In a case of first impression with potentially far-reaching consequences, the Fifth Circuit has ruled that a contractor may be held vicariously liable for double damages under the Anti-Kickback Act (AKA) even when the kickback is taken by an employee, not the contractor.  United States ex rel. Vavra, et al., v. Kellogg Brown & Root, Inc. (KBR), No. 12-40447 (5th Cir. Jul. 19, 2013). Thus, having first been victimized by a dishonest and disloyal employee, a contractor may then also suffer enhanced civil penalties in a lawsuit by a qui tam relator and/or the Department of Justice. The decision significantly raises the stakes for contractors who fail to monitor their employees or who, despite their best efforts, fall victim to employee self-dealing.

The case arose in connection with KBR’s contract to provide support services to the U.S. military in Afghanistan and Iraq. Two KBR employees who administered subcontracts for freight transportation later pled guilty to criminal charges arising from their acceptance of kickbacks from shipping companies, in the form of meals, tickets to sports events, golf outings, and other gifts and entertainment. A qui tam relator, later joined by the Department of Justice, filed a civil suit against KBR alleging violations of the federal Anti-Kickback Act. The government sought enhanced damages from KBR—twice the amount of the kickbacks plus up to US$11,000 per kickback. The lower court ruled that KBR was not liable for those enhanced penalties where the kickbacks were received not by the company but by lower-level employees for their personal benefit. The Fifth Circuit reversed, rejecting arguments that violations could be imputed to the employer only if the kickbacks were intended to benefit the company or were known at a higher level of management.

However, corporate vicarious liability under this AKA provision still requires that the company “knowingly” engage in prohibited conduct, a standard which the appellate court noted but did not construe. The ultimate impact on KBR – and contractors generally – will depend greatly on how the district court applies the knowledge standard. Typically, self-dealers try to conceal kickbacks from their immediate supervisors and higher management. If a low-level self-dealing employee’s own knowledge is deemed to be company knowledge, then corporate exposure for twice the amount of the kickback is almost unlimited. On the other hand, if knowledge is attributed to the company only if the self-dealing occurs at a higher management level, or is known to officials at a higher management level, then the exposure is far less.

Even if the knowledge standard is interpreted to place a meaningful limit on exposure, that element poses another type of challenge to a defendant company. Because the questions of knowledge and attribution of knowledge are highly fact-intensive, they are likely to survive dispositive pretrial motions. This increases litigation expense and litigation risk for the defendant corporation, and thereby may tend to increase the likelihood and amount of settlements—a phenomenon that will not be lost on the Justice Department or relators’ counsel.

There is ample room in the statutory language for other courts to reach differing conclusions, as the district court did in this case. Moreover, even in courts that interpret the statute as the Fifth Circuit has, there is considerable room for varying and potentially inconsistent applications of the knowledge standard. If a circuit split arises, it is a near certainty that the scope of vicarious corporate liability under the AKA will eventually be reviewed by the Supreme Court. In the meantime, public contractors would be well-advised to review their internal policies and controls for prohibiting, deterring, and detecting employee self-dealing.