and local laws in this field.  In order to successfully avoid invalidation in the courts, however, state and local lawmakers must draft legislation that allows for compliance with federal regulations, and which does not interfere with any federal objectives. The year 2017 left much to still be determined by the courts.  While Newton demonstrated that preemption concerns do and will continue to exist, the case did not address the boundary of the National Airspace.  Haughwout did address the boundary—though only through dicta—and suggested that, when the issue is decided, the boundary will likely not extend to the ground.  Thus, as was the case at the start of 2017, where the boundary will be drawn remains to be seen.

B.    Drone Registration: From Mandatory to Optional and Back to Mandatory

In December 2015, days before tens of thousands of drones were gifted for the holidays, the FAA adopted rules requiring the registration of drones weighing more than 0.55 pounds prior to operation.  This registration requirement only impacted recreational users, as commercial users are required to register under Part 107.  This rule was challenged in Taylor v. Huerta, and on May 19, 2017, the U.S. Court of Appeals for the D.C. Circuit vacated the rule.[13]  The FAA instituted a program to issue refunds, and recreational pilots enjoyed the freedom of flying unregistered drones for the next seven months. The Circuit Court struck down the rule because the FAA lacked statutory authority to issue such a rule for recreational pilots.  Section 336 of the FAA Modernization and Reform Act of 2012 states that the "Administrator of the Federal Aviation Administration may not promulgate any rule or regulation regarding a model aircraft."[14]  The Court held that the FAA's registration rule "directly violates that clear statutory prohibition" and vacated the rule to the extent it applied to model aircraft.[15]  The FAA responded by offering $5 registration fee refunds and the option to have one's information removed from the federal database, but encouraging recreational operators to voluntarily register their drones. However, in a turn of events, on December 12, 2017, the President signed the National Defense Authorization Act of 2018, which included a provision reinstating the rule:
Restoration Of Rules For Registration And Marking Of Unmanned Aircraft.—The rules adopted by the Administrator of the Federal Aviation Administration in the matter of registration and marking requirements for small unmanned aircraft (FAA-2015-7396; published on December 16, 2015) that were vacated by the United States Court of Appeals for the District of Columbia Circuit in Taylor v. Huerta (No. 15-1495; decided on May 19, 2017) shall be restored to effect on the date of enactment of this Act.[16]
As a result of the Act, both recreational and commercial pilots are now required to register their drones, and one can do so on the FAA's website.

C.    UAS and Privacy

1.    Voluntary Best Practices Remain Intact

A 2015 Presidential Memorandum issued by then President Obama ordered the National Telecommunications and Information Administration ("NTIA") of the U.S. Department of Commerce to create a private-sector engagement process to help develop voluntary best practices for privacy and transparency issues regarding commercial and private drone use.[17]  Since Part 107 of Title 14 of the Code of Federal Regulations ("Part 107")[18] does not address privacy, privacy advocates hoped that the NTIA would force the FAA to promulgate privacy regulations.[19]  Prior attempts to petition the FAA to consider privacy concerns in its Notice of Proposed Rulemaking ("NPRM") for Part 107 were unsuccessful.[20] The NTIA issued its voluntary best privacy practices for drones on May 19, 2016.[21]  While the final best practices found support from some privacy organizations and most of the commercial drone industry, other privacy groups raised concerns that the best practices neither established nor encouraged binding legal standards.[22]  Nonetheless, the best practices offer useful guidelines for companies testing and/or actively conducting drone operations.

2.    Litigation Regarding the FAA's Role in Addressing Privacy

As we discussed in an earlier update, the Electronic Privacy Information Center ("EPIC") challenged the FAA's decision to exclude privacy regulations from Part 107 in an August 2016 petition for review.[23]  In 2012, EPIC petitioned the FAA to promulgate privacy regulations applicable to drone use, which the FAA denied in February 2014.[24]  EPIC argued that the FAA Modernization and Reform Act of 2012 required the FAA to consider privacy issues in its NPRM.[25]  The FAA argued that while the Act directed the FAA to develop a comprehensive plan to safely integrate drones into the national airspace system, privacy considerations went "beyond the scope" of that plan.[26]  The D.C. Circuit dismissed EPIC's petition for review on two grounds.[27]  First, the Court deemed EPIC's petition for review "time-barred" because EPIC filed 65 days past the time allotted under 49 U.S.C. § 46110(a).[28]  Second, the Court held that the FAA's "conclusion that privacy is beyond the scope of the NPRM" was not a final agency determination subject to judicial review.[29] After the rule became final, EPIC filed a new petition for review asking the court to vacate Part 107 and remand it to the FAA for further proceedings.[30]  Consolidated with a related case, Taylor v. FAA, No. 16-1302 (D.C. Cir. filed August 29, 2016), EPIC argues that the FAA violated the Act by: (1) refusing to consider "privacy hazards," and (2) refusing to "conduct comprehensive drone rulemaking," which necessarily includes issues related to privacy.[31]  The FAA argues: (1) EPIC lacks standing, (2) the FAA reasonably decided not to address privacy concerns, and (3) even if EPIC has standing, Section 333 of the Act does not require the FAA to promulgate privacy regulations.[32]  Judge Merrick Garland, Judge David Sentelle, and Judge A. Raymond Randolph heard oral arguments in the consolidated cases on January 25, 2018.[33]  All eyes thus remain on the D.C. Circuit to determine whether the FAA must issue regulations covering privacy concerns raised by increased drone use.

D.    The United States Government Expands Its Use of Drones

Four years after the U.S. Department of Defense ("DoD") issued its 25-year "vision and strategy for the continued development, production, test, training, operation, and sustainment of unmanned [aircraft] systems technology,"[34] the drone defense industry continues to experience rapid growth.  A recent market report estimated that commercial and government drone sales will surpass $12 billion by 2021.[35]  However, that estimate is likely conservative when considering that the DoD allocated almost $5.7 billion to drone acquisition and research in 2017 alone.[36]  Likewise, the DoD allocates almost $7 billion to drone technology in its 2018 fiscal year Defense Budget.[37]  Additionally, Goldman Sachs forecasted a $70 billion market opportunity for military drones by 2020.[38]  According to Goldman Sachs: "Current drone technology has already surpassed manned aircraft in endurance, range, safety and cost efficiency — but research and development is far from over.  The next generation of drones will widen the gap between manned and unmanned flight even further, adding greater stealth, sensory, payload, range, autonomous, and communications capabilities."[39]  It should thus come as no surprise that organizations developing defense-specific drones will expect increased demand for complete systems and parts in the coming years.

1.    United States Government's Domestic Use Drones

The U.S. government mostly acquires drones for overseas military operations, a trend dating back to the deployment of the Predator drone in post-9/11 conflict territories.[40]  Domestic use of DoD-owned drones remains subject to strict governmental approval, and armed drones are prohibited on U.S. soil.[41]  In February 2015, the Deputy Secretary of Defense issued Policy Memorandum 15-002 entitled "Guidance for the Domestic Use of Unmanned Aircraft Systems."[42]  Under the policy, the Secretary of Defense must approve all domestic use of DoD-owned UAVs, with one exception—domestic search and rescue missions overseen by the Air Force Rescue Coordination Center.[43]  However, DoD personnel may use drones to surveil U.S. persons where permitted by law and where approved by the Secretary.[44]  The policy expired on February 17, 2018,[45] and it remains to be seen how the Trump administration will handle domestic use of DoD-owned drones and the integration of UAVs into day-to-day civilian operations.

E.    Drone Countermeasures

In response to the rapid growth of militarized consumer drones, particularly in ISIS-controlled territories,[48] 2017 saw an increased offering of anti-drone technologies in the U.S.[49]  In April 2017, the U.S. Army's Rapid Equipment Force purchased 50 of Radio Hill Technologies' "Dronebuster" radar guns.[50]  The Dronebuster uses radio frequency technology to interrupt the control of drones by effectively jamming the control frequency or the GPS signal.[51]  The end-user can overwhelm the drone and deprive its operator of control or cause the drone to "fall out of the sky."[52]  Handheld radar-type guns like the Dronebuster weigh about five pounds and cost an average of $30,000.[53]  The U.S. military also experimented with the Mobile High-Energy Laser-equipped Stryker vehicle.[54]  Similar to the Dronebuster, the 5 to 10kW laser overwhelms target drones' control systems with high bursts of energy.[55]  It can shoot down drones 600 meters away, all without making a sound.[56]

F.    Drone Safety Studies

Making UAS operations commonplace in urban airspace will be a big step in the technological and economic advancement of the U.S.; however, there are obstacles to overcome in ensuring the safe operation of drones in urban areas.  On April 28, 2017, the Alliance for System Safety of UAS through Research Excellence ("ASSURE") released the results of a study that explored the severity of a UAS collision with people and property on the ground.[57]  First, ASSURE determined the most likely impact scenarios by reviewing various operating environments for UAS and determining their likely exposure to people and other manned aircraft.[58]  Then the team conducted crash tests and analyzed crash dynamics by measuring kinetic energy transfer.[59]  The results revealed that earlier measurements of the danger of collision grossly overestimate the risk of injury from a drone.[60]  ASSURE concluded that the DJI Phantom 3 drone has a 0.03% chance of causing a head injury if it falls on a person's head.[61]  This is a very low probability considering blocks of steel or wood of the same weight have a 99% risk of causing a head injury in the same scenario.[62]  The disparity in probability of head injury is largely due to the fact that the DJI Phantom 3 drone absorbs most of the energy resulting from a collision, and therefore less energy is transferred on impact from the drone than from a block of steel or wood in the same collision.[63]

Comparison of Steel and Wood with Phantom 3

In fact there are numerous steps that drone designers and manufacturers can take to reduce the likelihood of injury in the event of a collision.[64]  Projectile mass and velocity, as well as stiffness of the UAS, are the primary drivers of impact damage.[65]  As such, multi-rotor drones tend to be safer because they fall more slowly due to the drag of the rotors as the drones fall through the air.[66]  The study made clear that blade guards should be a design requirement for drones used in close proximity to people in order to minimize the lacerations that can result from a collision.[67]  Moreover, ASSURE found that the more flexible the structure of the drone, the more energy the drone retains during impact, causing less harm to the impacted object of the collision.[68] Regarding crashes with other manned aircraft, however, the study revealed that the impact of a drone can be much more severe than the impact of a bird of equivalent size and speed.[69]  As such, the structural components of a commercial aircraft that allows it to withstand bird strikes from birds up to eight pounds are not an appropriate guideline for preventing damage from a UAS strike.[70]  The study also examined the dangers associated with lithium batteries, which are used to power most drones, in collisions.[71]  The major concern is the risk of a battery fire.[72]  The study found that typical high-speed impacts cause complete destruction of the battery, eliminating any concerns about battery fires.[73]  However, the lower impact crashes, which are mainly associated with take-off and landing, left parts of the battery intact, posing a risk of battery fire.[74] While the ASSURE study is the first of its kind, it certainly marks the need for more studies that analyze the practical aspects of collisions and how to reduce risk to minimize harm.  The hazards associated with commonplace drone operation are many.[75]  Analysis of the physical impact of a collision is one aspect of minimizing UAS risks.  There is still much work to be done in order to minimize other collateral risks, such as the risk of technology failures, which range from UAS platform failures, to failures of hardware or communication links controlling the UAS.[76]  Environmental hazards, such as the effect of rain, lightning, and other types of weather remains to be studied.[77]  Ways to safeguard against human error or intentional interference is another aspect of UAS safety that has yet to be studied in detail.[78]  Data link spoofing, jamming, or hijacking poses significant safety hazards, particularly as incidents of data breaches become more and more common.[79]  Before the integration of UAS into national airspace can be fully implemented, industry stakeholders must collaborate to conduct studies that will help inform legislators about what kind of technological requirements and operational regulations are necessary.

G.    UAS Airspace Integration Pilot Program

In October 2017, the U.S. Department of Transportation ("DOT") announced that it was launching the Unmanned Aircraft Systems Integration Pilot Program.[80]  The program, which was established in response to a presidential directive, is meant to accelerate the integration of UAS into the national airspace through the creation of public-private partnerships between UAS operators, governmental entities, and other private stakeholders.[81]  The program is designed to establish greater regulatory certainty and stability regarding drone use.[82]  After reviewing the applications, DOT will select a minimum of five partnerships with the goal of collaborating with the selected industry stakeholder in order to evaluate certain advanced UAS operational concepts, such as night operations, flights beyond the pilot's line of sight, detect-and-avoid technologies, flights over people, counter-UAS security operations, package delivery, the integrity and dependability of data links between pilot and aircraft, and cooperation between local authorities and the FAA in overseeing UAS operations.[83] One such application was made by the City of Palo Alto, in partnership with the Stanford Blood Center, Stanford hospital, and Matternet, a private drone company.[84]  The City of Palo Alto has proposed the use of drones to deliver units of blood from the Stanford Blood Center to Stanford hospital, which would involve establishing an approved flight path for drones to transfer the units of blood in urgent situations.[85]  Matternet has already tested its drones' capacity for transporting blood and other medical samples in Switzerland.[86]  A second project proposed by the City of Palo Alto involves the use of drones in order to monitor the perimeter of the Palo Alto Airport.[87]  This project involves a partnership between the city and a company called Multirotor, a German drone company that has experience working with the German army and the Berlin Police Department to integrate UAS as tools for law enforcement activities.[88] The creation of the pilot program has given stakeholders the sense that the current administration is supportive of integrating drones into the national airspace.  The support of the government has created the potential for unprecedented growth in an industry that could bring lucrative returns to its stakeholders.  The DOT has already received over 2,800 interested party applications.[89]  The majority of these applications have come from commercial drone companies, as well as various other stakeholders including energy companies, law enforcement agencies, and insurance providers.[90]  The UAS Pilot Program is to last for three years.[91]  The projected economic benefit of integrated UAS is estimated to equal $82 billion, creating up to 100,000 jobs.[92]  Industries that could see immediate returns from the program include precision agriculture, infrastructure inspection and monitoring, photography, commerce, and crisis management.[93]  The advent of established, government-sanctioned rules for the operation of UAS will motivate industry stakeholders both in the public and private sectors to push forward with new and innovative ways to use drones.

II.    GOVERNMENT CONTRACTS LITIGATION IN THE AEROSPACE AND DEFENSE INDUSTRY

Gibson Dunn's 2017 Year-End Government Contracts Litigation Update and 2017 Mid-Year Government Contracts Litigation Update cover the waterfront of the most important opinions issued by the U.S. Court of Appeals for the Federal Circuit, U.S. Court of Federal Claims, Armed Services Board of Contract Appeals ("ASBCA"), and Civilian Board of Contract Appeals among other tribunals.  We invite you to review those publications for a full report on case law developments in the government contracts arena. In this update, we (A) summarize key court decisions related to government contracting from 2017 that involve players in the aerospace and defense industry.  The cases discussed herein, and in the Government Contracts Litigation Updates referenced above, address a wide range of issues with which government contractors in the aerospace and defense industry are likely familiar.

A.    Select Decisions Related to Government Contractors in the Aerospace and Defense Industry

Technology Systems, Inc., ASBCA No. 59577 (Jan. 12, 2017)
TSI held four cost-plus-fixed-fee contracts with the Navy for research and development.  Several years into the contracts, the government disallowed expenses that had not been questioned in prior years.  TSI appealed to the ASBCA, arguing that it relied to its detriment on the government's failure to challenge those same expenses in prior years. The Board (Prouty, A.J.) held that the challenged costs were "largely not allowable" and that "the principle of retroactive disallowance," which it deemed "a theory for challenging audits whose heyday has come and gone," did not apply because the same costs had simply not come up in the prior audits.  The theory of retroactive disallowance, first articulated in a Court of Claims case in 1971, prevents the government from challenging costs already incurred when the cost previously had been accepted following final audit of historical costs; the contractor reasonably believed that it would continue to be approved; and it detrimentally relied on the prior acceptance.  Tracing the precedent discussing the principle, the Board cited the Federal Circuit's decision in Rumsfeld v. United Technologies Corp., 315 F.3d 1361 (Fed. Cir. 2003), which stated that "affirmative misconduct" on the part of the government would be required for the principle of retroactive disallowance to apply because it is a form of estoppel against the government.  The Board "sum[med] up: there is no way to read our recent precedent or the Federal Circuit's except to include an affirmative misconduct requirement amongst the elements of retroactive disallowance.  Period."  Further, the Board held that the government's failure to challenge the same costs in prior years did not constitute a "course of conduct precluding the government from disallowing the costs in subsequent audits."
Delfasco LLC, ASBCA No. 59153 (Feb. 14, 2017)
Delfasco had a contract with the Army for the manufacture and delivery of a specified number of munition suspension lugs.  The Army thereafter exercised an option to double the number of lugs required.  When Delfasco stopped making deliveries due to an inability to pay its subcontractor, the Army terminated the contract for default.  Delfasco appealed to the ASBCA, asserting that the government had waived its right to terminate for untimely performance by allegedly stringing Delfasco along even after the notice of termination. The Board (Prouty, A.J.) set out the test for waiver in a case involving termination for default due to late delivery as follows:  "(1) failure to terminate within a reasonable time after the default under circumstances indicating forbearance, and (2) reliance by the contractor on the failure to terminate and continued performance by him under the contract with the Government's knowledge and implied or express consent."  The Board held that Delfasco failed to satisfy the first prong because the government's show cause letter placed Delfasco on notice that any continued performance would only be for the purpose of mitigating damages.  Moreover, Delfasco failed to satisfy the second prong because Delfasco's payment to its subcontractor after the show cause letter would have been owed regardless, and was not paid in reliance upon the government's failure to terminate.  Therefore, the Board found that the government had not waived its right to terminate, and denied the appeal.
Raytheon Co., ASBCA Nos. 57743 et al. (Apr. 17, 2017)
Raytheon appealed from three final decisions determining that an assortment of costs—including those associated with consultants, lobbyists, a corporate development database, and executive aircraft—were expressly unallowable and thus subject to penalties.  After a two-week trial, the Board (Scott, A.J.) sided largely with Raytheon in a wide-ranging decision that covers a number of important cost principles issues. First, the Board rejected the government's argument that the consultant costs were expressly unallowable simply because the government was dissatisfied with the level of written detail of the work product submitted to support the costs.  Judge Scott noted that written work product is not a requirement to support a consultant's services under FAR 31.205-33(f), particularly not where, as here, much of the consultants' work was delivered orally due to the classified nature of the work performed.  The Board found that not only were the consultant costs not expressly unallowable, but indeed were allowable.  This is a significant ruling because the documentation of consultant costs is a recurring issue as government auditors frequently make demands concerning the amount of documentation required to support these costs during audits. Second, the government sought to impose penalties for costs that inadvertently were not withdrawn in accordance with an advance agreement between Raytheon and the government concerning two executive aircraft.  Raytheon agreed that the costs should have been withdrawn and agreed to withdraw them when the error was brought to its attention, but asserted that the costs were not expressly unallowable and subject to penalty.  The Board agreed, holding that the advance agreements did not themselves clearly name and state the costs to be unallowable, and further that advance agreements do not have the ability to create penalties because a cost must be named and stated to be unallowable in a cost principle (not an advance agreement) to be subject to penalties.  This ruling could have significance for future disputes arising out of advance agreements. Third, the government alleged that costs associated with the design and development of a database to support the operations of Raytheon's Corporate Development office were expressly unallowable organizational costs under FAR 31.205-27.  The Board disagreed, validating Raytheon's argument that a significant purpose of the Corporate Development office was allowable generalized long-range management planning under FAR 31.205-12, thus rendering the costs allowable (not expressly unallowable). The only cost for which the Board denied Raytheon's appeals concerned the salary costs of government relations personnel engaged in lobbying activities.  Raytheon presented evidence that it had a robust process for withdrawing these costs as unallowable under FAR 31.205-22, but inadvertently missed certain costs in this instance due to, among other things, "spreadsheet errors."  Raytheon agreed that the costs were unallowable and should be withdrawn, but disputed that the costs of employee compensation (a generally allowable cost) were expressly unallowable and further argued that the contracting officer should have waived penalties under FAR 42.709-5(c) based on expert evidence that Raytheon's control systems for excluding unallowable costs were "best in class."  The Board found that salary costs associated with unallowable lobbying activities are expressly unallowable and that the contracting officer did not abuse his discretion in denying the penalty waiver.
L-3 Comms. Integrated Sys. L.P. v. United States, No. 16-1265C (Fed. Cl. May 31, 2017)
L-3 entered an "undefinitized contractual action" ("UCA") with the Air Force in which it agreed to provide certain training services while still negotiating the terms of the contract.  After the parties failed to reach agreement on the prices for two line items in the UCA, the Air Force issued a unilateral contract modification, setting prices for those line items and definitizing the contract.  L-3 argued that the Air Force's price determination was unreasonable, arbitrary and capricious, and in violation of the FAR, and filed suit seeking damages.  The government moved to dismiss for lack of subject matter jurisdiction. The Court of Federal Claims (Kaplan, J.) dismissed L-3's complaint, concurring with the government that L-3 had never presented a certified claim to the contracting officer for payment "of a sum certain to cover the losses it allegedly suffered."  The court found that the proposals L-3 had presented to the Air Force were not "claims," but rather proposals made during contract negotiations that did not contain the requisite claim certification language.
Innoventor, Inc., ASBCA No. 59903 (July 11, 2017)
In 2011, the government entered into a fixed-price contract with Innoventor for the design and manufacture of a dynamic brake test stand.  As part of the contract's purchase specifications, the new design had to undergo and pass certain testing.  After problems arose in the testing process, Innoventor submitted a proposal to modify certain design components and applied for an equitable adjustment due to "instability of expectations."  The contracting officer denied Innoventor's request for an equitable adjustment, stating that the government had not issued a modification directing a change that would give rise to such an adjustment.  Innoventor submitted a claim, which the contracting officer denied, and Innoventor appealed. The Board (Sweet, A.J.) held that the government was entitled to judgment as a matter of law because there was no evidence that the government changed Innoventor's performance requirements, let alone that anyone with authority directed any constructive changes.  Here, the contract was clear that Innoventor's design had to pass certain tests, and because it failed some of them, and did not perform pursuant to the contract terms, there was no change in the original contract terms that would give rise to a constructive change.  The Board also found that there was no evidence that any person beyond the contracting officer had authority to direct a change because the contract expressly provided that only the contracting officer has authority to change a contract.  Accordingly, the Board denied Innoventor's appeal.
L-3 Commc'ns Integrated Sys., L.P., ASBCA Nos. 60713 et al. (Sept. 27, 2017)
L-3 appealed from multiple final decisions asserting government claims for the recovery of purportedly unallowable airfare costs.  Rather than audit and challenge specific airfare costs, the Defense Contract Audit Agency simply applied a 79% "decrement factor" to all of L-3's international airfare costs over a specified dollar amount, claiming that this was justified based on prior-year audits.  After filing the appeals, L-3 moved to dismiss for lack of jurisdiction on the grounds that the government had failed to provide adequate notice of its claims by failing to identify which specific airfare costs were alleged to be unallowable, as well as the basis for those allegations. The Board (D'Alessandris, A.J.) denied the motion to dismiss, holding that the contracting officer's final decisions sufficiently stated a claim in that they set forth a sum certain and a basis for such a claim.  The Board held that L-3 had enough information to understand how the government reached its claim, and its contention that this was not a valid basis for the disallowance of costs for the year in dispute went to the merits and not the sufficiency of the final decisions.
Scott v. United States, No. 17-471 (Fed. Cl. Oct. 24, 2017)
Brian X. Scott brought a pro se claim in the Court of Federal Claims seeking monetary and injunctive relief for alleged harms arising from the Air Force's handling of his unsolicited proposal for contractual work.  Scott was an Air Force employee who submitted a proposal for countering the threat of a drone strike at the base where he was stationed.  The proposal was rejected, but Scott alleged that portions of the proposal were later partially implemented.  Scott sued, claiming that the Air Force failed properly to review his proposal and that his intellectual property was being misappropriated.  Scott argued that jurisdiction was proper under the Tucker Act because an implied-in-fact contract arose that prohibited the Air Force from using any data, concept, or idea from his proposal, which was submitted to a contracting officer with a restrictive legend consistent with FAR § 15.608. The Court of Federal Claims (Lettow, J.) found that it had jurisdiction under the Tucker Act because an implied-in-fact contract was formed when the Air Force became obligated to follow the FAR's regulatory constraints with regard to Scott's proposal.  Nevertheless, the Court granted the government's motion to dismiss because Scott's factual allegations, even taken in the light most favorable to him, did not plausibly establish that the government acted unreasonably or failed to properly evaluate his unsolicited proposal by using concepts from the proposal where Scott's proposal addressed a previously published agency requirement.

III.    COMMERCIAL SPACE SECTOR

A.    Overview of Private Space Launches and Significant Milestones

Space exploration is always fascinating—2017 and early 2018 was no exception.  Starting off in February 2017, India's Polar Satellite Launch Vehicle launched 104 satellites, setting a record for the number of satellites launched from a single rocket.[101]  In June, NASA finally unveiled its 12 chosen candidates for its astronaut program out of a pool of over 18,000 applicants, which was a record-breaking number.[102]  A few months later, NASA's Cassini spacecraft was intentionally plunged into Saturn, ending over a decade's worth of service.[103]  President Donald Trump also signed Space Policy Directive 1, which instructs NASA to send astronauts back to the moon, which President Trump noted would help establish a foundation for an eventual mission to Mars.[104] In what was widely expected to be a record year for private space launches, SpaceX and other private space companies clearly delivered.  In 2017, SpaceX, the company founded and run by Elon Musk, flew a record 18 missions utilizing the Falcon 9 rocket.[105]  Blue Origin, the company founded by Jeff Bezos, also made significant progress.  It was able to launch a new version of its New Shepard vehicle on its first flight, which Bezos hopes will lay the foundation for potential crewed missions.[106]  Then, in late December, California startup Made in Space sent a machine designed to make exotic ZBLAN optical fiber to the International Space Station.[107]  Without a doubt, 2017 played witness to many significant milestones in space exploration. Additional milestones have already been surpassed in early 2018.  February 6, 2018 was a historic date for Space technology and exploration—SpaceX's Falcon Heavy had its maiden launch.  The Falcon Heavy can carry payloads larger than any available commercial rocket, and it has the potential to launch payloads outside of Earth's orbit.  In fact, the Falcon Heavy did just that by launching a Tesla Roadster, driven by "Starman" into interplanetary space.  Starman will likely continue driving its orbit for millions of years.  It is only a matter of time until Starman is replaced with astronauts and the destination becomes Mars—SpaceX plans to launch such a mission in 2024.

B.    Update on Outer Space Treaty and Surrounding Debate

The Treaty on Principles Governing the Activities of States in the Exploration and Use of Outer Space, Including the Moon and Other Celestial Bodies, otherwise known as the Outer Space Treaty, recently celebrated its 50th anniversary.  Signed in 1967 and designed to prevent a new form of colonial competition, the Treaty was lauded for its principal framework on international space law.  Indeed, shortly after the Treaty was entered into force, the United States and the Soviet Union successfully collaborated on many space missions and exercises.[108] The Treaty is not complex.  Consisting of 17 short articles, the Treaty obligates its signatories to perform space exploration "for the benefit and interest of all countries" and to not "place in orbit around the Earth any objects carrying nuclear weapons or any other kinds of weapons of mass destruction."[109]  Having been in force for over 50 years, there have recently been discussions regarding whether the Treaty is ripe for an update.  Only as far back as half a decade ago, experts met in Australia to discuss moon-mining of anything from water and fuel to rare minerals in what was then a world's first "Off-Earth Mining Forum."[110]  Discussion surrounded the legality of such mining under the Treaty.  Then in 2014, NASA accepted applications from companies that desired to mine rare moon minerals in a program called "Lunar Cargo Transportation and Landing by Soft Touchdown."[111]  This once again sparked a debate on the legality of such actions, specifically lunar property rights. In 2017, the focus turned toward private and commercial space flight, and spurred conversation as to whether the 50-year-old treaty needed an update.  For one, the Treaty was designed, and has been entirely focused, on only individual countries.  Thus, there is an argument that the Treaty does not apply to private appropriation of celestial territory.  Second, the quaint nature of the Treaty has spawned efforts at tackling the private appropriation issues.  For instance, the United States passed the Space Act of 2015, which provides for private commercial "exploration and exploitation of space resources."[112]  The Act has incited further debate on the various legal loopholes that inherently afflict the Treaty and its ban on countries owning celestial territory. Meanwhile, the U.S. government has continued to find methods of regulation, specifically those involving the FAA and the Federal Communications Commission ("FCC"), among others.[113]  Now, lawmakers are purportedly discussing legislation that would provide a regulatory framework for private commercial space travel to adhere to the Treaty, as there currently does not exist a framework for the U.S. government to oversee the launch of private space stations.[114] Moreover, Senator Ted Cruz (R-TX) has been leading the charge on updating the Treaty to address issues related to modern spaceflight, where private commercial entities are playing an ever-increasing role.[115]  In May, Senator Cruz, the chairman of the Subcommittee on Space, Science, and Competitiveness, convened a hearing to "examine U.S. government obligations under the [Treaty]" and to also "explore the Treaty's potential impacts on expansion of our nation's commerce and settlement in space."[116]  Featuring a panel of legal experts and a panel of commercial space business leaders, the hearing raised a number of different viewpoints with one apparently unifying message: the Treaty should not be amended.  One of the panel members, Peter Marquez, while acknowledging that the Treaty is not perfect, expressed concern that opening up the Treaty to modifications would leave the space industry worse off, and would be a detriment to national and international security.[117] One area of particular interest was Article VI of the Treaty, which provides that nations authorize and supervise space activities performed by non-governmental entities, such as a private commercial space company.  The CEO of Moon Express, Bob Richards, noted that while the Treaty should remain unchanged, the U.S. should adopt a streamlined regulatory procedure and process to make approvals for space activities more efficient and clear.[118]  One of the legal experts sitting on the panel, Laura Montgomery, expressed her belief that the U.S. need not further regulate new commercial space because a close reading of the Treaty would indicate that mining and other similar activities do not require such governmental approvals.[119] While the ultimate general consensus appeared to be that no change to the Treaty was necessary to accomplish the goals of private commercial space enterprises, the hearing did bring to light the issues that currently confront modern space protocols.

C.    The American Space Commerce Free Enterprise Act of 2017, Which Seeks to Overhaul U.S. Commercial Space Licensing Regime, Passes Committee but Stalls in House

On June 7, 2017, House members led by Rep. Lamar Smith (R-TX), Chairman of the U.S. House Science, Space, and Technology Committee, introduced H.R. 2809—the American Space, Commerce, and Free Enterprise Act of 2017 ("ASCFEA").[120]  The bill, if adopted, would amend Title 51 of the United States Code to liberalize licensing requirements to conduct a variety of commercial space activities, while consolidating the licensing approval process for such activities under the authority of the U.S. Department of Commerce ("DOC").[121] The regulation of commercial space activities historically has been distributed among a variety of agencies—with the National Oceanic and Atmospheric Administration ("NOAA") governing remote sensing, the FCC governing communications satellites,[122] and the FAA/AST regulating launch, reentry, and some other non-traditional activities.[123]  But with that patchwork of authority, proponents of the Act believe there exists a regulatory gap for overseeing and authorizing new and innovative space activities.[124]  A primary goal of the Act is to address this perceived uncertainty, and in so doing, resolve long-standing questions associated with the United States' responsibility to regulate commercial space activities under the Outer Space Treaty,[125] which the bill's text references extensively. In its current form, the bill would grant the Office of Space Commerce (within the DOC) "the authority to issue certifications to U.S. nationals and nongovernmental entities for the operation of:  (1) specified human-made objects manufactured or assembled in outer space . . . and (2) all items carried on such objects that are intended for use in outer space."[126]  The bill further eliminates the Commercial Remote Sensing Regulatory Affairs Office of the NOAA, and vests authority to issue permits for remote sensing systems, again, in the DOC.[127]  The bill also creates a certification process for other "commercial payloads not otherwise licensed by the government," thereby providing fallback legislation for "non-traditional applications like satellite servicing, commercial space stations and lunar landers."[128]  The DOC hence would occupy all the regulatory authority for commercial space activities, except for the FCC and FAA/AST's current authority, which those agencies would maintain.[129] The commercial space industry supports the bill, and in particular the bill's apparent presumption in favor of regulatory approval.[130]  Industry also supports the bill's overhaul of the regulation of remote sensing—for example, the bill requires the DOC to issue a certification decision within just 60 days (or else the application is granted),[131] provide an explanation for any rejections, and grant every application that seeks authorization for activities involving "the same or substantially similar capabilities, derived data, products, or services are already commercially available or reasonably expected to be made available in the next 3 years in the international or domestic marketplace."[132] Some opponents of the bill contend that the consolidation of regulatory approval will limit interagency review, which is important because the DoD, State Department, and the intelligence community currently play some regulatory role in the review of aspects of new commercial space activities that are perceived to potentially pose a threat to national security.[133]  Others contend that the Office of Space Commerce has inadequate resources and experience to handle the regulatory approvals.  The bill seeks to ameliorate these concerns by authorizing $5 million in funding for the Office in 2018.[134]  The Department of Justice also has voiced some constitutional concerns.[135] The House referred the bill to the House Committee on Science, Space, and Technology,[136] which on June 8, 2017 passed three amendments by voice vote.[137]  Since being marked up in committee, the bill has seen no further action by the House.[138]  The DOC currently is seeking public input on possible changes to commercial space operations licensing more broadly.[139]

D.    Industry and Government Regulators Call for Changes to NOAA's Licensing of Remote Sensing Technology

ASCFEA's effort to strip NOAA of its authority to regulate remote sensing technology coincides with a growing number of complaints from the remote sensing industry and government regulators concerning NOAA's ability to handle an increased number of licensing applications.[140] The Land Remote Sensing Policy Act of 1992 authorized the Secretary of Commerce to "license private sector parties to operate private remote sensing space systems."[141]  But despite a sea change in remote sensing technology and activities since 1992, that law remains the main source of authority for remote sensing licensing, and Congress has made few modifications to the law since its inception.[142]  Given the speed of technological change, and increased industry competition, remote sensing companies are advocating for NOAA to adopt a "permissive" approach to licensing, akin to the language proposed in the ASCFEA.[143] NOAA's issues have been exacerbated by the fact that license applications are now more varied and complex than they were previously.[144]   Representatives from NOAA describe how prior to 2011, it took an average of 51 days to review license applications, since many applications sought permission for similar concepts for satellite systems.[145]  Even though the Land Remote Sensing Policy Act of 1992 calls for a 120-day approval window, in practice, applications now extend far longer than that—and further, NOAA sometimes provides little to no explanation about why it rejects particular applications.[146]  Under the ASCFEA, the DOC would be required to approve applications using the "same or substantially similar capabilities, derived data, products, or services as are already commercially available or reasonably expected to be made available in the next 3 years in the international or domestic marketplace."[147] Another complexity is that many companies develop technology that do not solely or traditionally perform remote sensing functions, but have remote sensing capabilities.[148]  The ASCFEA addresses this problem by offering exceptions for "De Minimis" uses of remote sensing technology.[150]

E.    Commercial Space Policy in the Trump Era

On December 11, 2017, President Trump signed White House Space Policy Directive 1, entitled "Reinvigorating America's Human Space Exploration Program."[151]  As the subject suggests, the Directive's goal is to bring a renewed focus on human space flight at a time when the United States lacks an organic capability to send American astronauts into low-Earth orbit, let alone beyond.[152]  Fittingly, President Trump signed the directive on the forty-fifth anniversary of the lunar landing of Apollo 17, with Apollo 17 astronaut Senator Harrison Schmitt present at the ceremony.[153] According to the Directive, the United States will "[l]ead an innovative and sustainable program of exploration with commercial and international partners to enable human expansion across the solar system…."[154]  The directive calls for missions beyond low-Earth orbit, with the United States "lead[ing] the return of humans to the Moon for long-term exploration and utilization, followed by human missions to Mars and other destinations."[155] NASA is already working with several commercial entities to develop transportation to and from low-Earth orbit, as well as to the International Space Station.[156]  And a call for a return to the moon for use as a stepping-stone to other destinations is not new with President Trump; previous administrations have expressed a similar desire.[157]  What remains to be seen is how this "long-term exploration" will be funded, with a good indicator being what "will be reflected in NASA's FISCAL Year 2019 budget request."[158]  Until then, "No bucks, no Buck Rogers."[159]

F.    Updates on Space Law in Luxembourg, India, and Australia

Luxembourg Continues its Push for Commercial Space Prominence
The small country of Luxembourg, a signatory to the Outer Space Treaty,[160] has major commercial space ambitions.  In 2016, Luxembourg passed a law to set aside €200 million to fund commercial space mining activities, and also offered to help interested companies obtain private financing.[161]  On July 13, 2017, following the United States' lead,[162] Luxembourg passed a law that gives qualifying companies the right to own any space resources they extract from celestial bodies including asteroids.[163]  The law further outlines a regulatory framework for "the government to authorize and supervise resource extraction and other space activities," except for communications satellites, which a different Luxembourg agency regulates.[164]  To qualify for a space mining license, companies must be centrally administered and own a registered office in Luxembourg, and also must obtain regulatory approval.[165]  It is as of now unclear whether the Luxembourg law (as well as the U.S.'s analogous law) violate the Outer Space Treaty, which prohibits companies from claiming territory on celestial bodies, but does not clarify whether that prohibition extends to materials extracted from those celestial bodies.[166]
India Unveils Draft of New Commercial Space Law; Sets Satellite Launch Record
In November 2017, the India Department of Space released and sought comments for the "Space Activities Act, 2017."[167]  The stated goal of the bill is to "encourage enhanced participation of non-governmental/private sector agencies in space activities in India."[168]  The bill as currently drafted vests authority in the Indian Government to formulate a licensing scheme for any and all "Commercial Space Activity," and states that licenses may be granted if the sought activity does not jeopardize public health or safety, and does not violate India's international treaty obligations, such as the Outer Space Treaty, to which India is a signatory.[169] India's space agency also made headlines this year when it sent 104 satellites into space in 18 minutes—purportedly tripling the prior record for single-day satellite launches.[170]  The New York Times reports that satellite and other orbital companies closely scrutinized the launch, since India's space agency is cheaper to employ for satellite launches than its European and North American counterparts.[171]
Australia Announced that It Will Create a Space Agency; Details Pending
In September 2017, Australia's Acting Minister for Industry, Innovation and Science announced that Australia will create a national space agency.[172]  While details are still pending, Australia's goal purportedly is to take advantage of the $300-$400 billion space economy, while creating Australian jobs in the process.[173]

IV.    CYBERSECURITY AND PRIVACY ISSUES IN THE NATIONAL AIRSPACE

A.    Cybersecurity Issues

The Federal Aviation Administration (FAA) has lagged behind other sectors in establishing robust cybersecurity and privacy safeguards in the national airspace, although federal policy identifies the transportation sector (which includes the aviation industry) as one of the 16 "critical infrastructure" sectors that have the ability to impact significantly the nation's security, economy, and public health and safety.[174]  The need for the FAA to establish robust safeguards is obvious, as the catastrophic impact of a cyber attack on the national airspace is not hard to imagine post-9/11.  Recently, one hacker claimed he compromised the cabin-based in-flight entertainment system to control a commercial airline engine in flight. One development of note is the reintroduction of the Cybersecurity Standards for Aircraft to Improve Resilience Act of 2017 by U.S. Senators Edward Markey and Richard Blumenthal.[175] Senator Markey first introduced legislation aimed at improving aircraft cyber security protection in April 2016, following a 2015 survey of U.S. airline CEOs to discover standard cybersecurity protocols used by the aviation industry.  If signed into law, the bill would require the U.S. Department of Transportation to work with DoD, Homeland Security, the Director of National Intelligence, and the FCC to incorporate requirements relating to cybersecurity into the requirements for certification.  Additionally, the bill would establish standard protections for all "entry points" to the electronic systems of aircraft operating in the U.S.  This would include the use of isolation measures to separate critical software systems from noncritical software systems.

