In a case of first impression, the Fifth Circuit interpreted the Anti-Kickback Act (the Act), 41 U.S.C. §§ 8701-8707 (recently re-codified from 41 U.S.C. §§ 51-58), to extend vicarious liability for double damages and penalties to an employer for the acts of its employees. In United States ex. rel. Vavra v. Kellogg Brown & Root, Inc., Civ. No. 12-40447 (5th Cir. July 19, 2013), the court held that the civil liability provision of the Act, which provides for recovery of double damages and penalties from a person that knowingly engages in a kickback scheme in connection with a government prime or subcontract, permits the Government to attribute liability to corporate defendants vicariously. This decision means that government contractors at all subcontractor tiers must be especially sensitive to the corporate harm that can arise if an employee is alleged to have engaged in kickbacks.

In 2001, Kellogg Brown & Root (KBR) won the Logistics Civil Augmentation Program III (LOGCAP III) contract to provide global logistical services to the U.S. Army. KBR engaged two subcontractors to assist in carrying out LOGCAP III task orders for the transport of military equipment and supplies to Iraq, Afghanistan, and Kuwait between 2002 and 2006. The Government alleged that employees in KBR’s transportation department accepted on numerous occasions kickbacks from their subcontractor counterparts in the form of meals, drinks, sporting event tickets, and other forms of entertainment. The kickbacks allegedly were calculated to obtain favorable treatment from KBR, such as overlooking the subcontractors’ poor performance and the award of future subcontracts despite poor performance.

KBR moved to dismiss the action on grounds that the Government failed to state a claim for civil liability under § 8706(a)(1) of the Act (formerly § 55(a)(1)). The district court granted the motion to dismiss, stating that the plain language of the statute indicates that corporate vicarious liability does not extend to violations of the Act’s civil liability provisions, and that the Government failed to allege sufficiently that the KBR employees in question acted for KBR’s benefit.1

Section 8706(a) reads as follows:

(a) Amount. — The Federal Government in a civil action may recover from a person—

(1) that knowingly engages in conduct prohibited by section 8702 of this title a civil penalty equal to—

(A) twice the amount of each kickback involved in the violation; and

(B) not more than $[11,000]2 for each occurrence of prohibited conduct; and

(2) whose employee, subcontractor, or subcontractor employee violates section of this title by providing, accepting, or charging a kickback a civil penalty equal to the amount of that kickback.

The district court concluded that allowing vicarious liability under subsection (a)(1), which allows double damages and penalties, would render the single damages provisions of subsection (a)(2) superfluous.

On appeal, the Fifth Circuit reversed the district court’s decision. First, the court held that the plain language in both subsections of the statute’s civil liability provision contemplate recovery for violations by a “person,” which the Act defines broadly to include corporations. Second, the court held that, under the common law rule of vicarious liability, an employer can be subject to liability not only for the actions of its employees committed while acting in the scope of their employment, but also if the act, if committed outside the scope of employment, was furthered or aided by reliance on the employee’s apparent authority.

The Fifth Circuit concluded that the Government sufficiently alleged that KBR’s employees accepted kickbacks while acting within their apparent authority. The Fifth Circuit’s discussion of apparent authority is important. Quoting the Supreme Court, the Fifth Circuit noted that “one who appears to have authority to make statements for the [principal] gives to his statements the weight of the [principal’s] reputation.”3 In other words, an employee who accepts or orchestrates kickbacks — even if doing so outside the bounds of his or her actual authority and with no intent to benefit his or her employer — can subject the company to potential liability under the Act.

The Fifth Circuit noted that application of vicarious liability for knowing violation of the Act would hinge upon the resolution of whether the kickback-accepting employee possessed apparent authority, a fact-intensive inquiry. Nevertheless, the Fifth Circuit’s decision potentially places government contractors at risk under the Act for civil penalties equal to twice the amount of each kickback involved in the violation, as well as punitive damages up to US$11,000 for each occurrence of prohibited conduct. Strong compliance programs, comprehensive employee training, and focused internal investigation procedures are essential for contractors to minimize the risk of vicarious liability for the acts of rogue employees.