Today, the Fourth Circuit issued its opinion in the highly-publicized case U.S. ex rel. DRC, Inc., et al. v. Custer Battles, LLC, et al. The opinion is noteworthy for a number of reasons, not the least of which is that it provides the first Fourth Circuit interpretation of last year’s Allison Engine opinion by SCOTUS.
True to the predictions of many in the qui tam community, Allison Engine has turned out to be a win, and today’s Fourth Circuit in opinion in the Custer Battles case is an unmitigated victory for the American taxpayer.
The case was filed in the U.S. District Court for the Eastern District of Virginia in 2004, and arises out of fraud in various contracts related to the rebuilding of Iraq in 2003 and 2004. The time frame is important, because during this period Iraq was governed by the Coalition Provisional Authority (“CPA”), and one central issue in the case was whether presenting a false claim to the CPA was the same as presenting a false claim to the United States under 31 U.S.C. 3729(a)(1).
The case was filed under seal, as required by the False Claims Act, and served on the government, which declined to intervene. The case was then unsealed and served, and proceeded through discovery, summary judgment motions, a jury trial, and numerous motions under Fed. R. Civ. P. 50. Prior to submitting the case to a jury, Judge Ellis had granted judgment for the defendants on all amounts except for one–a $3 million payment to Custer Battles that had been paid with a U.S. Treasury check.
Judge Ellis conducted a “source of funds” analysis, and reasoned that the remainder of the money outside of the one $3 million payment had not been money of the United States, but rather money that came to the CPA from various other sources, included assets seized in Iraq after the Hussein government was toppled.
The jury found in favor of the relators, and determined that Custer Battles had defrauded the United States to the tune of $3 million, which Judge Ellis ostensibly trebled as per the requirements of the FCA.
(As an aside, in FCA jury trials, the jury simply decides whether false claims were submitted to the government, and if so, in what amount. The court then trebles the damages as a matter of law.)
Relators appealed the district court’s ruling that claims presented to the CPA were not claims submitted to the United States, and the Fourth Circuit agreed that the district court had erred. The plain language of the FCA states that a “claim” includes “any request or demand … for money or property which is made … to a grantee or other recipient if the United States Government provides any portion of the money or property which is requested or demanded … or if the Government will reimburse such Grantee … “.
The Fourth Circuit stated: “While we agree with the district court that § 3729(a)(1) requires that presentment be made to U.S. government personnel working in their official capacity, we conclude that the court erred in assuming that U.S. government personnel detailed to the Coalition Authority could not be working in their official capacities as U.S. government employees.” In fact, the circuit court pointed to evidence presented by the relators at trial, which showed that the U.S. military employees who contracted with the defendants were detailed to the CPA, but were always acting in their official capacities as employees of the United States, who were being paid by the U.S. Army and other U.S. agencies.
The Fourth Circuit also clarified that although § 3729(a)(1) imposes liability on those who make or use false statements or records to get false claims paid or approved “by the Government,” section (a)(1) does not contain the “by the Government” language. This distinction was significant to the circuit court, which held that “[s]ection 3729(a)(1) defines liability in terms of the person to whom the claim is presented, whereas § 3729(a)(2) defines liability in terms of the intended source of the payment or approval.”
It was at this point that the SCOTUS opinion in Allison Engine came into play; namely, the Fourth Circuit confirmed that while section (a)(1) contains a presentment requirement, section (a)(2) does not — neither explicitly nor implicitly. Based on these distinctions, the Fourth Circuit reversed the district court’s order granting the defendants motion for judgment as a matter of law, since the relators’ evidence was “sufficient for a reasonable jury to conclude that Custer Battles presented or caused to be presented fraudulently inflated invoices to persons acting in their official capacity as U.S. officials or employees.” However, the circuit court remanded to the district court the issues of whether the defendants’ claims were materially false, whether the United States suffered damages, and whether the individual defendants had sufficient knowledge of the alleged fraud to be liable.