B.    UAS Privacy Concerns

UAS are equipped with highly sophisticated surveillance technology with the ability to collect personal information, including physical location.  Senator Ayotte, Chair of the Subcommittee on Aviation Operations, Safety, and Security, summarized the privacy concerns drones pose as follows: "Unlimited surveillance by government or private actors is not something that our society is ready or willing or should accept.  Because [drones] can significantly lower the threshold for observation, the risk of abuse and the risk of abusive surveillance increases."  We describe below several recent federal and state efforts to address this issue.

1.    State Legislation Addressing Privacy Concerns

At least five out of the twenty-one states that either passed legislation or adopted resolutions related to UAS in 2017 specifically addressed privacy concerns.[176] Colorado HB 1070 requires the center of excellence within the department of public safety to perform a study that identifies ways to integrate UAS within local and state government functions relating to firefighting, search and rescue, accident reconstruction, crime scene documentation, emergency management, and emergencies involving significant property loss, injury or death.  The study must consider privacy concerns, in addition to costs and timeliness of deployment, for each of these uses. New Jersey SB 3370 allows UAS operation that is consistent with federal law, but also creates criminal offenses for certain UAS surveillance and privacy violations.  For example, using a UAS to conduct surveillance of a correction facility is a third degree crime.  Additionally, the law also applies the operation of UAS to limitations within restraining orders and specifies that convictions under the law are separate from other convictions such as harassment, stalking, and invasion of privacy. South Dakota SB 22 also prohibits operation of drones over the grounds of correctional and military facilities, making such operation a class 1 misdemeanor.  Further, the law modifies the crime of unlawful surveillance to include intentional use of a drone to observe, photograph or record someone in a private place with a reasonable expectation of privacy, and landing a drone on the property of an individual without that person's consent.  Such purportedly unlawful surveillance is a class 1 misdemeanor unless the individual is operating the drone for commercial or agricultural purposes, or the individual is acting within his or her capacity as an emergency management worker. Utah HB 217 modifies criminal trespass to include drones entering and remaining unlawfully over property with specified intent.  Depending on the intent, a violation is either a class B misdemeanor, a class A misdemeanor, or an infraction, unless the person is operating a UAS for legitimate commercial or educational purposes consistent with FAA regulations.  Utah HB 217 also modifies the offense of voyeurism, a class B misdemeanor, to include the use of any type of technology, including UAS, to secretly record video of a person in certain instances. Virginia HB 2350 makes it a Class 1 misdemeanor to use UAS to trespass upon the property of another for the purpose of secretly or furtively peeping, spying, or attempting to peep or spy into a dwelling or occupied building located on such property.

2.    UAS Identification and Tracking Report

The FAA chartered an Aviation Rulemaking Committee ("ARC") in June 2017 to provide recommendations on the technologies available for remote identification and tracking of UAS, and how remote identification may be implemented.[177]  However, the ARC's 213 page final report, dated September 30, 2017, notes that the ARC lacked sufficient time to fully address privacy and data protection concerns, and that therefore those topics were not addressed: [T]he ARC also lacks sufficient time to perform an exhaustive analysis of all the privacy implications of remote ID, tracking, or UTM, and did not specifically engage with privacy experts, from industry or otherwise, during this ARC.  These members agree, however, that it is fundamentally important that privacy be fully considered and that appropriate privacy protections are in place before data collection and sharing by any party (either through remote ID and/or UTM) is required for operations.  A non-exhaustive list of important privacy considerations include, amongst other issues, any data collection, retention, sharing, use and access.  Privacy must be considered with regard to both PII and historical tracking information.  The privacy of all individuals (including operators and customers) should be addressed, and privacy should be a consideration during the rulemaking for remote ID and tracking.

Accordingly, the ARC recognizes the fundamental importance of fully addressing privacy and data protection concerns, and we anticipate that future rulemaking will address these issues.

IV.    CONCLUSION

We will continue to keep you informed on these and other related issues as they develop.
[1] See Huerta, No. 3:16-cv-358, Dkt. No. 30. [2] Id. [3] Id. [4] See Boggs, No. 3:16-cv-00006, Dkt. No. 1 (W.D. Ky. Jan. 4, 2016). [5] See id. [6] See Boggs, No. 3:16-cv-00006, Dkt. No. 20 (W.D. Ky. Jan. 4, 2016). [7] See id. [8] See Singer, No. 1:17-cv-10071, Dkt. N. 63 (D. Mass. Jan. 17, 2017). [9] See id. [10] See id. [11] See id. [12] See id. [13] See Taylor v. Huerta, 856 F.3d 1089 (D.C. Cir. 2017). [14] See Pub. L. No. 112–95, § 336(a), 126 Stat. 11, 77 (2012) (codified at 49 U.S.C. § 40101 note). [15] See Taylor, 856 F.3d at 1090. [16] See Pub. L. No. 115–91, § 3 1092(d), (2017). [17] The White House, Office of the Press Secretary, Presidential Memorandum:  Promoting Economic Competitiveness While Safeguarding Privacy, Civil Rights, and Civil Liberties in Domestic Use of Unmanned Aircraft Systems, Feb. 15, 2015, available at https://obamawhitehouse.archives.gov/the-press-office/2015/02/15/presidential-memorandum-promoting-economic-competitiveness-while-safegua. [18] Operation and Certification of Small Unmanned Aircraft Systems, 81 Fed. Reg. 42064 (June 28, 2016). [19] Electronic Privacy Information Center ("EPIC"), EPIC v. FAA: Challenging the FAA's Failure to Establish Drone Privacy Rules, https://epic.org/privacy/litigation/apa/faa/drones/ (last visited Jan. 18, 2018). [20] See generally Electronic Privacy Information Center v. FAA (EPIC I), 821 F.3d 39, 41-42 (D.C. Cir. 2016) (noting that FAA denied EPIC's petition for rulemaking requesting that the FAA consider privacy concerns). [21] Voluntary Best Practices for UAS Privacy, Transparency, and Accountability, NTIA-Convened Multistakeholder Process (May 18, 2016), https://www.ntia.doc.gov/files/ntia/publications/ uas_privacy_best_practices_6-21-16.pdf. [22] EPIC, supra, note xix. [23] EPIC I, supra, note xx, at 41. [24] Id. 41-42. [25] Id. [26] Id. [27] Id. at 42-43. [28] Id. at 42. [29] Id. at 43. [30] Pet. For Review, Electronic Privacy Information Center v. FAA (EPIC II), Nos. 16-1297, 16-1302 (Filed Aug. 22, 2016), https://epic.org/privacy/litigation/apa/faa/drones/EPIC-Petition-08222016.pdf. [31] Appellant Opening Br., EPIC II, Nos. 16-1297, 16-1302 (Filed Feb. 28, 2017), https://epic.org/privacy/litigation/apa/faa/drones/1663292-EPIC-Brief.pdf. [32] Appellee Reply Br., EPIC II, Nos. 16-1297, 16-1302 (Filed April 27, 2017), https://epic.org/privacy/litigation/apa/faa/drones/1673002-FAA-Reply-Brief.pdf. [33] United States Court of Appeals District of Columbia Circuit, Oral Argument Calendar, https://www.cadc.uscourts.gov/internet/sixtyday.nsf/fullcalendar?OpenView&count=1000 (last visited Jan. 18, 2018). [34] United States Department of Defense, Unmanned Systems Integrated Roadmap (2013), https://dod.defense.gov/Portals/1/Documents/pubs/DOD-USRM-2013.pdf. [35] Andrew Meola, Drone Marker Shows Positive Outlook with Strong Industry Growth and Trends, Business Insider, July 13, 2017, available at http://www.businessinsider.com/drone-industry-analysis-market-trends-growth-forecasts-2017-7. [36] Office of the Under Secretary of Defense, U.S. Department of Defense Fiscal Year 2017 Budget Request (Feb. 2016). [37] Office of the Under Secretary of Defense, U.S. Department of Defense Fiscal Year 2018 Budget Request (May 2017). [38] Goldman Sachs, Drones: Reporting for Work, http://www.goldmansachs.com/our-thinking/technology-driving-innovation/drones/ (last visited Jan. 18, 2017). [39] Id. [40] Chris Woods, The Story of America's Very First Drone Strike, The Atlantic, May 30, 2016, available at https://www.theatlantic.com/international/archive/2015/05/america-first-drone-strike-afghanistan/394463/. [41] Deputy Secretary of Defense, Policy Memorandum 15-002, "Guidance for the Domestic Use of Unmanned Aircraft Systems" (Feb. 17, 2015), https://dod.defense.gov/Portals/1/Documents/Policy%20Memorandum%2015-002%20_Guidance%20for%20the%20Domestic%20Use%20of%20Unmanned%20Aircraft%20Systems_.pdf. [42] Id. [43] Id. [44] Id. [45] Id. [47] Id. [48] Eric Schmitt, Pentagon Tests Lasers and Nets to Combat Vexing Foe: ISIS Drones, N.Y. Times, Sept. 23, 2017, available at https://www.nytimes.com/2017/09/23/world/middleeast/isis-drones-pentagon-experiments.html. [49] Id. [50] Christopher Woody, The Pentagon is Getting Better at Stopping Enemy Drones—and Testing Its Own for Delivering Gear to the Battlefield, Business Insider, Apr. 24, 2017, available at https://www.businessinsider.com/military-adding-drones-and-drone-defense-to-its-arsenal-2017-4. [51] Id. [52] Radio Hill Technology, Birth of the Dronebuster, http://www.radiohill.com/product/ (last visited Jan. 18, 2018). [53] Id. [54] Kyle Mizokami, The Army's Drone-Killing Lasers are Getting a Tenfold Power Boost, Popular Mechanics, July 18, 2017, available at http://www.popularmechanics.com/military/research/news/a27381/us-army-drone-killing-laser-power/. [55] Sydney J. Freedberg Jr., Drone Killing Laser Stars in Army Field Test, Breaking Defense, May 11, 2017, available at https://breakingdefense.com/2017/05/drone-killing-laser-stars-in-army-field-test/. [56] Mizokami, supra, note lv. [57] ASSURE, UAS Ground Collision Severity Evaluation Final Report, United States (2017), available at http://www.assureuas.org/projects/deliverables/sUASGroundCollisionReport.php?Code=230 (ASSURE Study). [58] Id. [59] Id. [60] Id. [61] DJI, DJI Welcomes FAA-Commissioned Report Analyzing Drone Safety Near People, Newsroom News, Apr. 28, 2017, available at https://www.dji.com/newsroom/news/dji-welcomes-faa-commissioned-report-analyzing-drone-safety-near-people. [62] Id. [63] Id. [64] ASSURE Study, supra note lviii. [65] Id. [66] Id. [67] Id. [68] Id. [69] ASSURE, FAA and Assure Announce Results of Air-to-Air Collision Study, ASSURE: Alliance for System Safety of UAS through Research Excellence, Nov. 27, 2017, available at https://pr.cirlot.com/faa-and-assure-announce-results-of-air-to-air-collision-study/. [70] Id. [71] ASSURE Study, supra note lviii. [72] Id. [73] Id. [74] Id. [75] See Pathiyil, et al., Issues of Safety and Risk management for Unmanned Aircraft Operations in Urban Airspace, 2017 Workshop on Research, Education and Development of Unmanned Aerial Systems (RED-UAS), Oct. 3, 2017, available at http://ieeexplore.ieee.org/stamp/stamp.jsp?arnumber=8101671. [76] Id. [77] Id. [78] Id. [79] Id. [80] Patrick C. Miller, 2,800 Interested Parties Apply for UAS Integration Pilot Program, UAS Magazine, Jan. 3, 2018, available at http://www.uasmagazine.com/articles/1801/2-800-interested-parties-apply-for-uas-integration-pilot-program. [81] Unmanned Aircraft Systems Integration Pilot Program, 82 Fed. Reg. 50,301 (Oct. 25, 2017) (Presidential directive creating the program); see also Unmanned Aircraft Systems Integration Pilot Program—Announcement of Establishment of Program and Request for Applications, 82 Fed. Reg. 215 (Nov. 8, 2017) (Department of Transportation Notice of the UAS Pilot Program). [82] See id. [83] See id. [84] Elaine Goodman, Blood Deliveries by Drone Proposed—City Submits Unique Ideas to FAA, Daily Post, Jan. 5, 2018, available at http://padailypost.com/2018/01/05/blood-deliveries-by-drone-proposed-city-submits-unique-ideas-to-faa/. [85] Id. [86] Id. [87] Id. [88] Id. [89] Miller, supra note lxxxi. [90] Id. [91] Id. [92] Id. [93] Id. [101]   NASA Spaceflight, India's PSLV deploys a record 104 satellites (Feb. 14, 2017), available at https://www.nasaspaceflight.com/2017/02/indias-pslv-record-104-satellites/. [102]   NASA, NASA's Newest Astronaut Recruits to Conduct Research off the Earth, For the Earth and Deep Space Missions (June 7, 2017), available at https://www.nasa.gov/press-release/nasa-s-newest-astronaut-recruits-to-conduct-research-off-the-earth-for-the-earth-and. [103]   NASA, Cassini Spacecraft Ends Its Historic Exploration of Saturn (Sept. 15, 2017), available at https://www.nasa.gov/press-release/nasa-s-cassini-spacecraft-ends-its-historic-exploration-of-saturn. [104]   NASA, New Space Policy Directive Calls for Human Expansion Across Solar System (Dec. 11, 2017), available at https://www.nasa.gov/press-release/new-space-policy-directive-calls-for-human-expansion-across-solar-system. [105]   TechCrunch, SpaceX caps a record year with 18th successful launch of 2017 (Dec. 22, 2017), available at https://techcrunch.com/2017/12/22/spacex-caps-a-record-year-with-18th-successful-launch-of-2017/. [106]   The Verge, After a year away from test flights, Blue Origin launches and lands its rocket again (Dec. 12, 2017), available at https://www.theverge.com/2017/12/12/16759934/blue-origin-new-shepard-test-flight-launch-landing. [107]   Space.com, SpaceX Launches (and Lands) Used Rocket on Historic NASA Cargo Mission (Dec. 15, 2017), available at https://www.space.com/39063-spacex-launches-used-rocket-dragon-spacecraft-for-nasa.html. [108]   U.S. Department of State, Treaty on Principles Governing the Activities of States in the Exploration and Use of Outer Space, Including the Moon and Other Celestial Bodies, available at https://www.state.gov/t/isn/5181.htm#treaty. [109] NTI, Treaty on Principles Governing the Activities of States in the Exploration and Use of Outer Space, Including the Moon and Other Celestial Bodies (Outer Space Treaty) (Feb. 1, 2017), available at http://www.nti.org/learn/treaties-and-regimes/treaty-principles-governing-activities-states-exploration-and-use-outer-space-including-moon-and-other-celestial-bodies-outer-space-treaty/. [110] PHYS.ORG, Space likely for rare earth search, scientists say (Feb. 20, 2013), available at https://phys.org/news/2013-02-space-rare-earths-scientists.html. [111]   NASA, Lunar CATALYST (Jan. 16, 2014), available at https://www.nasa.gov/content/lunar-catalyst/#.WmLx1qinGHs. [112]   The Conversation, The Outer Space Treaty has been remarkably successful – but is it fit for the modern age? (Jan. 27, 2017), available at http://theconversation.com/the-outer-space-treaty-has-been-remarkably-successful-but-is-it-fit-for-the-modern-age-71381. [113]   The Verge, How an international treaty signed 50 years ago became the backbone for space law (Jan. 27, 2017), available at https://www.theverge.com/2017/1/27/14398492/outer-space-treaty-50-anniversary-exploration-guidelines. [114]   Id. [115]   The Space Review, Is it time to update the Outer Space Treaty? (June 5, 2017), available at http://www.thespacereview.com/article/3256/1. [116]   U.S. Senate, Reopening the American Frontier:  Exploring How the Outer Space Treaty Will Impact American Commerce and Settlement in Space (May 23, 2017), available at https://www.commerce.senate.gov/public/index.cfm/hearings?ID=5A91CD95-CDA5-46F2-8E18-2D2DFCAE4355. [117]   The Space Review, supra note cxvi. [118]   Id. [119]   Id. [120] H.R. Rep No. 2809 (2017), available at https://www.congress.gov/bill/115th-congress/house-bill/2809.  The other primary sponsors of the bill are Brian Babin (R-TX), chairman of the space subcommittee; and Rep. Jim Bridenstine (R-OK). [121] Sandy Mazza, Space exploration regulations need overhaul, new report says, Daily Breeze (Dec. 2, 2017), https://www.dailybreeze.com/2017/12/02/space-exploration-regulations-need-overhaul-new-report-says/.  The Act's stated purpose is to "provide greater transparency, greater efficiency, and less administrative burden for nongovernmental entities of the United States seeking to conduct space activities."  H.R. Rep No. 2809 (2017), available at https://www.congress.gov/bill/115th-congress/house-bill/2809 (Section 2(c)). [122] Jeff Foust, House bill seeks to streamline oversight of commercial space activities, Space News (June 8, 2017), http://spacenews.com/house-bill-seeks-to-streamline-oversight-of-commercial-space-activities/. [123] Marcia Smith, New Commercial Space Bill Clears House Committee, Space Policy Online (June 8, 2017), https://spacepolicyonline.com/news/new-commercial-space-bill-clears-house-committee/. [124] Under the Obama administration, many in government and industry presumed that the regulation of new space activities would fall to FAA/AST.  See Marcia Smith, New Commercial Space Bill Clears House Committee, Space Policy Online (June 8, 2017), https://spacepolicyonline.com/news/new-commercial-space-bill-clears-house-committee/ (In fact, the agency heads of the FAA/AST, and the Office of Science and Technology Policy, recommended the same). [125] Marcia Smith, Companies Agree FAA Best Agency to Regulate Non-Traditional Space Activities, Space Policy Online (Nov. 15, 2017), https://spacepolicyonline.com/news/companies-agree-faa-best-agency-to-regulate-non-traditional-space-activities/. [126] H.R. Rep No. 2809 (2017), available at https://www.congress.gov/bill/115th-congress/house-bill/2809. [127] Id. [128] Jeff Foust, House bill seeks to streamline oversight of commercial space activities, Space News (June 8, 2017), http://spacenews.com/house-bill-seeks-to-streamline-oversight-of-commercial-space-activities/. [129] Marcia Smith, New Commercial Space Bill Clears House Committee, Space Policy Online (June 8, 2017), https://spacepolicyonline.com/news/new-commercial-space-bill-clears-house-committee/. [130] Marcia Smith, New Commercial Space Bill Clears House Committee, Space Policy Online (June 8, 2017), https://spacepolicyonline.com/news/new-commercial-space-bill-clears-house-committee/; Marcia Smith, Companies Agree FAA Best Agency to Regulate Non-Traditional Space Activities, Space Policy Online (Nov. 15, 2017), https://spacepolicyonline.com/news/companies-agree-faa-best-agency-to-regulate-non-traditional-space-activities/.  The bill, for example, requires e the Secretary of Commerce to issue certifications or permits for commercial space activities, unless, for example, the Secretary finds by "clear and convincing evidence" that the permit would violate the Outer Space Treaty.  Bob Zimmerman, What You Need To Know About The Space Law Congress Is Considering, The Federalist (July 11, 2017), http://thefederalist.com/2017/07/11/need-know-space-law-congress-considering/.  Indeed, the policy section of the bill finds that "United States citizens and entities are free to explore and use space, including the utilization of outer space and resources contained therein, without conditions or limitations" and "this freedom is only to be limited when necessary to assure United States national security interests are met" or fulfill treaty obligations.  H.R. Rep No. 2809 (2017), available at https://www.congress.gov/bill/115th-congress/house-bill/2809. [131] Jeff Foust, House bill seeks to streamline oversight of commercial space activities, Space News (June 8, 2017), http://spacenews.com/house-bill-seeks-to-streamline-oversight-of-commercial-space-activities/. [132] Joshua Hampson, The American Space Commerce Free Enterprise Act, Niskanen Center (June 15, 2017), https://niskanencenter.org/blog/american-space-commerce-free-enterprise-act/. [133] Jeff Foust, House bill seeks to streamline oversight of commercial space activities, Space News (June 8, 2017), http://spacenews.com/house-bill-seeks-to-streamline-oversight-of-commercial-space-activities/. [134] Jeff Foust, House bill seeks to streamline oversight of commercial space activities, Space News (June 8, 2017), http://spacenews.com/house-bill-seeks-to-streamline-oversight-of-commercial-space-activities/; Congressional Budget Office Cost Estimate, Congressional Budget Office (July 7, 2017), https://www.cbo.gov/system/files/115th-congress-2017-2018/costestimate/hr2809.pdf. [135] Samuel R. Ramer, Letter from the Office of the Assistant Attorney General, Justice Department (July 17, 2017), https://www.justice.gov/ola/page/file/995646/download. [136] H.R. Rep No. 2809 (2017), available at https://www.congress.gov/bill/115th-congress/house-bill/2809/all-actions. [137] Marcia Smith, New Commercial Space Bill Clears House Committee, Space Policy Online (June 8, 2017), https://spacepolicyonline.com/news/new-commercial-space-bill-clears-house-committee/. [138] Jeffrey Hill, Congressman Babin Hints that Cybersecurity Could be Included in Larger Commercial Space Legislative Package, Satellite Today (Nov. 7, 2017), http://www.satellitetoday.com/government/2017/11/07/cybersecurity-featured-space-commerce-act/. [139] Commerce Department Now Accepting Public Inputs on Regulatory Streamlining, Space Commerce (Oct. 27, 2017), http://www.space.commerce.gov/commerce-department-now-accepting-public-inputs-on-regulatory-streamlining/; Sandy Mazza, Space exploration regulations need overhaul, new report says, Daily Breeze (Dec. 2, 2017), https://www.dailybreeze.com/2017/12/02/space-exploration-regulations-need-overhaul-new-report-says/. [140] Sean Kelly, The new national security strategy prioritizes space, The Hill (Jan. 3, 2018), http://thehill.com/opinion/national-security/367240-the-new-national-security-strategy-prioritizes-space; Jeff Foust, House panel criticizes commercial remote sensing licensing, Space News (Sept. 8, 2016), http://spacenews.com/house-panel-criticizes-commercial-remote-sensing-licensing/.  Critics argue that the NOAA's approval pace is harming U.S. companies to the benefit of foreign competitors. Randy Showstack, Remote Sensing Regulations Come Under Congressional Scrutiny, EOS (Sept. 14, 2016), https://eos.org/articles/remote-sensing-regulations-come-under-congressional-scrutiny. [141] H.R. Rep No. 6133 (1992), available at https://www.congress.gov/bill/102nd-congress/house-bill/6133. [142] Randy Showstack, Remote Sensing Regulations Come Under Congressional Scrutiny, EOS (Sept. 14, 2016), https://eos.org/articles/remote-sensing-regulations-come-under-congressional-scrutiny.  Indeed, the Commercial Space Launch Competitiveness Act, signed into law in November 2016, requires the Department of Commerce to analyze possible statutory updates to the remote sensing licensing scheme.  Jeff Foust, House panel criticizes commercial remote sensing licensing, Space News (Sept. 8, 2016), http://spacenews.com/house-panel-criticizes-commercial-remote-sensing-licensing/.  The text of the ASCFEA also recognizes that since "the passage of the Land Remote Sensing Policy Act of 1992, the National Oceanic and Atmospheric Administration's Office of Commercial Remote Sensing has experienced a significant increase in applications for private remote sensing space system licenses . . ."  H.R. Rep No. 2809 (2017), available at https://www.congress.gov/bill/115th-congress/house-bill/2809. [143] Joshua Hampson, The American Space Commerce Free Enterprise Act, Niskanen Center (June 15, 2017), https://niskanencenter.org/blog/american-space-commerce-free-enterprise-act/.  The ASCFEA defines a Space-Based Remote Sensing System as "a space object in Earth orbit that is "(A) designed to image the Earth; or (B) capable of imaging a space object in Earth orbit operated by the Federal Government."  H.R. Rep No. 2809 (2017), available at https://www.congress.gov/bill/115th-congress/house-bill/2809. [144] Jeff Foust, Commercial remote sensing companies seek streamlined regulations, Space News (Mar. 17, 2017), http://spacenews.com/commercial-remote-sensing-companies-seek-streamlined-regulations/. [145] Id. [146] Jeff Foust, House panel criticizes commercial remote sensing licensing, Space News (Sept. 8, 2016), http://spacenews.com/house-panel-criticizes-commercial-remote-sensing-licensing/. [147] H.R. Rep No. 2809 (2017), available at https://www.congress.gov/bill/115th-congress/house-bill/2809 (Chapter 8012 § 80202(e)(1)). [148] Jeff Foust, Commercial remote sensing companies seek streamlined regulations, Space News (Mar. 17, 2017), http://spacenews.com/commercial-remote-sensing-companies-seek-streamlined-regulations/. [150] H.R. Rep No. 2809 (2017), available at https://www.congress.gov/bill/115th-congress/house-bill/2809 (Chapter 802 § 80201(d)). [151] Reinvigorating America's Human Space Exploration Program, 82 Fed. Reg. 59501 (Dec. 11, 2017) [152] Nell Greenfieldboyce, President Trump Is Sending NASA Back to the Moon (Dec. 11, 2017) available at https://www.npr.org/sections/thetwo-way/2017/12/11/569936446/president-trump-is-sending-nasa-back-to-the-moon. [153] See Press Release, NASA, New Space Policy Directive Calls for Human Expansion Across Solar System (Dec. 11, 2017); see also NASA, https://www.nasa.gov/mission_pages/apollo/missions/apollo17.html (last visited Jan. 21, 2018). [154] Reinvigorating America's Human Space Exploration Program, supra note clii. [155] Id. [156] NASA, Commercial Crew Program – The Essentials, available at https://www.nasa.gov/content/commercial-crew-program-the-essentials/#.VjOJ3berRaT. [157] Michael Sheetz, Trump Orders NASA to Send American Astronauts to the Moon, Mars, CNBC (Dec. 11, 2017) available at https://www.cnbc.com/2017/12/11/trump-orders-nasa-to-send-american-astronauts-to-the-moon-mars.html. [158] See New Space Policy Directive Calls for Human Expansion Across Solar System, supra note cv; see also Christian Davenport, Trump Vows Americans Will Return to the Moon.  The Question Is How?, (Dec. 11, 2017) available at https://www.washingtonpost.com/news/the-switch/wp/2017/12/11/trump-vows-americans-will-return-to-the-moon-the-question-is-how/?utm_term=.4ceb20131cdf. [159] The Right Stuff (The Ladd Company 1983). [160] Laurent Thailly and Fiona Schneider, Luxembourg set to become Europe's commercial space exploration hub with new Space law, Ogier (Jan. 8, 2017), https://www.ogier.com/news/the-luxembourg-space-law. [161] Reuters Staff, Luxembourg sets aside 200 million euros to fund space mining ventures, Reuters (June 3, 2016), https://www.reuters.com/article/us-luxembourg-space-mining/luxembourg-sets-aside-200-million-euros-to-fund-space-mining-ventures-idUSKCN0YP22H; Laurent Thailly and Fiona Schneider, Luxembourg set to become Europe's commercial space exploration hub with new Space law, Ogier (Jan. 8, 2017), https://www.ogier.com/news/the-luxembourg-space-law.  Luxembourg invested €23 million in U.S. company Planetary Resources, and now owns a 10% share in the company.  Kenneth Chang, If no one owns the moon, can anyone make money up there?, The Independent (Dec. 4, 2017), http://www.independent.co.uk/news/long_reads/if-no-one-owns-the-moon-can-anyone-make-money-up-there-space-astronomy-a8087126.html. [162] In 2015, the U.S. passed the Commercial Space Launch Competitiveness Act, which clarified that companies that extract materials from celestial bodies can own those materials.  Andrew Silver, Luxembourg passes first EU space mining law. One can possess the Spice, The Register (July 14, 2017), https://www.theregister.co.uk/2017/07/14/luxembourg_passes_space_mining_law/. [163] Jeff Foust, Luxembourg adopts space resources law, Space News (July 17, 2017), http://spacenews.com/luxembourg-adopts-space-resources-law/. [164] Jeff Foust, Luxembourg adopts space resources law, Space News (July 17, 2017), http://spacenews.com/luxembourg-adopts-space-resources-law;  Paul Zenners, Press Release, Space Resources (July 13, 2017), http://www.spaceresources.public.lu/content/dam/spaceresources/press-release/2017/2017_07_13%20PressRelease_Law_Space_Resources_EN.pdf. [165] Laurent Thailly and Fiona Schneider, Luxembourg set to become Europe's commercial space exploration hub with new Space law, Ogier (Jan. 8, 2017), https://www.ogier.com/news/the-luxembourg-space-law.  Reportedly, two American companies already plan to move to Luxembourg:  Deep Space Industries and Planetary Resources. Vasudevan Mukunth, Fiat Luxembourg: How a Tiny European Nation is Leading the Evolution of Space Law, The Wire (July 15, 2017), https://thewire.in/157687/luxembourg-space-asteroid-mining-dsi/. [166] Andrew Silver, Luxembourg passes first EU space mining law. One can possess the Spice, The Register (July 14, 2017), https://www.theregister.co.uk/2017/07/14/luxembourg_passes_space_mining_law/;  Mark Kaufman, Luxembourg's Asteroid Mining is Legal Says Space Law Expert, inverse.com (Aug. 1, 2017), https://www.inverse.com/article/34935-luxembourg-s-asteroid-mining-is-legal-says-space-law-expert. [167] Antariksh Bhavan, Seeking comments on Draft "Space Activities Bill, 2017" from the stake holders/public-regarding, ISRO (Nov. 21, 2017), https://www.isro.gov.in/update/21-nov-2017/seeking-comments-draft-space-activities-bill-2017-stake-holders-public-regarding;  Special Correspondent, Govt. unveils draft of law to regulate space sector, The Hindu (Nov. 22, 2017), http://www.thehindu.com/sci-tech/science/govt-unveils-draft-of-law-to-regulate-space-sector/article20629386.ece;  Raghu Krishnan & T E Narasimhan, Draft space law gives private firms a grip on rocket, satellite making, Business Standard (Nov. 22, 2017), http://www.business-standard.com/article/economy-policy/draft-space-law-gives-private-firms-a-grip-on-rocket-satellite-making-117112101234_1.html. [168] Antariksh Bhavan, Seeking comments on Draft "Space Activities Bill, 2017" from the stake holders/public-regarding, ISRO (Nov. 21, 2017), https://www.isro.gov.in/update/21-nov-2017/seeking-comments-draft-space-activities-bill-2017-stake-holders-public-regarding. [169] Id. [170] Ellen Barry, India Launches 104 Satellites From a Single Rocket, Ramping Up a Space Race, The New York Times (Feb. 15, 2017), https://www.nytimes.com/2017/02/15/world/asia/india-satellites-rocket.html. [171] Id. [172] Yes, Australia will have a space agency. What does this mean? Experts respond, The Conversation (Sept. 25, 2017), http://theconversation.com/yes-australia-will-have-a-space-agency-what-does-this-mean-experts-respond-84588;  Jordan Chong, Better late than never, Australia heads (back) to space, Australian Aviation (Dec. 29, 2017), http://australianaviation.com.au/2017/12/better-late-than-never-australia-heads-back-to-space/. [173] Andrew Griffin, Australia launches brand new space agency in attempt to flee the Earth, The Independent (Sept. 25, 2017), http://www.independent.co.uk/news/science/australia-space-agency-nasa-earth-roscosmos-malcolm-turnbull-economy-a7966751.html;  Henry Belot, Australian space agency to employ thousands and tap $420b industry, Government says, ABC (Sept. 25, 2017), http://www.abc.net.au/news/2017-09-25/government-to-establish-national-space-agency/8980268. [174]   White House, Critical Infrastructure Security and Resilience, Presidential Policy Directive/PPD-21 (Feb. 12, 2013). [175]   Woodrow Bellamy III, Senators Reintroduce Aircraft Cyber Security Legislation, Aviation Today (Mar. 24, 2017), http://www.aviationtoday.com/2017/03/24/senators-reintroduce-aircraft-cyber-security-legislation/. [176]   The eighteen states that passed UAS legislation in 2017 were Colorado, Connecticut, Florida, Georgia, Indiana, Kentucky, Louisiana, Minnesota, Montana, Nevada, New Jersey, North Carolina, Oregon, South Dakota, Texas, Utah, Virginia and Wyoming. The three states that passed resolutions related to UAS were Alaska, North Dakota and Utah. [177]   Under Section 2202 of the FAA Extension, Safety, and Security Act of 2016, Pub. L. 114-190, Congress directed the FAA to convene industry stakeholders to facilitate the development of consensus standards for identifying operators and UAS owners.  The final report identifies the following as the ARC's stated objectives:
The stated objectives of the ARC charter were: to identify, categorize and recommend available and emerging technology for the remote identification and tracking of UAS; to identify the requirements for meeting the security and public safety needs of the law enforcement, homeland defense, and national security communities for the remote identification and tracking of UAS; and to evaluate the feasibility and affordability of available technical solutions, and determine how well those technologies address the needs of the law enforcement and air traffic control communities.
The final ARC report is available at: https://www.faa.gov/regulations_policies/rulemaking/committees/documents/media/UAS%20ID%20ARC%20Final%20Report%20with%20Appendices.pdf.
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February 1, 2018 |
Compliance – Was ist das eigentlich?

Munich partner Mark Zimmer is the author of "Compliance – Was ist das eigentlich?," [PDF] published in the February 2018 issue of the German publication BWV (Bundesverwehrverwaltung).  The article explains the relevance of compliance for business and governmental agencies.

November 15, 2017 |
Domaine public : Le Conseil d’État précise les conditions dans lesquelles une promesse de vente de biens relevant du domaine public pouvait être régulièrement conclue avant l’entrée en vigueur de l’article L. 3112-4 du CGPPP et indique que la réduction significative du périmètre d’une concession de service public en constitue une modification substantielle, en tant que telle illégale

Paris senior associate Grégory Marson is the author of “Domaine public : Le Conseil d’État précise les conditions dans lesquelles une promesse de vente de biens relevant du domaine public pouvait être régulièrement conclue avant l’entrée en vigueur de l’article L. 3112-4 du CGPPP et indique que la réduction significative du périmètre d’une concession de service public en constitue une modification substantielle, en tant que telle illégale (SEMEPA),” [PDF] published in Concurrences on November 15, 2017. The commentary focuses on the conditions in which an agreement to sell goods belonging in the public domain can be validly executed prior to the entry into force of the new article L. 3112-4 of the French general code of public property. The French Council of State indicates that a significant reduction in the scope of a concession contract constitutes a substantial change and is therefore illegal. It also confirms that the illicit object of a contract leads to its illegality.

February 6, 2018 |
DOJ Policy Statements Signal Changes in False Claims Act Enforcement

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The Department of Justice issued two internal memoranda in January that, taken together, reflect the Trump Administration's first significant policy statements on False Claims Act (FCA) enforcement.  The first memorandum directs government attorneys evaluating a recommendation to decline intervention in a qui tam FCA suit to consider in addition whether to exercise DOJ's authority to seek dismissal of the case outright.  The second prohibits DOJ from relying on a defendant's failure to comply with other agencies' guidance documents as a basis for proving violations of applicable law in affirmative civil enforcement actions.  The practical effects of these statements on FCA enforcement will only be clear when we see how – and how often – they are applied in actual cases.  But particularly when coupled with the Supreme Court's landmark decision on scienter and materiality in Universal Health Services v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), these DOJ memoranda provide substantial arguments for FCA defendants in seeking to defeat FCA claims.

Exercise of DOJ's Dismissal Authority

On January 10, 2018, Michael Granston, the Director of the Fraud Section of DOJ's Civil Division, issued a memorandum directing government lawyers evaluating a recommendation to decline intervention in a qui tam FCA action to "consider whether the government's interests are served . . . by seeking dismissal pursuant to 31 U.S.C. § 3730(c)(2)(A)."  DOJ did not publicly release the memorandum at the time, but it has now been widely reported and is available here. DOJ has authority under section 3730(c)(2)(A) to seek dismissal of qui tam FCA suits.  Traditionally, the government has exercised this authority only sparingly.  But, as we discussed in our year-end FCA update (found here), Mr. Granston hinted previously at a change in policy with respect to dismissal of meritless qui tam suits.  Despite DOJ's denial at the time that any policy changes had been implemented, the memorandum appears to confirm a policy shift in favor of more actively seeking dismissal of certain qui tam FCA actions. The memorandum notes that DOJ "has seen record increases in qui tam actions" filed under the FCA, and while the "number of filings has increased substantially over time," DOJ's "rate of intervention has remained relatively static."  Emphasizing that DOJ "plays an important gatekeeper role in protecting the False Claims Act," the memorandum identifies dismissal as "an important tool to advance the government's interests, preserve limited resources, and avoid adverse precedent." Under the memorandum, DOJ attorneys should consider dismissal:
  1. Where "a qui tam complaint is facially lacking in merit," or where, after completing an investigation, the government concludes that the relator's allegations lack merit.
  2. Where a qui tam action "duplicates a pre-existing government investigation and adds no useful information to the investigation."
  3. Where "an agency has determined that a qui tam action threatens to interfere with an agency's policies or the administration of its programs and has recommended dismissal to avoid these effects."
  4. Where "necessary to protect the Department's litigation prerogatives," such as "to avoid interference with pending Federal Torts Claim Act action" or "to avoid the risk of unfavorable precedent."
  5. When necessary "to safeguard classified information," particularly in cases "involving intelligence agencies or military procurement contracts."
  6. To preserve government resources "when the government's expected costs are likely to exceed any expected gain," (e.g., in situations where the government will incur the costs of  "monitor[ing] or participat[ing] in ongoing litigation, including responding to discovery requests").
  7. Where there are "problems with the relator's action that frustrate the government's efforts to conduct a proper investigation."
The memorandum cites cases illustrating each factor.  This list, the memorandum observes, is not exhaustive, and the seven factors are not mutually exclusive.  Further, "there may be other reasons for concluding that the government's interests are best served by the dismissal of a qui tam action."  The memorandum also notes that "there may be alternative grounds for seeking dismissal," such as under "the first to file bar, the public disclosure bar, the tax bar, the bar on pro se relators, or Federal Rule of Civil Procedure 9(b)." The federal courts have split on the extent of DOJ's authority to dismiss qui tam actions under section 3730(c)(2)(A).  While DOJ takes the position that it has "unfettered" discretion to dismiss qui tam FCA suits, the memorandum advises attorneys to argue in jurisdictions that adopt a "rational basis" standard that the standard was intended to be "highly deferential."  In jurisdictions where the standard of review is not settled, the memorandum instructs DOJ attorneys "to identify the government's basis for dismissal and to argue that it satisfies any potential standard for dismissal under section 3730(c)(2)(A)."

