The False Claims Act case against Lance Armstrong lasted longer than his 7 year Tour de France win streak.

While the settlement of the False Claims Act case against Lance Armstrong has generated a press release, a quick online search didn’t produce a copy of the actual agreement. So I filed a Freedom of Information Act request and the next day the Department of Justice provided me a copy of the Lance Armstrong settlement agreement.  Thank you, Team DOJ!  Below is my take on that agreement and what it tells us about the case.

The settlement amount

The settlement agreement provides that Lance Armstrong will pay $5 million to the Government and $1.65 million to the relator Floyd Landis. To put this in context, the Postal Service had paid about $40 million to sponsor Team Postal. Trebling that amount, and throwing in civil penalties and investigative costs, bumps up potential damages to well over $100 million. The settlement amount was thus less than 7 cents on the dollar.

Damages was always the Government’s weakness – because there weren’t any. This should have been apparent at the outset from the contemporaneous USPS reports on how much publicity and new revenue the Team Postal sponsorship had generated. These reports were poppycock, of course, but they still posed insurmountable problems for the Government’s case.

The USPS-generated reports on the value of the Team Postal sponsorship came in response to criticism over the deal. The Postal Service is often wrongly criticized for anything it spends on advertising. In my view, it should be spending a lot more, especially to defend the remains of First Class Mail. But these critics had a point. Why spend tens of millions of dollars on an event that takes place on foreign soil, and that most Americans have never seen and don’t care about?  And how will promoting the U.S. Postal Service in foreign countries generate more U.S. Mail?

To counter these criticisms, USPS needed to show that the six-year agreement made economic sense, so it generated report after report calculating the value it received.  Armstrong’s attorneys say these reports show USPS earned over $163 million in quantifiable benefits from the sponsorship – more than four times what USPS spent on it. These reports were backed by statements from high level USPS officials attesting to the great deal it had made. Armstrong’s summary judgment motion cited some of these beauties, including:

  • “I can assure you that the value of the brand advertising we receive from the USPS Pro-Cycling Team more than offsets the cost of the sponsorship.”
  • “The sponsorship has provided a substantial return-on-investment and has been a real bargain.”
  • “While postal officials decline to say how much they pay, spokesman Joyce Carrier said the free advertising they received ‘is way more than we ever spent’ to sponsor it. ‘Anyone who was looking at it on a return from investment, and everybody does . . . they think it’s pretty darn good.’”

How could the Government get past all of these contemporaneous statements from top USPS officials on the tremendous value USPS obtained from the sponsorship contract? And while Lance Armstrong later admitted to rampant doping during the Team Postal years, how did this revelation negate all of these previous economic benefits?

Yes, Lance Armstrong violated the no-doping clause of the USPS sponsorship agreement. But Armstrong somewhat successfully concealed the truth for a long time, thus allowing the Postal Service to get the benefit of the bargain.  If Armstrong had admitted to doping when the contract was in effect, maybe there would have been some damages, but his success at hiding the truth prevented that from happening. While that may be hard to swallow, the False Claims Act was not designed to mete out just desserts for all bad acts related to a government contract.

The round dollar figure

Next, let’s analyze the nice round $5,000,000 settlement figure itself. Having represented clients in various Government fraud investigations, most involving the Postal Service, I can tell you that the Government’s standard opening position is that it will only settle at twice the amount of actual damages. The Government prefers talking about damages, not entitlement, and its settlement offer is normally some specific dollar amount, multiplied by two.

The perfectly round number of the $5 million settlement shows it was not arrived at by an attempt to measure actual damages and multiplying by two. It is a number based on perceived litigation risk by both sides. From the Government’s side, the question was how much it could get from Armstrong without going to trial. Given its weakness on damages, the Government was staring at the possibility of getting only statutory penalties, which didn’t amount to much and would not have justified its pursuit of the case. From Armstrong’s side, the question was how much was finality worth?  Even though the Government was unlikely to recover significant damages, there is no telling what a jury would do.  Moreover, statutory penalties were likely, and an appeal would be required if the damages issue went the wrong way. Armstrong was looking at the possibility of spending millions more on professional fees with no assurance he would prevail.

The $1.65 million settlement with the Relator tells a different story. In context, this amount is not a perfectly round number – one hardly picks $1.65 million out of thin air. Instead, it is an approximation or discount on Relator’s attorney fees and expenses, likely based on actual numbers that were presented to Armstrong.

