January 15, 2015

Fourth Circuit Embraces Expansive View of False Claims Act Fraud and Materiality In Triple Canopy Ruling

By Gordon Schnell

Another circuit court decision giving a properly expansive view of what it takes to make out a fraud claim under the False Claims Act.  This one from the Fourth Circuit in United States v. Triple Canopy, Inc..  Before the Court were two key questions.  One, whether a defense contractor’s claim for payment still could be false when there was nothing false on the face of the invoice.  And two, whether a false statement or record still could be material to the government’s decision to pay when the government did not rely on or even see the statement or record.  The Fourth Circuit answered with a resounding “Yes” to both questions.

The case involved a government contract to provide security services at the Al Asad Airbase, the second largest airbase in Iraq.  Under the contract, Triple Canopy was responsible for employing security guards to, among other things, control access to the base, patrol the base, repel attacks and provide escorts.  A key contract requirement was the security guards passing a marksmanship test.  According to the government’s complaint, the several hundred Ugandan guards Triple Canopy hired did not pass this test.  Even worse, Triple Canopy allegedly knew of this failure and created false marksmanship scorecard sheets to keep the government from finding out.  Omar Badr, a Triple Canopy medic who the company allegedly ordered to prepare false scorecards, was the whistleblower who originated this action.

The district court dismissed the case on the pleadings, finding the complaint’s allegations failed to satisfy the fraud and materiality elements of the False Claims Act.  Specifically, the lower court looked to the claims for payment Triple Canopy submitted to the government and found them to lack any objectively false statement.  They did not, for example, invoice the government for an inflated number of guards, for services not performed or for a fraudulent sum of money.  They were simply based on guard services carried out by guards who allegedly did not satisfy the marksmanship requirement of the contract.  Given that the invoices contained no explicit references to this requirement, the court found no fraud in their submission.

The Fourth Circuit disagreed, pointing to the broad reach of the False Claims Act and its design in “reach[ing] all types of fraud, without qualification, that might result in financial loss to the Government.”  According to the Court, liability under the statute attaches “any time a false statement is made in a transaction involving a call on the U.S. fisc.”  Thus, it did not matter to the appellate court that the invoices for payment were objectively true because, as alleged, they were underpinned by Triple Canopy’s knowing and intentional failure to comply with the contract’s marksmanship requirement.  While criticizing the “rigid use” of “judicially created formal categories for false claims,” the Court acknowledged it was joining the “weight of authority” from other circuits in recognizing a “contractual implied certification” claim as a basis for False Claims Act liability.

Notably, the Court rejected any notion that an implied certification claim must hinge on a contractual provision that is a condition of payment under the contract.  The Court firmly stated “nothing in the statute’s language specifically requires such a rule.”  All that is necessary is a request for payment where the government contractor intentionally “withheld information about its noncompliance with material contractual requirements.”  The Court noted the potential “abuse” of this theory of False Claims Act liability by “parties seeking to turn the violation of minor contractual provisions into an FCA action.”  But it found this potential misuse accounted for by the statute’s materiality and scienter requirements.

Applying this standard, the Fourth Circuit “readily” concluded that the government had sufficiently alleged a false claim with its “abundance of allegations” that Triple Canopy did not satisfy the marksmanship requirement and undertook a fraudulent scheme to conceal its failure.  As to materiality, the Court pointed to “common sense” which “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.”  The Court also looked to Triple Canopy’s alleged actions in covering up this lapse as clear evidence that it believed the marksmanship requirement was material to the government’s decision to pay.

In sum, the Court looked to these basic facts: Triple Canopy agreed to provide a service that met certain objective requirements; failed to provide that service; continued to bill the Government knowing it was not providing that service; and tried to cover up its failure:

Distilled to its essence, the Government’s claim is that Triple Canopy, a security contractor with primary responsibility for ensuring the safety of servicemen and women stationed at an airbase in a combat zone, knowingly employed guards who were unable to use their weapons properly and presented claims to the Government for payment for those unqualified guards.

The Fourth Circuit concluded that the Supreme Court’s admonition that the False Claims Act reaches “all types of fraud, without qualification is simply inconsistent with the district court’s view of the FCA that Triple Canopy can avoid liability because nothing on the ‘face’ of the invoice was objectively false.”

The Court likewise rejected the district court’s attempt to import a strict reliance requirement into the False Claims Act.  The lower court did so by finding the allegedly fraudulent scorecards not material because the government failed to allege it actually looked at them.  The Fourth Circuit stressed that materiality focuses on the “potential effect of the false statement when it is made, not on the actual effect of the false statement when it is discovered.”  In other words, the statute reaches false statements or records “capable of influencing a decision,” not just those “that actually do influence the decision.”  Otherwise, it would allow a fraudulent contractor to escape liability merely because a government employee fails to catch a material false statement or the government entity decides it needs to continue funding the contract anyway.  Again, the Court emphasized that such an approach would not square with the statute’s ultimate design of reaching “all fraudulent attempts to cause the Government to pay out sums of money.”

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