Reliance on Agency Guidance in Affirmative Civil Enforcement Cases

Associate Attorney General Rachel Brand, the Department's third-ranking official, issued a memorandum on January 25, 2018, that prohibits DOJ from using noncompliance with other agencies' "guidance documents as a basis for proving violations of applicable law in" affirmative civil enforcement cases (ACE cases), and from using "its enforcement authority to effectively convert agency guidance documents into binding rules."  The memorandum is available here. Agencies commonly issue guidance documents interpreting legislation and regulations, and the government has sometimes employed evidence that a defendant violated such guidance to prove a violation of the underlying statute or regulation.   The memorandum explicitly prohibits DOJ attorneys from engaging in this practice.  Under the new policy, DOJ "may continue to use agency guidance documents for proper purposes."  For instance, where a guidance document "simply explain[s] or paraphrase[s] legal mandates from existing statutes or regulations," DOJ "may use evidence that a party read such a guidance document to help prove that the party had requisite knowledge of the mandate."  Notably, the memorandum applies to both "future ACE actions brought by the Department, as well as (wherever practicable) to those matters pending as of the date of this memorandum." The Brand memorandum carries forward to ACE actions a policy established by Attorney General Jeff Sessions in a November 16, 2017, memorandum.  In that memorandum, Attorney General Sessions prohibited Department components from issuing guidance documents that purport to create rights or obligations binding on persons "without undergoing the rulemaking process," and from "using its guidance documents to coerce regulated parties into taking any action or refraining from taking any action beyond what is required by the terms of the applicable statute or lawful regulation."  The Brand memorandum provides that the principles articulated by Attorney General Sessions "should guide Department litigators in determining the legal relevance of other agencies' guidance documents." While the policy articulated in the Brand memorandum applies to more than just FCA suits, the memorandum specifically emphasizes that it "applies when the Department is enforcing the False Claims Act, alleging that a party knowingly submitted a false claim for payment by falsely certifying compliance with material statutory or regulatory requirements."  That the memorandum uses FCA enforcement suits as its only illustrative example could suggest that the Department is particularly focused on the policy's application to FCA cases.

Analysis

The Granston and Brand memoranda reflect the most significant policy statements on FCA enforcement from DOJ under Attorney General Sessions.  As our year-end update explained, FCA enforcement remained robust in the first year of the Trump Administration, and on several occasions the new DOJ leadership expressed public support for continued strong enforcement of the law.  The policy statements  signal a shift in approach, at least in some cases.  The full effect of these policy statements will be determined over time as they are applied in actual cases, but a few observations are warranted now.
  • First, although the Granston memorandum may have some salutary effects for FCA defendants (as noted below), the Brand memorandum is likely to be the more significant development, especially in the wake of Escobar.  Recently, courts have relied on Escobar to set aside judgments on the ground that alleged misrepresentations were not material to the government's payment decision.In a 2017 decision, for example, the Fifth Circuit overturned a $663 million judgment—the largest judgment in FCA history—on the ground that a purported misrepresentation was not material because the government knew of the misrepresentation and yet continued to pay.  United States ex rel. Harman v. Trinity Industries, 872 F.3d 645, 663 (5th Cir. 2017).  In assessing materiality, the Fifth Circuit also relied on the fact that DOJ declined to intervene in the suit.  Likewise, in January 2018, a district court vacated a $350 million jury verdict after concluding that the relator failed to offer any evidence that the misrepresentation was material.  There, again, the government was aware of the alleged regulatory noncompliance underlying the suit but nevertheless continued to pay the defendants' claims.  The court recognized this as "strong" and uncontroverted evidence that noncompliance with the requirement was immaterial.  United States ex rel. Ruckh v. GMC II LLC et al., 2018 WL 375720, at *10 (M.D. Fla. Jan. 11, 2008).The Brand memorandum, coupled with courts taking Escobar's materiality discussion seriously, has the potential to be a strong pro-defendant development.  Historically, agency guidance documents appeared frequently in FCA cases.  Before the Brand memorandum, it looked likely that, as the government contended with heightened materiality requirements under Escobar, it would routinely invoke such guidance documents to establish the importance of a misrepresentation to a payment decision.  Now, where a defendant can show that the guidance document does more than merely restate the underlying law, DOJ will not be able to make such arguments.This may have important ramifications for FCA defendants from several industries.  For example, a significant number of Medicare-based FCA cases could be affected if the Medicare Benefit Policy Manual is considered an "agency guidance document."  Moreover, many anti-kickback cases rely on guidance documents issued by the Office of Inspector General (OIG) of the Department of Health and Human Services.  By eliminating agency guidance documents as a means to establish liability, the Brand memorandum could significantly reduce the range and scope of conduct that can give rise to FCA liability.The Brand memorandum also dovetails with the Granston memorandum.  Suppose that a relator asserts a claim under the FCA that is based on a theory that a defendant falsely certified compliance with a requirement, but that requirement is found only in an agency guidance document.  FCA defendants can rely on materiality arguments at the motion to dismiss or summary judgment stages, but could also rely on the Granston memorandum to advocate that DOJ recommend dismissal at the point of declination, on the grounds that dismissal is "necessary to protect the Department's litigation prerogatives" (namely, DOJ's policy of not using noncompliance with other agencies' guidance documents as a basis for proving violations of applicable law).Finally, the Brand memorandum is part of a broader trend that has reduced the ways in which a claim can be "false."  A growing number of courts have declined to find false claims where there is no evidence of an "objective falsehood," such as in cases where a claim is premised on battling expert interpretations of an ambiguous statute or regulation, or where based on competing medical opinions.  The Brand memorandum will make it harder than ever for DOJ to prove, for example, that a claim was "false" because it sought payment for services that were not "medically necessary."  First, in line with recent court decisions, DOJ cannot, in attempting to prove falsity, rely solely on its own expert's disagreement with the treating provider about what was "necessary."  Second, under the Brand memorandum, DOJ cannot rely on agency guidance documents construing what is "medically necessary" to prove liability.  While this prohibition could eliminate the Medical Benefit Policy Manual as a source for proving falsity, it will also presumably rule out national and local coverage determinations issued by program contractors, determinations that DOJ attorneys previously claimed were binding.
  • Second, nothing in the Brand memorandum suggests that the government will be able to use this policy decision to limit a defendant's use of guidance documents to defend itself.  To the contrary, the courts have been clear that all evidence that impacts a defendant's state of mind, including government statements, is admissible on the FCA's scienter element.  See, e.g., United States ex rel. Walker v. R&F Props. Of Lake Cnty, Inc., 433 F.3d 1349, 1356–58 (11th Cir. 2005) (deeming Medicare manuals and expert testimony relevant to show "the reasonableness of [defendant's] claimed understanding of that language," and rejecting the district court's holding that such evidence was "irrelevant . . . because none of it held the force of law.").And although it has been reported that DOJ criminal attorneys have emphasized that they are not bound by the Brand memorandum, the underlying legal principle applies equally to criminal cases: the executive branch should not, through agency documents, define the substantive scope of penal laws.  Cf., e.g., Carter v. Welles-Bowen Realty, Inc., 736 F.3d 722, 730 (6th Cir. 2013) (Sutton, J., concurring) ("[T]he rule of lenity forbids deference to the executive branch's interpretation of a crime-creating law.").
  • Third, DOJ's commitment to exercise its authority to dismiss qui tam actions is welcome news to FCA defendants given that relators have pursued cases more frequently even when DOJ has declined to intervene.  Historically, declined cases rarely led to significant recoveries, a sign of the relative weakness of such cases overall.  In 2017, the government recovered nearly $426 million in cases where it declined to intervene, the second-highest amount on record.  Although that amount accounted for just 11% of all federal recoveries in 2017, the promise of significant recoveries in declined cases might tempt relators to pursue weak cases.  To the extent that DOJ attorneys employ the Granston memorandum's factors to terminate such cases before defendants incur further litigation costs, defendants may enjoy some relief from the active relators' bar.On the other hand, the memorandum also observes that declination decisions frequently cause relators to dismiss their claims, and that that the number of voluntarily dismissed actions "has significantly reduced the number of cases where the government might otherwise have considered seeking dismissal pursuant to section 3730(c)(2)(A)."  This point could reflect DOJ's view that the pool of cases in which dismissal is appropriate is small.  Further, the Granston memorandum does not apply to FCA retaliation claims, or to claims brought under state FCA statutes.  The memorandum could encourage qui tam plaintiffs to assert these sorts of claims in order to prevent their suits from being dismissed outright.  These dynamics may limit the practical benefits of the memorandum for some FCA defendants.
  • Fourth, the Granston memorandum equips qui tam defendants with an arsenal of relevant arguments supporting dismissal.  In the past, FCA defendants have been forced to guess what arguments DOJ might find persuasive in deciding whether to invoke its authority under section 3730(c)(2)(A).  By specifying key factors and articulating the overall standard, the memorandum provides FCA defendants an analytical structure for advocating to DOJ that a relator's case is meritless and should be dismissed before litigation (i.e., before incurring the expenses associated with motion to dismiss briefing, discovery, and summary judgment briefing).  The Granston memorandum also cites cases illustrating each dismissal factor.  Qui tam defendants should consider whether their case is factually similar to these illustrative cases.  DOJ will likely hesitate to move for dismissal of a qui tam suit unless they are confident the motion will be granted.  FCA defendants who are able to show that precedent supports dismissal of their case have an increased likelihood of persuading DOJ to seek dismissal.Relatedly, the memorandum also will spur increased internal scrutiny within DOJ of dismissal questions.  The assigned DOJ case team will internally review whether dismissal is appropriate at every declination decision, and the case team's dismissal decision will be reviewed by component supervisors and tracked as a statistic by DOJ.  In other circumstances, just by tracking statistics on a policy shift of this nature, DOJ has nudged its attorneys toward the intended result.  Here, internal attention and tracking should increase the likelihood that DOJ attorneys recommend dismissing qui tam FCA suits.

* * * * *

In sum, there is reason to be optimistic that these two DOJ memoranda will have the effect of scaling back FCA enforcement.  Moreover, because the Brand memorandum applies to cases currently pending as of its issuance "wherever practicable," companies currently facing FCA liability should carefully consider whether the enforcement theory is rooted in the underlying statute or regulation, or is only supported by a guidance document.
The following Gibson Dunn lawyers assisted in preparing this client update: Stuart Delery, Winston Chan, John Partridge, Stephen Payne, Jonathan Phillips, Charles Stevens and Justin Epner. Gibson Dunn's lawyers have handled hundreds of FCA investigations and have a long track record of litigation success.  Among other significant victories, Gibson Dunn successfully argued the landmark Allison Engine case in the Supreme Court, a unanimous decision that prompted Congressional action.  See Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123 (2008).  Our win rate and immersion in FCA issues gives us the ability to frame strategies to quickly dispose of FCA cases.  The firm has more than 30 attorneys with substantive FCA expertise and more than 30 former Assistant U.S. Attorneys and DOJ attorneys. As always, Gibson Dunn's lawyers are available to assist in addressing any questions you may have about these developments.  To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following. Washington, D.C. F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) Joseph D. West (+1 202-955-8658, jwest@gibsondunn.com) Andrew S. Tulumello (+1 202-955-8657, atulumello@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Caroline Krass (+1 202-887-3784, ckrass@gibsondunn.com) Karen L. Manos (+1 202-955-8536, kmanos@gibsondunn.com) Stephen C. Payne (+1 202-887-3693, spayne@gibsondunn.com) Jonathan M. Phillips (+1 202-887-3546, jphillips@gibsondunn.com) New York Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Monica K. Loseman (+1 303-298-5784, mloseman@gibsondunn.com) John D.W. Partridge (+1 303-298-5931, jpartridge@gibsondunn.com) Ryan T. Bergsieker (+1 303-298-5774, rbergsieker@gibsondunn.com) Dallas Robert C. Walters (+1 214-698-3114, rwalters@gibsondunn.com) Los Angeles Timothy J. Hatch (+1 213-229-7368, thatch@gibsondunn.com) James L. Zelenay Jr. (+1 213-229-7449, jzelenay@gibsondunn.com) Palo Alto Benjamin Wagner (+1 650-849-5395, bwagner@gibsondunn.com) San Francisco Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com)
Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 24, 2018 |
The Most Important Government Contract Cost and Pricing Decisions of 2017

Washington, D.C. partner Karen Manos is the author of "The Most Important Government Contract Cost and Pricing Decisions of 2017," [PDF] published in Thomson Reuters' The Government Contractor on January 24, 2018.

January 16, 2018 |
2017 Year-End Government Contracts Update

Click for PDF In this year-end analysis of government contracts litigation, Gibson Dunn examines trends and summarizes key decisions of interest to government contractors from the second half of 2017.  This publication covers the waterfront of the opinions most important to this audience issued by the U.S. Court of Appeals for the Federal Circuit, U.S. Court of Federal Claims, Armed Services Board of Contract Appeals ("ASBCA"), and Civilian Board of Contract Appeals ("CBCA"). The last six months of 2017 yielded 3 government contracts-related opinions of note from the Federal Circuit, excluding decisions related to bid protests.  From July 1 through December 31, 2017, the U.S. Court of Federal Claims issued 7 notable non-bid protest government contracts-related decisions, and the ASBCA and CBCA published 48 and 40 substantive government contracts decisions, respectively.  As discussed herein, these cases address a wide range of issues with which government contractors should be familiar, including matters of cost allowability, jurisdictional requirements, contract interpretation, terminations, and the various topics of federal common law that have developed in the government contracts arena.  Before addressing each of these areas, we briefly provide background concerning the tribunals that adjudicate government contracts disputes.

I.     THE TRIBUNALS THAT ADJUDICATE GOVERNMENT CONTRACT DISPUTES

Under the doctrine of sovereign immunity, the United States generally is immune from liability unless it waives its immunity and consents to suit.  Pursuant to statute, the government has waived immunity over certain claims arising under or related to federal contracts through the Contract Disputes Act ("CDA"), 41 U.S.C. §§ 7101 - 7109, and through the Tucker Act, 28 U.S.C. § 1491.  Under the CDA, any claim arising out of or relating to a government contract must be decided first by a contracting officer.  A contractor may contest the contracting officer's final decision by either filing a complaint in the U.S. Court of Federal Claims or appealing to a board of contract appeals.  The Tucker Act, in turn, waives the government's sovereign immunity with respect to certain claims arising under statute, regulation, or express or implied contract, and grants jurisdiction to the Court of Federal Claims to hear such claims. The Court of Federal Claims thus has jurisdiction over a wide range of monetary claims brought against the U.S. government including, but not limited to, contract disputes and bid protests pursuant to both the CDA and the Tucker Act.  If a contractor's claim is founded on the Constitution or a statute instead of a contract, there is no CDA jurisdiction in any tribunal, but the Court of Federal Claims would have jurisdiction under the Tucker Act as long as the substantive source of law grants the right to recover damages.  Thus, the Court of Federal Claims' jurisdiction is broader than that of the boards of contract appeals. In addition to establishing jurisdiction for certain causes of action in the Court of Federal Claims, the CDA establishes four administrative boards of contract appeals:  the Armed Services Board, the Civilian Board, the Tennessee Valley Authority Board, and the Postal Service Board.  See 41 U.S.C. § 7105.  The ASBCA hears and decides post-award contract disputes between contractors and the Department of Defense and its military departments, as well as the National Aeronautics and Space Administration ("NASA").  In addition, the ASBCA adjudicates contract disputes for other departments and agencies by agreement.  For example, the U.S. Agency for International Development has designated the ASBCA to decide disputes arising under USAID contracts.  The ASBCA has jurisdiction pursuant to the CDA, its Charter, and certain remedy-granting contract provisions.  The CBCA hears and decides contract disputes between contractors and civilian executive agencies under the provisions of the CDA.  The CBCA's authority extends to all agencies of the federal government except the Department of Defense and its constituent agencies, NASA, the U.S. Postal Service, the Postal Regulatory Commission, and the Tennessee Valley Authority.  In addition, the CBCA has jurisdiction, along with federal district courts, over Indian Self-Determination Act contracts. The U.S. Court of Appeals for the Federal Circuit hears and decides appeals from decisions of the Court of Federal Claims, the ASBCA, and the CBCA, among numerous other tribunals outside the area of government contract disputes.  Significantly, the Federal Circuit has a substantial patent and trademark docket, hearing appeals from the U.S. Patent and Trademark Office and federal district courts that by volume of cases greatly exceeds its government contracts litigation docket.  Of 1,542 cases pending before the Federal Circuit as of September 30, 2017, 11 were appeals from the boards of contract appeals and 144 were appeals from the Court of Federal Claims—cumulatively comprising just over 10% of the appellate court's docket. Only 4% of the appeals filed at the Federal Circuit in FY 2017 were Contracts cases. Nevertheless, the Federal Circuit is the court of review for most government contracts disputes. On September 30, 2017, the founding, and longtime, Chairman of the CBCA, Judge Stephen M. Daniels, retired from the bench after 51 years of federal service, including 30 years as a judge.  Following Judge Daniels' retirement, Judge Jeri K. Somers was appointed to be the new Chair of the CBCA and Judge Erica Beardsley was appointed the new Vice Chair. Two new judges were appointed to the ASBCA during the summer of 2017.  Prior to his appointment in June, Judge Christopher M. McNulty was a Senior Trial Attorney with the Air Force, where he had served since 2009 after spending decades in private practice.  Judge Heidi L. Osterhout was appointed to the Board in July 2017 after serving three years as a Trial Attorney in DOJ's Commercial Litigation Branch and twenty years in the Air Force before that. On September 28, 2017, President Trump nominated Ryan T. Holte for one of the four remaining vacancies on the Court of Federal Claims.  If confirmed, Mr. Holte will fill the seat left vacant when Judge Nancy B. Firestone assumed senior status in October 2013.  Mr. Holte is currently an Associate Professor of Law at the University of Akron School of Law.  He is also the General Counsel of Counter Echo Solutions, an electrical engineering technology company, and previously served as an attorney with the Federal Trade Commission, and as a law firm associate. President Trump's first two nominees to the Court of Federal Claims, Damien Schiff and Stephen Schwartz, were not on the list of nominations re-submitted by the White House to Congress last week, after their initial nominations were not carried over into the new year under Senate rules.

II.     COST ALLOWABILITY

The ASBCA issued several important decisions during the second half of 2017 addressing the merits of cost allowability issues under the Federal Acquisition Regulation ("FAR").  Pursuant to FAR 31.202, a cost is allowable if it (1) is reasonable; (2) is allocable; (3) complies with applicable accounting principles; (4) complies with the terms of the contract; and (5) complies with any express limitations set out in FAR Subpart 31.

Luna Innovations, Inc., ASBCA No. 60086 (Nov. 29, 2017)

As a public company, Luna is required to account for employee stock options exercisable in future years at the time the options are awarded.  Luna used the "Black-Scholes" method of estimating the value of those stock options, which the contracting officer determined was expressly unallowable because one of the five variables used by the model is stock price variance among comparable companies, and FAR 31.205-6(i) does not allow for reimbursement of compensation calculated based on variances in stock price.  Luna argued that because stock volatility is only one of five variables in the Black-Scholes model, it is not "based on" the underlying stock volatility. The Board (D'Alessandris, A.J.) found that the Black-Scholes method did result in unallowable costs under the "plain language" of the FAR provision, because stock volatility is a primary factor in determining the value of the employee stock options.  Importantly, however, the Board found that Luna's cost claims were not expressly unallowable.  Noting "the complexity of the circumstances, the fact that the use of the Black-Scholes model is a question of first impression, the need to review the differential equations comprising the Black-Scholes model, and the fact that there could be a reasonable difference of opinion regarding the costs," the Board concluded that "it was not 'unreasonable under all the circumstances' for Luna to claim the employee stock option costs."  Thus, the costs were only unallowable and not expressly unallowable and subject to penalties.

Access Personnel Servs., Inc., ASBCA No. 59900 (Sept. 7, 2017)

The dispute in this case arose under a contract incorporating the pre-2007 version of FAR 52.232-7, Payments Under Time-And-Materials And Labor-Hour Contracts.  APS subcontracted a portion of the work, and instructed the subcontractor to bill APS at the fixed hourly rates specified in the prime contract.  But the subcontractor failed to follow this instruction and submitted two separate sets of invoices—one for work hours and a second set for vacation time.  Because the total of the invoices was the same as APS's combined rates, APS submitted the entire cost to the Navy.  The Navy focused on only the first set of invoices relating to the work year and disallowed the difference between APS's and the subcontractor's rates, claiming that APS was billing the government a rate higher than the rate billed to it by its subcontractor and that the subcontractor's vacation and holiday pay should have been included in its direct labor rate. Relying on the plain language of FAR 52.232-7, the Board (McNulty, A.J.) held that APS was entitled to the payment of costs, not the fixed hourly rates specified in the prime contract, for subcontract labor.  Because the Navy paid APS less than the full amount of costs that APS incurred in paying its subcontractor, the Board sustained the appeal on entitlement and remanded to the parties to validate APS's contention that the total of the subcontractor invoices was the same.

Am. Boys Constr. Co., ASBCA No. 60515 (Sept. 13, 2017)

The government awarded ABC a contract for the installation of a "sniper screen" at a base in Afghanistan.  After ABC had purchased materials for the contract, but before ABC otherwise commenced work, the government issued a stop-work order and terminated the contract for convenience.  ABC sought to recover the cost of the materials it purchased and stand-by costs. The Board (Prouty, A.J.) denied ABC's appeal.  Although the contract allowed for payment for costs of work that would be performed prior to contract termination, the Board agreed with the government that it was premature to purchase materials prior to receiving approval of the purchase.  The Board also found that because the government had not issued a notice to proceed, there was no time pressure driving the need to purchase the materials when ABC did.  Finally, the Board found that while reasonable stand-by costs incurred prior to a notice to proceed may be recoverable, ABC failed to provide evidence of its incurred stand-by costs.

III.     JURISDICTIONAL ISSUES

As is frequently the case, jurisdictional issues dominated the landscape of key government contracts decisions during the second half of 2017.

A.     Requirement for a Valid Contract

In order for there to be Contract Disputes Act jurisdiction over a claim, there must be a contract from which that claim arises.  See FAR 33.201 (defining a "claim" as "a written demand or written assertion by one of the contracting parties seeking . . . relief arising under or relating to this contract").  The CDA applies to contracts made by an executive agency for: (1) the procurement of property, other than real property in being; (2) the procurement of services; (3) the procurement of construction, alteration, repair, or maintenance of real property; and (4) the disposal of personal property.  41 U.S.C. § 7102(a)(1)-(4).

Safeco Ins. Co. of Am., ASBCA No. 60952 (July 25, 2017)

Safeco issued payment and performance bonds as surety for a contract between the U.S. Army Corps of Engineers and I.L. Fleming, Inc.  Safeco requested that the Corp not release funds to Fleming without Safeco's written consent.  Nevertheless, the Corps made final payment directly to Fleming.  Subsequently, Safeco filed a certified claim for the amount of the final payment plus a contract balance, which the contracting officer denied.  In its appeal, Safeco characterized its allegations as an equitable subrogation claim or, secondarily, an implied-in-fact contract. The Board (Clarke, A.J.) held that it did not have jurisdiction to hear a subrogation claim under the CDA, notwithstanding case law concerning the Court of Federal Claims' jurisdiction to hear such cases under the latter tribunal's Tucker Act jurisdiction.  The Board also rejected Safeco's arguments of an implied-in-fact contract because Safeco failed to allege the existence of such a contract in its complaint or claim.  Further, even if such a claim had been alleged, the Board would still reject Safeco's position because there was no plausible evidence of an implied-in-fact contract.  Therefore, the Board dismissed Safeco's appeal.

Ikhana, LLC, ASBCA Nos. 60462 et al. (Oct. 18, 2017)

The government awarded a contract to Ikhana to construct secured access lanes and remote screening facilities at the Pentagon.  Ikhana executed performance and payment bonds with its surety.  As part of an indemnity agreement for these bonds, Ikhana agreed that in the event of a default, it would assign to the surety a possessory right to collateral, including "contract rights."  After performance issues arose, the government terminated the contract for default and Ikhana appealed to the ASBCA seeking:  (1) to convert the termination to one of convenience; and (2) damages for breach of contract.  The government moved to dismiss, or in the alternative for summary judgment, arguing that Ikhana lacked standing because the surety was the real party in interest.  The surety also moved to intervene and to withdraw the appeals. The Board (Sweet, A.J.) explained that the fundamental issues underlying the pending motions were whether Ikhana assigned the claims underlying these appeals to the surety, and if so, whether that assignment precluded Ikhana from bringing the appeals.  The Board held that assuming, without deciding, that there was an assignment, that assignment would not preclude Ikhana from bringing these appeals.  Relying on Burnside-Ott Aviation Training Ctr. v. Dalton, 107 F.3d 854 (Fed. Cir. 1997), the Board held that the indemnification agreement and settlement agreement between the Government and surety "impermissibly attempt to deprive us of our power to hear these appeals, which otherwise fall under the CDA."

Eng'g Solutions & Prods., ASBCA No. 58633 (Aug. 4, 2017)

ESP leased a warehouse and then subleased it to the Army.  After the Army suggested that it would be interested in leasing more warehouse space from ESP, ESP entered into a 10-year lease for the warehouse.  After five years, the Army vacated the warehouse.  ESP submitted a claim for an early termination fee, the sixth year of rent, and other costs.  After the claim was denied, ESP appealed arguing that there was an implied-in-fact contract with the Army. The Board (D'Alessandris, A.J.) held that there was no implied-in-fact contract.  First, the Board noted that to establish such a contract, ESP would have to prove that there was mutuality of intent to contract, consideration, unambiguous offer and acceptance, and actual authority on the part of the government.  The Board focused only on the issue of mutuality of intent to contract, which it found dispositive.  It found that ESP had not established that anyone with authority to bind the Army was a party to the alleged implied-in-fact contract.  The Board also found that there was no ratification with respect to contracting authority.  Lastly, ESP failed to establish entitlement for the services provided since there was no implied-in-fact contract, and the government had already paid for any benefits it received.  Accordingly, ESP's appeal was denied.

Scott v. United States, No. 17-471 (Fed. Cl. Oct. 24, 2017)

Brian X. Scott brought a pro se claim in the Court of Federal Claims seeking monetary and injunctive relief for alleged harms arising from the Air Force's handling of his unsolicited proposal for contractual work.  Scott was an Air Force employee who submitted a proposal for countering the threat of a drone strike at the base where he was stationed.  The proposal was rejected, but Scott alleged that portions of the proposal were later partially implemented.  Scott sued, claiming that the Air Force failed properly to review his proposal and that his intellectual property was being misappropriated.  Scott argued that jurisdiction was proper under the Tucker Act because an implied-in-fact contract arose that prohibited the Air Force from using any data, concept, or idea from his proposal, which was submitted to a contracting officer with a restrictive legend consistent with FAR § 15.608. The Court of Federal Claims (Lettow, J.) found that it had jurisdiction under the Tucker Act because an implied-in-fact contract was formed when the Air Force became obligated to follow the FAR's regulatory constraints with regard to Scott's proposal.  Nevertheless, the Court granted the government's motion to dismiss because Scott's factual allegations, even taken in the light most favorable to him, did not plausibly establish that the government acted unreasonably or failed to properly evaluate his unsolicited proposal by using concepts from the proposal where Scott's proposal addressed a previously published agency requirement.

Lee's Ford Dock, Inc. v. Secretary of the Army, 865 F.3d 1361 (Fed. Cir. 2017)

LFD operated a marina on land leased from the Army Corps of Engineers at Lake Cumberland, Kentucky.  In the lease, the Corps retained the right to manipulate the water levels on the lake as necessary.  During the term of the lease, the Corps drew down the lake's level while it worked on repairs to a dam in the area.  LFD submitted a certified claim to the contracting officer seeking equitable reformation of the contract, which the contracting officer denied.  LFD appealed to the ASBCA and subsequently raised the new argument that the Corps breached its lease contract by failing to disclose its superior knowledge of the dam's state of repair and corresponding need to draw down the lake's water level.  The Board in 2016 granted summary judgment to the Corps.  LFD appealed to the Federal Circuit. The Federal Circuit (Schall, J.) first rejected the government's jurisdictional argument that lease claims are not subject to the CDA, holding that the lease was a contract for the disposal of personal property under the CDA.  Turning to the merits of the Board's decision, however, the Court held that both it and the Board lacked jurisdiction over the "misrepresentation by silence" claim because it was never submitted to the contracting officer as part of LFD's certified claim.  Further, the Federal Circuit affirmed the Board's grant of summary judgment to the Corps on the breach of contract claim because the lease provided the Corps with the clear right to manipulate water levels and even if reasonableness was a requirement, there was no evidence the Corps acted unreasonably.

Coast to Coast Computer Prods. v. Dep't of Agric., CBCA Nos. 3516 et al. (Aug. 14, 2017)

Coast to Coast was awarded a blanket purchase agreement ("BPA") by the U.S. Forest Service to provide and install printers and plotters.  Coast to Coast subsequently requested an equitable adjustment based on constructive changes that arose from requests to create or modify a related web portal.  This request was denied by the contracting officer and Coast to Coast appealed to the CBCA. The Board (Zischkau, A.J.) held that a BPA is not a contract under the CDA, but rather "a framework for future contracts, which come into being when orders are placed and accepted under it."  However, the Board further held that CDA jurisdiction can arise from individual orders placed under the BPA, which do create contractual obligations.  The Board therefore determined it had jurisdiction over claims arising from individual call orders issued by the Forest Service to the contractor under the blanket purchase agreement, though not over claims arising from the BPA itself.  After denying the claims premised only on the BPA for lack of jurisdiction, the Board denied Coast to Coast's claims arising from the calls orders on the merits, thus denying the appeals in their entirety.

B.     Adequacy of the Claim

Another common issue arising before the tribunals that hear government contracts disputes is whether the contractor appealed a valid CDA claim.  FAR 33.201 defines a "claim" as "a written demand or written assertion by one of the contracting parties seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising under or relating to this contract."  Under the CDA, a claim for more than $100,000 must be certified.  In the second half of 2017, the boards considered what constitutes a "claim," including when a contracting officer's final decision adequately states a government claim under the CDA.

Magwood Servs., Inc. v. Gen. Servs. Admin., CBCA No. 5869 (Oct. 30, 2017)

On September 22, 2016, a GSA contracting officer issued a notice of termination for default to Magwood.  The notice stated in plain terms that it was the "final decision of the contracting officer."  Magwood subsequently submitted to the contracting officer a "formal request to amend this determination to reflect a Termination for Convenience," as well as a request for $12,153.78 for unpaid "reimbursement."  The contracting officer responded that the prior letter was the final decision and that "no request for appeal or reconsideration should be directed" to GSA.  On October 2, 2017, Magwood filed a notice of appeal with the CBCA, asserting that the second letter from the contracting officer (from December 2016) was the final decision. The CBCA (Chadwick, A.J.) dismissed the appeal for lack of jurisdiction.  The Board held that the letter from Magwood, despite seeking a sum certain, was styled as a "formal request to amend the default termination."  Because Magwood was seeking a response and not prompt payment, the CBCA determined that a contracting officer could not have been expected to understand the request as a CDA claim.  Therefore, Magwood could not treat the contracting officer's alleged failure to respond as a deemed denial and the operative final decision was the September 2016 letter, for which the appeal period has already run.

L-3 Commc'ns Integrated Sys., L.P., ASBCA Nos. 60713 et al. (Sept. 27, 2017)

L-3 appealed from multiple final decisions asserting government claims for the recovery of purportedly unallowable airfare costs.  Rather than audit and challenge specific airfare costs, the Defense Contract Audit Agency simply applied a 79% "decrement factor" to all of L-3's international airfare costs over a specified dollar amount, claiming that this was justified based on prior-year audits.  After filing the appeals, L-3 moved to dismiss for lack of jurisdiction on the grounds that the government had failed to provide adequate notice of its claims by failing to identify which specific airfare costs were alleged to be unallowable, as well as the basis for those allegations. The Board (D'Alessandris, A.J.) denied the motion to dismiss, holding that the contracting officer's final decisions sufficiently stated a claim in that they set forth a sum certain and a basis for such a claim.  The Board held that L-3 had enough information to understand how the government reached its claim, and its contention that this was not a valid basis for the disallowance of costs for the year in dispute went to the merits and not the sufficiency of the final decisions.

C.     Requirement for a Contracting Officer's Final Decision

A number of decisions from the tribunals that hear government contracts disputes dealt with the CDA's requirement that a claim have been "the subject of a contracting officer's final decision."

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Kings Bay Support Servs., ASBCA Nos. 59213 et al. (July 10, 2017)

KBSS held a Navy contract for base operating support.  After KBSS sought additional compensation for maintenance work, which the government denied, KBSS appealed and the government subsequently filed a motion for summary judgment. The Board (Kinner, A.J.) denied the government's motion.  In addition to finding a genuine dispute of material fact, the Board rejected the government's argument that the Board was without jurisdiction because KBSS used terminology in its briefing that differed from that in its certified claim.  The Board held that KBSS's arguments were materially the same as those presented to the contracting officer and that the use of different terminology in its briefing did not change the operative facts or claims.

Emiabata v. United States, No. 17-44C (Fed. Cl. Nov. 17, 2017)

Philip Emiabata was awarded a U.S. Postal Service delivery contract.  The contracting officer thereafter terminated the contract for default, citing a number of alleged deficiencies.  Emiabata waited 364 days and filed a complaint pro se in the Court of Federal Claims alleging wrongful termination and a variety of breach of contract claims.  The government moved to dismiss. The Court of Federal Claims (Campbell-Smith, J.) granted the government's motion to dismiss the breach of contract claims because Emiabata failed to present them to the contracting officer, thus depriving the Court of jurisdiction pursuant to the CDA.  With respect to the wrongful termination claim, the Court directed the government to submit a new motion for summary judgment.

Vanquish Worldwide, LLC v. United States, No. 17-335 (Fed. Cl. Sept. 19, 2017)

Vanquish Worldwide held a contract to provide shipping and logistics services for the U.S. Army in Afghanistan.  After 12 of the contractor's shipments disappeared, the CO posted a "Marginal" performance evaluation in the Contractor Performance Assessment Reporting System ("CPARS").  Vanquish Worldwide timely disputed the rating through CPARS and requested that the evaluation be raised to "Satisfactory," but the reviewing official concurred with the rating and rejected the explanations for the disappearance of the shipments.  Vanquish Worldwide filed suit in the Court of Federal Claims seeking a declaratory judgment vacating the evaluation and remanding the matter to the agency. The Court of Federal Claims (Kaplan, J.) granted the government's motion to dismiss Vanquish Worldwide's complaint, holding that the continuing correspondence with the agency about the evaluation never ripened into a claim before the contracting officer.  The Court noted that the correspondence not only failed to request a final decision, but it also seemed to contemplate further dialogue.

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Under the CDA, if a contracting officer does not within 60 days issue a decision on a certified claim, or provide a date by which a decision will be issued, the contractor may appeal from a "deemed" denial of its claim or may petition a Board to direct the contracting officer to issue a decision.  41 U.S.C. § 7103(f).  In a recent case, the CBCA issued guidance concerning the ability to petition for a directed decision.

CTA I, LLC v. Dep't of Veteran Affairs, CBCA 5800 (Aug. 22, 2017)

On February 15, 2017, CTA submitted a certified claim to the VA for labor inefficiencies, delay, and other costs that arose from its contract to construct a dialysis center in Virginia.  The contracting officer stated he would respond to CTA's claims by July 10, 2017.  Rather than wait, CTA petitioned the CBCA for an order directing the contracting officer to issue a decision "no later than June 1, 2017," which the Board denied because there was insufficient time to resolve the matter by June 1.  When July 10 arrived, the VA stated that a commercial claims consultant was needed to evaluate CTA's claim, and informed CTA it would issue a final decision by September 8, 2017.  CTA filed this case on July 25, 2017, alleging that the VA engaged in "bad faith delaying tactics" and asking the Board to direct the VA to issue a final decision by the September 8 deadline.  In its brief, the VA indicated that no consultant had been retained and that it did not anticipate meeting the September 8 deadline. The Board (Chadwick, A.J.) held that the VA had failed to adhere to its CDA deadlines, but CTA's only relief was to treat this failure as a deemed denial and file an appeal from the same with the Board.  The Board noted that the government does not have a right to a second extension set outside the initial 60 days, and that any deadline for a decision that the contracting officer establishes at the end of the 60-day period is firm.  But if a contracting officer does not act on the claim within 60 days, or misses his own extended deadline, the contractor's options are to exercise its immediate right to appeal, or await a tardy contracting officer decision on the claim.

IV.     TERMINATIONS

The ASBCA issued three noteworthy decisions during the second half of 2017 arising from contract terminations.  In the first, the Board strictly construed the one-year time limit to submit a termination settlement proposal in accordance with the FAR's termination for convenience clause.

Black Bear Construction Co., ASBCA 61181 (Nov. 14, 2017)

Black Bear appealed a contracting officer's denial of a claim seeking settlement costs resulting from the government's termination for convenience of its contract for runway improvement construction in Afghanistan.  The government filed a motion for summary judgment, arguing that Black Bear waited more than the required one year to file its settlement proposal.  FAR 52.249-2 provides:  "After termination, the Contractor shall submit a final termination settlement proposal to the Contracting Officer . . . promptly, but not later than 1 year from the effective date of termination, unless extended in writing by the Contracting Officer upon written request of the Contractor within this 1-year period."  The government terminated the contract on August 12, 2012, and Black Bear did not submit its termination settlement claim until March 25, 2017. The Board (Osterhout, A.J.) found no evidence that Black Bear had requested an extension of time from the contracting officer.  Because no extension of time was ever sought, much less granted, the claim was untimely.  Therefore, the appeal was denied.

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In two cases, the ASBCA addressed when the government's waiver of a delivery schedule fails to justify converting a termination for default into once for convenience.

Avant Assessment, LLC, ASBCA Nos. 58903 et al. (Aug. 21, 2017)

Avant held several contracts for the development and delivery of foreign-language test items for the Defense Language Institute.  For one contract, the parties implemented a new delivery schedule, but the government nevertheless terminated the contract for default based on Avant's failure to meet the original schedule. The Board (McIlmail, A.J.) held that the government must justify the termination for default.  By implementing a new delivery schedule, the government effectively waived the prior delivery schedule.  Accordingly, there could not be a default termination, and the government failed to justify the termination.  The Board therefore sustained the appeal.

Asia Commerce Network, ASBCA No. 58623 (Oct. 4, 2017)

Similarly, a termination for default was converted into one for convenience where the Defense Logistics Agency waived default in delivery.  DLA awarded a contract to ACN for the delivery of jet fuel to Bagram Air Field, Afghanistan.  ACN had six months to achieve operational status and begin delivering fuel.  ACN did not meet the six-month deadline, and DLA issued a cure notice requesting an explanation for the delay and additional information.  ACN continued working on its pipeline and, when DLA subsequently terminated the contract for default, was within a few days of completion. The Board (O'Sullivan, A.J.) held that under these facts, the termination for default was not justified because the government is deemed to have waived default in delivery if "the contractor relies on the government's failure to terminate and continues to perform under the contract, with government knowledge and implied or express consent."  The Board found that ACN relied on the government's failure to terminate and continued to perform the contract up until the day it received the termination notice.  As a result, the Board converted the default termination to a termination for convenience.

V.     CONTRACT INTERPRETATION

A number of noteworthy decisions from the second half of 2017 articulate broadly applicable contract interpretation principles that should be considered by government contractors.

James M. Fogg Farms, Inc., et al. v. United States, No. 17-188C (Fed. Cl. Sept. 27, 2017)

The key question presented in this case was whether a federal statute may be read into a government contract as a contractual term that may give rise to breach.  Plaintiffs alleged that the government underpaid them pursuant to their Conservation Security Program contracts and that the regulation the National Resources Conservation Service implemented, laying out payment formulas for program participants, was contrary to the 2002 Farm Bill, 16 U.S.C. § 3838a et seq., which created the conservation program. The Court of Federal Claims (Wheeler, J.) granted the government's motion to dismiss, holding that where the contract expressly incorporated regulations, but did not incorporate not the statutory provision on which the plaintiff relied, there was no contractual term entitling plaintiffs to relief.