The payment terms

Typically, when the settlement amount is in this range and the defendant can afford it, the Government demands full or substantial payment upon agreement or soon afterwards, often within 10 days of signing. The settlement’s payment terms are lenient. Armstrong’s first payment was due 30 days after signing and was only $75,000; his second payment, due in 90 days, was $677,000. Armstrong then had 180 days to make the next payment of $1,879,000. No further payment was due until one year after signing, when Armstrong owed a balloon payment of $2,368,000. Nice payment terms, if you can get them.

Armstrong had similarly leisurely terms to pay the Relator. The first payment was due in 30 days and was only $25,000. The next payments were $223,000 in 90 days; $620,000 in 180 days; and the final $782,000 within one year.   [Rounded payment numbers used above.]

The settlement agreement’s layaway plan thus gives Armstrong plenty of time to sell “the Texas Collateral,” the proceeds of which he presumably intends to use to pay the settlement. Armstrong granted the Government and the Relator a lien on that property until it is sold. He also signed a Consent Judgment decree that can be filed against him should he default on his payment obligations.

Relator’s share

Now let’s look at the Relator’s share of the Government’s $5 million bounty. Since the Government intervened in the case, the Relator’s share could have been anywhere between 15 and 25 percent. The settlement agreement grants Relator a 22 percent share, which works out to $1.1 million. The Department of Justice has taken the positon that a 15 percent share is appropriate for a case that settled early (before trial or discovery) and a 25 percent share is reserved for fully litigated cases in which the relator’s contribution is substantial. All things considered, 22 percent was a healthy reward for the Relator in this case. One wonders whether the Government would have sought a lower Relator’s share if the recovery from Armstrong had been greater.

FCA claims with no real damages

I’ve been practicing long enough to remember when False Claims Act cases involved actual falsehoods, like doctored invoices and fake signatures. Rare is the case today where the Government alleges an affirmative falsehood by the contractor. Instead, modern day FCA cases involving government contracts are normally about a contract interpretation or breach of contract. Not only are these cases really contract disputes at heart, but in many of them, the contractor’s position is the most reasonable one. Evolving FCA standards have resulted in the fraudification of contract disputes.

The Armstrong case goes one step beyond fraudification to cases where the Government is not even monetarily harmed by the defendant’s bad actions.  There have been other FCA cases where the Government has suffered no or minimal damages from an alleged false claim. For example, in U.S. ex rel. Wall v. Circle C Constr., LLC, 813 F.3d 616 (6th Cir. 2016), the Government sought $1.6 million (after trebling) for a relatively minor violation of the Davis Bacon Act.  The Court found that the Government’s actual damages were only $9,900 and later held that the Government must pay the defendant’s attorney fees under 28 U.S.C. § 2412(d)(1)(D) because the Government’s demands were excessive.

With the teachings of the Circle C case, and the settlement of the Armstrong case after a 10 year slog, let’s hope the Government will be more reluctant to intervene in – and maybe even move to dismiss – future qui tam FCA cases where there are no real damages.

Contractors are now familiar with the Supreme Court’s June 2016 decision in Universal Health Services, Inc. v. United States ex rel. Escobar [PDF]. That decision recognizes False Claims Act liability for implied false certifications. But it also holds that FCA liability is available only when the false statement or omission is “material” to the Government’s decision to pay a claim. Our discussion of Escobar is available here.

Over the last 18 months, courts across the country have been asked to determine the impact of the Escobar decision. Ten of the eleven U.S. Circuit Courts of Appeal have interpreted Escobar. Numerous U.S. District Courts have applied Escobar in resolving pre-trial motions. Cases based on “garden-variety breaches of contract or regulatory violations” are being thrown out. Even jury verdicts are being overturned for insufficient evidence of materiality. There is one inescapable conclusion from these post-Escobar decisions: materiality matters.

In this entry, we discuss two recent decisions that illustrate the impact of Escobar. One reaffirms the notion that, after Escobar, minor non-compliance with a regulatory requirement will not normally support FCA liability. The other highlights the critical role the government’s actions can play in establishing materiality. Together they reject jury verdicts imposing more than $1 billion in False Claims Act liability. Continue Reading After Escobar, materiality matters

After nearly a decade of litigation, justice was finally meted out in an extreme case of Government over-reach against a government contractor. The Government had sought to recover over $1.6 million from a government contractor whose subcontractor had underpaid a handful of employees by $9,900.

When all was said and done, a federal appellate court finally rejected the Government’s legal theory as essentially frivolous and ordered it to pay the contractor’s attorney fees, estimated at roughly $500,000.  When the Government expressed concern that this would have a “chilling effect” on its efforts to vigorously enforce the False Claims Act, the court stated: “One should hope so.”  The case is called U.S. ex rel. Wall v. Circle C Constr., LLC, No. 16-6169, (6th Cir. Aug. 18, 2017).

