How to Lose Legitimate Federal Contract Claims

November 17, 2014
HOW TO LOSE LEGITIMATE FEDERAL CONTRACT CLAIMS by Doug Hibshman

Bottom Line Up Front: A recent decision by the Armed Services Board of Contract Appeals
(“ASBCA”) clearly demonstrates that federal contractors will lose (or at the very least put at
risk) their legitimate claims for payment or extra costs when they commit fraud on a federal
contract, even when the claims for payment or extra costs are not related to the actual fraud.

In the recent case of Laguna Construction Company (“Laguna”) v. United States, the contractor
received 16 different cost-reimbursable task orders to perform work in Iraq as part of ongoing
military operations. At some point during the performance of these task orders, several Laguna
employees arranged for, and began to accept, kickbacks from subcontractors who were seeking
future subcontracts (or faster subcontract payments from Laguna). The Laguna employees,
including a project manager and a vice president, were ultimately investigated and prosecuted for
their fraudulent actions under the contract.

While the criminal investigation was ongoing, the Department of Defense rejected Laguna’s
submission of 14 invoices for payment of legitimately completed work under numerous task
orders. These invoices totaled about $3 million. The ASBCA upheld the Government’s refusal to
pay these non-tainted invoices based on the fraudulent actions of Laguna's employees. The
ASBCA found Laguna’s kickbacks violated the “well settled principle of antecedent breach” and
that this material breach of the underlying contract excused the Government from paying Laguna
for any remaining invoices – even where those invoices were not tainted by fraud or wrongdoing.

Such a result leads to incredible liability for contractors where non-tainted claims for payment
under different task orders are subject to forfeiture for unrelated fraud. A sole kickback or false
claim under one task order could be found, like that in Laguna, to breach the entire contract for
failure to perform in good faith and fair dealing and excuse the Government from paying a
contractor.

It is unlikely that a contractor will be able to limit its liability by claiming that the false claim or
kickback was made by a “rogue” employee. In Laguna, the ASBCA found the actions of the
employees were imputed to the contractor (i.e. were transferred from the employees to the
contractor) since the contractor had selected the individuals to carry on its business in obtaining
and performing the task orders. In sum, contractors are liable for the acts of their employees, to
include fraud, even when the contractor has no knowledge of the actual fraud.

Lessons Learned: The Laguna holding is just the latest iteration of fraud-based liability for
contractors doing business with the federal government. The best defense to such employeecaused
fraud is to implement and apply a robust ethical compliance program to ensure that
employees are well educated on what they can and cannot do, and to ensure that checks and
balances are put in place to identify and mitigate any fraud that may occur.

Doug Hibshman is a partner in Fox Rothschild LLP’s Federal Government Contracts and
Procurement, Construction, and Infrastructure Practice Groups in Washington, DC, and
routinely represents federal contractors on False Claims Act prevention, compliance,
mitigation, and defense matters.