Bottom Line Up Front: A recent decision by the Armed Services Board of Contract Appeals (“ASBCA”) clearly demonstrates that federal contractors will lose (or the very least put at risk) their legitimate claims for payment or extra costs when they commit fraud on a federal contract, even when the claims for payment or extra costs are not related to the actual fraud.
In the recent case of Laguna Construction Company (“Laguna”) v. United States, the contractor received 16 different cost-reimbursable task orders to perform work in Iraq as part of ongoing military operations. At some point during the performance of these task orders, several Laguna employees arranged for, and began to accept, kickbacks from subcontractors who were seeking future subcontracts (or faster subcontract payments from Laguna). The Laguna employees, including a project manager and a vice president, were ultimately investigated and prosecuted for their fraudulent actions under the contract.
While the criminal investigation was ongoing, the Department of Defense rejected Laguna’s submission of 14 invoices for payment of legitimately completed work under numerous task orders. These invoices totaled about $ 3 million. The ASBCA upheld the Government’s refusal to pay these non-tainted invoices based on the fraudulent actions of Laguna’s employees. The ASBCA found Laguna’s kickbacks violated the “well settled principle of antecedent breach” and that this material breach of the underlying contract excused the Government from paying Laguna for any remaining invoices – even where those invoices were not tainted by fraud or wrongdoing.
Such a result leads to incredible liability for contractors where non-tainted claims for payment under different task orders are subject to forfeiture for unrelated fraud. A sole kickback or false claim under one task order could be found, like that in Laguna, to breach the entire contract for failure to perform in good faith and fair dealing and excuse the Government from paying a contractor.
It is unlikely that a contractor will be able to limit its liability by claiming that the false claim or kickback was made by a “rogue” employee. In Laguna, the ASBCA found the actions of the employees were imputed to the contractor (i.e. were transferred from the employees to the contractor) since the contractor had selected the individuals to carry on its business in obtaining and performing the task orders. In sum, contractors are liable for the acts of their employees, to include fraud, even when the contractor has no knowledge of the actual fraud.
Lesson Learned: The Laguna holding is just the latest iteration of fraud-based liability for contractors doing business with the federal government. The best defense to such employee-caused fraud is to implement and apply a robust ethical compliance program to ensure that employees are well educated on what they can and cannot do, and to ensure that checks and balances are put in place to identify and mitigate any fraud that may occur.
Doug Hibshman is a partner in Fox Rothschild LLP’s Federal Government Contracts and Procurement, Construction, and Infrastructure Practice Groups in Washington, DC, and routinely represents federal contractors on False Claims Act prevention, compliance, mitigation, and defense matters.