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A number of cases before the ASBCA and CBCA addressed whether a constructive change had occurred that justified an equitable adjustment of the contract price.  In order to recover for a constructive change, the contractor must prove that (1) the contracting officer compelled the contractor to perform work not required under the contract; (2) the person directing the change had contractual authority unilaterally to alter the contractor's duties; (3) the performance requirements were enlarged; and (4) the added work was not volunteered, but rather was at the direction of the contracting officer.

Innoventor, Inc., ASBCA No. 59903 (July 11, 2017)

In 2011, the government entered into a fixed-price contract with Innoventor for the design and manufacture of a dynamic brake test stand.  As part of the contract's purchase specifications, the new design had to undergo and pass certain testing.  After problems arose in the testing process, Innoventor submitted a proposal to modify certain design components and applied for an equitable adjustment due to "instability of expectations."  The contracting officer denied Innoventor's request for an equitable adjustment, stating that the government had not issued a modification directing a change that would give rise to such an adjustment.  Innoventor submitted a claim, which the contracting officer denied, and Innoventor appealed. The Board (Sweet, A.J.) held that the government was entitled to judgment as a matter of law because there was no evidence that the government changed Innoventor's performance requirements, let alone that anyone with authority directed any constructive changes.  Here, the contract was clear that Innoventor's design had to pass certain tests, and because it failed some of them, and did not perform pursuant to the contract terms, there was no change in the original contract terms that would give rise to a constructive change.  The Board also found that there was no evidence that any person beyond the contracting officer had authority to direct a change because the contract expressly provided that only the contracting officer has authority to change a contract.  Accordingly, the Board denied Innoventor's appeal.

Indus. Maint. Servs., Inc. v. Dep't of Veterans Affairs, CBCA No. 5618 (Sept. 15, 2017)

After IMS was awarded a contract to provide labor, materials, equipment, and supervision of an upgrade to a medical center, IMS and the VA entered into a bilateral modification that changed the contract work and increased the contract price, but without changing the completion date.  Correspondence exchanged when entering into the modification suggested that any concerns as to the impact on the schedule would be addressed separately, and IMS reserved its right to be compensated for additional days.  When IMS later submitted a request for equitable adjustment based on the additional time and expense incurred as a result of the modification, the VA denied it and IMS appealed. The Board (Vergilio, A.J.) determined IMS was entitled to its additional costs, as the bilateral modification did not foreclose additional time or costs that followed the change.  Further, the VA had failed to value the cost of the modification properly by omitting a cost for the value of impacted work to be performed.  The Board granted in part IMS's request, requiring the VA to correct its calculations and for the contractor to prove its actual costs and the value of impacted work.

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The ASBCA and Federal Circuit each considered whether contractor claims were foreclosed by a prior release clause.

Cent. Tex. Express Metalwork LLC, ASBCA No. 61109 (Sept. 7, 2017)

CTEM held a contract for the repair and replacement of various ventilation, heating, and air conditioning systems at Lackland Air Force Base.  After various payment disputes arose, CTEM entered into a release with the Air Force for a specific amount to be delivered to CTEM.  However, CTEM then opted not to receive the payment, and instead certified a claim for a greater amount, which the government denied on the grounds that CTEM had already released its claim.  CTEM appealed and the government filed a motion for summary judgment. The Board (Sweet, A.J.) first found that CTEM could not genuinely dispute that it agreed to release its claims.  A release followed by final payment generally bars a contractor from seeking recovery of its claims.  Here, CTEM had signed a final release, and the government had tendered payment.  Second, the Board rejected CTEM's argument that the release was not binding because it had refused to accept the government's payment.  The Board noted that the release was a binding contract with CTEM and once it was signed, which triggered the government's obligation to tender payment, CTEM's refusal to accept payment was an interference of the government's obligation.  Third, the Board rejected CTEM's argument that there was no consideration for the release.  In support, the Board found that when a contract called for a release at the time of final payment, the contract itself becomes the consideration.  Accordingly, the Board denied the appeal and granted summary judgment in favor of the government.

Ingham Reg'l Med. Ctr. v. United States, No. 874 F.3d 1341 (Fed. Cir. 2017)

In our 2016 Mid-Year Government Contracts Litigation Update, we covered the decision by the Court of Federal Claims (Horn, J.) that plaintiff hospital operators participating in the military TRICARE program failed to establish CDA jurisdiction over alleged underpayments that were predicated on certain non-contractual documents.  In this decision, the Federal Circuit considered an appeal from a different part of the lower court's decision finding that Ingham's breach of contract claims were barred by a release clause. The Federal Circuit (Hughes, J.) found that the release in question did not bar the claims because the release the government relied upon was in the very same contract it was accused of breaching. The Court found that DoD's promise to follow an agreed-upon methodology was part of the consideration for Ingham's agreement to provide the release, and that DoD could not therefore use the release to bar Ingham's claim that DoD breached its obligations under the same contract.  However, the Court affirmed the Court of Federal Claims' dismissal of Ingham's money mandating claims for failure to state a claim in light of the deference due to DoD's interpretation of the statute underlying the dispute.

VI.     COMMON LAW PRINCIPLES

The boards of contract appeals and Court of Federal Claims addressed a number of issues during the second half of 2017 arising out of the body of federal common law that has developed in the context of government contracts.

A.     Christian Doctrine

Under the Christian doctrine, a mandatory contract clause that expresses a significant or deeply ingrained strand of procurement policy is considered to be included in a contract by operation of law.  G.L. Christian & Assocs. v. United States, 312 F.2d 418 (Ct. Cl. 1963).

Atlas Sahil Construction Co., ASBCA No. 58951 (Nov. 9, 2017)

Atlas Sahil appealed the denial of a certified claim seeking to recover costs resulting from the Army's termination for convenience of a contract to expand a forward operating base in Afghanistan.  The government did not substantially contest the contractor's entitlement to recover termination costs.  Rather, the dispute arose over Atlas Sahil's argument that it was entitled to recover amounts based on the contract's line item prices, rather than on the cost of construction performed.  Atlas argued that the termination for convenience clause applicable to supply and service contracts, FAR 52.249-2, should be read into the contract under the Christian doctrine.  The government responded that the governing provision was that expressly incorporated into the contract, the termination for convenience clause applicable to construction contracts, FAR 52.249-2, Alt. I. The Board (Younger, A.J.) agreed with the government and denied the appeal.  The Board found that the Christian doctrine did not require the insertion of a different termination clause, since the parties agreed on the one incorporated into the contract.

B.     Fraud

We have been following in our recent publications developments in the law of whether and to what extent the boards of contract appeals may exercise jurisdiction over claims and defenses sounding in fraud when the alleged fraud affects the administration of government contracts.  For example, in our 2016 Year-End Government Contracts Litigation Update, we covered the Federal Circuit's decision in Laguna Construction Company, Inc. v. Carter, 828 F.3d 1364 (Fed. Cir. 2016), which held that as long as the ASBCA can rely upon prior factual determinations from other tribunals (such as through a guilty plea), the Board has jurisdiction to adjudicate legal defenses based upon those prior determinations.  We also covered the ASBCA's decision in Kellogg Brown & Root Services, Inc., ASBCA Nos. 57530 et al. (Nov. 8, 2016), where the Board interpreted Laguna to hold that nothing mandates that the Board "suspend appeals indefinitely [where] the government has merely filed a fraud cause elsewhere that might establish an affirmative defense of prior material breach if and whenever proven."

ABS Dev. Corp., ASBCA Nos. 60022 et al. (Aug. 30, 2017)

The government sought to amend its answers in two appeals to assert the defense that the contract at issue was void ab initio due to fraud.  The Board (McIlmail, A.J.) permitted the amendments, rejecting ABS's argument that the Board lacked jurisdiction because no third party had made factual determinations regarding any alleged fraud and reasserting that the Board possesses jurisdiction to determine for itself whether a contract is void because of fraud.  The Board stated that there is a "big difference" between whether the government is asserting an affirmative fraud claim over which the Board does not possess jurisdiction, as the Federal Circuit discussed in Laguna Construction Co., and whether a contractor can establish that it has a contract with the government in the first place.

Yates-Desbuild Joint Ventures v. Dep't of State, CBCA Nos. 3350-R et al. (Dec. 8, 2017)

Yates alleged that it incurred delay damages on its contract with the State Department to construct a nine-building consulate compound in Mumbai, and that the State Department withheld superior knowledge that the Government of India would not act upon construction permits in an effort to strong arm the State Department into helping it recoup unpaid taxes from the U.S. government.  In the initial decision on the matter, the CBCA agreed that the State Department had superior knowledge that Indian officials would withhold permits, but by the time those government-caused delays began, Yates was itself nearly a year behind schedule.  Yates moved for reconsideration, arguing that under a theory of first material breach, it was entitled to recover damages "that would place it in the position it would have occupied had it never entered the contract in the first place." The Board (Lester, A.J.) denied Yates's motion for reconsideration, finding that Yates waived its prior material breach argument.  The CBCA noted that Yates had not squarely placed the first material breach argument in dispute, thereby preventing the State Department from developing a record on this issue.  The Board also found that Yates's prior material breach defense was without merit.  Though a prior material breach may discharge a party from future performance, not all breaches do so.  Where a party can show fraud on the part of the government, the breach is per se material and the prior material breach doctrine is triggered.  However, the Board found that this appeal did not involve fraud, and it was not the State Department's withholding of information that caused the first material performance failures on the project.

C.     Good Faith & Fair Dealing

K2 Solutions, Inc., ASBCA No. 60907 (July 13, 2017)

K2 held a Navy contract to provide improvised explosive device detector dogs and related services.  K2 alleged that the Navy failed to exercise full delivery of the services contemplated in the base year, and that the government's notice to exercise the first option year suggested a reduction in requirements from the original contract.  K2 brought numerous claims against the government, which the government moved to dismiss for failure to state a claim. The Board (Sweet, A.J.) held that the claims for breach of contract and improper exercise of the option year failed to state a claim because the attempted option exercise was ineffective, so there was no option exercise that could have violated the contract.  An option in a contract is to keep an offer open for a set period of time, which conferred upon the government the right to accept or reject the offer.  A notice of acceptance that is not an entire acceptance of the option is not acceptance at all.  Thus, since the government did not actually accept the option year as set out in the contract, the government could not have breached the option year contract.  With K2's claim for breach of the duty of good faith, however, the Board held that this survived the government's motion to dismiss.  A typical "bait and switch," such as when the government awards a contract only to eliminate the benefit shortly thereafter, breaches the duty of good faith and fair dealing.  The Board found that while the modification was an ineffective exercise of the option, it could also plausibly be considered a new offer that K2 accepted by continuing to perform.  Thus, because the claim alleged that the government breached the duty after the modification reduced the scope of the work, the Board denied the government's motion to dismiss this claim.

Michael Johnson Logging v. Dep't of Agric., CBCA No. 5089 (Dec. 22, 2017)

After the Department of Agriculture awarded the Big Shrew South timber sale to Michael Johnson Logging, a dispute arose concerning "skid trails" that allow access to the timber.  Rather than the straight and wide corridors proposed by the plaintiff, the Department of Agriculture insisted on "zigzagging" skid trails to avoid "cutting legacy trees or damaging the forest."  This allegedly led to project delays and Michael Johnson Logging filed a claim for damages.  The Department of Agriculture denied the claim, Michael Johnson Logging filed the instant appeal, and the Department of Agriculture moved for summary judgment. The CBCA (O'Rourke, A.J.) denied the motion for summary judgment as to the breach claim.  The Board noted that although plaintiff's claim and its complaint did not include a reference to a violation of the duty of good faith and fair dealing, and plaintiff raised it for the first time in response to the Department of Agriculture's motion for summary relief, there was enough in the complaint to support the claim for breach of implied terms of the contract and the claim was therefore not new.  However, the Board sided with the Department of Agriculture in awarding summary judgment on the contractor's claim for "business devastation," a claim that arises where "a contractor asserts that the Government's actions caused the destruction" of a contractor's business.  The Board found that claims for business devastation are granted sparingly due to the difficulty of showing a nexus between government action and the failure of the business of the whole.  Finding here that the record did not support a nexus between the government's actions and the failure of Michael Johnson Logging's business, the Board granted summary judgment in favor of the Department of Agriculture on that claim.

MW Builders, Inc. v. United States, No. 13-1023 (Fed. Cl. Oct. 18, 2017)

MW Builders held an Army Corps of Engineers contract for electrical utility services necessary to build an Army Reserve Center in Sloan, Nevada.  The contract was silent as to who was responsible for securing easements for this work.  But when delays arose because of difficulties relating to these easements, the Army claimed MW Builders was responsible and refused to pay on a cost claim associated with the delay.  When MW Builders brought suit in the Court of Federal Claims, the Army counterclaimed in fraud because the contractor submitted costs based on estimates, rather than actual costs. The Court of Federal Claims (Braden, J.) determined that the Corps breached its contract with MW Builders and violated the duty of good faith and fair dealing.  In reaching its decision, the Court noted that MW Builders had a "reasonable expectation," consistent with industry practice, that the Corps was obligated to make arrangements for the easements.  The Court further dismissed the government's counterclaims for fraud stating that, "[t]he fact that MW Builders should have used actual costs, instead of estimated costs, does not evidence that MW Builders acted with a specific intent to defraud the Government."

D.     Sovereign Acts Doctrine

Another important common law limitation on a contractor's ability to obtain damages from the government is the sovereign acts doctrine, which insulates the government from liability for acts taken in its sovereign (not contractual) capacity.

ANHAM FZCO, LLC, ASBCA No. 59283 (July 20, 2017)

ANHAM held a contract for the procurement, storage, and distribution of food and non-food items to the military and other federal customers in the Middle East.  ANHAM was responsible for maintaining proper inventory and forecasting monthly demand.  Shortly before the government finalized the decision to pull many of its troops from the region, ANHAM became concerned about proper inventory in light of that expected decision.  Instead of supporting ANHAM's decision to reduce supply, the government advised ANHAM that it had to maintain a full inventory in order to fulfill performance of the contract.  Although delivery orders declined as troops were withdrawn, ANHAM had already renewed the lease for its largest warehouse.  Due to the number of troops being withdrawn, ANHAM submitted a claim to the contracting officer for the costs it incurred for the lease of the warehouse.  ANHAM argued that the government actively misled it regarding the impending departure of U.S. forces from Iraq by insisting throughout 2011 that it possessed no information about the withdrawal of U.S. troops, when the government had established a military departure date in a classified operational order, OPORD 11-01, issued January 6, 2011, which directed the removal of all U.S. troops from Iraq by the middle of December 2011.  The contracting officer denied ANHMA's claim.  ANHAM appealed, and the government subsequently filed a motion for summary judgment. The Board (Kinner, A.J.) held that the government was not entitled to summary judgment because there were numerous disputes of material fact.  For one, the government did not address ANHAM's allegations that it had been actively misled regarding the impending departure of the troops.  The Board also noted that whether the government knew about the withdrawal of troops was material to the government's representations to ANHAM, and the timing of the order removing the troops from the Middle East was material as well.  The Board also found that there was a prima facie case of breach of the duty of good faith and fair dealing in that the government's plan to withdraw troops was vital information for ANHAM and that ANHAM did not assume the risk that the government would withhold or falsify information regarding the amount of supplies needed.  Second, the Board found that the decision to renew the warehouse lease was dictated by the government's representation of the numbers of troops, thus obligating ANHAM to lease the space to continue its performance obligations.  The Board also rejected the government's argument that the sovereign acts doctrine precluded ANHAM's breach claims because the decision to withdraw troops from the Middle East was a sovereign act.  Here, the withdrawal of troops did not prevent the government from acting in good faith and fair dealing.  Noting that all contracts implicitly contain a covenant of good faith and fair dealing, the Board stated:  "Good faith in contractual relations means 'honesty in fact in the conduct or transaction concerned.'" The Board found that "[t]he government's alleged actions fail that standard even if it could offer a legitimate legal basis for withholding or misrepresenting the information."

VII.     DAMAGES

The Court of Federal Claims issued two decisions addressing the proper calculation of damages.

Omran Holding Grp., Inc. v. United States, No. 16-446C et al. (Fed. Cl. Oct. 20, 2017)

Omran is an Afghan construction and engineering firm providing services to the U.S. Army Corps of Engineers in Afghanistan.  Upon performance, the Corps was obligated to pay Omran in Afghani (AFN), the local Afghan currency.  Omran contended that the government did not use the appropriate rate of pay and sought damages totaling $1,418,925.22. The Court of Federal Claims (Williams, J.) held that, while the Corps paid Omran using the wrong currency conversion rate, Omran could not recover damages because the incorrect rate used was higher than what Omran was entitled to receive under the contract.  There can be no damages where Omran was "in at least as good, if not better, a position as it expected . . ., and it has not shown any particular harm to itself flowing from the alleged breach."

Agility Def. & Gov't Servs. Inc. v. United States, Nos. 13-55C et al. (Fed. Cl. Oct. 18, 2017)

We covered the Federal Circuit's decision in Agility Defense, 847 F.3d 1345 (Fed. Circ. 2017), in our 2017 Mid-Year Government Contracts Litigation Update.  There the Federal Circuit (Moore, J.) reversed a decision of the Court of Federal Claims and held that the government failed to provide Agility with a realistic workload estimate in violation of FAR 16.503, and thus Agility could claim additional costs under its fixed price surplus military property contract due to a "surge of equipment and material" known to the government but not Agility. On remand, the Court of Federal Claims (Wheeler, J.) found that Agility was entitled to a total equitable adjustment of $6,906,339.20, plus interest, under the actual cost method. The Court based this conclusion on a finding that this calculation accurately captures the cost of additional, unanticipated work Agility had to perform on the contract as a result of the government's negligent estimates.  The Court noted that: "When the Government provides a negligent estimate and a contractor reasonably relies on that estimate to its financial detriment, an equitable adjustment is the proper remedy."

VIII.     CONCLUSION

We will continue to keep you informed on these and other related issues as they develop.
The following Gibson Dunn lawyers assisted in preparing this client update: Karen L. Manos, John W.F. Chesley, Lindsay M. Paulin, Melinda Biancuzzo, Lauren M. Assaf, Matthew P. O’Sullivan, Pooja R. Patel and Casper J. Yen. Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding the issues discussed above.  Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following: Washington, D.C. Karen L. Manos (+1 202-955-8536, kmanos@gibsondunn.com) Joseph D. West (+1 202-955-8658, jwest@gibsondunn.com) John W.F. Chesley (+1 202-887-3788, jchesley@gibsondunn.com) David P. Burns (+1 202-887-3786, dburns@gibsondunn.com) Michael Diamant (+1 202-887-3604, mdiamant@gibsondunn.com) Caroline Krass (+1 202-887-3784, ckrass@gibsondunn.com) Michael K. Murphy(+1 202-995-8238, mmurphy@gibsondunn.com) Jonathan M. Phillips (+1 202-887-3546, jphillips@gibsondunn.com)> Melinda R. Biancuzzo (+1 202-887-3724, mbiancuzzo@gibsondunn.com) Michael R. Dziuban (+1 202-887-8252, mdziuban@gibsondunn.com) Ella Alves Capone (+1 202-887-3511, ecapone@gibsondunn.com) Melissa L. Farrar (+1 202-887-3579, mfarrar@gibsondunn.com) Lindsay M. Paulin (+1 202-887-3701, lpaulin@gibsondunn.com) Laura J. Plack (+1 202-887-3678, lplack@gibsondunn.com) Erin N. Rankin (+1 202-955-8246, erankin@gibsondunn.com) Jeffrey S. Rosenberg (+1 202-955-8297, jrosenberg@gibsondunn.com) Jin I. Yoo (+1 202-887-3797, jyoo@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Jeremy S. Ochsenbein (+1 303-298-5773, jochsenbein@gibsondunn.com) Los Angeles Marcellus McRae (+1 213-229-7675, mmcrae@gibsondunn.com) Maurice M. Suh (+1 213-229-7260, msuh@gibsondunn.com) James L. Zelenay, Jr. (+1 213-229-7449, jzelenay@gibsondunn.com) Dhananjay S. Manthripragada (+1 213-229-7366, dmanthripragada@gibsondunn.com) Sean S. Twomey (+1 213-229-7284, stwomey@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

August 9, 2017 |
Webcast: 2017 Mid-Year Update: The False Claims Act and Government Contractors (defense, technology, and others)

​The False Claims Act (FCA) is well-known as one of the most powerful tools in the government's arsenal to combat fraud, waste and abuse anywhere government funds are implicated. The U.S. Department of Justice has made clear that vigorous FCA enforcement is here to stay,  with newly filed cases remaining at historical peak levels and the DOJ  on pace to recover more than $3 billion from FCA cases for the seventh straight year.  More than ever, any company that deals in government funds—including companies in the education, health care and life sciences, government contracting and financial services sectors—needs to stay abreast of how the government and private whistleblowers alike are wielding this tool, and how they can prepare and defend themselves. Please join Gibson Dunn for a 90-minute discussion of the latest developments in FCA, including:

  • The latest trends in FCA enforcement actions and associated litigation involving government contracting;
  • Updates on the Trump Administration's approach to FCA enforcement;
  • Notable legislative and administrative developments affecting the FCA's statutory framework and application; and
  • The latest developments in FCA case law following the Supreme Court's Escobar decision.
View Slides [PDF]
[embed]http://vimeo.com/229183686[/embed]

PANELISTS: Karen Manos is a partner in the Washington D.C. office and Chair of the firm's Government Contracts practice group. She has experience on a broad range of government contracts issues, including civil and criminal fraud investigations and litigation, complex claims preparation and litigation, qui tam suits under the FCA, defective pricing, bid protests, cost allowability, the Cost Accounting Standards, and corporate compliance programs. Joseph West is a partner in the Washington, D.C. office and focuses his practice on contract counseling, compliance/enforcement, and dispute resolution. He previously Co-Chaired the firm's Government Contracts practice group, and he has represented both contractors (and their subcontractors, vendors and suppliers) and government agencies. John Chesley is a partner in the Washington, D.C. Office. He represents corporations, audit committees, and executives in internal investigations and before government agencies in matters involving the FCPA, procurement fraud, environmental crimes, securities violations, antitrust violations, and whistleblower claims. He also litigates government contracts disputes in federal courts and administrative tribunals. Erin Rankin is an associate in the Washington, D.C. office, where she is a member of the firm's Litigation Department. She has broad experience representing clients on government contracts matters relating to contract claims, bid protests, suspension and debarment proceedings, voluntary disclosures and government investigations.

July 24, 2017 |
2017 Mid-Year Government Contracts Litigation Update

In this mid-year check-in on government contracts litigation, Gibson Dunn examines trends and summarizes key decisions of interest to government contractors from the first half of 2017.  This publication covers the waterfront of the most important opinions issued by the U.S. Court of Appeals for the Federal Circuit, U.S. Court of Federal Claims, Armed Services Board of Contract Appeals ("ASBCA"), and Civilian Board of Contract Appeals ("CBCA").

The first six months of 2017 yielded three government contracts-related opinions of note from the Federal Circuit, excluding decisions related to bid protests.  From January 1 through June 30, 2017, the U.S. Court of Federal Claims issued 10 notable non-bid protest government contracts-related decisions, and the ASBCA and CBCA published 38 and 37 substantive government contracts decisions, respectively.  As discussed herein, these cases address a wide range of issues with which government contractors should be familiar, including matters of cost allowability, jurisdictional requirements, contract interpretation, the Service Contract Act, and the various topics of federal common law that have developed in the government contracts arena.  Before addressing each of these areas, we briefly provide background concerning the tribunals that adjudicate government contracts disputes.

I.     THE TRIBUNALS THAT ADJUDICATE GOVERNMENT CONTRACT DISPUTES

Under the doctrine of sovereign immunity, the United States generally is immune from liability unless it waives its immunity and consents to suit.  Pursuant to statute, the government has waived immunity over certain claims arising under or related to federal contracts through the Contract Disputes Act ("CDA"), 41 U.S.C. §§ 7101 - 7109, and through the Tucker Act, 28 U.S.C. § 1491.  Under the CDA, any claim arising out of or relating to a government contract must be decided first by a contracting officer.  A contractor may contest the contracting officer's final decision by either filing a complaint in the U.S. Court of Federal Claims or appealing to a board of contract appeals.  The Tucker Act, in turn, waives the government's sovereign immunity with respect to certain claims under statute, regulation, or express or implied contract, and grants jurisdiction to the Court of Federal Claims to hear such claims.

The Court of Federal Claims thus has jurisdiction over a wide range of monetary claims brought against the U.S. Government including, but not limited to, contract disputes and bid protests pursuant to both the CDA and the Tucker Act.  If a contractor's claim is founded on the Constitution or a statute instead of a contract, there is no CDA jurisdiction in any tribunal, but the Court of Federal Claims would have jurisdiction under the Tucker Act as long as the substantive source of law granted the right to recover damages.  Thus, the Court of Federal Claims' jurisdiction is broader than that of the boards of contract appeals.

In addition to establishing jurisdiction for certain causes of action in the Court of Federal Claims, the CDA establishes four administrative boards of contract appeals:  the Armed Services Board, the Civilian Board, the Tennessee Valley Authority Board, and the Postal Service Board.  See 41 U.S.C. § 7105.  The ASBCA hears and decides post-award contract disputes between contractors and the Department of Defense and its military departments, as well as the National Aeronautics and Space Administration ("NASA").  In addition, the ASBCA adjudicates contract disputes for other departments and agencies by agreement.  For example, the U.S. Agency for International Development has designated the ASBCA to decide disputes arising under USAID contracts.  The ASBCA has jurisdiction pursuant to the CDA, its Charter, and certain remedy-granting contract provisions.  The CBCA hears and decides contract disputes between contractors and civilian executive agencies under the provisions of the CDA.  The CBCA's authority extends to all agencies of the federal government except the Department of Defense and its constituent agencies, NASA, the U.S. Postal Service, the Postal Regulatory Commission, and the Tennessee Valley Authority.  In addition, the CBCA has jurisdiction, along with federal district courts, over Indian Self-Determination Act contracts.

The U.S. Court of Appeals for the Federal Circuit hears and decides appeals from decisions of the Court of Federal Claims, the ASBCA, and the CBCA, among numerous other tribunals outside the area of government contract disputes.  Significantly, the Federal Circuit has a substantial patent and trademark docket, hearing appeals from the U.S. Patent and Trademark Office and federal district courts that by volume of cases greatly exceeds its government contracts litigation docket.  Of 1,528 cases pending before the Federal Circuit as of June 30, 2017, 13 were appeals from the boards of contract appeals and 134 were appeals from the Court of Federal Claims—cumulatively comprising just under 10% of the appellate court's docket.  Nevertheless, the Federal Circuit is the court of review for most government contracts disputes. 

In January 2017, the CBCA marked 10 years since it was established by Act of Congress in the National Defense Authorization Act of 2006.  That Act abolished existing boards of contract appeals for most civilian agencies, folding their judges, staff, and jurisdiction into the new CBCA.  In the years since its creation, the CBCA has docketed more than 5,600 cases and resolved over 5,300 of them.  Also in January, Judge Richard Walters retired from the CBCA after 10 years of service on the Board and 25 years of federal government service.

On March 13, 2017, President Trump designated Judge Susan G. Braden as the Chief Judge of the U.S. Court of Federal Claims.  President Trump further nominated candidates to fill two of six vacant judgeships on the Court: Damien Michael Schiff and Stephen S. Schwartz.  Mr. Schiff is a senior attorney with the Pacific Legal Foundation in California and Mr. Schwartz is a litigation partner at a law firm in Washington, D.C.  The Senate Judiciary Committee approved Mr. Schiff's nomination on July 13.

II.     COST ALLOWABILITY

The ASBCA issued several important decisions during the first half of 2017 addressing the merits of cost allowability issues under the Federal Acquisition Regulation ("FAR"). 

Technology Systems, Inc., ASBCA No. 59577 (Jan. 12, 2017)

TSI held four cost-plus-fixed-fee contracts with the Navy for research and development.  Several years into the contracts, the government disallowed expenses that had not been questioned in prior years.  TSI appealed to the ASBCA, arguing that it relied to its detriment on the government's failure to challenge those same expenses in prior years. 

The Board (Prouty, A.J.) held that the challenged costs were "largely not allowable" and that "the principle of retroactive disallowance," which it deemed "a theory for challenging audits whose heyday has come and gone," did not apply because the same costs had simply not come up in the prior audits.  The theory of retroactive disallowance, first articulated in a Court of Claims case in 1971, prevents the government from challenging costs already incurred when the cost previously had been accepted following final audit of historical costs; the contractor reasonably believed that it would continue to be approved; and it detrimentally relied on the prior acceptance.  Tracing precedent discussing the principle, the Board cited the Federal Circuit's decision in Rumsfeld v. United Technologies Corp., 315 F.3d 1361 (Fed. Cir. 2003), which stated that "affirmative misconduct" on the part of the government would be required for the principle of retroactive disallowance to apply because it is a form of estoppel against the government.  The Board "sum[med] up: there is no way to read our recent precedent or the Federal Circuit's except to include an affirmative misconduct requirement amongst the elements of retroactive disallowance.  Period."  Further, the Board held that the government's failure to challenge the same costs in prior years did not constitute a "course of conduct precluding the government from disallowing the costs in subsequent audits."

A-T Solutions, Inc., ASBCA No. 59338 (Feb. 8, 2017)

ATS was awarded a cost-plus-fixed-fee contract with the U.S. Army Research, Development and Engineering Command to provide training for armed forces personnel.  ATS's proposal noted that it would charge for its commercial item training materials and equipment at its affiliate's catalog prices attached to the proposal, and the government accepted the proposal without further negotiation.  The Defense Contract Audit Agency subsequently questioned the costs under FAR 31.205-26(e) on the basis that although the training materials were commercial, ATS had not demonstrated that it transferred the materials at price within its accounting system.  ATS appealed the CO's decision disallowing the costs.

The Board (O'Sullivan, A.J.) held that FAR 31.205-26(e) does not impose a requirement that transfers have economic substance.  It was sufficient that the transfers were recorded by the transferring division at price.  Therefore, the Board decided that ATS was entitled to recover its commercial catalog prices for training materials.

Raytheon Co., ASBCA Nos. 57743 et al. (Apr. 17, 2017)

Raytheon appealed from three final decisions determining that an assortment of costs—including those associated with consultants, lobbyists, a corporate development database, and executive aircraft—were expressly unallowable and thus subject to penalties.  After a two-week trial, the Board (Scott, A.J.) sided largely with Raytheon in a wide-ranging decision that covers a number of important cost principles issues. 

First, the Board rejected the government's argument that the consultant costs were expressly unallowable simply because the government was dissatisfied with the level of written detail of the work product submitted to support the costs.  Judge Scott noted that written work product is not a requirement to support a consultant's services under FAR 31.205-33(f), particularly not where, as here, much of the consultants' work was delivered orally due to the classified nature of the work performed.  The Board found that not only were the consultant costs not expressly unallowable, but indeed were allowable.  This is a significant ruling because the documentation of consultant costs is a recurring issue as government auditors frequently make demands concerning the amount of documentation required to support these costs during audits. 

Second, the government sought to impose penalties for costs that inadvertently were not withdrawn in accordance with an advance agreement between Raytheon and the government concerning two executive aircraft.  Raytheon agreed that the costs should have been withdrawn and agreed to withdraw them when the error was brought to its attention, but asserted that the costs were not expressly unallowable and subject to penalty.  The Board agreed, holding that the advance agreements did not themselves clearly name and state the costs to be unallowable, and further that advance agreements do not have the ability to create penalties because a cost must be named and stated to be unallowable in a cost principle (not an advance agreement) to be subject to penalties.  This ruling could have significance for future disputes arising out of advance agreements.

Third, the government alleged that costs associated with the design and development of a database to support the operations of Raytheon's Corporate Development office were expressly unallowable organizational costs under FAR 31.205-27.  The Board disagreed, validating Raytheon's argument that a significant purpose of the Corporate Development office was allowable generalized long-range management planning under FAR 31.205-12, thus rendering the costs allowable (not expressly unallowable).

The only cost for which the Board denied Raytheon's appeals concerned the salary costs of government relations personnel engaged in lobbying activities.  Raytheon presented evidence that it had a robust process for withdrawing these costs as unallowable under FAR 31.205-22, but inadvertently missed certain costs in this instance due to, among other things, "spreadsheet errors."  Raytheon agreed that the costs were unallowable and should be withdrawn, but disputed that the costs of employee compensation (a generally allowable cost) were expressly unallowable and further argued that the contracting officer should have waived penalties under FAR 42.709-5(c) based on expert evidence that Raytheon's control systems for excluding unallowable costs were "best in class."  The Board found that salary costs associated with unallowable lobbying activities are expressly unallowable and that the contracting officer did not abuse his discretion in denying the penalty waiver.

Kellogg Brown & Root Servs., Inc., ASBCA Nos. 56358 et al. (June 8, 2017)

KBR appealed the government's withholding of over $44 million in allegedly unallowable costs incurred for private security to accompany officials and convoys used to deliver food and supplies to military forces in Iraq.  KBR moved for summary judgment on the basis that the use of private security was permissible in light of the government's breach of its obligation to provide adequate protection.

The Board (O'Sullivan, A.J.) granted summary judgment, holding that the government had committed the first material breach under the contract by failing to provide adequate force protection in accordance with the contract.  The Board further held that continued performance by KBR after this first breach was consistent with the purpose of the contract, and that it was a commercially reasonable decision to continue performance with private security forces.  Consequently, the Board held, the government could not disallow costs incurred by KBR and its subcontractors for private security, even if the costs were otherwise unallowable under the contract.

Quimba Software, Inc. v. United States, No. 12-142C (Fed. Cl. June 26, 2017)

Quimba had a cost-plus fixed-fee information technology research contract with the Air Force.  The company was prohibited from issuing invoices throughout a substantial portion of the life of the contract due to alleged deficiencies in its accounting systems, which finally were resolved.  Quimba was ultimately paid in full, but the contracting officer subsequently issued a final decision finding that a substantial portion of direct labor costs for the company's owners was unallowable pursuant to FAR 31.205-6.  Under this provision, compensation to owners of closely held corporations is allowable only to the extent it is deductible as compensation under the Internal Revenue Code.  The relevant tax regulations provide for a presumption (subject to exceptions, as noted below) that such compensation is deductible only in the year in which the compensation is paid; not the year in which it is accrued.

Ruling on cross-motions for summary judgment, the Court of Federal Claims (Smith, J.) found that the deferred compensation costs were in fact allowable under FAR 31.205-6 due to an exception in the tax regulations for deferred compensation costs that could not be paid in the year accrued because of administrative or economical impracticability.  The court found that deferral was the only option for Quimba, and thus "this case is one in which the evidence plainly overcomes the presumption" set forth in the tax regulations.  Quimba was awarded summary judgment.

III.     JURISDICTIONAL ISSUES

As they frequently do, jurisdictional issues dominated the landscape of key government contracts decisions during the first half of 2017.

A.     Requirement for a Valid Contract

In order for the ASBCA or CBCA to exercise jurisdiction over a claim, there must be a contract from which that claim arises.  See FAR 33.201 (defining a "claim" as "a written demand or written assertion by one of the contracting parties seeking . . . relief arising under or relating to this contract").  The boards of contract appeals issued two decisions during the first half of 2017 addressing what constitutes a valid contract from which a claim may arise. 

ASW Assocs., Inc. v. EPA, CBCA No. 2326 (Mar. 27, 2017)

The EPA awarded ASW a contract for the remediation of lead-contaminated properties in Missouri.  The contract provided for payment at defined rates for services and equipment ordered and used, and a total ceiling value, but did not guarantee a minimum amount of work or payment.  Further, although the contract contained estimates, it contained no guarantee that the government would actually purchase goods or services in the amount of these estimates.  Dissatisfied with its allocation of work, ASW brought suit before the CBCA.  This decision concerns cross-motions for partial summary judgment as to whether the contract was a time and materials contract or, alternatively, an indefinite delivery/indefinite quantity ("IDIQ") or requirements contract.

On March 27, 2017, the Board (Vergilio, J.) held that because the contract specified no minimum guarantee, and further did not provide that the contractor would fulfill all of EPA's requirements, the contract lacked the consideration necessary to establish an IDIQ or requirements contract.  Thus, EPA was granted summary judgment on this issue.  Nevertheless, the Board found that because "the agency ordered and the contractor performed services," ASW is "entitled to payment [] for services actually ordered . . . and provided."  The Board directed ASW to identify "what, if any, additional payment it seeks" based on the work it performed.

Raytheon Co., ASBCA Nos. 57743 et al. (Apr. 17, 2017)

The cost allowability issues of this case are discussed above.  As a preliminary matter, the ASBCA (Scott, A.J.) addressed whether it had jurisdiction over the three appeals because the final decisions referred only to "affected contracts" rather than designating a specific contract with Raytheon.  The Board held that while the CDA requires that a claim relate to a government contract, it does not require specific identification of that contract by number.  Thus, because it was clear that the government's claims related to contracts with Raytheon, the Board held that it had jurisdiction to address the merits.

B.     Adequacy of the Claim

Another common issue arising before the tribunals that hear government contracts disputes is whether the contractor appealed a valid CDA claim.  FAR 33.201 defines a "claim" as "a written demand or written assertion by one of the contracting parties seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising under or relating to this contract."  Under the CDA, a claim for more than $100,000 must be certified.  In the first half of 2017, the boards considered (1) when a claim accrues, (2) whether the claim has been properly certified, and (3) whether the claim demands payment of a sum certain.

1.     Claim Accrual and Statute of Limitations

The FAR defines "accrual" of a contract claim as "the date when all events, that fix the alleged liability of either the government or the contractor and permit assertion of the claim, were known or should have been known."  48 C.F.R. § 33.201.  The CDA provides for a statute of limitations of six years from the time when a claim accrues.

Campus Mgmt. Corp., ASBCA Nos. 59924 et al. (Apr. 20, 2017)

CMC contracted to obtain software and associated licenses for use by students at the National Defense University.  After the contract was completed and CMC was paid for its last invoice, CMC submitted a claim for interest on tardy payments for invoices submitted prior to the termination of the contract.

The ASBCA (Prouty, A.J.) rejected the government's argument that because payment of the invoices was never in dispute, it should not be obligated to pay interest to CMC after submission of the claim.  In essence, the government was arguing that a dispute is a necessary element of a claim under the CDA and that without a valid claim, there could be no CDA interest.  However, the Board held that an invoice could become the subject of a claim if it is disputed or the government unreasonably delays payment of the invoice.  Accordingly, the Board found that the government had unreasonably delayed its payment of invoices and was entitled to interest.

Clear Creek Cmty. Servs. Dist. v. United States, No. 10-420C (Fed. Cl. May 17, 2017)

In 1963, Clear Creek entered into a contract with the Department of Interior's Bureau of Reclamation ("BOR") whereby BOR agreed to construct a water distribution system and then transfer the system to Clear Creek for operation and maintenance.  In 2010, Clear Creek asserted a number of claims against BOR, including a breach of contract claim regarding the structure of the water conduit, and a claim that BOR bore a contractual responsibility to repair a toppled concrete vault.

The government moved to dismiss both claims as untimely, and the Court of Federal Claims (Sweeney, J.) agreed.  The court found that Clear Creek had been aware of the deficiencies underlying both claims as early as 2002.  Specifically, the court observed that Clear Creek knew about the corroding valves within the conduit as early as 1988, and had orally expressed concern about them sometime before October 2002.  The court stressed that this initial concern "should have triggered an investigation . . . into the nature of the alleged deficiencies," which would have revealed the structural problems underlying Clear Creek's breach of contract claim.  As for the collapsed concrete vault, the court found that because Clear Creek was also aware that the vault was collapsed as early as 2002, "it was on notice that it had a potential cause of action that demanded investigation," and it was that initial discovery of a problem that "trigger[ed] the accrual of plaintiff's claim, not its understanding of the exact nature of its claim."

