Litigation

Controlling legal spend is a frequent and important topic of discussion, especially among in-house counsel and their litigation teams. Much of the discussion focuses on the problem of soaring discovery costs driven by the proliferation of electronic data. As an eDiscovery attorney, I employ early case assessment strategies and tools, technology-assisted review, and even low-cost outside staff attorneys to try and curtail the cost of discovery. In the end, the effectiveness of these cost-reduction alternatives hinges on whether clients have done their part to reduce the volume of data upstream.

Beyond implementing a formal records retention plan, there are a number of fairly simple steps that companies can take to help reduce litigation costs. Items 1-5 help reduce the volume of data that needs to be collected and reviewed. Items 6-8 will help ensure that your litigation budget is not exhausted on spoliation or sanctions motions.

1.   When implementing an email archive, be mindful of how it will impact litigation costs.

An email archive is not a cure to your litigation woes. Storing every company email that was sent or received in an email archive may make preservation easy, but it may also be contributing to your soaring discovery costs. Despite claims to the contrary, most archives have poor search and export features. It is also very difficult to pull out only responsive email from an archive.  Instead, you end up overspending on attorney review of irrelevant data or producing mounds of irrelevant data.

One way to control this issue is to tailor the archive for your own business and legal needs from the beginning. Do you really need every employee’s email messages for the last 10 years? Very few industries have regulatory requirements that require such broad retention. Even those that do usually only apply to a small subset of employees. Confirm any applicable regulatory requirements and consider your own business and legal needs. Consider creating email groups with different retention cycles.

The attorney-client privilege applies with equal force to internal investigations today as it did 30 years ago thanks to the D.C. Circuit’s recent decision in In re: Kellogg Brown & Root, Inc., No. 14-5055 (D.C. Cir. June 27, 2014). The appeals court decision vacates the March 6, 2014 district court decision in the same case. At the district court, Judge James Gwin ruled that the attorney-client privilege did not protect documents developed during KBR’s internal investigations of potential fraud relating to its LOGCAP III contract. According to Judge Gwin, KBR’s investigations were not privileged because they were conducted “pursuant to regulatory law and corporate policy rather than for the purpose of obtaining legal advice.”

The D.C. Circuit’s decision reverses Judge Gwin’s ruling. The decision recognizes the “uncertainty generated by the novelty and breadth of the District Court’s reasoning” and echoes the Supreme Court’s concern that an “uncertain privilege, or one which purports to be certain but results in widely varying applications by the courts, is little better than no privilege at all.” If the district court’s decision were to stand, “businesses would be less likely to disclose facts to their attorneys and to seek legal advice.” The behavior created by this uncertainty in the attorney-client privilege would undercut the very compliance and disclosure regulations central to Judge Gwin’s analysis.

[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.]

Whether the Wartime Suspension of Limitations Act tolls the six-year statute of limitations for civil claims under the False Claims Act will soon be addressed by the Supreme Court. In Kellogg Brown & Root Services, Inc. v. United States ex rel Benjamin Carter, No. 12-1497 (July 1, 2014), the Court will have the opportunity to address several important questions about the application of the WSLA. Should it apply to civil claims or be limited to criminal actions? Does the tolling specified in the WSLA require a formal declaration of war? And does the WSLA apply to a qui tam claim in which the United States declines to intervene?

[Note:  The case also asks the Court to address whether the FCA’s “first-to-file” bar applies to cases filed after the first case is dismissed.  We’ll look at that question in another post.]

The case comes to the Supreme Court following the Fourth Circuit’s decision in U.S. ex rel Carter v. Halliburton Co., 710 F.3d 171 (4th Cir. 2013). In that case, the Fourth Circuit held that the WSLA tolled all civil actions—including civil FCA claims brought by qui tam relators—until the President or Congress declared a “termination of hostilities.” The Supreme Court accepted Halliburton’s petition for certiorari and will hear the case in 2015.

We believe the Fourth Circuit’s opinion represents a significant expansion of the WSLA. As Judge Agee points out in his dissenting opinion, a particularly troublesome aspect of the Fourth Circuit’s decision is its application of the WSLA to civil qui tam actions in which the United States has not intervened. The underlying purpose of the WSLA is to allow the law enforcement arm of the United States government to focus on its “duties, including the enforcement of the espionage, sabotage, and other laws’” in times of war. Id. (citing Bridges v. United States, 346 U.S. 209, 219 n. 18 (1953)). In a qui tam action initiated by a private citizen, the rationale for tolling the limitations period is diminished.

