Fourth Circuit Adopts Implied Certification Theory For Violations of Material Contract Terms and Rejects Challenge to Relator’s Standing Following Government’s Intervention

 

In U.S. ex rel. Badr v. Triple Canopy, Inc., 773 F.3d 628 (4th Cir. Jan. 8, 2015) the Court of Appeals for the Fourth Circuit recognized that the knowing violation of a contractual term can lead to FCA liability for false claims under an implied certification theory if the “Government’s decision to pay . . . would be influenced” by knowledge that the contractual provision had been violated; and the Court relied in part on “common sense” to assess the materiality of the provision. Further, in applying the “false statement” liability provision, the court reiterated that, when assessing whether a false statement is material to the government’s decision on payment, materiality under the FCA should be assessed objectively, not subjectively. Finally, the Court rejected the contention that the relator loses standing when the government intervenes.

The defendant in Triple Canopy contracted with the government to provide security at a military base in Iraq. 773 F.3d at 632. The contract required Triple Canopy to employ only those guards who had received weapons training and passed a marksmanship test. Id.The relator alleged, however, that Triple Canopy’s guards failed their marksmanship tests, and that Triple Canopy then falsified the guards’ marksmanship scorecards. Id. at 632-33. The federal contracting officer responsible for the contract then paid Triple Canopy’s invoices without reviewing the false scorecards. Id. at 633. The United States intervened; and the U.S. District Court for the Eastern District of Virginia subsequently granted Triple Canopy’s motion to dismiss. Id. The district court reasoned that the United States’ complaint-in-intervention failed to state a cause of action under § 3729(a)(1), the provision imposing liability for “false claims,” because it did not identify a false claim submitted to the government,  and failed to state a cause of action  under § 3729(a)(2), the provision imposing liability for “false statements,” because it did not allege that the false scorecards—the purported false statements—actually influenced the contracting officer’s decision to pay. Id. Moreover, the district court held that the United States’ intervention had stripped the relator of standing to assert his own claim based on the same conduct because the relator’s claims was “virtually indistinguishable” from the government’s. Id. at 633, 638.

The Court of Appeals reversed. While the court acknowledged the need to “guard[] against turning what is essentially a breach of contract claim into an FCA violation,” it held that a contractor nevertheless submits a false claim if, “with the requisite scienter, [it] ma[kes] a request for payment under a contract and ‘withh[olds] information about its noncompliance with material contractual requirements.’” Id. at 635 (quoting United States v. Sci. Applications Int’l Corp., 626 F.3d 1257, 1266 (D.C. Cir. 2010)). The court labeled this type of false claim an “implied certification” of compliance, but cautioned that the “rigid use of such labels can ‘do more to obscure than clarify’ the scope of the FCA.” Id. at 635 & n.3 (quoting U.S. ex rel. Hutcheson v. Blackstone Medical, Inc., 647 F.3d 377, 385 (1st Cir. 2011)).

Applying this standard, the court held that the complaint sufficiently alleged a knowing violation of a material contract requirement. The marksmanship requirement was material because it “had ‘a natural tendency to influence, or be capable of influencing,’ the Government’s decision to pay.” Id. at 637 (quoting 31 U.S.C. § 3729(b)(4)). According to the court, “common sense strongly suggests that the Government’s decision to pay a contractor for providing base security in an active combat zone would be influenced by knowledge that the guards could not, for lack of a better term, shoot straight.” Id. at 638. Further, the court held that Triple Canopy’s cover-up and the government’s decision to intervene both indicated that the marksmanship requirement was a condition of payment. Id. at 637 & n.5, 638. Therefore, it would be inconsistent with the FCA’s purpose—to reach “‘all types of fraud, without qualification’”—if Triple Canopy could “avoid liability because nothing on the ‘face’ of the invoice was objectively false.” Id. at 638 (quotingUnited States v. Neifert-White Co., 390 U.S. 228, 232 (1968)).

Turning to the § 3729(a)(2) claim, the court held that the court below “misaprehend[ed]” the legal standard because it assessed materiality subjectively rather than objectively. Id.at 639. Under a subjective standard, a contractor could “receive a windfall and escape FCA liability if . . . a Government employee fails to catch an otherwise material false statement”—a result at odds with the FCA’s language and purpose. Id. The district court thus “erred in focusing on the actual effect of the false statement rather than its potential effect.” Id.

Finally, the court held that the government’s decision to intervene did not divest the relator of standing to bring his own claim, noting that under the FCA’s plain language the relator has “the right to continue as a party to the action” when the government intervenes. Id. at 638. Based on this language, the court concluded that the district court erred in finding that the relator lacked standing to remain as a party to the action after the government intervened. Id.