In Veridyne Corp. v. United States, -- Fed. Cl. -- , 2012 WL 2673091 (July 6, 2012), the Court of Federal Claims (COFC) resolved a long running government contracts dispute involving an agency of the Department of Transportation (the Maritime Administration (MARAD)), and Veridyne, the plaintiff contractor. A must-read for anyone practicing before the COFC, the opinion deals with government counterclaims not only for common law fraud, but also pursuant to the False Claims Act, the Forfeiture of Fraudulent Claims Act (also known as the special plea in fraud), 28 U.S.C. § 2514, and the fraud provision of the Contract Dispute Act (CDA), 41 U.S.C. § 7103(c)(2).

Veridyne and MARAD executed a contract modification extending the life of Veridyne’s contract, which originally was awarded through the Small Business Administration’s 8(a) program. The modification had to satisfy a $3 million ceiling in order for MARAD to continue using Veridyne without opening the contract work to competition. Ultimately, believing that Veridyne’s proposal to obtain the modification was fraudulent, MARAD issued a stop-work order and refused to pay Veridyne’s invoices. Veridyne, in turn, submitted a certified CDA claim seeking payment for fully performed work, and the case proceeded to trial not only on Veridyne’s claims, but also on the government’s counterclaims. The government’s counterclaims sought all money paid under the contract, the forfeiture of plaintiff’s claims, statutory penalties and damages for false invoices, and for damages as a result of plaintiff’s inability to support portions of its CDA claims. In particular, the government alleged not only that that the modification was void ab initio because Veridyne obtained the modification with a fraudulent proposal (designed to stay just below the $3 million threshold, while knowing full well that the contract payments would exceed that amount), but also that Veridyne sought payment from MARAD in an amount in excess of what plaintiff knew was due to it.

Notwithstanding that the modification’s estimated costs and award fee pools totaled $2,999,948 – i.e., just under the $3 million threshold – the court rejected the government’s common law fraud claim, citing a “mountain of record evidence” in support of the finding that “it is inconceivable that MARAD justifiably relied on Veridyne’s $3 million proposal.” Holding that “[a]bsent justifiable reliance . . .[,] the record cannot support a finding that [the modification] was void ab initio[,]” the court determined that Veridyne was entitled to compensation for services rendered (to the extent of available funding in the applicable work orders).

With respect to the government’s remaining counterclaims, however, the government largely prevailed (with the exception that Veridyne was saved from a total forfeiture of its claims).

First, the court rejected Veridyne’s advice of counsel defense, finding that “Veridyne cannot escape the fact that it knew its submitted claims were false and intended to deceive MARAD into paying [plaintiff’s] claims” and invoices. Although the court explained that the amount awarded to Veridyne ordinarily would be subject to forfeiture, the court nevertheless held that, “to the extent that Veridyne performed services and is entitled to be compensated for its performance, recovery in quantum meruit is warranted” and “applies to negate the net monetary penalty represented by the statutory forfeiture.”

Second, the court rejected Veridyne’s reliance on a line of cases, including United States ex rel. Hagood v. Sonoma County Water Agency, 929 F.2d 1416 (9th Cir. 1991), that “stand for the proposition that government knowledge can vitiate FCA liability, depending on the circumstances.” The court viewed those opinions as incorrectly “engrafting on the FCA a requirement that the agency’s knowledge can vitiate the requisite knowledge of the claimant.” Although perhaps somewhat in tension with the court’s ruling on the common law fraud, the court held that “[b]ecause the proposal leading to award of [the] modification itself was fraudulent, all invoices submitted thereunder are tainted by that fraud.” The court assessed a maximum penalty for each of 127 invoices Veridyne submitted under the modification.

Finally, the court held that Veridyne was liable pursuant to the CDA’s fraud provision for failing to support nearly $600,000 in claimed amounts, which included overstated overhead and unincurred expenses.

This case illustrates that the Justice Department will continue to pursue fraud remedies against contractors aggressively and will do so even where some government officials may have been well aware of a contractor’s conduct only later characterized as fraudulent by an agency or DOJ. Contractors, particularly in the wake of Daewoo Eng’g & Constr. Co. v. United States, 557 F.3d 1332 (Fed. Cir. 2009), must continue to be extra-vigilant regarding the factual and legal bases of their CDA claims. [Note: This post’s author was involved in the early stages of this case while at the DOJ. The information contained herein, however, is based solely on publicly available information.]