The story starts when the prime contractor, Circle C Construction, won a contract to construct buildings at the Fort Campbell military base. Circle C hired a subcontractor, Phase Tech, to perform the electrical work. The prime contract required compliance with the Davis-Bacon Act, which is similar to the Service Contract Act but applies to construction work. Like the Service Contract Act, the Davis Bacon Act requires the prime contractor and all subcontractors to pay construction workers the prevailing wages and benefits set by the Department of Labor. The Davis-Bacon Act also requires that the contractor submit certified payrolls as a condition of contract payment.

While Circle C did not have a written contract with its subcontractor Phase Tech, it did provide Phase Tech with the Wage Determinations from its prime contract. But Circle C did not verify whether Phase Tech was in compliance with the Davis Bacon Act. Phase Tech did not submit payroll certifications for two years after the project commenced, and later contended it was not aware it had to do so.

Eventually, one of Phase Tech’s employees brought a qui tam False Claims Act action against both Phase Tech and Circle C based on the under-payment of wages. Phase Tech settled the case by agreeing to pay $15,000, leaving Circle C as the remaining defendant. The Government agreed to take over the case from the employee and pursued the claim against Circle C.

Initially, the case did not go well for Circle C. The federal trial court hearing the case granted plaintiff’s motion for summary judgment and damages of $555,000 (the entire cost of the electrical scope of work on the project), which was trebled to a total award of $1.66 million against Circle C.

Continue Reading Government ordered to pay contractor’s attorney’s fees in False Claims Act case

Photo by Sgt. Sara WoodThe Supreme Court’s unanimous decision in Universal Health Services, Inc. v. United States ex rel. Escobar, No. 15-7 (U.S. June 16, 2016), upholds the viability of the implied certification theory of False Claims Act liability. But it also makes cases arising from minor instances of noncompliance much harder to prove. The Court held that a knowing failure to disclose a violation of a material statutory, regulatory, or contractual requirement can create False Claims Act liability. The requirement need not be an express condition of payment, but it must be material to the Government’s decision to pay.

The requirement for proof of a misleading half-truth

Those hoping that the Court would eliminate implied certification altogether will be disappointed with the decision. It opens up the possibility of new False Claims Act cases in the Seventh Circuit and in other jurisdictions that had rejected the implied certification theory or limited its application to conditions of payment. Some cases that might have been thrown out on a motion to dismiss might stand a better chance of surviving through discovery and trial.

The Court nevertheless takes strong steps to limit misuse of the implied certification theory. According to the opinion in Escobar, liability under the implied certification theory can be imposed only when two conditions are satisfied. First, the claim for payment must make “specific representations about the goods or services provided.” An invoice that makes no affirmative statement about the quality of a contractor’s goods or services cannot be the basis for an implied certification.

Continue Reading Universal Health v. Escobar: the new standard of proof for implied certification liability under the False Claims Act

[UPDATE: The Supreme Court resolved the Escobar case in a unanimous decision published on June 16, 2015. A link to our discussion of the Court’s opinion is available here.]

In some courts in the United States today, a government contractor or a healthcare provider seeking reimbursement from a federal program can violate the False Claims Act even when its work is satisfactory and its invoices are correct. Under the theory of “implied certification,” a minor instance of non-compliance with one of the thousands of applicable statutes, regulations, and contract provisions can be the basis for a federal investigation, years of litigation, as well as fines, penalties, suspension and debarment, even imprisonment of company personnel.

This week, the Supreme Court heard oral arguments in Universal Health Services, Inc. v. United States ex rel. Escobar, Docket No. 15-7, a case involving the viability of the implied certification theory. Here, we look at the questions posed during oral argument to see if we can infer how the Court might resolve the case.

The Supreme Court agreed to consider two questions posed in Escobar. First, the Court agreed to address the current split in the circuits as to the viability of the implied certification theory. The First Circuit’s decision in United States ex rel. Escobar v. Universal Health Services, Inc., 780 F.3d 504 (1st Cir. 2015), broadly adopts implied certification. The Seventh Circuit’s decision in United States v. Sanford-Brown, Ltd., 788 F.3d 696 (7th Cir. 2015), firmly rejects it.

Continue Reading How the Supreme Court will limit False Claims Act liability for implied certification

Criminal charges for minimum wage violations are certainly rare. But the November 2015 indictment of electrical contractor Marcus Butler shows that they are possible. Mr. Butler faces jail time and heavy fines for allegedly making false certifications regarding $126,514 in Davis-Bacon Act wages on three HUD multi-family housing projects.