2.     Standing

A decision from the ASBCA considered who is an appropriate representative for a contractor in a CDA appeal, while a decision from the CBCA considered whether a contractor that changed its name still had standing to appeal.

TKC Int'l LLC, ASBCA No. 59784 (Apr. 6, 2017)

The Navy awarded TKC several contracts related to technical expertise and program management.  After the Defense Contract Audit Agency determined that TKC's indirect cost rate proposals were inadequate, the contracting officer issued a final decision seeking reimbursement of indirect costs.  A notice of appeal was subsequently lodged by a former officer of TKC, who failed to describe his legal relationship with the company.  The Navy moved to dismiss the appeal, arguing that TKC's representative was not a corporate officer of the company and could not bring the appeal. 

The Board (Paul, A.J.) held that TKC had the burden of proving that the representative qualified as an "officer" of TKC, and since the representative was no longer an officer of TKC, he could not represent TKC in its appeal.  The Board accordingly dismissed the appeal.

Eastco Bldg. Servs. v. GSA, CBCA No. 5272 (Mar. 2, 2017)

The government awarded a Federal Supply Schedule contract to Eastco, which thereafter changed its legal name to United Facility Services Corporation ("UFSC") while continuing to do business under the Eastco name.  The parties then executed a blanket purchase agreement and task order for operations and maintenance at three federal buildings in Miami pursuant to the original FSS contract with "Eastco."  Eventually, GSA and UFSC modified all relevant contracts so that they were in UFSC's name, but noting that UFSC was doing business as Eastco.  A dispute arose over a request for an equitable adjustment, and the company filed an appeal to the CBCA under the Eastco name.  The government moved to dismiss the appeal, alleging that only UFSC, not Eastco, was in privity of contract with the government.

The Board (Lester, A.J.) rejected the government's argument.  While the CBCA only has jurisdiction under the CDA to hear claims where there is privity of contract, the Board found that the government modified its contract knowing that Eastco was alternate name for UFSC.  Finding that operating a business under two different names does not alone create two separate entities, the Board held that GSA clearly knew that Eastco and UFSC were the same entity and, therefore, privity of contract existed.

3.     Claim Certification

In two cases, the ASBCA and Court of Federal Claims considered whether a demand for payment in connection with negotiations to definitize a contract, or the submission of an invoice, could constitute a certified claim under the CDA.

Kandahar Gravel Supplies & Logistics, ASBCA No. 60531 (Mar. 7, 2017)

The Army awarded a contract to Kandahar for the provision of gravel and other supplies and services.  Kandahar never commenced performance on the contract and the Army issued a notice of termination for default.  Four years later, Kandahar submitted an invoice requesting payment for work allegedly performed, which the contracting officer denied because the wrong contract number was listed and no such contract existed in the Army's contracting database.  After Kandahar appealed, the Army moved to dismiss on the grounds that the Board lacked jurisdiction because Kandahar failed to submit a certified claim to the contracting officer prior to initiating the appeal.

The Board (D'Alessandris, A.J.) held that Kandahar did not file an actual claim because a written demand seeking the payment of money that exceeds $100,000 must be certified prior to filing an appeal to constitute a "claim" under the FAR.  Accordingly, the Board granted the Army's motion to dismiss the appeal for lack of jurisdiction.

L-3 Comms. Integrated Sys. L.P. v. United States, No. 16-1265C (Fed. Cl. May 31, 2017)

L-3 entered an "undefinitized contractual action" ("UCA") with the Air Force in which it agreed to provide certain training services while still negotiating the terms of the contract.  After the parties failed to reach agreement on the prices for two line items in the UCA, the Air Force issued a unilateral contract modification, setting prices for those line items and definitizing the contract.  L-3 argued that the Air Force's price determination was unreasonable, arbitrary and capricious, and in violation of the FAR, and filed suit seeking damages.  The government moved to dismiss for lack of subject matter jurisdiction.

The Court of Federal Claims (Kaplan, J.) dismissed L-3's complaint, concurring with the government that L-3 had never presented a certified claim to the contracting officer for payment "of a sum certain to cover the losses it allegedly suffered."  The court found that the proposals L-3 had presented to the Air Force were not "claims," but rather proposals made during contract negotiations that did not contain the requisite claim certification language.

4.     Requirement for a Sum Certain

The ASBCA also issued two decisions analyzing whether contractors had adequately claimed a "sum certain," a jurisdictional prerequisite under the CDA and FAR definition of "claim."  These decisions make clear that even if some components of a claim are for specific damages, if other components of the claim are unspecified, that can be enough to divest the tribunal of jurisdiction over the entire case for failure to state a total claim for a sum certain.

Islands Mech. Contractor Inc., ASBCA No. 59655 (Apr. 13, 2017)

The Navy awarded IMC a contract to provide wastewater treatment system repairs.  After alleging that the Navy provided defective plans and specifications, IMC submitted a request for equitable adjustment, which it thereafter certified.  After the Army failed to respond, IMC filed a deemed denial appeal with the ASBCA seeking nearly $2 million in specified damages for equipment and home office overhead costs, as well as $373,000 for additional work that IMC proposed to do in order to complete the contract.

The Board (Sweet, A.J.) held that it did not possess jurisdiction over the appeal because IMC failed to demand a sum certain in its claim.  The claims for nearly $2 million in specific costs incurred as a matter of right were valid, but the $373,000 for work proposed, but not yet ordered to be performed, was not.  Because the overall "claim" must be for a sum certain, the Board refused to allow the appeal to proceed only with the specified costs; the additional, indefinite proposed costs divested the Board of jurisdiction over the entire appeal. Further, because claims may not be asserted for the first time in the complaint but must be in the claim presented to the contracting officer, the Board refused to permit IMC to amend its complaint to correct the deficiency.

Melwood Horticultural Training Ctr., ASBCA No. 60666 (June 7, 2017)

Melwood entered into a contract with the government to perform facility maintenance services at Fort Meade in Maryland.  Melwood sought additional funds for reimbursement of retention bonuses, subcontractor payments, and anticipatory lost profits in an amount "TBD."  The contracting officer responded to Melwood's request with a letter requesting additional information and explicitly stating "[t]his is not a final decision of the contracting officer."  Melwood did not respond to the letter, but rather filed an appeal with the ASBCA.

The Board (Woodrow, A.J.) held that because the total amount requested was unspecified and "to be determined," the total amount claimed could not be readily calculated, and therefore the Board did not have jurisdiction to hear the appeal.  While Melwood argued that the "TBD" sums could be calculated from information in the government's possession, the Board rejected this argument for two reasons:  (1) Melwood did not explain how the government would make such a calculation; and (2) Melwood's submittal did not identify the specific contracts that would give rise to the lost profits dollar amounts.  Further, as in the IMS case discussed immediately above, the Board declined to assert jurisdiction over the portions of the claim containing specific amounts, finding that if a portion of a claim does not contain a sum certain, the submission to the contracting officer does not satisfy the definition of a claim.  For all of these reasons, the Board dismissed the appeal.

C.     Requirement for a Contracting Officer's Final Decision

A number of decisions from the tribunals that hear government contracts disputes dealt with the CDA's requirement that a claim have been "the subject of a contracting officer's final decision."

Andrews Contracting Servs., ASBCA No. 60808 (May 22, 2017)

ACS submitted a request for equitable adjustment to the contracting officer.  The contracting officer responded with a letter denying the request and, without stating whether it was or was not a final decision, advising that "[i]f ACS wishes to continue this request for equitable adjustment then do so in accordance with contract clause 52.233-1 Disputes."  ACS thereafter filed an appeal with the ASBCA, which the government moved to dismiss for failure to submit a certified claim to the contracting officer.

The Board (McIlmail, A.J.) held that because the contractor's request did not implicitly or explicitly request a contracting officer's final decision, and because the reference to the Disputes clause in the contracting officer's response did not substitute as a request for a final decision, the Board lacked jurisdiction.  The Board therefore dismissed ACS's appeal.

Foxy Constr., LLC v. Dep't of Agriculture, CBCA No. 5632 (Mar. 13, 2017)

The Department of Agriculture awarded Foxy a fixed price contract for the relocation of a U.S. Forest Service bunkhouse and visitor center near Las Vegas, Nevada.  By four separate letters, Foxy requested additional payments from the government to account for changes to the scope of the project.  The contracting officer denied each of the requests for various reasons, including a lack of detail, the format in which they were written, and failure to certify the request.  Finally, Foxy submitted a notice of appeal to the CBCA.

The Board (Lester, A.J.) determined that it lacked jurisdiction to hear Foxy's claims and accordingly dismissed the appeal.  The Board found that Foxy's letters failed to request a final decision and were uncertified.  Although the contracting officer issued a final decision in response to at least one letter, the government cannot confer jurisdiction on the Board by issuing a decision on an uncertified claim.

*          *          *

In a pair of decisions, the Court of Federal Claims considered when the Court may retain jurisdiction over claims that were not submitted to the contracting officer for a final decision.

Kansas City Power & Light Co. v. United States, No. 15-348C (Fed. Cl. Mar. 27, 2017)

KCPL contracted with the government to provide electrical utility services to a federal property.  The contract included a tariff schedule providing for indemnity.  During performance of the contract, an employee received fatal burns from a blast on site and his wife sued KCPL for negligence and loss of consortium.  The parties eventually settled the suit, after which KCPL submitted a certified claim to the contracting officer to recover the amount paid in the settlement as well as the costs of litigation.  When the contracting officer issued a final decision denying the claim, KCPL filed a complaint in the Court of Federal Claims.

We reported in our 2016 Mid-Year Government Contracts Litigation Update on the government's unsuccessful motion to dismiss portions of KCPL's complaint as contradictory to the claim before the contracting officer, thus rendering that portion of the complaint outside of the claim over which the court had jurisdiction.  The court (Sweeney, J.) rejected that argument, holding that "even though the complaint adds a detail that was not contained within the text of the certified claim and was not referenced by the CO in his final decision, the operative facts underlying both are the same."  This year, it was KCPL's turn to try and strike a portion of a pleading based on what was submitted to the contracting officer.

After its motion to dismiss was denied, the government filed an amended answer asserting seven affirmative defenses, including offset.  KCPL moved to strike the offset defense as not presented to the contracting officer, but Judge Sweeney again rejected this argument.  Although the defense had not been raised before the contracting officer, the court found that the defense was not a claim in the typical sense:  it did not involve any request for relief under the contract, but instead sought to offset a claim for reimbursement of monies otherwise paid.  The court therefore found that a contracting officer did not need to consider the merits of the reimbursement for the court to have jurisdiction to address the defense.

Walsh Constr. Co. v. United States, No. 16-845 (Fed. Cl. May 31, 2017)

Walsh submitted a certified claim for equitable adjustment in connection with its contract to construct a number of "drilled piers" for the Army Corps of Engineers.  Walsh asserted in the request that additional work was necessary because of differing site conditions and disruption of work flow due to numerous "unnecessary inspections."  The contracting officer denied the claim, and Walsh filed suit in the Court of Federal Claims asserting three counts:  government-caused delay, breach of good faith and fair dealing, and differing site conditions.  The government moved to dismiss the first two counts as not submitted to the contracting officer.

The court (Braden, C.J.) split the difference, denying the motion with respect to government-caused delay and granting it with respect to breach of good faith and fair dealing.  As to government-caused delay, Chief Judge Braden explained that the claim filed in court need not parrot "the exact language or structure" of the claim filed with the contracting officer; rather, it need only contain the same "operative facts" and request "essentially the same relief."  Despite the fact that Walsh attributed the additional costs to a "differing site condition" in the claim for equitable adjustment and as "Government-caused delay" in the complaint, the court nonetheless found that they contained allegations of the "same 'operative facts.'"  But with respect to the good faith and fair dealing count, the court agreed that the "operative facts [set forth in the request for equitable adjustment] were not sufficient to alert the contracting officer of the possibility of a claim for breach of the duty of good faith and fair dealing."  Nonetheless, the court stayed the case for three months to allow Walsh the opportunity to "present a claim for a breach of the duty of good faith and fair dealing to the CO for a final decision," finding that it would be inequitable to dismiss one count when the other two had been properly submitted to the contracting officer.

*          *          *

Two cases from the boards considered whether a contracting officer's denial of a claim was required to proceed with the instant appeal.

Savannah River Nuclear Solutions, LLC v. Dep't of Energy, CBCA 5287 (May 12, 2017)

In this case, the CBCA addressed the jurisdictional questions of whether a deemed denial results where a contracting officer asserts that he lacks authority to decide a claim based on suspicion of fraud.  The underlying dispute arose from Savannah River's contention that certain costs were allowable, which the contracting officer refused to decide based upon a False Claims Act case filed after the certified claim was submitted.  The Board (Goodman, A.J.) held in accordance with Court of Federal Claims precedent that a contracting officer lacks authority to decide a claim when a suspicion of fraud exists.  The Board further determined that when a contracting officer is divested of authority to issue a final decision on a CDA claim, there is no deemed denial of claim to confer jurisdiction to the Board.

ABS Dev. Corp., ASBCA Nos. 61042 et al. (June 14, 2017)

ABS submitted a certified claim in December 2016, to which the contracting officer responded in February that she "intend[ed] to issue a final decision by 5 May 2017."  Rather than wait until May, the contractor filed an appeal the same day that it received the response from the contracting officer, asserting that a reasonable time had passed and thus there was a deemed denial of the claim.  The government moved to dismiss.

The Board (McIlmail, A.J.) initially stayed the appeal until the May 5 date set forth in the contracting officer's response.  When no response was submitted, and no timeline set forth by the government as to when it would come, the Board held that it did not need to decide whether the original appeal was untimely because, under the CDA, contracting officers must issue a decision within 60 days or otherwise notify the contractor of the (reasonable) time within which a decision will be made.  Because the contracting officer had not issued a final decision, had missed the date by which the officer intended to issue a decision, and had provided no follow-up indicating the necessity for more time to issue a decision, the Board held that an unreasonable amount of time had passed, and denied the government's motion to dismiss.

IV.     TERMINATIONS

The ASBCA issued two noteworthy decisions during the first half of 2017 arising from contract terminations for default.

Delfasco LLC, ASBCA No. 59153 (Feb. 14, 2017)

Delfasco had a contract with the Army for the manufacture and delivery of a specified number of munition suspension lugs.  The Army thereafter exercised an option to double the number of lugs required.  When Delfasco stopped making deliveries due to an inability to pay its subcontractor, the Army terminated the contract for default.  Delfasco appealed to the ASBCA, asserting that the government had waived its right to terminate for untimely performance by allegedly stringing Delfasco along even after the notice of termination.

The Board (Prouty, A.J.) set out the test for waiver in a case involving termination for default due to late delivery as follows:  "(1) failure to terminate within a reasonable time after the default under circumstances indicating forbearance, and (2) reliance by the contractor on the failure to terminate and continued performance by him under the contract with the Government's knowledge and implied or express consent."  The Board held that Delfasco failed to satisfy the first prong because the government's show cause letter placed Delfasco on notice that any continued performance would only be for the purpose of mitigating damages.  Moreover, Delfasco failed to satisfy the second prong because Delfasco's payment to its subcontractor after the show cause letter would have been owed regardless, and was not paid in reliance upon the government's failure to terminate.  Therefore, the Board found that the government had not waived its right to terminate, and denied the appeal.

Pyrotechnic Specialties, Inc., ASBCA Nos. 57890 et al. (March 13, 2017)

After the Army rejected two production lots under a contract with PSI because they failed to pass multiple acceptance tests, the contractor was placed in delinquent status under the contract's delivery schedule.  Thereafter, the contract was terminated for default.  PSI filed an appeal with the ASBCA seeking to recover unreimbursed costs and alleging that the government wrongfully rejected one of the production lots.

The Board (Page, A.J.) noted that where the contractor alleges that it complied with the contract's specifications, the contractor bears the burden of proving its compliance with the contract's specifications.  Here, PSI did not meet that burden because it failed to provide any evidence that it substantially complied with the contract's plans and specifications.  The Board further rejected PSI's contention of a prior course of dealing based on two prior instances of the different performance.  Accordingly, the Board denied the appeal.

V.     CONTRACT INTERPRETATION

A number of noteworthy decisions from the first half of 2017 articulate broadly applicable contract interpretation principles that should be considered by government contractors.

U.S. Coating Specialties & Supplies, LLC, ASBCA No. 58245 (Apr. 6, 2017)

A settlement during bankruptcy proceedings resulted in the termination for default of one of U.S. Coating's government contracts.  In the instant appeal, U.S. Coating asserted that it agreed to the settlement under the mistaken belief that the contract termination would not be for default, but rather for convenience.  The government moved for summary judgment arguing:  (1) that U.S. Coating's allegation of a prior agreement was barred by the parol evidence rule; and (2) even if consideration of the prior agreement were not barred, the statement by an Assistant U.S. Attorney upon which U.S. Coating based its belief is not a proper authority to bind the government.

The Board (Woodrow, A.J.) denied summary judgment because there was evidence that a separate oral agreement existed with the government that entirely contradicted the government's contention that the settlement was integrated.  The Board further held that the government attorney had actual authority to bind the government under 28 U.S.C. § 516, which statutorily delegates settlement authority to the U.S. Department of Justice.  Therefore, because of the bankruptcy filing, the DOJ and its officers had actual authority to supervise and conduct all litigation.  Moreover, the bankruptcy filing imposed an automatic stay prohibiting the contracting officer from commencing administrative actions or proceedings.  Accordingly, the government could not terminate the contract for default absent permission from the Bankruptcy Court.

IAP Worldwide Servs., Inc., ASBCA Nos. 59397 et al. (May 17, 2017)

IAP contracted to provide power plants to military bases in Afghanistan, which required delivery into the country from Pakistan.  After the government provided notice to IAP to proceed with some of the contract deliveries, Pakistan closed its borders for seven months.  IAP filed an appeal with the ASBCA seeking an equitable adjustment for costs incurred in connection with the border closure.

The Board (Melnick, A.J.) held that IAP was entitled to an equitable adjustment based on the doctrine of constructive acceleration.  Constructive acceleration occurs when the government demands compliance with an original contract deadline, despite there being an excusable delay.  The Board found that IAP could not have foreseen the border closure, that the closure was out of IAP's control, and that IAP was entitled to recover the significant additional expense it incurred in meeting the government's insisted deadline notwithstanding the border closure.  The Board rejected separate commercial impracticability and warranty of availability claims by IAP.

Paradise Pillow, Inc. v. GSA, CBCA No. 5237-C (Feb. 1, 2017)

The government contracted with Paradise Pillow to provide the Federal Emergency Management Agency with 150,000 blankets for victims of a hurricane.  After Paradise Pillow delivered the blankets, the government decided that the blankets were not necessary and the parties agreed that the government would be able to return the blankets in return for a 35% restocking fee.  Two days later, the government sent Paradise Pillow a letter cancelling the contract "in its entirety."

The CBCA (Daniels, A.J.) granted Paradise Pillow summary relief, finding that a clause in the original contract ("RESTOCKING:  Not applicable.") "did not preclude the parties from agreeing . . . to modify the delivery order to have the contractor retrieve and restock" the goods.  The Board found that the government had agreed to the modification in an arm's-length negotiation, and the modification was valid.

Agility Def. & Gov't Servs., Inc. v. United States, 847 F.3d 1345 (Fed. Cir. 2017)

In 2007, the Defense Reutilization and Marketing Service ("DRMS") solicited bids for a five-year contract to dispose of military equipment.  Throughout the bidding process, DRMS fielded multiple requests to disclose the anticipated workload for the contract.  Over the course of multiple responses, DRMS provided historical workload data and stated that it anticipated an increase relative to historical data.  In the contract ultimately awarded to Agility, a clause stated, "the contractor may experience significant workload increases or decreases," and specified a process for the contractor to "renegotiate the price" if the workload increased 150% over the average workload of the three previous months.  Immediately after commencing performance, Agility realized that the workload was substantially higher than predicted and immediately sought to renegotiate the price, arguing that the workload at the outset was over 150% greater than the historical data DRMS had provided.  DRMS denied the request, asserting that the contract measured the 150% threshold from the workload at the beginning of Agility's performance, not the historical data.

As noted in our 2015 Year-End Government Contracts Litigation Update, Agility filed suit in the Court of Federal Claims, which found for DRMS.  Agility appealed to the Federal Circuit and, in an opinion issued in February 2017, the Federal Circuit (Moore, J.) reversed.  The court held that DRMS failed to provide Agility with a realistic workload estimate in violation of FAR 16.503, noting that the estimates DRMS provided were negligent in light of a 2007 DRMS memo concluding that there would be an imminent "surge of equipment and material" that would be turned into DRMS.

VI.     SERVICE CONTRACT ACT

The McNamara-O'Hara Service Contract Act, 41 U.S.C. § 6701 et seq., establishes labor standards for government contracts and subcontracts over $2,500 where the principle purpose of the contract is to furnish services in the United States through the use of service employees.  In the first half of 2017, the Federal Circuit considered whether government contractors are entitled to a price adjustment for increased costs of providing a defined benefit pension pursuant to the Multiemployer Pension Protection Amendments Act of 1980 (MPPAA).

Call Henry, Inc. v. United States, 855 F.3d 1348 (Fed. Cir. 2017).

Call Henry had a follow-on contract with NASA to provide inspection, maintenance, and testing services.  The contract was subject to the Service Contract Act ("SCA"), 41 U.S.C. § 6701 et seq., which entitles a contractor's covered service employees to certain wage and fringe benefit standards.  Additionally, for follow-on contracts resulting from competitive bid, employees under a collective bargaining agreement cannot be deprived of benefits their representative negotiated under the predecessor contract.  Due to the increased cost of complying with these provisions, contractors may be entitled to an upward contract price adjustment under the SCA.  In this case, Call Henry had negotiated a collective bargaining agreement under the predecessor contract, requiring contributions to the union's pension plan, but during the follow-on contract its employees voted to associate with a new union.  This triggered withdrawal liability under the prior pension plan, for which Call Henry submitted a claim that NASA denied.

Call Henry filed suit in the Court of Federal Claims, which dismissed the case on the pleadings.  On appeal, the Federal Circuit (Reyna, J.) upheld the dismissal, holding that Call Henry was not entitled to an upward price adjustment under the SCA.  The SCA price adjustment clause, FAR 52.222–43(d), covers increased costs incurred complying with a "wage determination otherwise applied to the contract."  However, Call Henry had independently negotiated the prior collective bargaining agreement; Call Henry's contract with NASA itself did not require Call Henry to pay withdrawal liability costs.  Therefore, the withdrawal liability was not an increased cost of complying with a wage determination and not entitled to an adjustment in contract price.

VII.     COMMON LAW PRINCIPLES

The boards of contract appeals and Court of Federal Claims addressed a number of issues during the first half of 2017 arising out of the body of federal common law that has developed in the context of government contracts.

A.     Christian Doctrine

Under the Christian doctrine, a mandatory contract clause that expresses a significant or deeply ingrained strand of procurement policy is considered to be included in a contract by operation of law.  G.L. Christian & Assocs. v. United States, 312 F.2d 418, 426 (Ct. Cl. 1963).  The ASBCA considered whether FAR 52.228-15, Performance and Payment Bonds—Construction, was such a mandatory clause.

K-Con, Inc., ASBCA Nos. 60686 et al. (Jan. 12, 2017)

K-Con was awarded two firm-fixed-price contracts for the design and construction of a laundry facility communications equipment shelter at Camp Edwards in Massachusetts.  After awarding both contracts, but before issuing a notice to proceed for either contract, the government requested that K-Con provide performance and payment bonds despite the absence of bonding requirements in either contract.  The government acknowledged that K-Con would need to charge the government for the bonding fees.  It took several years for K-Con to obtain the required bonding, and when it did it submitted a request for equitable adjustment not only for the bonding costs but also for the cost escalation over this period.  The government accepted only the increased cost for the bond and denied the rest.  K-Con appealed.

The Board (Woodrow, A.J.) determined that, under the Christian Doctrine, the FAR 52.228-15 bonding clause was included in the original contract by operation of law because it was both mandatory and represented a significant public procurement policy.  Thus, it denied the appeals.

B.     Injunctive Relief for Performance Reviews

CompuCraft, Inc. v. GSA, CBCA No. 5516 (Mar. 1, 2017)

CompuCraft had a contract for services related to the heating, ventilation, and air conditioning system at the Savannah Tomochichi Federal Building and Courthouse.  In 2015, CompuCraft completed its obligations under the contract and received payment in full.  Six months later, the contracting officer posted an evaluation of CompuCraft with negative ratings and a recommendation that CompuCraft not receive similar work in the future.  CompuCraft appealed the performance evaluation as inconsistent with regulatory requirements and the government moved to dismiss.

The Board (Sullivan, A.J.) granted the government's motion to dismiss in part.  The Board found that it lacked jurisdiction to grant injunctive relief, and dismissed those portions of the complaint seeking such relief.  But it denied the motion with respect to the government's argument that those claims based on categories that had been reconsidered in the contracting officer's revised performance evaluation were moot because the overall negative rating under "management" still brought the entire dispute within the Board's purview.

C.     Fraud

We have been following in our recent publications developments in the law of whether and to what extent the ASBCA may exercise jurisdiction over claims and defenses sounding in fraud when that fraud affects the administration of government contracts.  For example, in our 2016 Year-End Government Contracts Litigation Update, we covered, among other cases, the Federal Circuit's decision in Laguna Construction Company, Inc. v. Carter, 828 F.3d 1364 (Fed. Cir. 2016), which held that as long as the ASBCA can rely upon prior factual determinations from other tribunals (such as through a guilty plea), the Board has jurisdiction to adjudicate legal defenses based upon those prior determinations.

Supreme Foodserv. GmbH, ASBCA Nos. 57884 et al. (Apr. 27, 2017)

We last checked in on the ASBCA litigation involving Supreme Foodservice in our 2016 Mid-Year Government Contracts Litigation Update.  The Defense Logistics Agency claimed that its multi-billion dollar contract with Supreme Foodservice for the delivery of food, water, and other products to U.S. military bases in Afghanistan was void ab initio based upon fraudulent overcharging of above-market prices and cited a prior guilty plea by Supreme Foodservice as the basis for prior factual determinations.  The key issue still in dispute was whether the Defense Logistics Agency was aware of the alleged overcharging and nonetheless continued to contract with Supreme Foodservice such as to give rise to a defense of waiver.

In the wake of Laguna Construction, the government moved for partial reconsideration of its prior motion for summary judgment, arguing that the Federal Circuit established a bright line standard that the government cannot have a "known right" to relinquish and waive prior to the entry of a guilty plea arising from the conduct at issue.  The Board (Scott, A.J.) rejected this argument, holding that there is no such bright line standard.  Rather, whether the government was aware of the facts underlying the fraud is a question of fact that focuses on the conduct at issue, not the existence of a guilty plea in court.  There being material facts in dispute under this standard, the Board reaffirmed its prior decision denying the government's motion for partial summary judgment.

D.     Good Faith & Fair Dealing

CanPro Invs. Ltd. v. United States, No. 16-268C (Fed. Cl. Jan. 26, 2017)

CanPro contracted with GSA to lease space in a Boca Raton commercial building to the Social Security Administration.  CanPro alleges that it expected no more than 250 visitors to the space per day, which was consistent with the office space, but after the Social Security Administration closed the nearest branch office the number of daily visitors increased to over 500.  CanPro filed a complaint in the Court of Federal Claims alleging breach of contract and of the implied duty of good faith and fair dealing.

The Court of Federal Claims (Sweeney, J.) dismissed CanPro's breach of contract claims on the pleadings, but denied the motion to dismiss the claims alleging breach of the implied duty of good faith and fair dealing.  Notwithstanding the lack of a specific lease provision regarding the number of daily visitors, the court found that GSA had an implied duty of good faith and fair dealing and the "normal and customary" use provision of the lease implicitly limited daily visitors to a reasonable number.  The court found that GSA adequately stated a claim and that CanPro could establish damages from "excessive overcrowding" if this was reasonably foreseeable to GSA at the time of contracting.

Horn & Assocs., Inc. v. United States, No. 8-415C (Fed. Cl. May 25, 2017)

NASA awarded a contract to Horn to assist with the recovery of errant payments made to other contractors, providing for a 13.5% contingency fee on all recoveries.  Over the course of the contract, Horn identified and submitted 402 claims to NASA, of which NASA approved and paid only 40.  Horn filed suit in the Court of Federal Claims.

Following a "lengthy trial," the court (Horn, J.) agreed with Horn that the government breached both the contract and its implied duty of good faith and fair dealing, finding that NASA's conduct was "not in line with plaintiff's reasonable expectations under the contract."  The court noted that NASA's delays both in providing Horn with the data it needed to complete payment audits, as well as in reviewing the claims submitted by Horn, materially impacted Horn's ability to perform under the terms of the contract.  The court did not, however, go so far as to find that NASA acted in bad faith, given the large amount of general intra-agency confusion over the scope of the contract and the "high standards to prove bad faith."

E.     Sovereign Acts Doctrine

Another important common law limitation on a contractor's ability to obtain damages from the government is the sovereign acts doctrine, which insulates the government from liability for acts taken in its sovereign (not contractual) capacity.

Garco Constr., Inc. v. Sec'y of the Army, 856 F.3d 938 (Fed. Cir. 2017).

Garco's subcontractor was hired to work on housing construction on Malmstrom Air Force Base in Montana.  In October 2007, base command staff promulgated a memorandum providing that individuals with certain criminal records would be denied access to the installation.  Garco submitted a request for equitable adjustment on the ground that its subcontractor had planned to use some individuals with criminal records on its work at Malmstrom, and that these base access restrictions made it more difficult to complete performance.  The request was denied and, as set forth in our 2015 Year-End Government Contracts Litigation Update, the ASBCA rejected Garco's appeal under the sovereign acts doctrine.

On appeal, the Federal Circuit (Stoll, J.) affirmed but for a different reason.  Garco conceded before the court that the base access restriction did constitute a sovereign act, but nevertheless argued that the memorandum constituted a change of policy that effected a compensable constructive acceleration of the contract.  The court rejected the argument that the memorandum constituted a change to prior base access policy, finding that it did not and thus could not constitute an unforeseeable change.  In a dissenting opinion, Judge Wallach contended that the case should have been remanded to the ASBCA for further findings to establish whether the government should be released from liability for its sovereign act.

VIII.     CONCLUSION

We will continue to keep you informed on these and other related issues as they develop.




The following Gibson Dunn lawyers assisted in the preparation of this client update: Karen L. Manos, John W.F. Chesley, Lindsay M. Paulin, Lauren M. Assaf, Matthew P. O’Sullivan, Pooja R. Patel and Casper J. Yen.

Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding the issues discussed above.  Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following:

Washington, D.C.
Karen L. Manos (+1 202-955-8536, kmanos@gibsondunn.com)
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February 2, 2017 |
2016 Year-End Government Contracts Litigation Update

In this Government Contracts Litigation Update, Gibson Dunn examines trends and summarizes key decisions of interest to government contractors from the second half of 2016.  This publication covers the waterfront of the most important opinions issued by the U.S. Court of Appeals for the Federal Circuit, U.S. Court of Federal Claims, Armed Services Board of Contract Appeals, and Civilian Board of Contract Appeals, among other tribunals. This second half of the year yielded 5 government contracts-related opinions from the Federal Circuit, excluding decisions related to bid protests.  From July 1 through December 31, 2016, the U.S. Court of Federal Claims issued 37 substantive government contracts-related Orders and Opinions, the Armed Services Board of Contract Appeals ("ASBCA") published 47 substantive government contracts decisions, and the Civilian Board of Contract Appeals ("CBCA") issued 64 substantive decisions.  The cases discussed herein address a wide range of issues with which government contractors should be familiar, including issues of contract interpretation, jurisdictional requirements, and the various topics of federal common law that have developed in the government contracts arena.  Broadly speaking, these decisions can be grouped into five main categories: (1) jurisdictional matters; (2) terminations; (3) contract interpretation issues; (4) damages; and (5) common law principles.  Before addressing each of these areas in turn, we briefly discuss the tribunals that adjudicate government contracts disputes.

I.      THE TRIBUNALS THAT ADJUDICATE GOVERNMENT CONTRACT DISPUTES

Under the doctrine of sovereign immunity, the United States generally may not be sued unless it has waived its immunity and consented to suit.  Pursuant to statute, the Government has waived immunity over certain claims arising under or related to federal contracts through the Contract Disputes Act, 41 U.S.C. §§ 7101 - 7109 ("CDA"), and through the Tucker Act, 28 U.S.C. § 1491.  Under the CDA, any claim arising out of or relating to a government contract must be decided first by a contracting officer.  A contractor may contest the contracting officer's final decision by either filing a complaint in the U.S. Court of Federal Claims or appealing to a board of contract appeals.  The Tucker Act, in turn, waives the Government's sovereign immunity with respect to certain claims under statute, regulation, or express or implied contract, and grants jurisdiction to the Court of Federal Claims to hear such claims.  The CDA waives the Government's sovereign immunity with respect to claims arising under or relating to an executive agency contract. The Court of Federal Claims thus has jurisdiction over a wide range of monetary claims brought against the U.S. Government including, but not limited to, contract disputes and bid protests pursuant to both the CDA and the Tucker Act.  For example, if a contractor's claim is founded on the Constitution or a statute instead of a contract, there is no CDA jurisdiction in any tribunal, but the Court of Federal Claims would have jurisdiction under the Tucker Act as long as the substantive source of law granted the right to recover damages.  Thus, the Court of Federal Claims' jurisdiction is broader than that of the boards of contract appeals. In addition to establishing jurisdiction for certain causes of action in the Court of Federal Claims, the CDA establishes four administrative boards of contract appeals:  the Armed Services Board, the Civilian Board, the Tennessee Valley Authority Board, and the Postal Service Board.  See 41 U.S.C. § 7105.  The ASBCA hears and decides post-award contract disputes between contractors and the Department of Defense and its military departments, as well as NASA.  In addition, the ASBCA adjudicates contract disputes for other departments and agencies by agreement.  For example, the U.S. Agency for International Development has designated the ASBCA to decide disputes arising under USAID contracts.  The ASBCA has jurisdiction pursuant to the CDA, its Charter, and certain remedy-granting contract provisions.  The CBCA hears and decides contract disputes between contractors and civilian executive agencies under the provisions of the CDA.  The CBCA's authority extends to all agencies of the federal government except the Department of Defense and its constituent agencies, NASA, the U.S. Postal Service, the Postal Regulatory Commission, and the Tennessee Valley Authority.  In addition, the CBCA has jurisdiction, along with federal district courts, over Indian Self-Determination Act contracts. The U.S. Court of Appeals for the Federal Circuit hears and decides appeals from decisions of the Court of Federal Claims, the ASBCA, and the CBCA, among numerous other tribunals outside the area of government contract disputes.  Significantly, the Federal Circuit has a substantial patent and trademark docket, hearing appeals from the U.S. Patent and Trademark Office and federal district courts, that by volume of cases greatly exceeds its government contracts litigation docket.  Of 1,524 cases pending before the Federal Circuit as of December 2016, 12 were appeals from the boards of contract appeals and 119 were appeals from the Court of Federal Claims – cumulatively comprising roughly 8.6% of the appellate court's docket.  Nevertheless, the Federal Circuit is the court of review for most government contracts disputes. The ASBCA saw additional new appointments to its bench during the second half of 2016.  Judges Donald E. Kinner and James R. Sweet were appointed to the ASBCA in July 2016 and December 2016, respectively.  Both new appointees hailed most recently from the U.S. Department of Justice's Civil Division, which represents the Government before the Court of Federal Claims.  Additionally, Judge John J. Thrasher, who has served on the Board since February 2011, was appointed Chairman of the ASBCA effective December 5, 2016. There are currently six vacant judgeships on the U.S. Court of Federal Claims, the most recent resulting from the retirement of Judge Lawrence Block in January 2016.  The Court lost an additional judicial officer with the death of Senior Judge James F. Merow on December 23, 2016.  In September 2016, Senator Tom Cotton (R-Ark.) objected (again) to a unanimous consent request to confirm Court of Federal Claims nominees put forward by Senator Chris Coons (D-Del.), arguing that appointing additional judges to the Court would waste taxpayer money. Senator Cotton had previously blocked an effort to vote on the confirmation of then-pending five nominees in July 2015 on the same basis. These six vacancies are among the approximately 103 total federal judicial vacancies inherited by the new Trump Administration.

II.      JURISDICTIONAL ISSUES

As they frequently do, jurisdictional issues dominated the landscape of key government contracts decisions during the second half of 2016.

      A.      Requirement for a Valid Contract

In order for the ASBCA or CBCA to exercise jurisdiction over a claim, there must be a contract from which that claim arises.  See FAR 33.201 (defining a "claim" as "a written demand or written assertion by one of the contracting parties seeking. . . relief arising under or relating to this contract").  The Court of Federal Claims and boards of contract appeals issued numerous decisions during the second half of 2016 addressing what constitutes a valid contract from which a claim may arise. These decisions addressed two primary issues: (1) the types of agreements to which the CDA applies; and (2) whether a valid agreement exists so as to confer CDA jurisdiction.

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In a trio of cases decided this year, the Court of Federal Claims looked to the policy rationales behind the CDA to determine whether particular types of contracts were subject to the CDA, and thus whether the Court had jurisdiction over the disputes.                       Anchor Tank Lines, LLC. v. United States, 127 Fed. Cl. 484 (July 15, 2016) In February 2011, plaintiffs signed a purchase agreement to acquire Old Anchor, an oil and transportation company owned and operated by the Government, following the indictment of the company's shareholders and managers.  The purchase agreement identified Old Anchor as the Seller and the United States as Old Anchor's sole shareholder following the criminal forfeiture of the stock to the Government.  Prior to this sale, several pension funds had obtained judgments for Old Anchor's required pension fund contributions that had not been paid while the Government operated Old Anchor.  These funds sued the plaintiffs to collect on these judgments, and the plaintiffs in turn sought indemnification from the Government under the purchase agreement.  The Government moved to dismiss the indemnification claim, in part, on the basis that the CDA barred the claims because they "were not first submitted to and denied by a 'contracting officer.'" The Court of Federal Claims (Lettow, J.) disagreed, noting that the CDA does not apply to "contracts that do not comport with the 'cost and competition' policy considerations underlying the CDA's enactment by Congress, and where applying the CDA would not 'do justice to the realities of the situation.'"  The purchase agreement at hand, executed in the context of an ongoing federal investigation, did not fit within the meaning of the "disposal of personal property" in the CDA.  Further, the sale of Old Anchor did not appear to occur in the context of a competitive sale.  Instead the agreement contemplated that the business would be run with certain portions of the profits going to the fines imposed on the embezzling prior shareholder.  On this basis, the Court denied the Government's motion to dismiss.                       Lee v. United States, 127 Fed. Cl. 734 (Aug. 24, 2016) In this case, the Court of Federal Claims (Lettow, J.) similarly determined that an implied breach of contract claim did not constitute the type of contract to which the CDA applies.  Plaintiffs consisted of individuals who worked for an organization within the Broadcasting Board, an independent government agency, and claimed their contracts should have been classified as personal service contracts that would have entitled them to greater pay and benefits.  Specifically, plaintiffs claimed, in part, that the Government breached implied contracts "to compensate them in the same manner as contractors performing under actual personal service contracts." The Government argued the CDA barred this claim because plaintiffs did not submit and have their claim rejected by a contracting officer.  The Court resolved the issue on other grounds, but nonetheless commented in a footnote that the CDA's requirements did not apply because plaintiffs' argument was that the contract did not arise from the Government's normal procurement efforts and as such, it "would not 'comport with the cost and competition policy considerations underlying the CDA's enactment.'"  Further, plaintiffs did not make a claim for a sum certain, instead making the broader argument that under the implied contracts they were entitled to a different, to-be-determined compensation.  This further precluded their claim from the Court's consideration under the CDA.                       Calif. Dept. of Water Res. v. United States, 128 Fed. Cl. 603 (Oct. 4, 2016) The California Department of Water Resources ("CDWR") manages certain joint state & federal water projects.  The federal and California governments entered into a various agreements regarding shared responsibility for CDWR water plants, the most important of which was a Joint Use Agreement.  CDWR claimed that these agreements entitled CDWR to recover for "scheduling coordinator charges" that it incurred on behalf of the federal government.  CDWR submitted a certified claim to the contracting officer of the United States Bureau of Reclamation ("USBR"), which the USBR rejected on January 7, 2015. CDWR brought suit in the Court of Federal Claims and the Government moved to dismiss for lack of subject-matter jurisdiction and for failure to state a claim.  The Court (Griggsby, J.) granted the Government's motion to dismiss, finding that the agreements CDWR entered into with the federal government were "cooperative agreement[s] that the Court has traditionally found to fall outside the scope of the CDA."  Judge Griggsby rejected CDWR's arguments that the contracts were contracts for procurement of property, services, or the construction, alteration, repair, or maintenance of real property.  Instead, the contracts clearly contemplated that the federal government and state government would "both be substantially involved in carrying out the activities" and therefore claims arising under them could not be brought under the CDA.

