In a decision many in the defense bar will argue was wrongly decided, the U.S. District Court for the District of Columbia in U.S. v. DynCorp Int’l LLC ruled that knowingly billing for unreasonable costs can serve as the basis for an implied certification claim under the FCA. The court took an expansive view of implied certification that departs from the Supreme Court’s guidance in Escobar and, we would argue, sidesteps the rigorous materiality requirements emphasized by the Court.
The court largely denied DynCorp’s motion to dismiss the government’s complaint, which alleged that DynCorp presented false claims to the government by knowingly billing the State Department at “unreasonable” rates for lodging, labor, and general and administrative costs. DynCorp submitted the bills in connection with its contract to help train and equip a new civilian police force in Iraq and provide other support services. Lodging and G&A were billed as cost-reimbursable line items, while labor was billed initially under undefinitized firm-fixed-price line items and then later as cost-reimbursable charges. The court concluded that the government adequately alleged falsity, materiality, and scienter under an implied certification theory for the cost-reimbursable charges and under a fraudulent inducement theory for the fixed-price charges. We focus here on the court’s implied certification analysis.
Falsity. The Supreme Court held in Escobar that an implied certification theory is viable “at least” where a claim makes specific representations about the goods or services provided but fails to disclose noncompliance with material statutory, regulatory, or contractual requirements, making the representations misleading half-truths. The court here went further, just as the Fourth Circuit recently did in its Triple Canopy decision. Both courts found that specific representations are not necessary and that it is sufficient merely for a contractor to withhold information about its noncompliance with material contractual requirements since, they reasoned, claims for payment implicitly represent that the billing party is legally entitled to payment. But while the Fourth Circuit determined that billing for “guards” was a representation that the guards met marksmanship requirements and the sort of “half-truth” that the Escobar Court found to be sufficient, the D.C. court provided no analysis of why DynCorp’s bills for lodging, labor, and G&A were “half-truths.”
Materiality. The court also considered whether unreasonable costs could satisfy the FCA’s materiality requirement and concluded that claims for costs are material if “significantly higher than reasonable.” While acknowledging that “reasonableness is subjective,” the court nonetheless found “significantly higher” to be a sufficient guidepost by which to assess the materiality of “unreasonable” costs. We would argue that this “we know it when we see it” measurement of materiality is inconsistent with the Supreme Court’s instruction that materiality is a “rigorous” and “demanding” standard that must be applied to ensure that the FCA is not used as a vehicle for punishing garden-variety breaches of contract or regulatory violations.
Scienter. In assessing whether the government adequately pled that DynCorp had knowledge that compliance with the contract’s cost reasonableness requirement was material to the government’s decision to pay, the court relied on “common sense” and the existence of regulatory provisions permitting the government to refuse to pay unreasonable costs. This strikes us as odd given that the court noted in its materiality analysis that a regulation permitting contracting officers to refuse to pay unreasonable costs is just one indication of materiality, but found that such a regulation plus simple “common sense” was sufficient for the court to infer that DynCorp had knowledge that billing for labor, lodging, and G&A at the allegedly excessive rates would be material.