Federal Circuit Rejects “Fraud in Inducement” Theory in Kickback Case

 

In Kellogg Brown & Root Svcs., Inc. v. United States,, 2013 U.S. App. LEXIS 18447 (Fed. Cir. Sept. 5, 2013), the Court of Appeals for the Federal Circuit rejected “fraud in the inducement” as a viable theory for finding all claims submitted under a contract obtained through kickbacks to be false and also refused to presume that the kickbacks inflated the amount of the contractor’s invoices. Allegations and Procedural History In an action that Kellogg Brown Root (“KBR”) brought against the Army alleging nonpayment under a contract for dining services in Iraq, the United States brought a counterclaim alleging that a KBR subcontractor had paid kickbacks to members of an internal KBR board, who then successfully lobbied the board to assign work orders to the subcontractor. The United States argued that KBR’s invoices to the Army under the dining services contract were consequently false because they were tainted by kickbacks and presumptively inflated by the amount of the kickbacks. The Court of Federal Claims dismissed the government’s FCA claim and the government appealed. The Court’s Holding The Court of Appeals for the Federal Circuit affirmed the district court, holding that the government did not meet the FCA’s threshold pleading requirements because it failed to allege facts demonstrating how the kickbacks rendered KBR’s invoices false or inflated their value. Id. at *44-*46. In a footnote, the Court rejected the “fraud in the inducement” theory of liability as a basis for concluding that all claims under a contract obtained through kickbacks are false, suggesting that the theory has been applied only in cases in which defendants made false statements to obtain contracts. Id. at n. 20. In another footnote, the Court observed that the counterclaim also failed because, even assuming the kickbacks inflated KBR’s invoices, the United States had failed to show that KBR officials knew of any such inflationary effect.