Given the rarity of criminal indictments for wage-and-hour violations, I infer that Mr. Butler’s alleged conduct was much worse than simply miscalculating the prevailing wage or losing track of some payroll records. But there is nothing in the indictment that would reveal the underlying aggravating factors that motivated it. The Government asserts simply that Mr. Butler participated in a “scheme” and that he “knowingly and willfully” overstated wages and benefits on his 61 separate certified payrolls (DOL Form WH-347).

It will probably be some time before we see whether this is case is the result of overreaching conduct by DOL and government attorneys (like another recent DOL case) or the application of the new Justice Department policy set forth in the Yates Memorandum on Individual Accountability for Corporate Wrongdoing. This new policy will almost certainly increase the number of criminal charges arising from ordinary non-compliance and administrative oversight. Husch Blackwell’s client alert on the Yates Memorandum is available here.

Either way, now is the right time for federal contractors to take on the task of reviewing and updating their own HR policies and practices.

Continue Reading Overkill or the new normal? Criminal charges for underpayment of prevailing wages and benefits

The Supreme Court’s decision in Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter, No. 12-1497 (U.S. May 26, 2015) [pdf], holds that the Wartime Suspension of Limitations Act applies only to criminal offenses. It also holds that the first-to-file bar in the False Claims Act applies only when an earlier-filed action remains “pending.” BALAD AIR BASE, Iraq.  Staff Sgt. Gary Messer, 332nd Expeditionary Aerospace Medical Squadron bioenvironmental engineer, transfers a sample of tap water to a tube before performing tests to confirm that the water is free from bacteria. March 13, 2008. (U.S. Air Force photo / Senior Airman Julianne Showalter.)The unanimous opinion, written by Justice Alito, takes a plain-meaning approach to both of the questions presented.

The Wartime Suspension of Limitations Act

Citing dictionary definitions of the word “offense” and the appearance of the WSLA in Title 18 of the U.S. Code, the Court inferred that Congress intended to toll the applicable statutes of limitations only in criminal cases. As to the removal of the phrase “now indictable” from the text of the WSLA in 1944, the Court found that such a subtle change does not prove that Congress intended to expand the tolling effect of the WSLA beyond criminal cases. “[T]he removal of the ‘now indictable’ provision was more plausibly driven by Congress’ intent to apply the WSLA prospectively, not by any desire to expand the WSLA’s reach to civil suits.”

Carter reverses the Fourth Circuit’s holding in United States ex rel. Carter v. Halliburton Co., 710 F.3d 171 (4th Cir. 2013) as to the scope of the WSLA. Continue Reading KBR v. US ex rel. Carter—a plain-meaning approach to the Wartime Suspension of Limitations Act and the False Claims Act first-to-file bar

Redline of 2015 Amendments to FAR 52.222-50

The 2015 amendments to the anti-trafficking provisions in the Federal Acquisition Regulation will apply to all federal contracts and subcontracts awarded after March 2, 2015. Existing IDIQ contracts for which additional orders are anticipated will be modified “on a bilateral basis” to include the new language in FAR 52.222-50. See 80 Fed. Reg. 4967 (Jan. 29, 2015). The changes implement the requirements outlined in Executive Order 13627 (Sept. 25, 2012) and the anti-trafficking provisions of the 2013 National Defense Authorization Act, Public Law No. 112-239 (Jan. 2, 2013), codified in 22 U.S.C. Chapter 78.

Here we present some of the background on the original FAR clause and a summary of the new requirements. A redline version of the 2015 amendments to FAR 52.222-50 is available here.

The original FAR language on human trafficking

A contract clause prohibiting severe forms of human trafficking, procurement of commercial sex acts, and the use of forced labor has appeared in federal service contracts since April 2006. See 71 Fed. Reg. 20301 (Apr. 19, 2006) [pdf]. The 2006 version of the anti-trafficking clause included a general prohibition applicable to federal service contractors and a requirement to establish policies and procedures to ensure employee compliance. It required contractors to notify employees of the policy and to establish an appropriate employee awareness program. It required contractors to notify the government of an alleged violation and specified penalties for human trafficking violations. The original interim version of FAR 52.222-50 was also a mandatory flowdown in all subcontracts for the acquisition of services.

FAR 52.222-50 was expanded in 2007 to cover all federal contracts and subcontracts, including those for supplies and for commercial items. See 72 Fed. Reg. 46335 (Aug. 7, 2007). The clause was revised again in January 2009. See 74 Fed. Reg. 2741 (Jan. 15, 2009). The main substantive addition at that time was the addition of language making it clear that a contracting officer could consider the adoption of a Trafficking in Persons awareness program as a mitigating factor in determining the appropriate remedy for a trafficking violation.

