The decision unexpectedly expands potential liability.
On January 8, the U.S. Court of Appeals for the Fourth Circuit issued a panel decision that established a new and potentially significant False Claims Act (FCA) precedent when it unambiguously embraced—for the first time in Fourth Circuit FCA jurisprudence—the FCA theory of implied certification. The decision, United States ex rel. Badr v. Triple Canopy Inc., represents a significant departure from Fourth Circuit jurisprudence; although several other circuits acknowledged this theory of liability, the Fourth Circuit has hedged for a long time, reluctant to establish case law that could turn the FCA into a breach of contract remedy. The decision introduced new concepts of liability and materiality that are notable for assessing liability and will be used by the government and whistleblowers to expand application of the statute.
Triple Canopy Contracted to Provide Security at Iraq Airbase
In June 2009, the U.S. government awarded a military contract to Triple Canopy to provide security services at the Al Asad Airbase, the second-largest airbase in Iraq. One of Triple Canopy’s responsibilities under the Al Asad Task Order (TO-11) was to provide personnel with demonstrated marksmanship capabilities, or, more specifically, to ensure that all employees (1) received weapons training and (2) achieved a qualifying score on the relevant U.S. Army skills test (the “marksmanship requirement”). Significantly, TO-11 did not expressly condition payment on complying with these responsibilities.
Implied Compliance with Marksmanship
In fulfilling the TO-11, Triple Canopy hired 332 Ugandan guards to serve at several of its bases, some or all of whom did not satisfy the marksmanship requirement. Although the invoice that Triple Canopy submitted was on its face accurate (i.e., did not misrepresent the number of personnel or the appropriate rate for their services), the government argues that the claim was false because it implied compliance with a key obligation of the agreement—that is, the marksmanship requirement—with which it was knowingly not in compliance. Specifically, the government alleged that Triple Canopy “‘billed the Government the full price for each and every one of its unqualified guards’ and ‘falsified documents in its files to show that the unqualified guards each qualified as a ‘Marksman’ on a U.S. Army Qualification course.’”
District Court Dismissal
The relator, a Triple Canopy medic, filed a qui tam complaint against Triple Canopy alleging, in part, that he was directed by his supervisor to prepare false marksmanship scorecards for the guards, who were subsequently dispatched to multiple locations. The government intervened, alleging that (1) Triple Canopy knowingly presented false claims in violation of 31 U.S.C. § 3729(a)(1)(A) (Count I) and (2) Triple Canopy caused the creation of false records material to a false claim in violation of 31 U.S.C. § 3729(a)(1)(B) (Count II). The district court dismissed both Counts I and II, respectively, for (1) failure to plead that Triple Canopy submitted a demand for payment that contained an objectively false statement and (2) failure to allege a false claim and that certain documentation related to the skills of contracted personnel was reviewed by the government’s contracting officer representative prior to paying invoices. Both holdings were reversed on appeal.
Degree of Scienter, or Knowledge, Alleged
The Fourth Circuit rejected the district court’s reasoning with respect to Count I, holding that the government adequately pleaded submission of a false claim where it “allege[d] that the contractor, with the requisite scienter, made a request for payment under a contract and ‘withheld information about its noncompliance with material contractual requirements.’”
Debating the concept of “withheld information about noncompliance” has extraordinary implications for litigating FCA cases. The U.S. Department of Justice (DOJ) and whistleblowers, applying the reckless disregard or deliberate ignorance standards, may routinely assert that a contractor or healthcare provider withheld disclosure of its noncompliance for any range of activities or conduct. Nevertheless, to distinguish the facts ofTriple Canopy from those of other cases that involve routine contractual disputes, to which the FCA has been held inapplicable, the court focused on (1) the materiality of the misrepresentation and (2) the degree of scienter, or knowledge, alleged.
With respect to scienter, the court emphasized that not only did Triple Canopy fail to satisfy the marksmanship requirement, but it also had actual knowledge of that failure and “it undertook a fraudulent scheme that included falsifying records to obscure its failure.”
Materiality and Common Sense
With respect to materiality, the court looked first to common sense: Of course the government expected the guards responsible for ensuring the security of its military bases to be able to “shoot straight.” Second, the court looked to Triple Canopy’s efforts to conceal the failure: If Triple Canopy thought the requirement was insignificant (i.e., immaterial), it likely would not have gone to great lengths (falsifying records) to conceal its failure. Finally, the court relied on cases in other jurisdictions, including a significant District of Columbia decision, United States v. Science Applications International Corp., and its gasoline octane example to explain that the government need only show that a particular item is a material requirement of the contract, rejecting distinctions between condition of payment and inadequate contract performance.
Court Acknowledges Risk of Implied Certification Theory
Although the court acknowledged the risk that an implied certification theory may enable plaintiffs to “shoehorn a breach of contract claim into an FCA claim,” it concluded that it could not endorse an application of the FCA that would enable a defendant, under the facts alleged, to “avoid liability because nothing on the ‘face’ of the invoice was objectively false.” Many would argue that substantial compliance with a contract does not give rise to per se FCA liability in the face of no falsity on the invoice, but in Triple Canopy, the court was understandably troubled by the allegation that the contractor’s supervisor falsified the marksmanship records and was determined to allow a remedy. Whether the remedy should be the FCA by expanding its reach to implied certifications has been the legal debate of the last decade in FCA jurisprudence.
Count II—The Falsified Records Claim
As for Count II, the falsified records claim, the court likewise rejected the district court’s reasoning and added an odd gloss to the materiality analysis by suggesting that the “potential” effect of a false statement as opposed to its actual effect is actionable. The court found that (1) the government did not need to allege a false statement and (2) the marksmanship scorecards were actually reviewed because “the FCA reaches government contractors who employ false records that are capable of influencing a decision, not simply those who create records that actually do influence the decision.” Applying this more expansive view, the court concluded that the falsified scorecards (the false records) were material and integral to the invoices (the false statement).
Qui Tam Filings Expected to Increase
Many FCA practitioners are concerned that the DOJ and whistleblowers sometimes assert technical issues or conditions of participation as material to payment, even in the face of substantial contract or other performance, and this decision will likely expand the potential for liability exposure in this jurisdiction and increase the number of qui tam filings. The Triple Canopy decision acknowledges as much, suggesting that the FCA is designed to reach all fraudulent attempts to cause the government to pay out sums of money. In this regard, it could be inconsonant with an important tenet of the United States ex rel. Harrison v. Westinghouse Savannah River Co. decision as well as the more recent United States of America, ex rel. Barry Rostholder v. Omnicare Inc. et al. decision, all of which caution restraint in interpreting or applying the FCA as a general fraud statute. The decision may also increase the trend of novel FCA theories of liability moored only to regulatory violations.
Triple Canopy is a triple win for the government because the court reinstated the government’s dismissed counts, embraced the FCA-implied certification theory, and held that a contractor may face FCA liability where it has allegedly withheld information about its noncompliance with material contractual requirements. The precedent of this panel decision should be watched for adoption in the conference room and the courthouse.