*     *     *

The CBCA addressed whether the contract underlying the dispute was a "valid" contract in two separate decisions.                       Acad. Partners, Inc v. Dep't of Labor, CBCA No. 4947 (Aug. 11, 2016) The Department of Labor ("DOL") awarded API an order to provide computer server maintenance services at several locations.  The order had a 9-month base period and two 1-year option periods.  Although DOL never exercised the options in writing, API continued to provide services at the request of DOL employees into the second option year.  After a dispute arose, API filed suit alleging that there was an "oral, implied-in-fact contract to issue renewal options." On appeal to the CBCA, DOL moved to dismiss for lack of jurisdiction or, alternatively, for failure to state a claim, arguing that API failed to allege facts sufficient to show the existence of a contract, a requirement for CDA jurisdiction.  The Board (Kullberg, A.J.) rejected this argument, stating "the determination of whether or not a contract in fact exists is not jurisdictional; it is a decision on the merits."  API's complaint alleging the existence of either an implied-in-fact or oral contract was thus sufficient to establish jurisdiction; whether API could later prove the existence of such a contract was a merits determination with no bearing on the jurisdictional issue.  The Board further noted that "a contractor can allege the existence of a contract with the Government for the continued performance of an expired contract when the Government fails to timely exercise an option," as was the case here.                       Sylvan Orr v. Dep't of Agric., CBCA No. 5299 (Oct. 18, 2016) In another case from the CBCA concerning whether the agreement at issue constituted a valid contract, Sylvan Orr appealed the contracting officer's denial of several "claims" submitted to the U.S. Forest Service ("USFS").  Among other things, Orr asserted that he should have been awarded a certain work order pursuant to an Incident Blanket Purchase Agreement ("IBPA"),  and that USFS failed to conduct a proper performance evaluation under the IBPA. The CBCA held that it lacked CDA jurisdiction to hear Orr's challenge.  With respect to USFS's decision not to award him certain work under the IBPA, the Board (Lester, A.J.) concluded that the IBPA did not constitute a binding and enforceable contract, but rather was an "illusory promise" lacking in mutuality of obligation.  With respect to Orr's challenge to USFS's deficient performance evaluation, the Board observed that although a non-monetary dispute can be the subject of a "claim" for CDA purposes, "any defect in a performance evaluation must have a prejudicial effect upon the contractor if a board is to exercise jurisdiction to entertain a challenge to it."  In this case, USFS had cancelled Orr's adverse evaluation, which mooted his claim and prevented him from showing any prejudicial effect.

      B.      Defining the Claim

Because the CDA does not define the term "claim," the courts and boards of contract appeals look to the definition set forth in the Federal Acquisition Regulation ("FAR").  FAR 33.201 defines a "claim" as "a written demand or written assertion by one of the contracting parties seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising under or relating to this contract."  Whether the courts and boards have jurisdiction over a matter therefore turns on whether there is a valid "claim" and, relatedly, how that claim is defined. Two decisions from the ASBCA considered whether the contractor had submitted a claim as required by the CDA.                       Amaratek, ASBCA No. 60503 (Sept. 7, 2016) In 2011, the Army awarded a contract to Amaratek to provide laboratory services.  After multiple contract extensions, the contracting officer notified Amaratek by letter that the Army was in-sourcing the services.  Amaratek objected by letter. Because jurisdiction requires a written claim by either the Government or a contractor, the Board (D'Alessandris, A.J.) found that Amaratek must prove that either the Army's letter or Amaratek's letter constituted a "claim."  In holding that Amaratek failed to establish a "claim," the Board explained that the Army's letter was not a "demand" or an "assertion" seeking payment; rather, it was merely a notification.  Amaratek's letter similarly failed to establish a "claim" because it was based upon a Government decision for a contract not yet in existence, thus the "claim" did not arise under or relate to the contract.  The Board also considered Amaratek's letter as more akin to a bid protest, over which the Board lacked jurisdiction.                       Alaska Aerospace Corp., ASBCA No. 59794 (Sept. 13, 2016) In 2003, the Missile Defense Agency awarded a contract to Alaska Aerospace for support services and the use of a launch complex.  The contract incorporated by reference FAR clause 52.216-7, Allowable Cost And Payment (DEC 2002), which allows reimbursement of contributions to employee pension plans.  In 2014, the Government partially disallowed costs for employee pension plans and sought to recover the disallowed costs. The Board (Melnick, A.J.) first noted that because the Government was seeking to recoup money, the case was a Government claim for which the Government bore the burden of proof.  In finding that the Government failed to meet its burden, the Board explained that the its reliance on the contracting officer's final decision as evidence of overpayment was improper.  The final decision attempted to impose a penalty, not establish recoupment as a basis for the demand for payment.  Further, findings of fact in the final decision are not binding upon the parties and was not entitled to any deference.

      C.      Adequacy of the Claim

Another common issue before the tribunals that hear government contracts disputes is whether the contractor appealed a valid CDA claim.  FAR 33.201 defines a "claim" as "a written demand or written assertion by one of the contracting parties seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising under or relating to this contract."  Under the CDA, a claim for more than $100,000 must be certified.  In the second half of 2016, the Federal Circuit and boards considered (1) when a claim accrues, and (2) whether the claim has been properly certified.

       1.      Claim Accrual and Statute of Limitations

The FAR defines "accrual" of a contract claim as "the date when all events, that fix the alleged liability of either the Government or the contractor and permit assertion of the claim, were known or should have been known."  48 C.F.R. § 33.201.  Although the CDA provides for a statute of limitations six years from the time a claim accrues, the CBCA considered when parties may contractually agree upon a different deadline to submit a valid claim.                       ThinkGlobal Inc. v. Dep't of Commerce, CBCA No. 4410 (Sept. 9, 2016) TGI entered into two related contracts with the Department of Commerce ("DOC"), in 2004 and 2009.  In 2013, TGI asserted a variety of claims against DOC, including claims for breaches of the 2004 contract. DOC moved to dismiss the breach of contract claim based on the 2004 contract.  The Board (Drummond, A.J.), recognizing that "[a] party's failure to submit a claim within six years of accrual is an affirmative defense to the claim," agreed that the claim was untimely.  The crux of TGI's claim was that DOC failed to meet its contractual obligations to provide certain contractually specified information to TGI.  Under the terms of the contract, however, DOC was to provide such information to TGI "immediately after contract signing."  Any breach therefore would have occurred "immediately after contract signing," in 2004, and TGI's breach claim would have accrued at that time.  TGI's failure to assert this claim within six years of claim accrual was fatal to the claim.                       Jonathan Noeldner v. Dep't of Agric., CBCA No. 5379 (Sept. 23, 2016) Pursuant to a timber sale contract between Noeldner and the USFS, Noeldner had 60 days from the time he received notice that a sale had closed to submit claims to the contracting officer.  In July 2015, Noeldner received notice that a sale had closed; he did not, however, file any claims until March 2016, at which time the contracting officer denied all claims on timeliness grounds. The CBCA (Daniels, A.J.) agreed that the claims were untimely.  Although the CDA generally permits a party to file a claim against the Government up to six years after accrual, parties--including the Government--are free to agree to terms that expedite the claim resolution process.  And where, as here, a contract clearly states that the contractor will lose rights if it does not make a submission within a prescribed period of time, such a limitation will be strictly enforced.  Given the unambiguous terms of the contract, Noeldner's claims were deemed untimely.                       AHTNA Environmental, Inc. v. Dep't of Transportation, CBCA No. 5456 (Dec. 22, 2016) AHTNA held a fixed price contract with the Federal Highway Administration ("FHWA"), which provided that if, after final payment, "unresolved claims exist or claims are proposed," AHTNA was required to list those claims on a release form FHWA would send upon final acceptance and verification of final pay records.  The clause further provided that failure to execute the "release of claims document within 90 days after receipt shall constitute and be deemed execution of the documents and the release of all claims against the Government arising by virtue of the contract."  After performance concluded, AHTNA disputed the final voucher and release by written communications within 90 days.  It did not, however, submit a Request for Equitable Adjustment ("REA") until eight months after receiving the final voucher and release. The CBCA (Lester, A.J.) again reiterated that the CDA's statute of limitations in which to file a claim could be contractually limited: "Such a waiver provision is not unenforceable simply because the time limit imposed for reserving claims is shorter than the statute of limitations identified in the CDA."  However, "because the contracting officer had or should have had a full understanding of the scope and amount of [the] anticipated claims before making final payment on April 26, 2016 (following AEI's detailed REA submission in December 2015)," the Board found that the FHWA could not rely on the contractual release under these circumstances. Accordingly, the CBCA declined to find that the claim was barred by the release.

       2.      Claim Certification

Two decisions from the boards considered whether the signatory to the claim had the proper authority to bind the contractor, such that the claim was properly certified as required by the CDA.                       AMX Veterans Specialty Servs., LLC v. Dep't of Veterans Affairs, CBCA No. 5180 (Aug. 9, 2016) AMX appealed the deemed denial of its claim for costs and damages resulting from the Department of Veterans Affairs' ("VA") termination for convenience.  The VA moved to dismiss for lack of subject matter jurisdiction, arguing (among other things) that AMX did not properly certify its claim.  AMX's claim certification was signed by the company's chief operations officer ("COO").  VA argued that there were no documents in the record establishing the COO's authority to certify the claim and that such a defect in the certification deprived the Board of jurisdiction. The Board (Beardsley, A.J.) first noted that "[i]t is well-settled that even if [the COO] did not have authority to certify AMX's claim, and the certification would consequently be considered defective, the Board would not be deprived of jurisdiction."  In any event, the Board found that the COO had both actual and apparent authority to certify the claim.  VA's arguments that the COO did not sign the initial contract and that he was not listed as COO in the company's articles of organization were insufficient to undermine the actual and apparent authority of the company's COO, which were well established by the facts before the Board.                       ABS Development Corp., ASBCA Nos. 60022 et al (Nov. 17, 2016) In ABS, the Government moved to dismiss for lack of jurisdiction on a pair of consolidated claims arguing that the person who certified the claims on behalf of the appellant lacked the proper authority to do so.  The Government asserted that the signatory was not an employee of the ABS and that ABS had promised, prior to being awarded the contract, only employees would manage the work. The Board (McIlmail, A.J.) disagreed, citing FAR 33.207(e), which provides that "certification may be excited by any person authorized to bind the contractor with respect to the claim."  A declaration by ABS's president indicated that Gueron was duly authorized to act on behalf of ABS, which was sufficient, and that "there is no further requirement that the person also be an employee of the contractor."  On a second group of claims, the Government's basis for dismissal was that the underlying claims were not actually "signed" because they were electronically typed "signatures."  The Board agreed, reasoning that because they could not be authenticated, electronic signatures were insufficient and that such a defect could not be corrected.

      D.      Requirement for a Contracting Officer's Final Decision

A number of decisions from the tribunals that hear government contracts disputes dealt with the CDA's requirement that a claim have been "the subject of a contracting officer's final decision."                       Magnus Pacific Corp. v. United States, No. 13-859C (Fed. Cl. July 13, 2016). The Court of Federal Claims (Bush, J.) raised sua sponte the issue of its jurisdiction over two counterclaims the Government sought to add in a motion for leave to amend its answer:  a retainage claim and a recalculation claim.  The retainage claim sought $466,092 and had already been the subject of a contracting officer's final decision prior to becoming an issue in the litigation.  The recalculation claim arose from a disagreement between the Government's expert and the contracting officer's final decision.  The Government's expert believed a contract modification should have resulted in the reduction of $725,540, an additional $279,448 from the $466,092 previously determined by the contracting officer. Under the CDA, a court only has jurisdiction over a Government counterclaim where the Government's claim was "the subject of a contracting officer's final decision."  The retainage claim satisfied this standard and the Court granted the Government leave to amend in part to add the claim.  However, the recalculation claim had never been presented or decided by a contracting officer; instead, it was determined by the Government's expert.  On that basis, the claim also did not qualify for the mirror-image exception to the CDA's jurisdictional requirement because having been decided by an expert, the claim could not be "the mirror image of a contractor claim denied by the contracting officer."  The Court therefore denied the Government's request for leave to amend to add the recalculation claim.                       Regency Constr., Inc. v. Dep't of Agric., CBCA Nos. 3246 et al (Aug. 17, 2016) In 2008, Regency submitted an REA for $281,650 after performing canal excavation and sediment removal services for the Natural Resources Conservation Service ("NRCS").  The REA was not certified and also did not seek certain "contract administration costs" that it had paid for assistance in calculating and preparing the REA.  In 2012, after years of negotiating, NRCS sent Regency a response to the REA, which it later described as a contracting officer's final decision.  In a January 2013 letter to the contracting officer, Regency argued that any "final decision" had been premature because Regency had not certified its claim, which it did for the first time in this January 2013 letter.  A month later, without waiting for a new decision on its claims, Regency filed its first appeal with the CBCA.  Regency later filed a second appeal with the CBCA seeking "contract administration costs.". The CBCA (Sullivan, A.J.) dismissed Regency's original appeal, noting that a contracting officer's decision rendered on an uncertified claim is a "nullity," which precludes the Board from exercising appellate jurisdiction.  Although NRCS maintained that the contracting officer had issued a "final decision" on the REA, any such decision was issued prior to the time when Regency certified its claim.  On the second appeal, the Board held that it lacked jurisdiction to consider Regency's claim for contract administration fees.  Under the CDA, the Board only has jurisdiction to hear claims that are first presented to a contracting officer for decision: "If a claim is not presented to the contracting officer, the Board lacks jurisdiction to consider it in an appeal."  Because Regency's claim for contract administration costs had never been presented to the contracting officer, the Board was precluded from considering such a claim, even if the costs were otherwise recoverable.                       Stobil Enter. v. Dep't of Veterans Affairs, CBCA No. 5246 (Aug. 19, 2016) Several years into its contract with the VA, Stobil filed a request seeking over $100,000 for wage increases and benefits based on prevailing wage rates established by the DOL.  Stobil also sought over $5,000 in damages for goods that Stobil claimed were lost or damaged during contracting performance and/or close-out.  The VA's contracting officer ultimately granted part of the relief sought but, in his decision, noted that Stobil did not submit a certified claim.  Stobil appealed and the VA moved to dismiss for lack of jurisdiction. The Board (Russell, A.J.) granted the VA's motion, noting that a written demand for payment in excess of $100,000 is not a "claim" under the CDA unless and until it is certified.  It was irrelevant that the contracting officer had issued a decision on the uncertified claim and that Stobil allegedly had certified the claim after the CO's decision but before the appeal.                       Baistar Mech., Inc. v. United States, 128 Fed. Cl. 504 (Sept. 28, 2016). Baistar obtained a contract in 2010 with The Retirement Home, an independent Executive Branch agency.  The contract was terminated early in 2015.  The contractor satisfied the CDA's requirements by submitting written requests to the contracting officer, which were all rejected in final decisions by that officer.  Baistar argued that the Government failed to properly compensate it for services performed both within and outside the scope of the contract, that the Government impeded its performance, and that the Government improperly terminated the contract. The Government argued that if Baistar's allegations that the contracting officer had denied the claims improperly were true, the officer's decision would not have been a proper final decision and therefore, CDA jurisdiction did not exist. The Court of Federal Claims (Lettow, J.) was not convinced.  Where the contractor's claim had been properly filed, an improper decision by the officer would be considered a legal nullity that did not "affect the 'contractor's rights or obligations.'"  Instead, the court would proceed as though the decision had never been made.  Where an officer failed to respond to a properly filed claim within 60 days after receipt of those claims, the claim would be deemed a denial, and the Court would still have jurisdiction under the CDA.  The Court therefore determined that regardless of the propriety of the contracting officer's decision here, jurisdiction existed under the CDA.                       Fed. Contracting, Inc. v. United States, 128 Fed. Cl. 788 (Sept. 28, 2016). The Court of Federal Claims (Kaplan, J.) again addressed the CDA's exhaustion requirements when it granted in part the Government's motion to partially dismiss a contractor's claims arising from the U.S. Army Corps of Engineers' ("Army Corps") termination of its contract with FCI for the construction of a medical warehouse on an airbase.  FCI's two claims for breach of contract were dismissed because although the contractor submitted responses to the Government's cure, show cause, and termination notices, FCI's responses did not contain a demand for a sum certain and therefore could not constitute valid claims for payment under the CDA.  By contrast, FCI's fourth claim that an interim performance evaluation was, among other things, inaccurate and an abuse of discretion, was not dismissed.  The Court reached this decision relying on a string of cases holding "that a contractor's challenge to an agency's performance evaluation" could constitute a CDA claim.  Further, the contractor did not seek monetary relief for that claim, and so needed only to "have submitted a written demand for a final decision seeking relief . . . and received a final decision on that claim."

*     *     *

Three decisions – two from the Court of Federal Claims and one from the CBCA – addressed the recurring jurisdictional issue of whether the scope of the issues on appeal was properly captured by the claim presented to the contracting officer.                       Bruhn NewTech, Inc. v. United States, No. 16-783C (Fed. Cl. Dec. 19, 2016) In 1998, Bruhn received a contract from the U.S. Marine Corps to produce commercial software.  Though the contract allowed the Marine Corps to make "an unlimited number of copies" of the software and distribute them for the Government's internal purposes, the software license agreements forbade the Marine Corps from selling the software to third parties.  Bruhn alleged that it learned in 2013 that the Marine Corps distributed its software to the South Korean and Jordanian governments.  Bruhn submitted a claim to the contracting officer, which denied the claim.  Bruhn filed suit, alleging, in relevant part, breach of the contract between it and the Marine Corps.  The Marine Corps moved to dismiss for lack of subject-matter jurisdiction and for failure to state a claim, alleging that Bruhn's claim to the contracting officer concerned only a 2008 version of the software whereas its complaint concerned the 1998 version. The Court of Federal Claims (Horn, J.) found that there was a fundamental factual dispute between the parties as to whether there were one or more versions of the software.  Bruhn argued that 2008 and 1998 software versions were one and the same, with the 2008 "version" representing an update to the underlying 1998 software.  At the motion-to-dismiss stage, the Court found that Bruhn sufficiently alleged that it made a certified claim as to the 1998 contract, as the certified claim identified the 1998 contract and the complaint similarly discussed the 1998 contract.                       Claude Mayo Constr. Co. v. United States, No. 128 Fed. Cl. 616 (Oct. 6, 2016) Claude Mayo received a contract to renovate the U.S. Attorney's Office in Syracuse, New York.  Thereafter, the Government Services Administration ("GSA") sent Claude Mayo a notice to cure, in which it stated that Claude Mayo had failed to provide schedules of completed work and failed to respond to two contract modification requests.  Various other disputes arose and GSA terminated the contract.  Under the contract, Claude Mayo could dispute the termination to GSA's contracting officer.  Claude Mayo did so by mailing a letter requesting rescission of GSA's termination or, in the alternative, payment for all outstanding pay applications and lost profits.  The contracting officer denied the request and Claude Mayo brought suit in the Court of Federal Claims alleging, in relevant part, breach of contract. The Government moved to dismiss, alleging that Claude Mayo failed to properly present its breach-of-contract claim to a contracting officer before filing the complaint.  The Court of Federal Claims (Kaplan, J.) agreed, finding that Claude Mayo never advised the contracting officer that it was asserting a claim for breach of contract.  Judge Kaplan expressly denied Claude Mayo's argument that its letter responding to GSA's decision to terminate sufficed, as that letter (1) did not make any assertion that GSA breached its contract and instead only rebutted GSA's reasons for termination; (2) only requested rescission of the decision to terminate; and; (3) did not seek payment in sum-certain for any alleged breach of contract.  Additionally, Judge Kaplan rejected Claude Mayo's argument that the breach-of-contract claim and the improper-termination claim were one and the same, finding that "a termination for default is a claim by the government, separate from a contractor's breach of contract claim."                       CB&I AREVA MOX Services, LLC v. Dep't of Energy, CBCA No. 5395 (Dec. 15, 2016) CB&I was the successor in interest to a contract with the Department of Energy ("DOE") for mixed oxide fuel fabrication and reactor irradiation services. CB&I submitted a claim to the contracting officer requesting relief under a contract clause for an increase in fee percentage, as well as under the CDA for payment of an award fee.  The contracting officer denied the claim, and CB&I filed an appeal requesting three forms of relief: (1) a finding that the Government's alleged failure to negotiate on an option year fee was a material breach of the contract; (2) a finding that the contract provided for an increase in fee percentage; and (3) a monetary award based on the additional fee owed. In dismissing the appeal for lack of jurisdiction, the CBCA (Daniels, A.J.) noted that while a contractor may increase the amount of his claim, he may not raise any new claims not presented and certified to the contracting officer.  When a new claim is asserted that was not directly addressed in the contractor's submission to the contracting officer, the CBCA will determine whether the newly posed claim derives from the same operative facts, seeks essentially the same relief, and, "in essence, merely asserts a new legal theory for the recovery originally sought."  Here, the Board determined that while the claims relating to the fee increase and related quantum were properly before the contracting officer prior to the appeal, the evidentiary issues that may be required to be resolved for the lack of good faith claim were not submitted to the contracting officer.  Accordingly, because the CBCA would have to examine different operative facts to resolve CB&I's lack of good faith contention from the facts it must examine to resolve the contractor's fee claims submitted to the contracting officer, the CBCA dismissed the portion of the complaint alleging a lack of good faith.

      E.      Timeliness of Appeals

A host of recent cases address the CDA's jurisdictional requirement to timely file an appeal after receipt of a contracting officer's final decision.  Under the CDA, a board of contract appeals has jurisdiction only over appeals that are taken within 90 days of receiving the contracting officer's final decision; whereas there is a one-year statutory clock applicable to appeals filed in the Court of Federal Claims.                       Suffolk Constr. Co. v. GSA, CBCA No. 4377 (Aug. 26, 2016) Over the course of more than two years, Suffolk submitted a number of claims to the GSA's contracting officer following the completion of its construction contract.  The contracting officer denied Suffolk's claims and, for the majority of the claims, Suffolk timely appealed to the CBCA.  For one such denial, however, Suffolk filed suit in the Court of Federal Claims ("COFC") just under 12 months after the denial was issued.  The Court then transferred the case to the CBCA for consolidation with Suffolk's other pending appeals.  GSA argued that Suffolk could not circumvent the 90-day time limit for filing appeals with the Board by filing its claim in the Court of Federal Claims and later having the case transferred. Citing Glenn v. United States, 858 F.2d 1577, 1581 (Fed. Cir. 1988), the Board (Zischkau, A.J.) rejected GSA's jurisdictional argument and held that "COFC's authority to transfer actions to agency boards under 41 U.S.C. § 7107(d) is not limited to only those actions filed with . . . COFC within ninety days of receipt of the CO's final decision."  Thus, even though Suffolk did not appeal to the CBCA within 90 days of the denial of its claim, its timely suit in the Court of Federal Claims did not divest the Board of jurisdiction to hear the transferred case.                       Bass Transp. Servs., LLC v. Dep't of Veterans Affairs, CBCA No. 4995 (July 6, 2016) The VA terminated Bass's contract for default and informed Bass that the termination constituted a final decision.  More than three months later, Bass submitted a claim to the contracting officer for damages as a result of the termination and alleged breach.  A successor contracting officer denied Bass's claim and Bass appealed.  While on appeal, VA submitted a decision of the contracting officer converting the termination for default to a termination for convenience. Relying on the ASBCA's decision in Military Aircraft Parts, ASBCA 60139 (June 3, 2016), covered in our 2016 Mid-Year Government Contracts Litigation Update, the CBCA (Chadwick, A.J.) concluded that it lacked jurisdiction over the appeal because Bass did not appeal within 90 days of receiving notice that the contracting officer had terminated the contract for cause.  While Bass did appeal to the CBCA within 90 days of the successor contracting officer's decision denying its claim for damages, Bass's claim was "not independent of the unappealed termination decision, but ar[o]se[] from it.  A tribunal could award the breach damages that Bass [sought] (if at all) only by finding that VA should not have terminated the contract for cause--an issue that the CDA places beyond our review, as it was the crux of a government claim that was not appealed and is final."  That VA converted the termination to a termination for convenience after the appeal was filed did not change the fact that the Board lacked jurisdiction when the appeal was filed.                       Alaska Excavating, LLC v. Dep't of Transp., CBCA No. 5342 (Aug. 2, 2016) Alaska Excavating submitted a claim to the contracting officer, which was denied in part in a final decision received by the contractor on February 26, 2016.  Alaska Excavating submitted an appeal to the CBCA on the 91st day and "plead[ed] leniency" under the circumstances for missing the deadline by one day. The Board (Somers, A.J.) refused, noting: "[Alaska Excavating] was not only represented by counsel, but also informed in the final decision of the contracting officer exactly how, when, and to whom the written notice of appeal should be sent."  The failure to timely appeal divests the Board of jurisdiction to consider a case on the merits.

III.      TERMINATIONS

The ASBCA and Court of Federal Claims also issued several important decisions during the second half of 2016 arising from contract terminations for default.

      A.      Terminations for Default

                      GSC Constr., Inc., ASBCA Nos. 59402 et al (July 12, 2016) The U.S. Army Corps of Engineers terminated a contract with GSC on the grounds that GSC allegedly violated labor standards contract provisions.  GSC appealed and then moved to dismiss, asserting that DOL possessed exclusive jurisdiction to determine whether such a violation had occurred. The Board (McIlmail, A.J.) conceded that although it did not have jurisdiction to determine whether GSC had violated a contract's labor provisions, it certainly had jurisdiction to determine whether the findings by DOL were final, and whether a contract default termination was justified as a result.  The Board further held that it may uphold a contract termination for default on any ground that existed at the time of termination, even if it was not the specific ground the contracting officer's final decision relied upon.                       Avant Assessment, LLC, ASBCA No. 58866 (Sept. 28, 2016) In 2011, Avant Assessment and the Army entered into a contract for the delivery of foreign language test items.  The contract provided that any items provided for by the contract, but not accepted by the Government, would be removed from the scope of the contract.  In 2013, the Government terminated the contract for cause for failure to provide the contracted number of items. The Board (McIlmail, A.J.) agreed with Avant Assessment that the clause removing items not accepted from the scope of the contract essentially removed the delivery amount requirement.  Thus, the Government could not terminate the contract for failure to deliver a required amount of test items.                       Primestar Construction v. Dep't of Homeland Security, CBCA No. 5510 (Dec. 9, 2016) Primestar held a contract with the Federal Emergency Management Agency ("FEMA") for the replacement of an elevator. Less than two years into performance of the contract, the FEMA contracting officer issued a termination for default, asserting that Primestar had failed to complete 30% of the work required under the contract, and that Primestar had not corrected deficiencies in response to prior show cause and cure notices.  Primestar filed a notice of appeal disputing that it had failed to complete the work, and, to the extent any work was not performed, it was because the work was outside the scope of the contract or could not be done due to unforeseen site conditions. The appeal requested monetary compensation for final payment due, as well as "all incidental expenses incurred; the total amount is not yet fully determined." FEMA filed a motion to dismiss the monetary claim for lack of jurisdiction, arguing that the contracting officer's termination did not cover money damages, and that Primestar had not submitted a separate claim to the contracting officer in accordance with the CDA. The CBCA (Lester, A.J.) agreed, and dismissed the portion of the appeal seeking monetary damages, finding that "Unless it has previously submitted a claim to the contracting officer seeking monetary relief, a contractor cannot piggyback a request for monetary damages onto a contracting officer's termination decision."

      B.      Terminations for Convenience

                      Boarhog, LLC v. United States, No. 16-678C (Fed. Cl. Nov. 14, 2016) On September 18, 2014, the U.S. Navy awarded a contract to Boarhog for the provision of "engineering, logistical, and clerical support" for Navy ships near San Diego, California.  Boarhog's contract provided that it would provide service from September 2014, until September 2015.  Just before the contract was set to begin, the Navy terminated the contract for convenience and awarded the contract to one of Boarhog's competitors.  After Boarhog filed a bid protest, the Navy engaged in corrective actions and awarded a second contract.  But the second contract was not awarded until March and had the same end date of September.  Boarhog filed suit alleging breach of the contract arising from the Navy's conversion of a 12-month contract into one for six months. The Court of Federal Claims (Wheeler, J.) granted the Government's motion to dismiss, relying on the Government's right to terminate for convenience under the contract.  The Navy's decision to terminate for convenience could only create liability if the Navy were to terminate "in bad faith" or "abuse[ ] its discretion."  Accordingly, Judge Wheeler found the pleading standard to require some allegation of bad faith or abuse of discretion, which Boarhog did not make.  Alternatively, the Court found that Boarhog had failed to sufficiently allege damages because it had not begun performance under the old contract and had therefore accrued no costs.

IV.      CONTRACT INTERPRETATION

A number of noteworthy decisions from the second half of 2016 articulate broadly applicable contract interpretation principles that should be considered by government contractors.                       CACI Int'l, Inc. & CACI Techs., Inc., ASBCA No. 60171 (July 18, 2016) CACI's contract with the Government provided that contractors could pay employees hazardous duty compensation ("danger pay"), but that this danger pay could not exceed 35% of basic compensation.  CACI paid danger pay based on salaries that reflected actual hours worked, and passed on these costs to the Government, who in turn compensated CACI.  However, the Special Inspector General for Afghanistan Reconstruction challenged these danger payments, and argued that the Government had over-compensated CACI because certain hours worked constituted overtime, which the Government argued did not constitute a valid basis for the danger pay. The Board (Prouty, A.J.) found that CACI was entitled to danger pay under the contract, and the question thus became what constituted "basic compensation" under the contract such that the danger pay did not exceed 35% of that amount.  The Board concluded that an employee's pay for normal or usual working hours under the contract constituted basic compensation for two reasons: (1) portions of the Department of State Standardized Regulations ("DSSR") that excluded overtime pay were not applicable to the present contract; and (2) CACI employees were not paid overtime despite working significantly more than 40 hours per week.  The Board concluded that in the absence of any applicable definition contained in the DSSR, "basic pay" would have its common meaning, which was the salary given to employees before being subject to multipliers or additions.  Thus, despite CACI employees' longer work hours, salaries for the number of hours worked per week for which no overtime pay was given would be the proper amount considered as basic pay.  The Board also concluded that despite working more than 40 hours per week, CACI employees were in fact not working overtime because the contract did not treat hours worked in excess of 40 hours as other than normal work hours.  Thus, the additional hours worked were actually part of the CACI employees' normal workweeks, leading the Board to hold that the danger pay was ultimately proper.                       King Aerospace, Inc., ASBCA No. 57057 (July 26, 2016) In 2005, the Government awarded a contract to King for the maintenance of a fleet of aircraft.  In 2009, King presented a certified claim incorporating an REA based on additional maintenance required as a result of aircraft conditions inferior to that represented in the contract.  The contracting officer denied the claim and King appealed. The Board (McImail, A.J.) concluded that King was entitled to additional compensation, noting that in order to prevail on a claim of misrepresentation, the contractor needed to show that there was a false representation of material fact that the contractor reasonably relied on to the contractor's detriment.  The Board determined that the contract had represented that aircraft would be maintained in accordance with industry practices, although the aircraft clearly were not.  Further, this misrepresentation was material because the condition of the aircraft was likely to affect the inducement of King in assenting to maintaining the aircraft.  Moreover, King honestly relied on the misrepresentation to its detriment because King would have bid higher had it known of the substandard condition of the aircraft.  The Board also found that King's reliance was reasonable as there was no contrary representation of the aircrafts' condition.

V.      COMMON LAW PRINCIPLES

The boards of contract appeals and Court of Federal Claims addressed a number of issues during the second half of 2016 arising out of the body of federal common law that has developed in the context of government contracts.

      A.      Subcontractors and Third Party Beneficiary Claims

                      Global Freight Sys. Co., W.L.L. v. United States, No. 15-378C (Fed. Cl. Dec. 29, 2016) Global Freight was a subcontractor that provided services to the U.S. Navy at Camp Lemonnier in Djibouti.  The prime contracts under which Global Freight was a subcontractor incorporated a Base Access Agreement between the U.S. and Djiboutian governments, including a dispute-resolution mechanism providing that any dispute arising under the contract would not "be referred to any national or international tribunal or any third party for settlement."  In 2014, the Navy instructed Global Freight to move its vehicles to a villa outside of Camp Lemonnier, at which point local government authorities promptly seized 29 of Global Freight's vehicles based on an alleged failure to pay taxes.  Global Freight had to pay 25 million Djiboutian francs (~ $139,727.00 USD) in order to regain control of the vehicles.  Global Freight filed suit alleging that it was a third-party beneficiary of the Base Access Agreement and the Government should have invoked it to prevent Global Freight from paying its settlement.  The Government moved to dismiss, alleging that 28 U.S.C. § 1502 divested the Court of jurisdiction over any claims dependent on a treaty with a foreign nation and that, given the broad reading of the term "treaty" under relevant precedent, the Base Access Agreement was a treaty. The Court of Federal Claims (Williams, J.) found the issue of whether Section 1502 applied in this case to be "thorny" and instead decided that the better approach was to determine whether Global Freight was a third-party beneficiary under the prime contract at all.  The Court determined that Global Freight's allegations that the Navy provided it with tax exoneration letters congruent with the terms of the Base Access Agreement were sufficient to trigger discovery on the question of third-party-beneficiary status.  Accordingly, the Court denied the Government's motion to dismiss.

      B.      Fraud

                      Laguna Construction Company, Inc. v. Carter, 828 F.3d 1364 (Fed. Cir. 2016) The Government refused to reimburse Laguna for approximately $3 million in costs related to subcontractors, which Laguna appealed to the ASBCA in 2012.  That same year, Laguna's COO was criminally indicted for fraud based on alleged kickbacks he received in exchange for awarding the subcontracts at issue.  After the COO pleaded guilty in 2013, the Government asserted the affirmative defense of fraud in its answer to Laguna's appeal.  Both sides moved for summary judgment, and the ASBCA sided in favor of the Government, reasoning that the it was not required to pay Laguna's invoices because the company had committed a material breach of the contract by engaging in the fraudulent kick-back scheme. Two issues were presented to the Federal Circuit:  first, did the ASBCA have jurisdiction over the affirmative defense of fraud, and second, whether the alleged fraud excused the Government from performing its obligations under the contract. On the issue of jurisdiction, the Federal Circuit held that jurisdiction was proper over the fraud defense so long as the ASBCA did not have to make any factual determinations, which in this case it did not since the COO had already pleaded guilty.  With respect to the Government's nonperformance and refusal to pay Laguna's costs, the Court reaffirmed that the Government need not know about a prior breach at the time that the breach occurred to excuse it from subsequent obligations.  For those reason, the Federal Circuit affirmed the ASBCA decision dismissing Laguna's claims.                       Kellogg Brown & Root Services, Inc., ASBCA Nos. 57530 et al (Nov. 8, 2016) In this case, the Government argued that the recent Federal Circuit decision in Laguna discussed immediately above required the Board to suspend KBR's cost appeals when the appeals were the subject of a pending False Claims Act case pending in federal district court.  The Board (Melnick, A.J.) disagreed and distinguished its facts from those in Laguna.  In Laguna, the district court made determinations as to the facts underlying the fraud and the Government asserted a prior material breach affirmative defense.  In KBR, however, the Government's fraud claim was still pending in district court and had not yet presented a prior material breach defense.  Accordingly, the board concluded that, "[n]othing in Laguna mandates that the Board suspend appeals indefinitely [where] the government has merely filed a fraud cause elsewhere that might establish an affirmative defense of prior material breach if and whenever proven."                       Bryan Concrete & Excavation, Inc. v. Dep't of Veterans Affairs, CBCA No. 2882 (Aug. 26, 2016) The VA awarded a contract reserved for Service Disabled Veteran Owned Small Businesses ("SDVOSBs") to BCE, a business founded by a disabled veteran and which had SDVOSB status with VA.  BCE did not inform the VA, however, that it had entered into a "teaming agreement" with a non-SDVOSB third-party, through which the third-party "took over management and control of BCE."  After a series of unrelated issues arose during performance of the contract, the contracting officer terminated the contract for default.  BCE appealed the termination to the CBCA.  During discovery, VA learned of the third-party teaming agreement, an agreement which would have disqualified BCE from eligibility for the SDVOSB contract.  VA moved for summary judgment on the grounds that the contract was void ab initio. The Board (Somers, A.J.) granted summary judgment to the VA, finding that VA had satisfied the test set forth in Long Island Savings Bank v. United States, 503 F.3d 1234, 1246 (Fed. Cir. 2007), which requires the Government to prove that a contractor obtained a Government contract by knowingly making a false statement.  In this case, BCE did not dispute that it obtained the contract and that, through its representatives, it certified its eligibility as an SDVOSB without disclosing the existence of the teaming agreement.  Because the contract was void ab initio, the Board denied BCE's appeal challenging the contract termination.

