On April 10, 2009, the U.S. Court of Appeals for the Fourth Circuit issued an important decision regarding the application of the False Claims Act (FCA), 31 U.S.C. § 3729, to contracts with the Coalition Provisional Authority (CPA), the temporary body established by the U.S. to govern Iraq following the overthrow of Saddam Hussein in 2003. A jury in United States ex rel. DRC, Inc. v. Custer Battles, LLC , found that Custer Battles presented both false claims and false records to justify an advance on a contract that it held with the CPA to provide support services. The District Court in Custer Battles made two important rulings that were reversed on appeal. First, prior to submitting the case to the jury, the District Court limited the relators' fraud claims to $3 million, the amount paid to Custer Battles directly from the U.S. Treasury. United States ex rel. DRC, Inc. v. Custer Battles, LLC , 376 F. Supp. 2d 617, 647 (E.D. Va. 2005). The District Court reasoned that, because the remaining payments to Custer Battles were made from Iraqi funds to which the U.S. had neither title nor control, the claims that resulted in those payments could not support liability under the FCA. Second, after the jury returned a verdict against Custer Battles for the full $3 million, the District Court overturned that verdict on the grounds that there was insufficient evidence that Custer Battles presented fraudulent invoices to "an officer or employee of the United States Government or a member of the Armed Forces of the United States." United States ex rel. DRC, Inc. v. Custer Battles, LLC, 444 F. Supp. 2d 678, 683, 689 (E.D. Va. 2006) (quoting 31 U.S.C. § 3729(a)(1)).
On appeal, the Fourth Circuit reversed both rulings. United States ex rel. DRC, Inc. v. Custer Battles, LLC, No. 07-1220, 2009 WL 971017 (4th Cir. Apr. 10, 2009). With respect to the first ruling, the Fourth Circuit determined that the District Court erred in limiting relators' claims to the amounts paid directly from U.S. Treasury funds. DRC , slip op.at 17. The Fourth Circuit rejected the District Court's "source-of-funds analysis," which attempted to segregate those claims paid directly from the U.S. Treasury and those claims paid from the "Development Fund for Iraq," which included moneys contributed by the U.S. but which the District Court determined belonged to the Iraqi people. DRC, 376 F. Supp. 2d at 647. The Fourth Circuit held that a claim made to a grantee of United States money satisfies the definition of an FCA claim if "'any portion' of the claim is or will be funded by U.S. money given to the grantee." DRC , slip op.at 15 (quoting 31 U.S.C. § 3729(c)). The Fourth Circuit further held that the "the U.S. need no longer have control over the funds" for FCA liability to attach. Id.at 16. Therefore, claims that were ultimately paid from the Development Fund for Iraq, which was a grantee of the United States government, could also support liability under the FCA. Id.
With respect to the second ruling, the Fourth Circuit determined that the District Court erred in its application of a presentment requirement in both § 3729(a)(1) and § 3729(a)(2) of the FCA. The District Court found that § 3729(a)(1)'s requirement that a claim be presented to "an officer or employee of the United States Government" was not met by presentment to United States government personnel who were detailed to the CPA, as the CPA was not an instrumentality of the United States and the personnel were therefore not acting in their official capacity as employees of the United States. DRC, 444 F. Supp. 2d at 689. The Fourth Circuit disagreed, observing that Custer Battles submitted its invoices to "U.S. government contracting officers, who were paid and supervised by the U.S. Military," and that these officials were "functioning as employees of the United States to do precisely the jobs that the United States hired them to do full-time and for which the United States paid them." DRC, slip op. at 20, 21-22. Finally, the Court held that § 3729(a)(2) contains no presentment requirement, applying the Supreme Court's decision in Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123 (2008), which was decided while Custer Battles was on appeal. DRC, slip op. at 23.
The Fourth Circuit's decision is significant not only for contractors that did business with the CPA during its brief existence in 2003 and 2004, but for all contractors doing business with recipients of U.S. funds. The decision anticipates (at least in the Fourth Circuit) pending legislation that would have responded to the District Court's ruling by expanding the definition of "claim" to include "any request or demand . . . for money or property and whether or not the United States has title to the money or property ." Fraud Enforcement and Recovery Act of 2009, S.386, 111th Cong. § 4 (2009). The presentment aspect of the decision also has the potential to significantly broaden the reach of the FCA, and creates some uncertainty as to when liability will attach under the Act. The decision provides little guidance as to when a government official is sufficiently removed from the control of the United States government so as to not be acting in his or her official capacity as a government employee for purposes of the FCA.