Custer Battles Decision Introduces More Uncertainty to Scope of False Claims Act
May 27, 2009
By: Eric Whytsell
On April 10th, the U.S. Court of Appeals for the Fourth Circuit issued a ruling in the Custer Battles case clarifying the potential False Claims Act liability of contractors performing contracts in Iraq and elsewhere.
The judgment partially reverses a controversial decision by the U.S. District Court for the Eastern District of Virginia that limited the application of the False Claims Act (FCA) to contracts awarded by the Coalition Provisional Authority the temporary governing body created by the United States that governed Iraq from May 2003 to June 2004.
The Court of Appeals decision marks a victory for the relators (as whistleblowers are known under the False Claims Act (FCA)) and potentially expands the reach of the FCA. I dont know what more we could possibly ask for. The Appeals Court actually invited us to go after more [money], said Alan Grayson, the relators lawyer. (Mr. Grayson is now a U.S. Representative (D-FL) he argued the appeal approximately one month before heading to Congress).
Background & the District Courts Ruling
The case centered upon a $15 million cost-plus contract awarded in 2003 by the Coalition Provisional Authority to the defense contractor, Custer Battles, LLC, to assist the Coalition in exchanging the new Iraqi dinar for the old dinar (which bore a picture of Saddam Hussein). According to the relators claims, Custer Battles intentionally overcharged the Coalition on the dinar exchange contract in violation of the FCA.
The district court ruled that Custer Battles had defrauded the Coalition on the dinar exchange contract by presenting false records to justify payments it had received from the Coalition. The court limited the award to $3 million (the value of an advance it received directly from the U.S. Treasury) because the remainder of the funds used to pay Custer Battles were paid for by the Development Fund for Iraq, which officially belonged to the people of Iraq, and not US government funds as required by the FCA.
The district court went on to overturn the entire verdict against Custer Battles because the claims for payment had not been presented to a US Government official as required by the FCA. Although the Coalition was largely composed of US government employees, the employees were held not to have been acting on behalf of the United States.
The Fourth Circuits Decision
In a sweeping reversal, the Fourth Circuit ruled that the district court erred in two significant ways, finding that:
The False Claims Act applies so long as any portion of the claim is paid for by the U.S. Government
The Fourth Circuit disagreed with the district courts finding that Custer Battles had not presented a claim for payment. The court noted that, although the funds were no longer U.S. funds, the Development Fund was largely composed of U.S. grants. The court observed that:
Custer Battles made claims to a grantee of U.S. money, i.e. the Coalition Provisional Authority, and that the claims were paid from the grantees funds, i.e. the Development Fund for Iraq, a portion of which was provided to the grantee by the U.S. Government, i.e. $210 million.
Under 31 U.S.C. §3729(c), a claim includes any request or demand which is made to a grantee or other recipient of funds, so long as any portion of those funds were provided by the U.S. Government. Under this ruling, claims for payment made to a grantee of federal funds regardless of the amount of Government funding can trigger FCA liability.
The relators provided sufficient evidence to prove that the claims were presented to U.S. Government employees
In the second pat of its ruling, the Fourth Circuit held that the district court erred in its interpretation of the presentment requirements of §§3720(a)(1) and (a)(2). The court found that under §3720(a)(1), the relators had brought forth sufficient evidence to show that Custer Battles presented or caused to be presented fraudulently inflated invoices to U.S. government personnel who were detailed to the Coalition Authority, because:
invoices claiming payment were presented in the first instance to professional U.S. government contracting officers, who were paid and supervised by the U.S. Military. The principle contracting officer . . . testified that she was a contracting officer working for and paid by the U.S. Army Contracting Agency. She functioned under a warrant, a document authorizing her to contract on behalf of the United States
However, in overturning the district courts dismissal in favor of Custer Battles, the Fourth Circuit declined to offer a standard for determining when contracting personnel are working in their official government capacity. Moreover, the Fourth Circuit reiterated the Supreme Courts recent determination in Allison Engine, that §3720(a)(2) does not contain an express presentment requirement.
What This Means
The much-debated Custer Battles case has the potential to impact all contractors not just contractors performing contracts in Iraq and Afghanistan. The Fourth Circuits ruling expands the scope of the FCA to include claims presented to non-governmental bodies receiving grants from the Government. This arguably expands FCA-coverage to include all entities receiving any sort of Government funding. The second part of the Custer Battles decision leaves some uncertainty over the extent of the presentment requirement potentially leading to a significant expansion of the FCA to include claims presented to quasi-governmental personnel.
Congress has proposed two pieces of legislation that may clarify this issue, while also granting further advantages to relators. One bill, the Fraud Enforcement and Recovery Act of 2009 (see our previous blog post) would support the Fourth Circuits expansive definition of claim. The second bill, the False Claims Act Clarification Act of 2009, would create significant procedural advantages to relators in FCA litigation.
For further information on these proposed bills, Custer Battles, or the False Claims Act, contact Pete Hoffman in Jackson Kellys Washington, DC office; or Gail Zirkelbach in Jackson Kellys Denver, CO office.
This article was authored by Samuel Jack, and Eric Whytsell, Jackson Kelly PLLC.