On Friday, May 17th, the U.S. Court of Appeals for the Fourth Circuit affirmed the U.S. District Court for the Eastern District of Virginia’s dismissal of a lawsuit brought pursuant to the False Claims Act (31 U.S.C. § 3729 et seq.) by two relators against their former employers Kellogg, Brown & Root Services, Inc. and Services Employees International, Inc. The relators’ claims—arising out of the defendants’ alleged failure to deliver contractually promised services to the United States pertaining to the maintenance of trucks and other moving equipment in Iraq—were filed under seal in 2004 pursuant to the qui tam procedures of the FCA and served on the United States Attorney General and the United States Attorney for the Eastern District of Virginia.
To read the district court opinion dismissing the Complaint in United States ex rel Godfrey v. Kellogg Brown & Root, Inc., click /files/116785-109034/USA_exrel_godfry_v_KBR_4thcir.pdf”>here.
The relators alleged FCA violations in several different scenarios. First, relators alleged that the defendants failed to satisfy the contract’s maintenance and repair requirements by failing to perform routine maintenance procedures on trucks and other vehicles. Relators alleged that defendants (1) made false certifications; (2) wrongfully induced the United States to enter into the contract in violation of the FCA, and (3) engaged in a conspiracy to submit false claims to the United States for payment in violation of the FCA.
Relators also alleged that they experienced unlawful retaliation when they were terminated from their employment, and thus brought claims pursuant to 31 U.S.C. §3730(h). The Fourth Circuit affirmed the District Court’s ruling that those claims were stayed pursuant to an arbitration agreement each employee signed at the outset of his employment.
Affirming the district court’s dismissal, the appeals court held that the relators could not state an FCA claim for fraudulent inducement. The court reasoned that the defendants’ statement that they would perform the maintenance and repair work specified under the contract was not an objective falsehood, but was, at best, a disputed legal question.
Turning to the fraudulent inducement claim, the court noted that, since the government form—known as a DD Form 1155—alleged to have been used to fraudulently induce the contract award was not executed until five months after the defendants’ work began, the statements contained in that document could not have induced the Government to contract with the defendants.
Moreover, the court stated that because the DD Form 1155 is a standard, boilerplate government form without an express certification, the repair and maintenance language relied on by the relators in the DD Form 1155 was not material to the contract. Presumably, had the repair and maintenance language been of such profound importance to the contract, it would not have been included on the DD Form 1155, but would have been incorporated from some other, more specific, document attached to the contract.
Much of this will come as no surprise to qui tam practitioners, as the Fourth Circuit has been one of only three circuits to read an implicit materiality requirement into the FCA. The FCA itself, of course, does not contain a materiality requirement, and many find it strange that the Fourth Circuit would take it upon itself to read such a requirement into the statute.
With regards to the arbitration agreement the plaintiffs signed at the outset of their employment, the Fourth Circuit also followed its past precedent and held that the plaintiffs’ retaliation claims under 31 U.S.C. § 3730(h) were subject to mandatory arbitration under the Federal Arbitration Act (9 U.S.C. §3 and §4).
Careful readers will note that the employment at issue here was for work related to trucks and other moving equipment in Iraq, and thus would seem to fall within the exception to the FAA for those engaged in “foreign commerce.” Interestingly, the employees had also signed a choice of law provision in their agreements, which called for the contract to be governed by principles of Texas law. Thus, the Court ruled, even if the FAA did not apply, the strong presumption in favor of arbitration under Texas law would suffice to compel arbitration.
However, it is always for a Court, and not an arbitrator, to decide whether the provisions of an arbitration agreement apply. A.T. Massey Coal v. International Union, 799 F.2d 142 (4th Cir. 1986). Moreover, general contractual defenses, such as duress, fraud or unconscionability may apply and may be grounds to invalidate arbitration agreements. Doctor’s Associations v. Casarotto, 517 U.S. 681 (1996). Given the fact that the filing of an arbitration action would undoubtedly count as the sort of public disclosure which is prohibited by the FCA, practitioners should take note that the holding in this case does very little to actually change the basic procedure of a qui tam filing. Qui tam complaints must still be filed under seal, and issues related to the enforceability of claims under §3730(h) can be dealt with at the time of unsealing.
Perhaps the most problematic aspect of the Court’s ruling for qui tam practitioners will be that clients may be more likely to attempt to initiate arbitration proceedings on their own, prior to retaining counsel. Counsel will have to be vigilant to warn potential clients that any such filing will count as a public disclosure, which will almost certainly disqualify them from pursuant a False Claims action later.
Zachary Kitts
Cook & Kitts, PLLC