The Severin doctrine restricts the ability of prime contractors to hold the government responsible for costs incurred by subcontractors. It is often of limited practical effect because it can usually be avoided by contract. Liquidation agreements, sponsorship agreements, pass-through agreements, and other similar agreements often include a conditional release that limits the subcontractor’s recovery to the amount that the prime contractor recovers from the government. With this protection, prime contractors are often willing to pursue subcontractor claims on a pass-through basis.

As we discussed in part one of this post, the Severin doctrine is nevertheless a recurring issue in federal contracts. Here we address two recent cases that explore the application of the Severin doctrine when the rights of the prime contractor and subcontractor are not expressed in a written agreement.

No subcontract at all

The decision in Parsons-UXB Joint Venture, ASBCA No. 56481, 13-1 BCA ¶ 35,378 (Aug. 1, 2013) [pdf] addresses the application of the Severin doctrine when there is no written subcontract. Parsons and UXB formed a joint venture to complete a Navy project to restore the Hawaiian island of Kaho’olawe, which had been used as a weapons range. The JV was “unpopulated,” meaning that employees of Parsons and UXB did all the work even though the JV formally held the contract. There were no subcontracts in place between the JV and either Parsons or UXB. When a dispute developed over costs incurred on the project and the JV brought the case to the Armed Services Board, the Navy cited the Severin doctrine. Without a subcontract, the Navy asserted that the JV could not be liable for costs incurred by Parsons or UXB and therefore could not pursue claims on their behalf.

Read the press about Judge James Gwin’s decision in  United States ex rel. Barko v. Halliburton Co., No. 1:05-cv-1276 (D.D.C. Mar. 6, 2014), and you might see it as the beginning of the end for the attorney-client privilege in internal investigations. While the ultimate implications of the decision remain to be seen, that’s not how we see it.

The attorney-client privilege and the work product doctrine are alive and well, as is their application to internal investigations. The FAR clause implementing the requirement for a Code of Business Ethics and Conduct preserves the contractor’s right to conduct an internal investigation subject to the protections of the attorney-client privilege and the work product doctrine. See FAR 52.203-13. The Justice Department’s Principles of Federal Prosecution of Business Organizations explicitly states that a company is not required to waive privilege in order to get credit for cooperating with a government investigation. “[W]aiving the attorney-client and work product protections has never been a prerequisite under the Department’s prosecution guidelines for a corporation to be viewed as cooperative.”

For federal contractors, publicly-traded companies, and others in highly-regulated industries, the real question presented by Barko is more granular: How can my company avoid the same result?

You’ve heard by now that the Supreme Court’s decision in Atlantic Marine Constr. Co. v. United States District Court, No. 12-929 (U.S. Dec. 3, 2013) is a strong endorsement of a contractor’s right to choose the forum that will resolve disputes with subcontractors. We discuss the Court’s decision in an earlier post.

So you know that you can have a forum selection clause. But Atlantic Marine doesn’t answer the hard question, which is this—

How do you write a forum selection clause that will be reliably and economically enforced—without an expensive trip through the court system, perhaps even all the way to the Supreme Court?

Here are some basic points on drafting a forum selection clause, drawn from some of the dozens of reported court cases addressing them—

The Contract Disputes Act gives prime contractors a straightforward procedure for resolving claims against the federal government. But there is no mandatory approach to resolving disputes between contractors and subcontractors. Private parties may agree to arbitrate their disputes or designate a specific court to hear them. They may identify the applicable law, provide for the recovery of attorney’s fees, and prescribe any number of other details.

The Supreme Court’s decision in Atlantic Marine Constr. Co. v. United States District Court for Western District of Texas, No. 12-929 (U.S. Dec. 3, 2013), holds that forum selection clauses in subcontracts on federal projects are enforceable. In this first blog post of a two-part series, we discuss the decision in Atlantic Marine and the limits of the Supreme Court’s analysis. In the subsequent one, we will discuss the use of subcontract dispute resolution clauses more broadly.