      C.      Bad Faith

                      Puget Sound Envtl. Corp., ASBCA No. 58828 (July 12, 2016) In 2009, the Government awarded a contract to PSE that provided for a total of four option years, exercisable at the Government's discretion.  In 2011, the Government opted to terminate the contract for its convenience, and chose not to exercise its options pursuant to the contract.  Consequently, PSE filed a claim seeking 4% of the revenue that it lost had the Government exercised all its options.  The contracting officer did not issue a final decision and this appeal followed. The Board (O'Connell, A.J.) noted that the appeal was primarily about the failure to exercise options, and not the termination of the contract.  In addressing the failure to exercise options, the Board found that while the Government has the right not to exercise options, there is a limited exception if the contractor can prove bad faith.  Thus, the Board needed to determine whether it could be reasonable to find by clear and convincing evidence that the contracting officer acted in bad faith.  While PSE contended that the contracting officer rushed to judgment, the Board found that the officer had a reasonable basis for his decision at the time, and there was no evidence that even hinted at specific intent to injure PSE.  Because PSE could not demonstrate by clear and convincing evidence that the contracting officer had a specific intent to injure PSE, the Board found that the Government did not err in exercising its contract rights not to exercise an option.                       ThinkGlobal Inc. v. Dep't of Commerce, CBCA No. 4410 (Sept. 9, 2016) In ThinkGlobal Inc., also discussed above in the context of the decision's jurisdictional implications, TGI produced, marketed, and distributed an advertising catalog called "Commercial News USA" pursuant to a series of contracts with the Department of Commerce ("DOC").  The contracts were "no cost" contracts under which DOC had no financial obligations to TGI--TGI would derive revenues from advertising sales on the publication.  After several years of performance, DOC chose not to exercise the remaining option years and ordered TGI to cease performance.  TGI asserted a variety of claims against DOC, primarily for breach of contract and bad faith termination. The Board (Drummond, A.J.) rejected DOC's primary argument that TGI could not show entitlement to relief simply because the contract was "no cost" in nature and TGI actually earned profits from third-parties.  "Although the Government will not pay for services rendered under no-cost contracts, that does not mean that the Government is similarly immune from paying damages for breaching the terms of a no-cost contract in a way that limits the contractor's ability to earn monies from third parties under its contract."  Nevertheless, the Board agreed that DOC's decision not to exercise the remaining option years did not amount to a breach of contract because a contract that provides for one-year options "based upon satisfactory performance" does not transform a traditional option--where the option holder possesses the unilateral right to exercise--into a condition limiting the Government's discretion.  Further, the Board agreed that TGI failed to state a claim for bad faith termination because TGI had alleged no facts "indicating a specific intent by DOC to injure TGI, a necessary element of a bad faith claim against the Government."

      D.      Stay of Proceedings

                      BAE Sys. Tactical Vehicle Sys. LP, ASBCA Nos. 59491 et al (July 25, 2016) The Government requested the Board stay proceedings in the current appeal due to a pending False Claims Act lawsuit involving what it claimed were the same facts then pending in federal district court.  Under the CDA, the Board (O'Sullivan, A.J.) has the authority to stay proceedings by balancing competing interests.  The Board considered the following factors: (1) whether the logistics in both proceedings are substantially similar; (2) whether the on-going litigation could be compromised by going forward with the current case; (3) the extent to which any stay could harm the non-moving party; and (4) whether the duration of the requested stay is reasonable.  The Board also considered whether judicial efficiency should lead to a stay. In denying the stay, the Board found that there were sufficient differences between the ASBCA appeal and the False Claims Act case such that BAE was entitled to the Board's decision on the matter.  Further, the Government had failed to demonstrate a clear case of hardship, especially since the Board's decision would likely precede trial in the False Claims Act case.  In addition, a stay would likely result in a loss of witnesses and evidence for BAE such that a stay would cause sufficient harm to BAE.  The Board also held that judicial efficiency would not warrant a stay, since the resolution of the CDA claim would likely simplify and streamline the issues in the False Claims Act action.  Lastly, the Government's request for a stay of indefinite duration was unreasonable, in light of there being no pressing need.

VI.      CONCLUSION

We will continue to keep you informed on these and other related issues as they develop.
The following Gibson Dunn lawyers assisted in the preparation of this client update:  Karen L. Manos, John W.F. Chesley, Lindsay M. Paulin, Lauren M. Assaf, David H. Glanton, Matthew P. O’Sullivan, Christopher M. Rigali, Victor Twu, and Casper J. Yen. Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding the issues discussed above.  Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following: Washington, D.C. Karen L. Manos (+1 202-955-8536, kmanos@gibsondunn.com) Joseph D. West (+1 202-955-8658, jwest@gibsondunn.com) John W.F. Chesley (+1 202-887-3788, jchesley@gibsondunn.com) Daniel P. Chung (+1 202-887-3729, dchung@gibsondunn.com) David P. Burns (+1 202-887-3786, dburns@gibsondunn.com) Michael Diamant (+1 202-887-3604, mdiamant@gibsondunn.com) Michael K. Murphy (+1 202-995-8238, mmurphy@gibsondunn.com) Justin Accomando (+1 202-887-3796, jaccomando@gibsondunn.com) Ella Alves Capone (+1 202-887-3511, ecapone@gibsondunn.com) Jim Doody (+1 202-887-3716, jdoody@gibsondunn.com) Michael R. Dziuban (+1 202-955-8252, mdziuban@gibsondunn.com) Melissa L. Farrar (+1 202-887-3579, mfarrar@gibsondunn.com) Lindsay M. Paulin (+1 202-887-3701, lpaulin@gibsondunn.com) Jonathan M. Phillips (+1 202-887-3546, jphillips@gibsondunn.com) Erin N. Rankin (+1 202-955-8246, erankin@gibsondunn.com) Jeffrey S. Rosenberg (+1 202-955-8297, jrosenberg@gibsondunn.com) Audi Syarief (+1 202-887-3717, asyarief@gibsondunn.com) Jin I. Yoo (+1 202-887-3797, jyoo@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Jeremy S. Ochsenbein (+1 303-298-5773, jochsenbein@gibsondunn.com) Orange County Laura J. Plack (+1 949-451-4086, lplack@gibsondunn.com) Los Angeles Timothy J. Hatch (+1 213-229-7368, thatch@gibsondunn.com) Marcellus McRae (+1 213-229-7675, mmcrae@gibsondunn.com) Maurice M. Suh (+1 213-229-7260, msuh@gibsondunn.com) James L. Zelenay, Jr. (+1 213-229-7449, jzelenay@gibsondunn.com) Dhananjay S. Manthripragada (+1 213-229-7366, dmanthripragada@gibsondunn.com) Sean S. Twomey (+1 213-229-7284, stwomey@gibsondunn.com) Paris Nicolas Baverez (+33 (0)1 56 43 13 38, nbaverez@gibsondunn.com) Nicolas Autet (+33 (0)1 56 43 13 08, nautet@gibsondunn.com) Maïwenn Béas (+33 (0)1 56 43 13 51, mbeas@gibsondunn.com) Grégory Marson (+33 (0)1 56 43 13 84, gmarson@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 5, 2017 |
2016 Year-End False Claims Act Update

I.     INTRODUCTION

What a year.  With two Supreme Court decisions and nearly $5 billion in recoveries (among other interesting entries) in 2016's now-closed books, we can say with certainty that 2016 delivered plenty of False Claims Act ("FCA") headlines.  It is also clear that the U.S. government, state governments, and private whistleblowers (i.e., qui tam relators) continue to press new and aggressive theories of liability under the FCA--with significant success.  As recoveries remained high and fraud theories proliferated, 2016 saw the second highest number of FCA lawsuits ever brought in a single year.  Looking forward, we have little reason to believe that the government's haul from FCA matters--or the sheer number of FCA lawsuits--will decline materially next year. But there are several issues that will continue to be closely watched--and contested--as we head into 2017.  Foremost among them is the extent to which the Supreme Court's 2016 decision in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), abrogated existing FCA jurisprudence regarding the statute's falsity, materiality, and scienter elements.  To the government and relators, the case represents a course correction that leaves intact the path to recover on expansive (and often nebulous) theories of liability.  For defendants, Escobar requires a sweeping reassessment of the theories and allegations that have allowed plaintiffs to survive the pleading stage--and even prevail--in cases where falsity, materiality, and scienter are not readily apparent.  As detailed below, the lower courts are beginning to coalesce around particular readings of Escobar; we will continue to monitor these developments throughout 2017. Questions also linger about the incoming administration's impact on FCA enforcement.  Many observers inside and outside government have suggested that FCA enforcement may be insulated from more dramatic shifts elsewhere at the U.S. Department of Justice ("DOJ") because of the FCA's bipartisan appeal as a tool for returning funds to the government.  But, as described below, the incoming administration's campaign commitment to scrap the Patient Protection and Affordable Care Act ("ACA"), if implemented, could unwind recent changes to the FCA's statutory language and scope, with potentially important consequences.  Meanwhile, certain industries may hope for less aggressive enforcement--at least from the government--in the next four years.  And individuals facing liability as part of the DOJ's renewed emphasis on personal accountability under the so-called Yates Memorandum would welcome a reprieve from the Obama administration's aggressive enforcement priorities. This update first details enforcement activity under the FCA during the Fiscal Year ending September 30, 2016.  In the hopes of distinguishing trends from aberrations, we break down the past year's enforcement data, focusing on the key theories underlying, and the industries targeted in, the government's nearly $5 billion recovery haul, and then survey the key settlements and judgments in the last six months.  We then turn to the mostly quiet legislative front, summarizing the past year's developments and analyzing potential ACA-related changes that may come to pass in 2017.  Finally, we analyze the developments in FCA jurisprudence during the latter half of 2016.  Please refer to our 2016 Mid-Year False Claims Act Update ("2016 Mid-Year Update") for our assessment of the legislative and case law developments during the first half of the year. As always, Gibson Dunn's recent publications on the FCA may be found on our Website, including in-depth discussions of the FCA's framework and operation along with practical guidance to help companies avoid or limit liability under the FCA.  And, of course, we would be happy to speak with you about these developments.

II.     FCA ENFORCEMENT ACTIVITY

The federal government recovered more than $4.7 billion in civil settlements and judgments under the FCA during the 2016 fiscal year, the third-highest amount on record.[1]  There were also more than 800 new FCA cases filed in 2016, the second-highest number of FCA cases in any single year on record.[2]  All in all, 2016 was the seventh consecutive year in which the government recovered over $3 billion and where there were at least 700 new FCA matters.  Below, we discuss the qui tam activity driving these remarkably high numbers and the industries that were most significantly affected.

A.     Qui Tam Activity

Last year, we reported on the notable fact that the government recovered a record $1.2 billion in qui tam suits where the government declined to intervene.  This may well have been an aberration.  Historically, the government's decision on intervention has been strongly correlated with the potential for significant recoveries.  And in 2016, recoveries in declined cases returned to a figure consistent with years past ($105 million).[3]  That figure represented approximately 2% of all federal recoveries in 2016--a stark contrast to 2015, where cases in which the government declined to intervene accounted for a whopping 32% of all federal recoveries in 2015. This past year's figure does not result from any lack of effort.  Keeping with the trends since the 1986 amendments to the FCA, the vast majority--about 83%--of new FCA cases filed in fiscal year 2016 were initiated by a whistleblower (702 out of 845).  Although consistent with recent years, this marks a dramatic increase since Congress amended the FCA in 1986: in the first five years after the amendments, only about one-quarter of FCA cases were qui tam cases.  Yet, whistleblowers have now brought more than 11,000 qui tam cases since 1986--70% of the total. The chart below demonstrates both the increase in overall FCA litigation activity since 1986 and the distinct shift from largely government-driven investigations and enforcement to qui tam-initiated lawsuits.  After two years of declines in the overall number of cases, 2016's total jumped up to a near-record total:

Number of FCA New Matters

The government chooses to intervene in about 20% of FCA cases.[4]  But, as noted above, that sliver of the overall total of FCA cases resulted in the vast majority of recoveries for the federal government in 2016:

Settlement or Judgments in Cases where the Government Declined Intervention

B.     Industry Breakdown

Recoveries from health care and life sciences companies continued to make up the lion's share of the total of FCA recoveries, as the government recovered $2.5 billion from entities in the health care industry.  But after a relatively quiet 2015 for FCA cases involving financial institutions, the DOJ also obtained more than $1.6 billion from the financial industry in 2016 thanks to reinvigorated enforcement of alleged mortgage-related fraud.

Settlement and Judgment Recoveries by Industry

1.     Health Care Industry

Just as in 2015, 55% of all federal FCA recoveries came from the health care industry (including life sciences companies) in 2016.  The typical health care FCA case involves allegations that a defendant defrauded federal health care programs, such as Medicare, Medicaid, and TRICARE, which provides health care to members of the armed services and their dependents.  Since January 2009, the DOJ has recovered $19.3 billion for purported health care fraud under the FCA.[5]  Just shy of $2.6 billion of that total came in fiscal year 2016.[6] That substantial sum represented a significant rebound from recoveries in each of the preceding three years, thanks in part to another round of large-value settlements from a handful of companies.  For example, a branded pharmaceutical maker paid $413 million to the federal government after it allegedly reported falsely inflated prices for two of its drugs to Medicaid, thereby decreasing rebate payments it was required to make to Medicaid that were pegged to those prices.[7]  Another maker of branded drugs settled with the government for $390 million--including nearly $307 million paid to the federal government--to resolve allegations that it paid kickbacks to pharmacies that agreed to recommend two of the company's drugs.[8] Federal regulators were active on this front during the past year.  In its Spring 2016 Semiannual Report to Congress, the Department of Health and Human Services Office of Inspector General ("HHS OIG") reported that it commenced 379 civil actions (including but not limited to FCA actions) in the first half of the 2016 fiscal year,[9] far in excess of the 320 it commenced during the same period in 2015.[10]  HHS OIG also reported expected recoveries of approximately $2.8 billion, including about $2.2 billion in "investigative receivables."[11]  Both of these figures are more than 50% greater than the comparable figures from just a year ago.[12] It will come as no surprise that the Anti-Kickback Statute ("AKS") and the Stark Law lurked behind many of the FCA recoveries in the health care industry this past year.  The AKS prohibits giving or offering--and requesting or receiving--any form of payment in exchange for referring a product or a service that is covered by federally funded health care programs.[13]  The Stark Law prohibits physicians from referring Medicare patients to a provider with which the physician has a financial relationship.[14]  Among other noteworthy settlements in 2016, the DOJ entered into a settlement with a laboratory testing company for nearly $260 million after it allegedly violated the AKS and the Stark Law by allegedly billing for unnecessary testing and bribing physicians to refer tests to the company.[15] FCA recoveries from hospitals and hospital systems have lagged behind those from pharmaceutical, medical device, and outpatient clinics in recent years.  However, in 2016, a large chain of hospitals paid more than $360 million after the government alleged that it paid kickbacks to physicians.[16]  

2.     Government Contracting and Defense/Procurement

Recoveries from government contracting firms dropped in 2016 as compared to recent years (down to $122 million).[17]  Of that amount, $82.6 million came from the government's settlement with an energy exploration company of allegations that the company concealed unsafe drilling habits, leading to an oil spill.  The government alleged that this constituted an FCA violation because of billings related to the exploration company's lease of the land on which it drilled from the Department of the Interior.[18] In what could be the beginning of a trend in the next administration, the DOJ recovered about $50 million for alleged violations of customs regulations that impose duties on certain imported goods.[19]  For example, a Texas company and a California company both paid $15 million for allegedly evading duties on Chinese furniture.[20]  Given the rhetoric on trade and imports that pervaded the presidential campaign, this type of case seems likely to continue to gain steam in 2017.

3.     Financial Industry

In 2014, the government recovered massive amounts of money in FCA cases against financial institutions that allegedly contributed to the financial crisis through their mortgage lending and underwriting practices.  In 2015, recoveries from the financial industry declined by about 90% from their 2014 high of more than $3.1 billion.  But anyone who believed that the government was no longer pursuing financial institutions for mortgage-related practices in the lead-up to the financial crisis was sorely mistaken.  Financial-industry FCA recoveries more than quadrupled in 2016, up to $1.6 billion.[21]

III.     NOTEWORTHY SETTLEMENTS AND JUDGMENTS ANNOUNCED DURING THE SECOND HALF OF 2016

As noted above, FCA settlements and judgments resulted in more than $4.7 billion in recoveries for the government this year.  We summarize below a number of notable settlements and judgments announced during the past six months (notable settlements and judgments from the first half of the year were covered in our 2016 Mid-Year Update), including in the health care and life sciences industries, government procurement and defense industries, and the financial industry.  These cases provide specific examples of the industries the government has targeted, as well as the theories of liability that the government and relators have advanced. Notably, in the first full year after it issued the Yates Memorandum, which promised a more aggressive approach to individual accountability, the DOJ also secured millions of dollars in recoveries from individuals, including at least ten doctors and health care industry executives.  Several of these cases are also highlighted below.

A.     Health Care and Life Sciences Industries

  • On June 29, 2016, a Minneapolis-based medical device company agreed to pay $8 million to resolve allegations that it provided illegal kickbacks to physicians through marketing and other practice development services promoting the use of its devices in atherectomies.  The government alleged that the company coordinated meetings with referring physicians and implemented business expansion plans for physicians using the devices.  The company also entered into a five-year Corporate Integrity Agreement ("CIA") with HHS OIG that requires the company to undergo reviews by an independent organization.[22]
  • On June 30, 2016, a California-based health care provider agreed to pay $5.5 million to settle allegations that it and several other entities and individuals violated the federal FCA and California's analogue.  The government alleged various billing violations, including providing chemotherapy infusions without having a physician present and improperly billing for double dosages after using single dose vials on more than one patient.[23]
  • On July 5, 2016, a Pennsylvania-based owner and operator of physical therapy clinics settled health care fraud allegations for $7 million.  The government alleged that the provider submitted claims for individual physical therapy sessions when its physical therapists and assistants were actually providing group sessions.  The whistleblowers were former employees of the company and will receive $1.68 million.[24]
  • On July 13, 2016, a Minnesota-based hospice provider agreed to pay $18 million to resolve allegations that it submitted reimbursements to Medicare for ineligible hospice patients who were not terminally ill.  The government alleged that the provider discouraged doctors from recommending discharge from hospice and failed to ensure accurate and complete documentation of patients' conditions in their medical records.[25]
  • On July 12, 2016, a federal district court judge ordered two New Jersey-based diagnostic imaging companies and their owners to pay $7.75 million for submitting falsified diagnostic test reports, underlying tests, and claims for neurological tests conducted without physician supervision.  The court's order came after it granted the United States' motion for summary judgment.  Separately, the owners pled guilty to charges of health care fraud related to the conduct.[26]
  • On July 13, 2016, a federal district court judge entered a judgment of $4.5 million against the owner of two medical device companies and her companies for allegedly making false statements in order to receive millions of dollars in federal grants from the National Institutes of Health ("NIH").  The government alleged that the owner improperly diverted the funds to her personal use and impermissible business expenses rather than to developing customized electronic pillboxes for specific patient populations, as contemplated by the grants.[27]
  • On July 22, 2016, a diagnostic imaging service provider agreed to pay $3.51 million to resolve alleged federal and Texas False Claims Act violations.  The government alleged that independent diagnostic facilities operated by the company performed certain procedures without required physician supervision on-site.[28]
  • On July 22, 2016, a California-based medical device manufacturer agreed to pay $18 million to resolve off-label allegations that it marketed and distributed its sinus spacer product for use as a drug delivery device without FDA approval.  Notably, the government alleged that it continued its off-label marketing even after the FDA rejected the company's request to expand the approved uses, and even though the company added a warning to its label regarding the use of active drug substances in the device.  On July 20, 2016, the company's former CEO and former Vice President of Sales also were convicted following a trial of ten misdemeanor counts of introducing adulterated and misbranded medical devices into interstate commerce.  The whistleblower will receive approximately $3.5 million from the settlement.[29]
  • On July 28, 2016, a South Carolina hospital agreed to pay $17 million to resolve allegations that it violated the FCA and the Stark Law by maintaining improper financial arrangements with 28 physicians.  The government alleged that the hospital entered into improper employment agreements and asset purchase agreements for the acquisition of physician practices, which were tied to referral volume or value, were not "commercially reasonable," or exceeded fair market value.  As part of the settlement, the hospital will enter into a five-year CIA.  The relator, a former physician employed by the hospital, will receive approximately $4.5 million.[30]
  • On July 29, 2016, a federal district court judge entered a judgment against an Oklahoma-based behavioral health counseling company and its owner for $4.7 million to resolve alleged violations of the federal FCA and its Oklahoman analogue for false claims submitted to the jointly funded Oklahoma Medicaid program.  The government alleged that the company and its owner sought reimbursement for services provided by unqualified personnel, altered service codes to support reimbursement, and double-billed for services, among other issues.  The company and its owner must also comply with a five-year national exclusion from participation in the Medicaid and Medicare programs.[31]
  • On August 1, 2016, a New York hospital paid $3.2 million to settle allegations that it violated both the federal and New York false claims statutes by presenting claims for reimbursement to the state Medicaid program for services performed by purportedly unqualified staff.  United States and New York attorneys alleged that, between 2007 and 2016, hospital personnel provided services for individuals suffering from an acute mental health crisis even though the personnel performing such services did not meet regulatory staffing requirements, such as having two professional staff members present when mental health services are rendered outside of an emergency room.[32]
  • On August 31, 2016, a health services provider agreed to pay $7.4 million to resolve allegations that it sought reimbursement for medically unnecessary drug screening procedures in violation of the FCA.  The government alleged that the company performed expensive "quantitative drug tests" on all patients in its care, even though these are generally only to be performed when there is reason to doubt the results of less expensive "qualitative drug tests."  Because the company performed both tests on all of its patients, the government contended that the company submitted reimbursement claims to Medicare for medically unnecessary services.[33]
  • On September 7, 2016, two medical equipment companies focusing on the supply of durable medical equipment to diabetic patients, along with their owners and presidents individually, agreed to pay more than $12.2 million to resolve allegations that they used a fictitious entity to make unsolicited calls to Medicare beneficiaries to sell them medical equipment.  The companies' scheme allegedly violated the Medicare Anti-Solicitation Statute, which prohibits submitting claims to Medicare for equipment sold based on unsolicited cold-calls.[34]
  • On September 14, 2016, the owner of a home health care company agreed to pay $6.8 million to resolve civil allegations that the company allegedly violated the FCA and the AKS by inducing false certifications of eligibility for home services through illegal kickbacks and then submitting claims for these purportedly fraudulent services to Medicare.  In connection with this civil settlement, the company's owner pled guilty to one criminal count of violating the AKS, which is punishable by up to five years in prison; sentencing is scheduled for February 2017.[35]
  • On September 14, 2016, the owners of a compound pharmacy agreed to pay $7.75 million to resolve allegations that they violated the FCA by purportedly submitting claims for reimbursement that were not reimbursable.  The government alleged that from January 2013 through January 2014, the pharmacy requested reimbursement for prescriptions it had procured through the use of illegal kickbacks, in violation of the AKS.[36]
  • On September 19, 2016, a skilled nursing services company, the chairman of its board, and the senior vice president of reimbursement analysis settled civil claims that they allegedly violated the FCA.  The government's allegations involved the purported submission of false for medically unnecessary services.  The settlement provided for payments of $28.5 million from the company, $1 million from the board chairman, and $500,000 from the senior vice president.  The settlement further provided for the company to enter into a CIA.[37]
  • On September 28, 2016, a national hospital chain agreed to pay $32.7 million, plus interest, to settle allegations that the company violated the FCA by billing Medicare for unnecessary services.  The company allegedly admitted persons to its facilities who did not demonstrate symptoms that qualified them for admission, in addition to extending the stays of some patients without regard for necessity or quality of care.  As part of the resolution, the company will be subject to a five-year CIA.  The case was originally filed by a former employee of a facility, who will receive at least $4 million of the settlement.[38]
  • On September 29, 2016, a home health care agency was ordered to pay $6.15 million in civil damages after the judge ruled the agency violated the FCA by falsifying records to obtain Medicaid funding.  The judge ruled in the government's favor in February 2016, after finding that the evidence showed patient files contained forged physician signatures and falsified timesheets, and that employees had alerted the president and founder of the agency that other employees were defrauding the government, but the agency did not report the fraudulent conduct to Medicaid.  The judge trebled the $1.3 million damage award to the United States and imposed an additional $10,000 penalty for each D.C. Medicaid invoice submitted, which totaled 216 invoices.[39]
  • On October 3, 2016, a U.S. hospital network and multiple subsidiaries agreed to pay more than $513 million to settle criminal and civil claims alleging bribery and kickbacks to owners and operators of prenatal care clinics in exchange for the clinics referring patients to the hospital chain or its subsidiaries for labor and delivery services.  Two subsidiaries pled guilty to conspiracy to defraud the U.S. and to pay kickbacks and bribes in violation of the AKS.  The subsidiaries also agreed to forfeit more than $145 million.  Another subsidiary, which was the parent of the two subsidiaries previously mentioned, entered into a three-year non-prosecution agreement.  As part of the civil settlement, the hospital chain agreed to pay $368 million to resolve the claims.  The federal government will receive approximately $244.2 million; the state of Georgia will receive nearly $123 million; and the state of South Carolina will receive more than $892,000.  A whistleblower, who brought the original suit under the federal and Georgia false claims statutes, will receive more than $84 million.[40]
  • On October 14, 2016, a global settlement was reached with an independent laboratory, a nutritional supplement provider, and the founder of both companies for over $6.1 million to resolve claims that they submitted false claims to Medicare and TRICARE.  The laboratory was subject to requirements under the Clinical Laboratory Improvement Amendments ("CLIA"), which required that the laboratory validate its tests to ensure their reliability and accuracy.  The companies allegedly reported test results based on an improperly validated reference range, recommended products to patients based on that range, and did not report those activities to the Centers for Medicare and Medicaid Services ("CMS").  As part of the global settlement, the supplement provider pled guilty to conspiring to obstruct CMS's administration of the CLIA program, and the founder pled guilty to intentionally violating the CLIA program requirements.[41]
  • On October 14, 2016, a not-for-profit community health system agreed to pay $5.85 million to settle allegations that it violated the FCA by misreporting information on annual cost reports regarding the number of hours its employees worked.  This misreporting caused the wage index in the area to be artificially inflated, and also caused the health system to allegedly receive more money from Medicare than owed.  The case was originally brought by a whistleblower, who will receive a $1.17 million share of the settlement.[42]
  • On October 17, 2016, the nation's largest nursing home pharmacy agreed to pay $28.13 million to settle claims that it both solicited and received kickbacks from a pharmaceutical manufacturer in exchange for promoting the manufacturer's prescription drug.  The federal government will receive approximately $20.3 million and the state Medicaid portion is approximately $7.8 million.  This settlement, together with two prior settlements with the manufacturer and another nursing home pharmacy, resolves two FCA lawsuits filed by former employees of the pharmaceutical manufacturer.  As part of this settlement, one of the whistleblowers will receive $3 million.[43]
  • On October 21, 2016, a hematology-oncology medical practice agreed to pay $5.31 million to settle claims that the practice unlawfully waived copayments and fraudulently billed Medicaid for the copayments, as well as submitted false claims for services that were never provided or were not permitted under government program rules.  As part of the settlement, the practice admitted, acknowledged, and accepted responsibility for the fraudulent acts.  The practice also entered into a CIA.  A whistleblower initially filed this lawsuit.[44]
  • On October 21, 2016, the owner of a Florida-based compound pharmacy agreed to pay $4.25 million to settle claims that the compound pharmacy billed federal health care programs for services it knew were not reimbursable because they were allegedly tainted under the AKS.  The government remains engaged in claims against other participants allegedly involved with the compound pharmacy.[45]
  • On October 24, 2016, a skilled nursing facility chain agreed to pay $145 million to settle allegations that the company submitted false claims to Medicare and TRICARE for services that were unreasonable or unnecessary.  According to the government, the company engaged in systemic efforts to increase billing to Medicare and TRICARE by, for example, instituting corporate-wide policies that resulted in patient stays that were longer than necessary.  The settlement is the DOJ's largest settlement with a skilled nursing facility.  The company also entered into a CIA.  The case was originally filed by a whistleblower, who will receive $29 million.[46]
  • On October 24, 2016, a holding company for subsidiaries that operate skilled nursing facilities in Texas agreed to pay $5.3 million to settle claims that they submitted bills to Medicare and Medicaid for materially substandard services provided to several residents of four of the nursing facilities.  The holding company also entered into a five-year CIA as part of the settlement.[47]
  • On November 7, 2016, a medical device company agreed to pay $25 million to resolve allegations that it violated the FCA by causing false claims to be submitted to government health care programs.  The company allegedly promoted its embolization device--designed to be inserted into blood vessels to block the flow of blood to tumors--for off-label use as a "drug-delivery" device, which was not an FDA-approved use and was not supported by substantial clinical evidence.  The company also agreed to pay an additional $11 million in criminal fines and forfeitures.[48]
  • On December 7, 2016, a Florida-based orthopedic medical group agreed to pay $4.48 million to resolve allegations that it billed the government for services that were not medically necessary and reasonable.  The government alleged that the group engaged in "questionable" billing practices related to, among other things, certification of "meaningful use" of electronic health records, care provided without physician supervision, and medically unnecessary procedures.[49]
  • On December 7, 2016, a not-for-profit hospital in southern Florida agreed to pay $12 million to resolve claims that one of its doctors allegedly performed unnecessary cardiac procedures, including echocardiograms and electrophysiology studies, for the "sole purpose of increasing the amount of physician and hospital reimbursements."  The allegations arose from two other doctors who brought suit as whistleblowers.[50]
  • On December 9, 2016, a pharmaceutical company agreed to pay $19.5 million to settle claims with forty-three state attorneys general concerning the alleged off-label promotion of its schizophrenia drug.  The company allegedly promoted the drug for use in pediatric populations and to treat dementia and Alzheimer's in elderly patients, despite the fact that those were not FDA-approved uses.[51]
  • On December 15, 2016, a pharmaceutical company agreed to pay $38 million to resolve allegations that it paid kickbacks to induce physicians to prescribe their drugs.  The alleged kickbacks came in the form of meals and payments in connection with speaker programs.  The company allegedly provided the payments even when the programs were cancelled, when no licensed health care professionals attended the programs, or when the same physicians attended multiple programs over a short period of time.[52]

B.     Government Contracting and Defense/Procurement

  • On July 6, 2016, five California-based information technology companies agreed to pay a total of $5.8 million to resolve allegations that they falsely certified that one of the companies met small business requirements in order to obtain contracts reserved for small businesses, even though its affiliation with the other companies was an alleged disqualifier.  The government also alleged that the companies underreported sales under a General Services Administration contract to avoid required fee payments.  The whistleblowers who filed the suit will receive approximately $1.4 million of the settlement.[53]
  • On July 14, 2016, a federal district court judge approved a $9.5 million settlement with a New York-based university to resolve allegations related to the university's purported receipt of excessive cost recoveries in connection with 423 research grants funded by the NIH.  The government alleged that the university sought federal reimbursements for costs at a higher "on-campus" rate, even though the research was primarily conducted at off-campus facilities owned and operated by the state and by New York City and even though the university did not pay for the use of the space for most of the relevant period.[54]
  • On October 28, 2016, several geothermal power plant operators agreed to pay a total of $5.5 million to settle claims that they violated the FCA by submitting applications for federal clean energy grants that they were not entitled to receive.  The claim was initially brought by two former employees of one of the operators.[55]
  • On November 4, 2016, an aerospace company agreed to pay $2.7 million to resolve allegations that it falsely certified it had performed required inspections on aerospace parts used in military aircraft, spacecraft and missiles used by the Department of Defense.  The company sold those parts to major defense contractors, who used them in equipment eventually sold to the United States.  The employee who filed the qui tam action will receive $621,000 of the recovered funds.[56]
  • On November 23, 2016, a group of Energy Department contractors agreed to pay $125 million to resolve allegations that they improperly billed the government for services and goods rendered under a contract to clean up a nuclear site.  The contractors allegedly billed the government despite failing to comply with mandatory standards related to materials, testing, and services in connection with the contract.  The case originated with complaints from three former employee whistleblowers.[57]

C.     Financial Industry

  • On August 16, 2016, a large national bank agreed to pay $9.5 million to settle FCA allegations that it submitted claims for reimbursement to the Small Business Administration ("SBA") even though it knew or should have known that some of the requirements for reimbursement had not been met.  These allegations stemmed from SBA-guaranteed loans brokered by another, smaller bank, which admitted in separate plea agreements that its employees created false documents to secure the larger bank's approval.[58]
  • On September 13, 2016, a regional bank based in the southeastern United States agreed to pay $52.4 million to resolve allegations that it knowingly originated and underwrote faulty mortgage loans issued by the Department of Housing and Urban Development's ("HUD") Federal Housing Administration ("FHA").  As part of this settlement, the bank admitted that, from 2006 through 2011, it certified mortgage loans that did not meet HUD's underwriting requirements regarding creditworthiness, neglected to adequately monitor its underwriting process, and failed to fully self-report suspected findings of fraud to HUD.[59]
  • On September 29, 2016, a banking company agreed to pay $83 million to settle claims that it knowingly originated and underwrote mortgage loans insured by the FHA that did not meet the FHA's quality control requirements or HUD's underwriting requirements.  Due to the company's actions, HUD allegedly insured loans endorsed by the company that were not eligible for mortgage insurance under the relevant program, and that HUD would not have otherwise insured.[60]
  • On October 3, 2016, two Utah-based mortgage companies agreed to pay a total of $9.25 million ($5 million from one company and $4.25 million from the other company) to resolve allegations that they knowingly originated and underwrote mortgage loans insured by the FHA that did not meet the program's requirements.  Both companies admitted their actions as part of the settlement.[61]
  • On November 30, 2016, after a five-week trial, a jury found two related mortgage originators liable for violations of the FCA and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), and awarded single-damages of more than $92 million.  The mortgage companies allegedly originated mortgages at a network of "shadow" branches that were not approved by HUD, and therefore not subject to HUD oversight, resulting in unapproved FHA loans.  The single-damages award could grow larger after statutory trebling and imposition of per-claim civil penalties.[62]

D.     Other

  • On July 13, 2016, a clothing importer and two foreign clothing manufacturers agreed to pay $13.38 million to settle alleged FCA violations for under-reporting the value of their imported merchandise.  The government alleged that the companies conspired with clothing wholesalers to underpay customs duties by making false representations in entry documents filed with the U.S. Customs and Border Protection.  Pursuant to the alleged double invoicing scheme, the companies allegedly presented one invoice that undervalued the garments to the government to use in duty calculations, while another invoice reflected the garments' actual value.[63]
  • On July 14, 2016, a federal district court judge approved a settlement for $4.29 million with a New York-based for-profit educational institution and its former COO to resolve alleged violations of two U.S. Department of Education ("DOE") rules.  Pursuant to Program Participation Agreements with the DOE, for-profit schools agree to comply with various rules and requirements to participate in federal funding programs.  The institution allegedly violated rules prohibiting incentive compensation payments to enrollment personnel based on success in securing student enrollments and advertising inaccurate job placement rates to prospective students.[64]
  • On August 24, 2016, an insurance carrier for a now-defunct for-profit cosmetology school agreed to pay over $8.6 million to settle qui tam allegations brought by six former employees that it obtained federal student loan funds for students whom the school helped obtain allegedly bogus high school diplomas.  According to the allegations, the school allowed students without high school diplomas wishing to enroll at the school to take a test to earn the equivalent of a diploma, but the school allowed these students to take the tests without a proctor, to use their phones and notes to look up answers, and to take the test repeatedly until they passed.[65]

IV.     LEGISLATIVE ACTIVITY

In light of the November 2016 election, it is not surprising that the second half of 2016 was relatively quiet on the legislative front.  Although there was no new legislation at the federal level, the Department of Justice's interim final rule increasing maximum penalties for FCA violations took effect on August 1, 2016.  Under the rule, the maximum penalties jumped from $11,000 to $21,563 per claim.  The rule applies to penalties assessed after August 1, 2016, whose associated violations occurred after November 2, 2015[66] and, as discussed in our 2016 Mid-Year Update, may result in an uptick in Eighth Amendment and Due Process challenges to judgments, particularly when the amount awarded in penalties dwarfs the damage to the government. If, as expected, the new Congress introduces legislation to repeal and/or replace the ACA, consistent with the President-elect's campaign promise, the new year may bring a flurry of FCA-related activity at the federal level.  We address below the potential impact of a repeal on those provisions of the ACA that modified the FCA. At the state level, legislative activity was also quiet, with no significant legislative developments since our 2016 Mid-Year Update.

A.     Federal Activity: Potential for ACA Repeal in 2017

The President-elect has promised to repeal the ACA within his first 100 days in office.[67]  Although many Congressional leaders also have pledged to repeal the ACA, it is difficult to predict precisely how Congress will handle the ACA.  The significant questions that remain regarding the extent to which Congress will repeal--and, perhaps, replace--the ACA implicate the components of the FCA that were amended by the ACA. In particular, the ACA modified the FCA's "public disclosure bar" in several respects.  The ACA removed any reference to "jurisdiction" from the public disclosure bar, a shift which several courts have interpreted to mean that the bar is no longer jurisdictional in nature.  See, e.g., United States ex rel. Moore & Co., P.A. v. Majestic Blue Fisheries, LLC, 812 F.3d 294, 299–300 (3d Cir. 2016).  The ACA also provided the government discretion to oppose the dismissal of qui tam actions where the allegations are based on public disclosures.  31 U.S.C. § 3730(e)(4).  Further, the ACA narrowed the definition of "public" disclosures to encompass only federal criminal, civil, or administrative disclosures, meaning that relators can base qui tam lawsuits on disclosures from state and local government sources, unless the information is also disclosed in the news media or another source encompassed by the statutory language.  31 U.S.C. § 3730(e)(4)(A)(i)–(iii).  The ACA also modified the standard for a relator to qualify as an "original source."  Rather than requiring the relator to have "direct and independent knowledge" of the alleged fraud, the ACA eliminated the "direct" knowledge requirement, and instead required "knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions."  31 U.S.C. § 3730(e)(4)(C). Aside from those procedural amendments, the ACA altered the FCA in ways that were particularly important to Medicare and Medicaid providers.  First, the ACA clarified the 60-Day Rule established under the Fraud Enforcement and Recovery Act of 2009 ("FERA"), which requires payback of Medicare and Medicaid overpayments within 60 days of identification.  42 U.S.C. § 1320a-7k(d).  The failure to return government overpayments can lead to potential FCA liability under a "reverse false claims" theory pursuant to 31 U.S.C. § 3729(a)(1)(G).  Second, the ACA also provided that any claim submitted in violation of the AKS constitutes a false and fraudulent claim for purposes of the FCA.  Further, the ACA relaxed the intent requirement such that the government can establish a violation of the AKS without showing that a defendant either knew about the statute's specific prohibitions or intended to violate the statute.  42 U.S.C. § 1320a-7b(h). A full repeal of the ACA would have the effect of eliminating all of these provisions.  However, with Congress still undecided about how to address the ACA, the amendments relevant to FCA enforcement remain intact.

B.     State Activity

There was very little legislative activity at the state level in the second half of 2016.  But that activity may pick up as a result of a September 2016 announcement by the CMS that states should amend their false claims acts in the next two years to mirror the increased civil penalties available under federal law.[68]  States that do not take this action may be deemed by the DOJ and HHS OIG to be less effective than the federal FCA in facilitating qui tam actions and thereby lose the ability to increase by 10% their share of recoveries in cases that prosecute Medicaid fraud. On May 2, 2016, the Louisiana Senate voted against legislation introduced in 2014 to create a broader Louisiana False Claims Act (S.B. 327).  However, on May 3, 2016, the bill was returned to the calendar and may be called for further consideration at a later time.[69]  Currently, Louisiana has a false claims act circumscribed to claims related to funds for medical care.[70] Additionally, HHS OIG has determined that the Nevada False Claims Act[71] and amended Washington Medicaid Fraud False Claims Act[72] are compliant with Debt Recovery Act ("DRA") requirements and are at least as robust as the federal FCA.  HHS OIG has yet to announce whether Maryland's expanded False Claims Act,[73] which became effective in 2015, and Wyoming's False Claims Act,[74] enacted in 2013, meet DRA requirements.[75] As for several items that we mentioned in previous updates:
  • On February 11, 2016, Alabama legislators introduced a false claims act in the state's senate.  Legislation is still pending in the state's Senate Judiciary Committee.[76]
  • In New Jersey, no further action has been taken on a bill that would authorize the retroactive application of New Jersey's False Claims Act under certain circumstances.  The general assembly, the lower house of the state's legislature, previously passed this bill on May 14, 2015.[77]
  • In New York, no further action has been taken on a May 2015 bill that would provide for securities fraud whistleblower incentives and protections.[78]
  • South Carolina legislators have taken no further action on a bill to enact the "South Carolina False Claims Act" (S.B. 223), which was referred to the Committee on Judiciary in January 2015.[79]

V.     CASE LAW

The Supreme Court's June 2016 Escobar decision drove significant developments in FCA jurisprudence during the second half of the past year.  But, as discussed below, the federal courts also handed down noteworthy cases addressing other aspects of the FCA during the last six months.

