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Government Allowed to Seek Enhanced Penalties for Illegal Kickbacks in its False Claims Act Case Against KBR

Supreme Court PillarsOn Friday, the U.S. Circuit Court of Appeals for the Fifth Circuit overturned a federal trial court decision and ruled that the government can seek enhanced penalties against private military contractor Kellogg Brown & Root, Inc. (“KBR”) in connection with its employees’ alleged violations of the Anti-Kickback Act, a statute that prohibits government contractors and subcontractors from using bribes to influence awards. The court held for the first time that the company could be found vicariously liable for its employees’ conduct under that statute. The decision is part of ongoing litigation between the government and KBR for violations of the federal False Claims Act that were first exposed by two industry whistleblowers.

KBR secured an indefinite delivery and indefinite quantity contract to provide global logistical services to the Army in 2001. Under the contract, the Army would issue task orders to KBR. The task orders could then be fulfilled by KBR on its own or by a KBR subcontractor. The contract permitted KBR to charge the Army markups of 1% as profit and an award fee of up to 2% for its use of subcontractors to fulfill the task orders. KBR would then periodically bill the Army for the cost of performing the task orders, including any costs incurred by its subcontractors. KBR subsequently used two subcontractors to assist in the transportation of military equipment and supplies to Iraq, Afghanistan, and Kuwait between 2002 and 2006. The government intervened in United States of America ex rel. Vera, et al. v. Kellogg Brown & Root, Inc., et al. in 2010 with respect to allegations that KBR transportation department employees received illegal kickbacks in the form of meals, drinks, golf outings, and tickets to sporting events from two KBR subcontractors, Eagle Global Logistics and Panalpina Inc. Both subcontractors have since settled with the government.

After the government intervened, it sought to recover enhanced penalties against KBR for “knowing” violations of the Anti-Kickback Act. Under that law, civil penalties equal to twice the amount of each kickback as well as up to $11,000 for each occurrence can be assessed against a defendant that is found liable. The government’s complaint alleged that KBR employees took 317 separate kickbacks totaling approximately $46,000. Under the False Claims Act, a defendant is liable for treble damages as well as between $5,500 and $11,000 for each individual false claim. If found liable, KBR would be responsible under the False Claims Act for any fraudulently received subcontract award fee percentage and profit percentage as well as any of the kickback costs incurred by its subcontractors that were then charged to the Army under the prime contract.

Dating back to 1863, the False Claims Act recognizes various types of fraud, including false claims made with respect to government defense contracts. Such contracts are especially susceptible to fraud as they account for approximately one-fifth of all government spending. Under the qui tam provisions of the False Claims Act, a private citizen acting as a whistleblower (also known as a relator) can sue on behalf of the United States to allege fraud. Following an investigation, the government will decide whether or not to intervene in the case. If the government does not intervene, a relator may still proceed with their claims. In this case for example, the government only chose to intervene with respect to certain allegations made by the relators. If the qui tam suit is successful, the relator is entitled to between 15% and 30% of any final judgment or settlement. Recent amendments to the False Claims Act have also given relators increased protection from employer retaliation.