The Department of Justice is always busy prosecuting fraud related to government contracts. The two obvious reasons why this is a DOJ priority are (1) a lot of public money is spent through government contracts, and (2) the size and complexity of the contracts no doubt leads to opportunities for mischief.
In these criminal cases, the government will often proceed with a parallel civil False Claims Act (FCA) case. So, many of my cases over the years have included a civil element. Even if you want to practice all white-collar defense work, you need to understand the civil side of things and how your clients face that liability as well.
The Fifth Circuit recently decided an interesting case addressing when a company can be held liable under the FCA for wrongdoing committed by its employees. In United States ex rel. Vavra v. Kellogg Brown & Root, Inc., 848 F.3d 366 (5th Cir. 2017), the court of appeals split the baby—choosing a standard in between those proposed by the government and by Kellogg Brown & Root.
The Case History
The case arose out of a 2001 contract between KBR and the government, requiring KBR to provide logistical support to the U.S. Army. KBR subcontracted with a company called EGL, Inc. to provide freight forwarding services to KBR. EGL allegedly made payments to KBR that the government believed were kickbacks.
In 2004, whistle-blowers filed a False Claims Act complaint against KBR and EGL. It took six years, but the government intervened in 2010 and filed its own complaint, which also alleged kickbacks in violation of the Anti-Kickback Act (41 U.S.C. §§ 8701-07). There was an intervening appeal reversing the grant of KBR’s motion to dismiss and remanded. The appeal addressed the standard for vicarious liability under the FCA.
After a bench trial after remand in the first appeal, the district court held that KBR had violated the AKA because two of its employees had knowingly accepted kickbacks in connection with the contract. KBR appealed to the Fifth Circuit. The court of appeals remanded the case a second time. This time, it concluded that the district court correctly held that one employee’s knowledge could be imputed to the company but incorrectly held that the other employee’s knowledge could be similarly imputed to the company.
The Anti-Kickback Act
The AKA prohibits providing kickbacks, soliciting kickbacks, or including kickbacks in contract prices so that the costs of such kickbacks are passed on to the Government. 41 U.S.C. § 8702. A “kickback” is broadly defined in § 8701(2):
any . . . gratuity, thing of value, or compensation of any kind that is provided to a . . . prime contractor employee . . . to improperly obtain or reward favorable treatment in connection with a . . . subcontract relating to a prime contract.
Section 8706 is the civil enforcement provision. (There is also a criminal enforcement provision.) If the government can show that the defendant “knowingly” engaged in kickbacks, then it can recover a civil penalty equal to two times the kickbacks plus up to $11,000 per kickback. If the government cannot show knowledge, but can show a violation, then it can seek a civil penalty equal to the amount of the kickback. When it comes to penalties, then, knowledge is a very big deal.
The government here relied on the first provision, so it had to prove KBR’s knowledge of the kickbacks.
Competing Theories of Liability
Although there were several issues on appeal, the one I’m going to talk about is the standard the court applied to impute knowledge of the employees to the company.
According to the Fifth Circuit, there were three possible standards it could apply:
- The government argued that it needed only to show that the employees had apparent authority in order to impute their knowledge to KBR.
- KBR argued that the appropriate standard for imputation of knowledge was found in the Limited Liability Act, which includes evaluation of eight factors.
- The lower court had applied an “intermediate standard” that applied corporate law principles.
The court began its inquiry by explaining that in the first appeal in this case, it had held that the AKA imposes “vicarious liability for employee actions taken under apparent authority.” U.S. ex rel. Vavra v. Kellogg Brown & Root, Inc., 727 F.3d 343 (5th Cir. 2013).
However, the AKA doesn’t define “knowingly” and how the “knowingly” standard fit into the apparent authority standard hadn’t been an issue in the first appeal. That was the key issue for this appeal.
Since the court of appeals had already defined the appropriate standard as apparent authority, the question was who has this authority within a corporation and how should a court determine who has this authority?
The court first rejected the government’s reliance on apparent authority alone. It reasoned that if that were the sole standard, it would read out the “knowingly” requirement from the statute. Anyone who received or paid a kickback has apparent authority (why else pay or receive a kickback?). This standard was too easy for the government to satisfy.
Next, the court rejected the Limited Liability Act (LLA) standard suggested by KBR. This standard requires that the employee whose knowledge is imputed to the corporation be a “managing agent with respect to the field of operations in which the negligence occurred” and looks at eight factors such as the scope of the agent’s authority over the specific operations, the ability to hire and fire employees/enter into contracts/set prices/pay expenses and the duration of his authority, among others.