The 2015 FAR amendments

The 2015 amendments to FAR Subpart 22.17 and FAR 52.222-50 go well beyond the original requirements. They introduce a list of specific types of conduct that had not previously appeared in the clause. They add a requirement for many contractors to implement trafficking compliance plans and to certify the absence of any trafficking activities every year. They also modify the mandatory disclosure obligations and specify the minimum level of cooperation required of contractors responding to a trafficking investigation. Finally, the amendments to the FAR clause expand the list of contracting relationships subject to the anti-trafficking clause. Continue Reading The 2015 amendments to the FAR rule on human trafficking

Despite getting a rare Writ of Mandamus from the D.C. Circuit Court of Appeals establishing that its internal investigations were covered by the attorney-client privilege, Kellogg Brown & Root must still turn them over. As predicted in our earlier posts on Barko v. Halliburton, Judge James Gwin has ruled that KBR waived the attorney-client privilege that would otherwise have shielded KBR’s internal investigation documents from discovery. His rationale is reflected in three opinions published in November and December 2014.A trash-burning incinerator is installed at Forward Operating Base Warhorse, Iraq, through a LOGCAP contract.

In a June 2014 opinion, the D.C. Circuit held that KBR’s internal investigation documents would be privileged if obtaining or providing legal advice was “a primary purpose of the communication, meaning one of the significant purposes. . . .”

But the Court of Appeals also invited the District Court to consider additional arguments that might have been timely asserted as to “why these documents are not covered by either the attorney-client privilege or the work product doctrine.”

That is what Judge Gwin did. When the case returned to the District Court, Barko sought “interviews, reports, and documents that KBR prepared while investigating tips KBR had received that involved the same allegations found in Barko’s complaint.” Barko relied on four arguments to support his claim that KBR had waived any attorney-client privilege or work-product protection over the documents:

  1. KBR put the contents of the documents at issue in the litigation;
  2. KBR’s Rule 30(b)(6) witness reviewed the privileged documents prior to testifying at his deposition;
  3. The documents fell under the crime-fraud exception to the privilege; and
  4. KBR had failed to list these documents on a privilege log when responding to an earlier administrative subpoena from the Defense Criminal Investigative Service (“DCIS”).

In an opinion issued on November 20, 2014, Judge Gwin accepted the first two arguments.

Continue Reading Barko v. Halliburton: The next (and final?) chapter

Six years from accrual. Three years from discovery. And never longer than ten years.

Despite the statutory language imposing time limits on the government’s pursuit of False Claims Act violations, courts continue to bend over backwards to give the government more time to assert them. The decision in United States ex rel. Sansbury v. LB&B Associates, Inc., No. 07-251 (D.D.C. July 16, 2014) [pdf] allowed the government a total of 14 years from the date of the first alleged false claim.

We hope that the Supreme Court will restore some sanity to the enforcement of the FCA limitations period in its decision in Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter, No. 12-1497. We discuss the issues in that case in an earlier post. But we still have to wait a while for that. Argument in the Carter case is scheduled for January 13, 2015.

[UPDATE: On May 26, 2015, the Supreme Court reversed the Fourth Circuit’s decision in Carter and held that the Wartime Suspension of Limitations Act is limited to criminal offenses. Kellogg Brown & Root Services, Inc. v. Carter, No 12-1497 (U.S. May 26, 2015) [pdf]. Our discussion of the Carter decision is available here.]

 

The FCA limitations and tolling framework

Sansbury is an unusual case that is based on the intricacies of the FCA’s limitations and relation-back provisions. Before getting into the facts of the case and the holding, here’s a breakdown of those provisions.

According to the text of the False Claims Act (31 U.S.C. § 3731(b)), the limitations period applicable to civil FCA actions is the later of:  (1) 6 years after the date on which the violation is committed; or (2) 3 years after the date when the material facts giving rise to the cause of action are known or reasonably should have been known by the U.S. official responsible for acting on FCA violations (i.e. DOJ official), but in no event more than 10 years after the date on which the violation is committed.

But these may not be real deadlines. Even without the tolling that that may be available under the Wartime Suspension of Limitations Act, the government may get several additional years to make a decision on whether to intervene in a whistleblower’s qui tam suit. If the whistleblower’s original action is timely under § 3731(b), the government’s intervention complaint “relates back” to the date of the initial complaint. Even if the government takes three years to file its intervention complaint, it is deemed to have been filed on the date of the original suit. The relation back provision appears in 31 U.S.C. § 3731(c).

Continue Reading How a 14-year-old case escaped the False Claims Act’s 6-year statute of limitations