The Contract Disputes Act imposes a six-year statute of limitations on all claims, whether they are asserted by the contractor or by the Government. See 41 U.S.C. § 7103(a)(4)(A). The limitations period begins to run upon accrual of a claim, which is “the date when all events . . . that fix the alleged liability of either the Government or the contractor and permit assertion of the claim . . . were known or should have been known.” FAR 33.201. Because six years must pass before the claim expires, the precise date of accrual is often little more than an academic question. Indeed, there have been relatively few cases applying the CDA limitations period to Government claims. But accrual has recently become a real and sometimes insurmountable obstacle to Government claims. Here is a short summary of the basic concepts that have emerged from the decisions that have addressed the issue.

1.         The government has the burden of proving timeliness. 

The CDA limitations period is “jurisdictional.” When the government asserts a claim against a contractor, the government has the burden of proving jurisdiction. To do so, the government must establish that the claim was timely asserted. If the government cannot show that the claim was asserted within six years of accrual, the Board or the Court lacks jurisdiction to hear the claim. Raytheon Missile Systems, ASBCA No. 58011 (Jan. 28, 2013) [pdf].

[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.]

What is the statute of limitations for qui tam actions brought against a contractor during a time of war? The answer to this question depends not only on whether the Wartime Suspension of Limitations Act applies to actions brought by an individual relator under the qui tam provisions of the False Claims Act, but also on when the United States is “at war.” The Fourth Circuit Court of Appeals addressed both of these questions in U.S. ex rel. Carter v. Halliburton Co., 710 F.3d 171 (4th Cir. 2013).

“At war” does not mean “declared war.”

The Wartime Suspension of Limtations Act was enacted in 1942. It suspends the applicable limitations period for any offense involving fraud against the United States when the country is “at war” or when Congress has enacted a specific authorization for the use of the Armed Forces. The suspension lasts for the duration of the war and until five years after hostilities end. 18 U.S.C. § 3287. Hostilities must be terminated “by a Presidential proclamation, with notice to Congress, or by a concurrent resolution of Congress.”

The meaning of “at war” is not specifically outlined in the WSLA, but it is a focal point of the decision in Carter. The relator, a water purification operator at two U.S. military camps in Iraq, asserted that his employer charged the government for work that was not performed. Due to a number of procedural obstacles, the action was filed outside of the six-year limitations period that normally applies to FCA qui tam actions. As a result, the district court dismissed the action as untimely. The relator appealed, asserting that the WSLA tolled the limitations period because the hostilities in Iraq meant that the United States was “at war.” The Fourth Circuit agreed, reasoning that a “formalistic” definition of when the country was “at war” did not reflect the “realities of today.”

Contractors sued for False Claims Act violations face a potential judgment assessing stiff civil penalties and treble damages. Even assuming that the government can meet its burden of proving a violation of the False Claims Act, defenses to the damages elements of the case should not be ignored. Grossly disproportionate penalties One important limit on the assessment of civil penalties appears in the 8th Amendment to the United States Constitution, which prohibits the assessment of excessive fines. To prevail on an 8th Amendment defense, a contractor must show that the fine would be grossly disproportionate to the gravity of the offense. Four factors are relevant here:

  1. the extent of the harm caused;
  2. the gravity of the offense relative to the fine;
  3. whether the violation was related to other illegal activity, and the nature and extent of that activity; and
  4. the availability of other penalties and the maximum penalties which could have been imposed.

In one recent case, the court accepted an 8th Amendment argument that wiped out a $50 million civil penalty against a contractor found guilty of bid rigging. See United States ex rel. Bunk v. Birkart Globistics GMBH & Co., No. 1:02cv1168, 1:07cv1198 (E.D. Va. Feb. 14, 2012). The contract involved moving services for military personnel stationed in Europe. The contractor submitted a bid with 51 line item prices. The court found a violation of the False Claims Act because one of the line item prices was affected by a subcontractor bid-rigging scheme. The government sought to assess a $5,500 penalty for each of the contractor’s 9,136 invoices, yielding a penalty of $50,248,000. Despite the False Claims Act violation, the court refused to assess the penalty because it was grossly disproportionate to the gravity of the offense. The entire contract price was only $3.3 million and the contractor’s profit was only $150,000. There was no evidence of economic harm to the government because the contractor’s services were acceptable and the prices were lower than any competitor’s prices.