But the LLA was enacted to limit the liability of vessel owners, based on their knowledge of the wrongdoing. This standard was too difficult for the government to satisfy.
The court of appeals decided that corporate-law principles should govern–a safe middle road. It mostly cited Fletcher Cyclopedia of the Law of Corporations for the relevant standard.
Normally, an employee’s knowledge will not be imputed to the corporation, though this is not always the case: “Whether an individual’s knowledge will be imputed to the corporation depends on a factual determination, according to the particular circumstances, of the individual’s position in the corporate hierarchy,” which includes asking if the “employee has sufficient responsibility or authority to impute his knowledge to the corporation.” (Fletcher §§ 790, 807.)
This is, not surprisingly, an extremely fact-dependent determination. In other words, you probably won’t win a dismissal of an FCA complaint on this basis, and it’s going to be tough to win on summary judgment too.
The court held that
the proper test for imputing knowledge under Section 8706(a)(1) is that corporations are liable “only for the knowing violations of those employees whose authority, responsibility, or managerial role within the corporation is such that their knowledge is imputable to the corporation.”
I wouldn’t say this is the clearest standard–it’s a bit circular to say that the standard for imputing knowledge is whether the person’s role within the company “is such that their knowledge is imputable to the corporation.”
The court of appeals did add a little meat to the bone here, and suggested that the ultimate test is closer to the standard suggested by KBR than the standard suggested by the government:
To be clear, the precise question being asked is whether “a person,” i.e., a corporation, itself has knowledge, not merely whether one of its agents has knowledge. See id. at 354 n.1 (Jolly, J., concurring). Answering which agent’s knowledge is the corporation’s knowledge is the linchpin. This analysis will usually involve “developing the evidence, both factual and expert, regarding the employees’ job titles, their actual responsibilities, and their overall place within the company.” Id. at 356. The goal is to determine whether an employee’s knowledge may be fairly imputed to the corporation. “Where the level of responsibility begins must be discerned from the circumstances of each case.” Cf. Continental Oil Co. v. Bonanza Corp., 706 F.2d 1365, 1376 (5th Cir. 1983). Although we do not adopt wholesale the “managing agent” test from the LLA, its focus on the agent’s authority “over the sphere of activities in question” is helpful. See In re Signal Int’l, LLC, 579 F.3d 478, 496–97 (5th Cir. 2009) (quoting In re Kristie Leigh Enters., 72 F.3d 479, 481 (5th Cir. 1996)).
But it could be called the Goldilocks Approach—not too difficult, not too easy, but just right. It’s a fair compromise and doesn’t allow the government to prove a knowing violation of the Anti-Kickback Act too easily.
Applying the Standard to the Facts
Surprisingly, the court of appeals found that although the district court got it mostly right on the law, it was partially wrong on the facts, even under a “clearly erroneous” standard.
As to Robert Bennett (one of the two KBR employees at issue), he was “responsible for supervising the EGL subcontract, including both general performance and day-to-day operations,” and this was sufficient to impute his knowledge of the kickbacks to KBR. According to the court:
Although he was neither an executive nor particularly high on KBR’s corporate ladder, the evidence supports the district court’s finding that he worked in a supervisory capacity as to the EGL subcontract. In other words, he had somewhat significant managerial authority “over the sphere of activities in question.” See Signal Int’l, 579 F.3d at 496. KBR tasked him with such authority, thus permitting a conclusion that his knowledge may be fairly imputed to KBR.
However, as to James Bennett (the other KBR employee), the district court got it wrong. He was in charge of initially awarding the contract to EGL but had “almost no further involvement or authority” with the contract. The court of appeals looked at the timeline closely: James Bennett may have had authority over the contract at one point early on, but he did not have that authority when the kickbacks were paid.
Thus, the record — and indeed the district court’s other findings — undermine the district court’s finding that James Bennett’s limited authority was sufficient to impute his knowledge to KBR. We hold such finding was clearly erroneous.
This is not a perfect opinion from a defense perspective. I would have preferred some higher standard to impute knowledge of a single employee to an entire corporation than a soft standard about someone’s responsibility. It seems too easy for the government to show this responsibility based on job title rather than how the company works in reality.
But it’s not a completely unfair opinion for a defendant either. The fact-heavy determination at least makes the government work for a judgment.
Given how aggressively the government uses the False Claims Act to leverage massive payments from companies, it’s good to see a court of appeals impose a measured view of what the government has to prove along the way.