A.     Post-Escobar Developments

As we reported in our 2016 Mid-Year Update, the Supreme Court's landmark Escobar decision reshaped the legal landscape in FCA cases.  Indeed, the Court both affirmed the viability of the "implied false certification" theory of liability under certain circumstances and sharpened the FCA's "demanding" materiality standard. Yet, like many Supreme Court decisions, Escobar does not answer all questions.  Thus, in the wake of Escobar the lower courts have grappled with the Supreme Court's opinion.  Two hotly litigated issues have come to the forefront in these cases:  (1) the requirements a plaintiff must meet to advance a viable "implied false certification" theory and (2) the proper application of Escobar's interpretation of the FCA's materiality standard.  We explore the key cases addressing these issues below, and we will closely monitor these and other Escobar-related issues as they develop in the upcoming year.

1.     Defining the Boundaries of an "Implied False Certification" Claim

The Supreme Court stated in Escobar that an "implied certification" theory can provide a basis for liability under the FCA where (1) "the claim does not merely request payment, but also makes specific representations about the goods or services provided," and (2) "the defendant's failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths."  136 S. Ct. at 2001 (emphasis added).  Since then, the lower courts have reached different conclusions as to the precise circumstances under which a relator may pursue an implied certification theory. Most courts have imposed a strict test, requiring the FCA plaintiff to show the defendant made specific misleading representations about the goods or services provided to be liable based on an implied false certification theory.  See, e.g., United States ex rel. Tessler v. City of N.Y., No. 14-CV-6455, 2016 WL 7335654, at *4 (S.D.N.Y. Dec. 16, 2016); United States v. Crumb, No. 15-0655, 2016 WL 4480690, at *12 (S.D. Ala. Aug. 24, 2016); United States ex rel. Beauchamp v. Academi Training Ctr., Inc., No. 1:11-CV-371, 2016 WL 7030433, at *3 (E.D. Va. Nov. 30, 2016).  As these courts have observed, imposing liability in the absence of a sufficiently "specific" misrepresentation about the goods or services provided "would result in an 'extraordinarily expansive view of liability' under the FCA, a view that the Supreme Court rejected in Escobar."  Tessler, 2016 WL 7335654, at *4 (citing Escobar).  Under this reading of Escobar, courts have not hesitated to dismiss cases where the relator fails to identify specific misrepresentations.  See, e.g., Tessler, 2016 WL 7335654, at *4; cf. New York ex rel. Khurana v. Spherion Corp., No. 15-CV-6605, 2016 WL 6652735, at *15 (S.D.N.Y. Nov. 10, 2016) (dismissing New York False Claims Act claim under Escobar on this basis). In October, the Seventh Circuit addressed Escobar's impact on the implied false certification theory, concluding that a relator must prove the defendant made specific, misleading representations in connection with a claim for payment.  In United States v. Sanford–Brown, Ltd., the Seventh Circuit reconsidered an earlier opinion affirming summary judgment in favor of the defendant, after the Supreme Court vacated and remanded the case in light of Escobar.  840 F.3d 446–47 (7th Cir. 2016).  There, following Escobar, the Seventh Circuit held that an implied false certification theory can only be a basis for liability where (i) "the claim does not merely request payment, but also makes specific representations about the goods or services provided" and "the defendant's failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths."  Id. at 447.  The court once again affirmed summary judgment for the defendant, finding that the relator had offered no evidence that the defendant had made "any representations at all," let alone a misleading one.  Id. (holding that "bare speculation that [a defendant] made misleading representations is insufficient"). Among the courts that have strictly construed Escobar, several have concluded that use of billing codes that correspond to particular services, procedures, or individuals with certain qualifications are sufficiently "specific" representations, if false, to state a claim.  See Crumb, 2016 WL 4480690, at *13 (Medicare and Medicaid billing codes); United States ex rel. Lee v. N. Adult Daily Health Care Ctr., No. 13-CV-4933, 2016 WL 4703653, at *11 (E.D.N.Y. Sept. 7, 2016) (Medicaid billing codes); Beauchamp, 2016 WL 7030433, at *3 (codes corresponding to jobs restricted to those with specific qualifications).  By contrast, at least one court has held that general allegations regarding representations that the defendant complied "with applicable implementing federal, state, and local statutes, regulations, [and] policies," fail to represent anything specific about the good or services.  See Tessler, 2016 WL 7335654, at *4. A minority of courts has embraced a less restrictive reading of Escobar, rejecting the notion that an implied certification theory requires specific misleading representations.  For example, in Rose v. Stephens Institute, the court rejected the argument "that Escobar establishes a rigid" test for falsity "that applies to every single implied false certification claim."  No. 09-CV-05966, 2016 WL 5076214, at *5 (N.D. Cal. Sept. 20, 2016).  Reasoning that the Supreme Court left the door open by limiting its holding to "at least" the circumstances before it in Escobar and by expressly declining to "resolve whether all claims for payment implicitly represent that the billing party is legally entitled to payment," the court held that a relator can state an implied false certification claim without necessarily identifying a "specific" representation that was a "misleading half-truth" in any claim.  Id.  The court declined, however, to elaborate on what such a claim might look like because it found that the relator had identified a specific representation--in the form of a representation that the defendant was "eligible" to receive the funds for which it was seeking reimbursement.  That representation, according to the court, would be a misleading half-truth if, as the plaintiff alleged, the defendant was not in compliance with applicable regulations (and therefore, ineligible to receive payment).  Id. A magistrate judge from the Western District of New York also reached the same conclusion.  United States ex rel. Panarello v. Kaplan Early Learning Co., No. 11-CV-00353, Dkt. No. 96, at 8–10 (W.D.N.Y. Nov. 14, 2016).  There, the plaintiff alleged that the defendant violated the FCA by submitting claims for work performed by workers who were not paid the government's prevailing wage requirements.  The magistrate judge accepted relator's theory that the defendant had falsely certified that it had complied with those wage requirements simply by making a claim for payment, reasoning that Escobar does not require specific representations in every implied false certification claim.  Id. at 8–9.  The court reached this conclusion even as it acknowledged that the claims contained no payment codes (and did not even make any mention of the labor requirements), and thus lacked any "specific" representations.  Id.  The magistrate judge's opinion is presently under consideration by the district court. Although most federal appellate courts have not yet weighed in on the issue, we expect that more will begin to do so in this coming year.  The Rose court, for example, subsequently certified its decision on this issue for interlocutory appeal to the Ninth Circuit.  2016 WL 6393513, at *1 (N.D. Cal. Oct. 28, 2016).  Similarly, in Panarello, the magistrate judge recommended that the question of whether "specific" representations are required to state an implied certification claim be certified for interlocutory appeal to the Second Circuit, although that issue remains pending before the district court.  No. 11-CV-00353, Dkt. No. 96, at 9 (W.D.N.Y. Nov. 14, 2016).

2.     Application of Escobar's "Demanding" Materiality Standard

In Escobar, the Supreme Court not only adopted the implied certification theory in some circumstances, but also reframed the FCA's materiality standard as a question of whether a violation of the specific statute, regulation, or requirement at issue would actually have affected the government's decision to pay for a claim had it known of the alleged noncompliance.  136 S. Ct. at 1996.  In so doing, the Court made clear that whether the particular statutory, regulatory or contractual requirement at issue is specifically labeled a condition of payment remains relevant, but is not dispositive of its materiality, because it is not enough that the government merely have the option not to pay a claim.  Id.  The Court also stated that the FCA's materiality requirement is "demanding" and "rigorous."  Id. at 2003–2004 n.6. Since Escobar, courts have reached differing conclusions as to the decision's impact on the FCA's materiality analysis.  Several courts have interpreted Escobar as now requiring plaintiffs to plead that:  (i) the government either actually does not pay claims that involve violations of the statute or regulation at issue, or (ii) the government was unaware of the violation but "would not have paid" the claims at issue "had it known of" the alleged violations.  See, e.g., United States ex rel. Southeastern Carpenters Reg'l Council v. Fulton County, Georgia, No. 1:14-CV-4071, 2016 WL 4158392, at *8 (N.D. Ga. Aug. 5, 2016); Knudsen v. Sprint Commun. Co., No. C13-04476, 2016 WL 4548924, at *14 (N.D. Cal. Sept. 1, 2016); Lee, 2016 WL 4703653, at *12. In one of the first appellate court decisions on the issue, the Seventh Circuit held that a relator must provide "evidence that the government's decision to pay" a claim "would likely or actually have been different had it known of [the defendant's] alleged noncompliance" with the statute, rule, or regulation at issue.  Sanford–Brown, 840 F.3d at 447.  The court affirmed summary judgment for the defendant, concluding that the alleged noncompliance was not material to the government's decision to pay claims because the government had "already examined" the alleged misconduct "multiple times over and concluded that neither administrative penalties nor termination was warranted."  Id. at 447–48. Similarly, in a case discussed in further detail below, the First Circuit concluded that allegations that a defendant's purported misconduct "could have" influenced "the government's payment decision" failed to satisfy the "demanding" materiality standard set by EscobarUnited States ex rel. D'Agostino v. ev3, Inc., No. 16-1126, --- F.3d ---, 2016 WL 7422943, at *5 (1st Cir. Dec. 23, 2016).  There, in holding the relator had not adequately alleged materiality, the First Circuit also relied on the fact that the government "ha[d] not denied reimbursement" for the claims at issue (nor had it taken any other regulatory actions) despite having been made aware of the allegations of the defendant's fraudulent conduct six years earlier.  Id.  In this regard, D'Agostino appears to be somewhat in tension with the First Circuit's opinion on remand in Escobar, discussed below, in which a different panel of the court distinguished the government's mere awareness of alleged misconduct from actual knowledge that the misconduct occurred, holding that a relator could still satisfy the materiality requirement despite evidence of the former. And some courts have even gone further, interpreting Escobar's "demanding" materiality standard as requiring a relator's complaint to "explain why" the government would not have paid claims at issue had it known of the alleged violation, as opposed to simply alleging that the government would not have paid.  United States ex rel. Dresser v. Qualium Corp., No. 5:12-CV-01745-BLF, 2016 WL 3880763, at *6 (N.D. Cal. July 18, 2016) (emphasis added); United States ex rel. Scharff v. Camelot Counseling, No. 13-cv-3791, 2016 WL 5416494, at *8–9 (S.D.N.Y. Sept. 28, 2016) (granting motion to dismiss, in part, because relator did not "explain why the purportedly fraudulent conduct was material to the payment of reimbursements"). On the other hand, some courts have applied a more lenient standard of materiality, in spite of the Court's language in Escobar.  Under this more lenient standard, alleged violations may still be material even where the government takes no action despite being aware of the alleged violations.  In Rose, for example, the court denied the defendant summary judgment as to materiality even though defendant argued that the government had "continued to pay [claims] despite having knowledge of the allegations in this case," and had enforced compliance with the regulation at issue in the past largely by requiring corrective actions or imposing fines rather than by revoking payment.  2016 WL 5076214, at *4.  The court reasoned that "[n]othing in Escobar suggests that actions short of a complete revocation of funds are irrelevant to the court's materiality analysis" and found that a jury could conclude that the alleged noncompliance was material because it was "'capable of influencing' the government's payment decisions" even though it apparently had not done so in the past.  Id. at *7 (quoting 31 U.S.C. § 3729(b)(4)).  Further clarity on this issue appears to be on the horizon as the district court certified this issue as part of the interlocutory appeal to the Ninth Circuit.  Rose, 2016 WL 6393513, at *1. Decisions from two circuit courts in which relators have been able to satisfy the "demanding" materiality standard also underscore the continued importance of "conditions of payment" and participation, even after Escobar's admonition that evidence of conditions of payment is not "automatically dispositive" of materiality.  136 S. Ct. at 2003. The First Circuit, on remand in Escobar, concluded that the relators' bare allegation that the government "would not have paid" the allegedly false claims at issue "had it known of the [alleged] violations" was sufficient to establish materiality.  United States ex rel. Escobar v. Universal Health Servs., Inc., 842 F.3d 103, 111 (1st Cir. 2016).  The First Circuit also relied in part on the fact that the allegedly violated regulatory requirements were "sufficiently important to influence the behavior" of the government in deciding whether to pay the claims because they are conditions of payment, indicating that whether a regulation is a condition of payment may remain important even after EscobarId. at 110.  The First Circuit also rejected the defendant's argument that the government continued to pay claims despite being aware of the alleged regulatory noncompliance, holding that "mere awareness of allegations concerning noncompliance with regulations" was not enough to show the violations were immaterial.  Id. at 112.  The court left the door open, however, to the notion that evidence of the government's payment despite its "knowledge of actual noncompliance" with the regulation at issue (as opposed to mere awareness of allegations of noncompliance) could be enough to demonstrate a violation is not material.  Id. The Eighth Circuit reached a similar conclusion on summary judgment in another case remanded for reconsideration in light of EscobarSee United States ex rel. Miller v. Weston Educ., Inc., 840 F.3d 494, 504 (8th Cir. 2016).  Miller involved allegations that the defendant violated the FCA by fraudulently inducing the Department of Education to provide educational funding under Title IV of the Higher Education Act of 1965, by allegedly falsely promising to comply with student recordkeeping requirements.  Id. at 497.  Before Escobar, the district court granted summary judgment to the defendant, holding that the alleged noncompliance was immaterial.  Id. at 505.  The Eighth Circuit reversed that decision, reasoning that the government viewed the recordkeeping requirement as material because it was a condition of participation in Title IV funding.  The Supreme Court vacated and remanded that opinion for reconsideration in light of Escobar. On remand, the Eighth Circuit doubled down on its denial of summary judgment on materiality, again relying on evidence that the government conditioned participation in Title IV programs on compliance with the regulatory recordkeeping requirement.  Id. at 504.  The court held under Escobar, "a false promise to comply with express conditions is material if it would affect a reasonable government funding decision or if the defendant had reason to know it would affect a government funding decision."  Id. at 504.  Applying this standard, the Eighth Circuit held that the government's repeated conditioning of participation in Title IV funding programs on compliance with the recordkeeping regulation in the statute and elsewhere was sufficient evidence to demonstrate materiality, even as it acknowledged that "conditioning is not 'automatically dispositive' of materiality."  Id. (quoting Escobar, 136 S. Ct. at 2003).

B.     The Supreme Court Addresses the Effect of Seal Violations

The Supreme Court's foray into the FCA this year was not limited to Escobar--the Court also considered whether a violation of the FCA's seal requirement mandates dismissal of a relator's complaint.  The FCA provides that a complaint shall be kept under seal for a statutorily mandated period, but is silent as to the result of a violation of that provision, which had led the circuit courts to impose varying consequences, including dismissal, for such a violation.  31 U.S.C. § 3730(b)(2). On December 6, 2016, in State Farm Fire & Casualty Co. v. United States ex rel. Rigsby, a unanimous Court held that "a seal violation does not mandate dismissal."  137 S. Ct. 436, 438 (2016).  In Rigsby, the relators' counsel violated the seal provision by e-mailing a sealed filing to several journalists.  Id. at 441.  The sealed filing disclosed the qui tam complaint and the underlying allegations that an insurer submitted false claims by misclassifying wind damage as flood damage in order to shift insurance liability to the government.  Id.  Although none of the media outlets revealed the existence of an FCA complaint, each published the underlying allegations of fraud.  Id.  The relators also met with a Congressman who spoke publicly about the purported fraud, but similarly did not disclose the existence of the FCA suit.  Id. In determining that a seal violation does not necessitate dismissal, the Supreme Court relied on the text and purpose of the FCA.  The Court explained that Congress mandated automatic dismissal for certain violations of the FCA, but did not do so for violations of the statute's seal provision.  Id. at 443.  As such, the Court decided not to read an automatic consequence of dismissal into the statute.  Id.  The Court also reasoned that because the "seal requirement was intended in main to protect the Government's interests," a rule mandating automatic dismissal for violations would be unduly harsh and undermine the very interests the provision was meant to protect.  Id. The Court declined, however, to resolve the circuit split over the proper test for deciding whether dismissal is warranted for a seal violation.  The Fifth and Ninth Circuits employ a three-part test, balancing (1) the actual harm to the Government, (2) the nature of the violations, and (3) evidence of bad faith.  United States ex rel. Lujan v. Hughes Aircraft Co., 67 F.3d 242, 245–46 (9th Cir. 1995); United States, ex rel., Rigsby v. State Farm Fire & Cas. Co., 794 F.3d 457, 470–71 (5th Cir. 2015), aff'd 137 S. Ct. 436.  The Second and Fourth Circuits employ an "incurable frustration" test that looks to whether the disclosure incurably frustrates four relevant interests of the FCA:  (1) allowing the government time to investigate and decide whether to intervene; (2) protecting defendants' reputations from meritless actions; (3) protecting defendants from having to answer complaints without knowing whether the government or relators will pursue the litigation; and (4) incentivizing defendants to settle to avoid the unsealing of a case.  See United States ex rel. Pilon v. Martin Marietta Corp., 60 F.3d 995, 998–99 (2d Cir. 1995) (discussing interests that can be "incurably frustrated" due to seal violation); Smith v. Clark/Smoot/Russell, 796 F.3d 424, 430 (4th Cir. 2015) (following Pilon).  Although the Supreme Court noted the factors in the three-part test "appear to be appropriate," it went no further, stating that it was "unnecessary to explore" the issue until "later cases."  Rigsby, 137 S. Ct. at 444. Even though the Court did not mandate automatic dismissal of qui tam suits for seal violations, FCA defendants can take solace in the fact that the Supreme Court at the least left lower courts with the discretion to dismiss cases where the seal has been violated, depending on the circumstances.  And the Court may very well address what it considers to be the proper test for such a determination in the future.

C.     The First Circuit Cabins FCA Liability Based on Alleged Fraud on the FDA

The First Circuit's decision in D'Agostino, discussed above, is also notable in that it effectively forecloses alleged fraud perpetrated on the FDA as a basis for FCA liability, with the potential exception of where FDA has actually withdrawn pre-market approval of a medical device based on such fraud.  2016 WL 7422943, at *5.  The relator in D'Agostino predicated his FCA claim on allegations that the defendants had made fraudulent misstatements in seeking pre-market approval to FDA for the defendant's medical device, including that the defendants allegedly disclaimed uses for the device they later pursued, overstated the training they would provide for the device, and omitted critical safety information from the information provided to FDA.  Id. at *4–5.  According to the relator, FDA would not have approved of the device had it known of the fraudulent statements and, thus the statements ultimately led to a different government agency's payment of claims for use of that device (which that agency would not have done but for the FDA's pre-market approval).  Id. at *5. The First Circuit definitively rejected the relator's fraud on the FDA theory of FCA liability.  First, the court reasoned that the relator did not allege that the purported misrepresentations "actually cause[d] the FDA to grant approval it otherwise would not have granted" and, therefore, that he had not demonstrated the required causation between the alleged false statements and disbursement of government funds for the device.  Id. at *4–6.  Indeed, the court observed that FDA had not withdrawn its pre-market approval of the device, nor had it taken any other action (such as imposing post-approval requirements or suspending approval), despite having been aware of the alleged fraudulent statements for six years.  Id. at *6.  Second, the Court invoked important policy justifications for its holding, recognizing that "[t]o rule otherwise would be to turn the FCA into a tool with which a jury of six people could retroactively eliminate the value of FDA approval and effectively require that a product largely be withdrawn from the market even when FDA itself sees no reason to do so."  Id.  In addition to unjustifiably allowing private parties to override FDA rulings, the First Circuit recognized such a course would be fraught with practical problems, such as deterring new device approval applications, and requiring courts to attempt to determine whether or not "FDA would not have granted approval but for the fraudulent representations" made by the applicant.  Id. Though the First Circuit's decision reins in future use of fraud-on-FDA theory in the FCA context, the decision leaves open the possibility that such a theory could potentially support a viable FCA claim where FDA had, in fact, made the decision to withdraw its approval of a device after discovering fraud perpetrated during the pre-market approval process.  Id. The court, however, expressly declined to resolve whether a relator would be able to state a viable FCA theory under those circumstances.  Id.

D.     Developments Relating to Rule 9(b) Pleading Requirements in FCA Cases

One issue that has been the subject of many cases over the last several years is what a plaintiff must plead to satisfy Rule 9(b)'s particularity requirement in an FCA case, and therefore survive a motion to dismiss.  There have been at least two interesting developments on this front over the last six months relating to:  (1) plaintiffs' attempts to use statistical evidence to satisfy their pleading burden, and (2) whether and when Rule 9(b)'s particularity requirements should be relaxed in certain circumstances.

1.     The First Circuit (and Potentially Fourth Circuit) Explore the Limits on Use of Statistical Sampling in FCA Cases

Recognizing that it can be difficult for some plaintiffs to plead actual facts demonstrating that claims submitted by defendants to the government are false on their face, plaintiffs (primarily relators) have begun regularly attempting to plead "falsity" through statistical sampling.  Relators attempt to show that although they cannot allege that a claim submitted to the government is false by comparing the content of the claim to actual facts, they claim the totality of background facts show statistically that it is likely that the statements made on or in connection with a claim were false. The First Circuit highlighted the difficulties plaintiffs face in overcoming Rule 9(b)'s particularity requirements when using this method to plead an FCA case.  In Lawton ex rel. United States v. Takeda Pharm. Co., the relator alleged that the defendant had caused "false" claims to be submitted to the government by third parties as a result of the defendant "engag[ing] in an illegal off-label marketing campaign" for one of its drugs.  842 F.3d 125, 131 (1st Cir. 2016).  Because the relator could not demonstrate that any of the particular claims ultimately submitted to the government were actually tainted by this alleged illegal activity, the relator attempted to rely upon statistical evidence that Medicare and Medicaid funds were used to pay for prescriptions of the drug between 2003 and 2012.  Id. at 128–32. The First Circuit rejected relator's attempts and affirmed dismissal of his claims, holding they were not enough to satisfy even a "flexible" Rule 9(b) pleading standard.  The First Circuit stated that although a relator could use "factual or statistical evidence . . . without necessarily providing details as to each [submitted] false claim," a relator still must identify, among other things, "specific medical providers who allegedly submitted false claims," the "rough time periods, locations, and amounts of the claims," and "the specific government programs to which the claims were made."  Id. at 130-31 (emphasis added).  The First Circuit concluded that the relator's statistical evidence in Lawton was not enough to satisfy Rule 9(b) because he merely "point[ed] to the amounts of Medicare and Medicaid funds used to pay for [the] prescriptions" and concluded a "portion of [the] funds must have been used to pay unlawful claims"--saying nothing of who submitted the false claims or when they were submitted.  Id. at 132. Lawton demonstrates that even a nominally "relaxed" Rule 9(b) standard for "statistical evidence" relating to third party submissions of claims remains demanding.  Moreover, Lawton makes clear that a relator may not sidestep Rule 9(b)'s requirements that a relator plead the "who, what, when, where, and how of the alleged fraud" simply by pleading statistical evidence.  Id. at 130. Although not in a case involving the pleadings stage, the Fourth Circuit also appeared ready to weigh in on this issue.  On October 26, 2016, it heard oral argument in United States ex rel. Michaels v. Agape Senior Community, Inc., No. 15-2145 (4th Cir. 2016).  In that case, as we reported in our 2015 Year-End Update, the district court rejected the relators' request to use statistical sampling to prove liability for the allegedly false claims at issue and to prove damages.  The district court found that the case was not suited for sampling because the underlying medical charts for all the claims at issue were "intact and available for review" to determine whether "certain services furnished to nursing home patients were medically necessary."  Michaels, No. 0:12-3466-JFA, 2015 WL 3903675, at *7, *8 (D.S.C. June 25, 2015). Despite agreeing to hear the issue, the Fourth Circuit indicated during oral argument that it may not ultimately reach the statistical sampling issue, instead ruling on jurisdictional grounds.  Oral Arg., Michaels, No. 15-2145 (4th Cir. 2016), http://coop.ca4.uscourts.gov/OAarchive/mp3/15-2145-20161026.mp3.  If true, this will come as a disappointment to defendants who had hoped the Fourth Circuit might provide much-needed clarity on the use of statistical sampling in FCA cases.

2.     The Sixth and Seventh Circuits Embrace Relaxed Pleading Requirements in Certain Cases

As we have previously reported, the circuits have in the past split on the proper Rule 9(b) pleading standard for FCA cases.  Although the precedents defy easy categorization, generally speaking the Fourth, Eighth, Tenth, and Eleventh Circuits apply a somewhat heightened pleading standard, requiring identification of at least one claim for payment that is false,[80] while several other circuits (including the First, Fifth, Seventh, Ninth, and D.C. Circuits) use a less stringent pleading standard, allowing claims based on allegations of particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that false claims were actually submitted.[81] The Sixth Circuit recently adopted a relaxed Rule 9(b) pleading standard, at least for certain FCA cases.  Over the years, the Sixth Circuit has left open the door for a relaxed pleading standard, and it has now taken at least one step across the threshold with United States ex rel. Prather v. Brookdale Senior Living Communities, Inc., 838 F.3d 750, 773 (6th Cir. 2016).  There, the court held that the relator need not identify an actual false claim or produce an actual billing or invoice to survive a motion to dismiss, at least where a relator has "personal billing-related knowledge that support[s] a strong inference that specific false claims were submitted."  Id. at 769, 773.  In reaching its decision, the Sixth Circuit explained that a rigid, heightened Rule 9(b) pleading standard would "undermine the effectiveness of the [FCA]."  Id. at 772. The Seventh Circuit also further explored the bounds of its relaxed Rule 9(b) pleading standard.  In United States ex rel. Presser v. Acacia Mental Health Clinic, LLC, the Seventh Circuit held that the Rule 9(b) pleading standard may be relaxed even where a relator lacks all the facts necessary to detail her claim.  836 F.3d 770, 778 (7th Cir. 2016).  The Seventh Circuit clarified that, although the complaint must provide "plausible" grounds for the relator's suspicions, a relator's specific billing knowledge provides enough of an "inference" of fraud to meet the Rule 9(b) pleading requirements even if the relator does not "present, or even include allegations about, a specific document or bill that the defendants submitted to the Government."  Id. at 777–78.  To be sure, the Seventh Circuit stated the relaxed standard still requires the relator to demonstrate how the allegedly wrongful scheme could fairly be understood as "unusual" or fraudulent, but it recognized a relator need not identify a specific false claim.  Id. at 780.

E.     Developments Relating to the FCA's Scienter Requirements

The FCA's liability provisions provide that a defendant violates the FCA only if the defendant acts "knowingly."  31 U.S.C. § 3729(a)(1) (emphasis added). The Eighth Circuit and Sixth Circuit recently issued opinions relating to the FCA's scienter standard that are sure to be welcomed by FCA defendants.

1.     The Eighth Circuit Dismisses an FCA Claim Based on an Objectively Reasonable Interpretation of a Regulation

For many years, defendants have argued that the FCA's scienter requirement cannot be met where a false claim is premised on a vague or ambiguous regulatory, statutory, or contractual requirement.  These arguments tend to rely on the Supreme Court's statement in Safeco Ins. Co. Am. v. Burr, 551 U.S. 47, 70 n.20 (2007).  Applying another federal statute with a knowledge standard identical to the FCA's, the Supreme Court held in Safeco that where a statute, regulation, or contract would "allow for more than one reasonable interpretation, it would defy history and current thinking to treat a defendant who merely adopts one such interpretation as a knowing or reckless violator."  See also United States ex rel. Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370, 378 (4th Cir. 2008) ("An FCA relator cannot base a fraud claim on nothing more than his own interpretation of an imprecise contractual provision."). In United States ex rel. Donegan v. Anesthesia Assocs. of Kan. City, PC, the Eighth Circuit held that a defendant's objectively reasonable interpretation of a government regulation precludes a finding the defendant "knowingly" submitted false claims in violation of this provision.  833 F.3d 874 (8th Cir. 2016).  Donegan centered around use of the term "emergence" in a Medicare regulation authorizing reimbursement for anesthesiology services if the physician participated in a patient's "induction and emergence."  Id. at 879.  The Eighth Circuit concluded at the summary judgment stage that the meaning of "emergence" as used in the regulation was "ambiguous" because neither a "controlling source" nor a "professional bod[y]" responsible for "establish[ing] anesthesia standards" had defined the term.  Id. at 878.  Relying on evidence introduced by the defendant that the defendant had adopted standards defining "emergence" to include treatment administered in the recovery room (bolstered by expert testimony defining the term in the same manner), the Eighth Circuit found the defendant's interpretation "objectively reasonable."  Id.  As a result, it held that a defendant's "reasonable interpretation of the ambiguous regulation" precluded a finding it knowingly submitted false claims in violation of the FCA.  See id. at 880–81. The Eighth Circuit cautioned, however, that a reasonable interpretation would not necessarily preclude summary judgment on the FCA scienter issue "if a Relator (or the United States) produce[d] sufficient evidence of government guidance that warn[ed] a regulated defendant away from an otherwise reasonable interpretation of an ambiguous regulation."  Id. at 879 (citations and marks omitted) (emphasis in original). The Eighth Circuit's decision is notable as it places the burden on the plaintiff to demonstrate the defendant should have adopted a different interpretation of an ambiguous regulation, providing some measure of comfort to FCA defendants that adopt an objectively reasonable interpretation in the face of ambiguous language in a statute or regulation.  However, it should be noted that the Eighth Circuit's decision came at summary judgment, meaning defendants seeking to use its ruling may still be subject to costly discovery.

2.     The Sixth Circuit Affirms Scienter Is Properly Addressed at the Pleadings Stage and Addresses Reverse False Claims

In United States ex rel. Harper v. Muskingum Watershed, 842 F.3d 430, 436–37 (6th Cir. 2016), the Sixth Circuit demonstrated its willingness to dismiss a case at the pleadings stage on scienter grounds and, in a matter of first impression, opined on the scienter required to state reverse false claims and conversion claims under the FCA. In 2009, Congress amended the FCA's reverse false claim provision to impose liability for "knowingly and improperly avoid[ing] or decreas[ing] an obligation to pay or transmit money or property to the Government."  31 U.S.C. § 3729(a)(1)(G).  Construing the term "knowingly," the Sixth Circuit held that a defendant must both know its conduct violates a legal obligation and must act knowingly, in deliberate ignorance of, or with reckless disregard for the fact that it is involved in conduct that violates a legal obligation to the United States.  842 F.3d at 436–37. Observing that the FCA is not a vehicle to police technical compliance with federal obligations, the Sixth Circuit held that it is not enough for a defendant to know it has a legal obligation but be under the mistaken belief the obligation does not apply.  Id.  Accordingly, the Sixth Circuit affirmed dismissal of the relator's complaint under Rule 12(b)(6) for failing to adequately allege the defendant acted with scienter.  Id. at 440. In addition to policing the bounds of "knowing" conduct under the FCA, the Sixth Circuit's decision also demonstrates that courts can--and should--address scienter issues at the pleadings stage.

F.     Developments Relating to the FCA's Public Disclosure Bar

As revised by the Affordable Care Act, the FCA's public disclosure bar provides that a "court [must] dismiss an action or claim . . . if substantially the same allegations or transactions . . . were publicly disclosed" in a prior case or via the news media "unless . . . the person bringing the action is an original source of the information."  31 U.S.C. § 3730 (e)(4)(A)(i)-(iii). Congress amended the FCA in 2010 to provide that an "original source" is someone who either "(1) prior to a public disclosure . . . has voluntarily disclosed to the Government the information on which allegations or transactions in a claim are based, or (2) who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions."  31 U.S.C. § 3730(e)(4)(B) (2010).  Prior to this, the statute allowed a relator to qualify as an original source only if he or she possessed "direct and independent knowledge" of the alleged fraud.  See 31 U.S.C. § 3730(e)(4)(B) (1986). Two decisions addressing original source status under the FCA reinforce the notion that relators face a high burden under either version of the FCA's public disclosure bar when the underlying allegations have been publicly disclosed.

1.     The Ninth Circuit Sets a High Bar for Who May Qualify as an Original Source

In United States Hastings v. Wells Fargo Bank, NA, the Ninth Circuit held the relator was not an original source under either the current or pre-2010 version of the FCA's public disclosure bar.  656 F. App'x 328, 330 (9th Cir. 2016).  Under the pre-2010 version, the Ninth Circuit held the relator lacked "direct" knowledge of the purported insurance fraud at issue because he relied on evidence such as real estate postings, internal lending guidelines, and other public documents rather than anything demonstrating he "[saw] the fraud with [his] own eyes" to reach his conclusions.  Id. at 331.  The relator also failed to qualify as an original source under the current FCA.  Id.  Among other reasons, the relator's knowledge provided "only background information and details relating to the alleged fraud" and thus did not "materially add to [the] public disclosure" as required by the statute.  Id. at 331–32.  For instance, the relator had argued he was an original source based on letters he sent to the government, but the Ninth Circuit found those letters "consisted of speculation rather than knowledge" and merely described the government "program in general [terms] and the possibility that it would" be fraudulently misused rather than the key facts of the alleged fraud.  Id. at 330–31.  To the extent the letters contained facts relating to the fraud, the Ninth Circuit found that the government already "knew" that information because it had obtained the facts in connection with an earlier related settlement.  Id. at 331–32.

2.     The Eleventh Circuit Denies Original Source Status to Relator Claiming Secondhand Knowledge of Fraud

The Eleventh Circuit in November also addressed "whether [the relator's] secondhand knowledge is sufficient to make him an original source" under the pre-2010 version of the FCA's public disclosure bar, joining the Third, Seventh, Eighth, and Tenth Circuits in finding that it does not.  United States ex rel. Saldivar v. Fresenius Med. Care Holdings, Inc., 841 F.3d 927, 935 (11th Cir. 2016). In Saldivar, the relator filed suit claiming the defendant had billed the government for drug "overfill" (an amount in excess of what was indicated on the drug's labeling) that it received at no cost.  Id.  Although the relator had "firsthand knowledge related to inventory and administration of overfill," the Eleventh Circuit found he had only "secondhand knowledge" related to the alleged improper billing of the government (i.e., the FCA violation itself) because he had only ever "heard about [the] billing practice from others" rather than directly observing it himself.  Id. at 936.  The Eleventh Circuit held such secondhand knowledge was insufficient to meet the "direct" knowledge requirement in the pre-2010 version of the public disclosure bar.  Id. at 937.

G.     The Fourth Circuit Addresses Successor Liability in FCA Claims

In the latest ruling in a long-running FCA saga we have covered in the past, the Fourth Circuit addressed the proper test for determining liability of a successor corporation in FCA cases.  The dispute in United States ex rel. Bunk v. Government Logistics N.V. began more than 15 years ago and previously resulted in the Fourth Circuit ruling that a $24 million judgment should be entered in the relator's favor against Gosselin, one of the corporate defendants.  842 F.3d 261, 273–74 (4th Cir. 2016). In the Fourth Circuit's most recent opinion in the case, relator Bunk attempted to recover his judgment from an alleged successor corporation to the Gosselin defendant.  Although the Fourth Circuit ultimately found the relator could take advantage of an exception for fraudulent mergers to attempt to obtain judgment from Gosselin's successor, it rejected application of a relaxed standard for determining successor liability in the FCA context.  Id. at 273–74.  The Fourth Circuit held that because the FCA did not specifically address the rule for successor liability, courts should apply the common law test, which looks to whether the successor is a "mere continuation" of the prior entity and impose successor liability only in those circumstances (or where another narrow exception might apply).  Id. at 274.

H.     FCA Retaliation Claims

Under the FCA's anti-retaliation provision, an employer may not "discharge[], demote[], suspend[], threaten[], harass[], or in any manner discriminate[] against [an employee or contractor] because of [1] lawful acts done by [the employee or contractor] . . . in furtherance of an action under [the FCA] or [2] other efforts to stop 1 or more violations of [the Act]."  31 U.S.C. § 3730(h)(1). Two circuits recently provided guidance on what standards lower courts should apply in assessing a retaliation claim under the FCA.

1.     The Fourth Circuit Applies an Objective Test to Retaliation Claims Asserted under the Second Prong of Section 3730(h)(1)

In Carlson v. DynCorp International LLC, the Fourth Circuit became one of the first to address the expanded protections Congress afforded to whistleblowers in anti-retaliation provisions in the 2010 amendments to the FCA.  657 F. App'x 168 (4th Cir. 2016).  In Carlson, the defendant allegedly terminated the plaintiff for questioning his employer's billing practices, which resulted in underbilling of the government.  Id. at 169.  The plaintiff argued that this conduct "amounted to 'efforts to stop 1 or more violations of [the FCA]'" pursuant to Section 3730(h)(1).  Id. at 170. The district court, in granting a motion to dismiss, applied the "distinct possibility" test, which provides that "an employee engages in protected activity [under Section 3730(h)] when litigation is a distinct possibility, when the conduct reasonably could lead to a viable FCA action, or . . . when litigation is a reasonable possibility."  Id. at 171 (citations omitted) (internal quotation marks omitted).  The Fourth Circuit found the district court's articulation of law was error, explaining that the district court's announced test only applies when an employee engages in protected activity under the first prong of Section 3730(h)(1)--"lawful acts done . . . in furtherance of an action under [the FCA]."  Id. at 171–72.  The Fourth Circuit noted that Congress had expanded the scope of the FCA's anti-retaliation provision in 2010 to include additional protection for "efforts to stop 1 or more violations of [the FCA]."  Id.  The Fourth Circuit concluded that the "distinct possibility" test did not apply to the "efforts to stop" prong.  Id.  Instead, the Fourth Circuit "assume[d], without deciding" that an employee engages in protected activity under this other prong when his "efforts are motivated by an objectively reasonable belief that the . . . employer is violating, or soon will violate, the FCA."  Id. at 172.  The Fourth Circuit affirmed dismissal of the relator's claim here, concluding "his alleged belief that [his employer] was violating the FCA was not reasonable" because the plaintiff could not "point[] to any . . . provision or case that would make under billing a violation [of the FCA]," as the statute is only concerned with financial loss to the government  Id. at 173–75.

2.     The Seventh Circuit Applies an Objective Test to Retaliation Claims Asserted under the First Prong of Section 3730(h)(1)

The Seventh Circuit recently provided guidance on what constitutes protected activity under the first prong of Section 3730(h)(1) in United States ex rel. Uhlig v. Fluor Corp., 839 F.3d 628, 635 (7th Cir. 2016).  There, the plaintiff claimed the defendant was employing unlicensed electricians in violation of a government contract and reported the information to the government as well as a whistleblower website.  Id. at 633.  The plaintiff was later terminated for including confidential information in his e-mail to the website, in violation of the employer's computer-use policy.  Id.  He claimed his discharge was unlawful retaliation under the first prong of Section 3730(h)(1).  See id. at 635 (citations omitted). To determine whether the plaintiff engaged in protected activity under the statute, the Seventh Circuit applied a two-prong test:  "whether (1) the employee in good faith believes, and (2) a reasonable employee in the same or similar circumstances might believe, that the employer is committing fraud against the government."  Id.  In other words, the plaintiff must both subjectively and objectively believe the employer is violating the FCA.  The Seventh Circuit held that the plaintiff failed the objective prong of the test because he lacked "firsthand knowledge" of the purported fraud and what he did know "was not sufficient to cause a reasonable person to suspect fraud on the part of [the defendant]." Id. Carlson and Uhlig demonstrate that a plaintiff must have an "obj