Fifth Circuit’s Ruling on Anti-Kickback Act May Generate More Lawsuits against Federal Contractors

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In United States v. Kellogg Brown & Root, Inc., No. 12-40447 (5th Cir. July 19, 2013) (“KBR”), the U.S. Court of Appeals for the Fifth Circuit decided questions of first impression concerning the federal Anti-Kickback Act that may result in increased civil litigation against federal contractors based on the acts of their employees. The KBR decision adopts a more lenient standard for the imputation of vicarious liability to employers for their employees’ alleged violations of the Act. This lenient standard may inspire more qui tam suits under the False Claims Act and government enforcement actions under the Anti-Kickback Act itself. Government contractors should reexamine their training and compliance programs to ensure that they fully educate employees about the Anti-Kickback Act and adhere to its monitoring and reporting requirements.

In KBR, the Court interpreted a subsection of the Act’s civil suit provision permitting recovery of double damages and per-occurrence penalties, 41 U.S.C. § 8706(a)(1), to extend vicarious liability to employers. The Court also adopted a lenient, common-law standard for the imposition of vicarious liability under this subsection and refused to require employees to have been acting with the intent to benefit their employer as a prerequisite to employer liability. This compliance alert provides a brief background on the Anti-Kickback Act, a synopsis of the Fifth Circuit’s decision and its potential impact on employers, and some guidance relating to training and compliance programs.

Congress enacted the Anti-Kickback Act in 1946 in response to reports that World War II defense subcontractors were paying fees to prime contractors to gain valuable military subcontracts. These payments were ultimately a burden on taxpayers, as prime contractors would pass these inflated subcontract costs along to the government. The U.S. Supreme Court reaffirmed the purpose of the Act in a 1966 decision when it observed that “public policy requires that the United States be able to rid itself of a prime contract tainted by kickbacks.” United States v. Acme Process Equip. Co., 385 U.S. 138, 147, 87 S. Ct. 350, 356 (1966). In 1986, Congress amended the Act “to enhance the government’s ability to prevent and prosecute kickback practices.” H.R. REP. NO. 99–964, at 4 (1986), reprinted in 1986 U.S.C.C.A.N. 5960−61. Congress explained that “[t]hese practices have become a pervasive problem in Federal procurement. This form of commercial bribery has tremendous impact. Kickbacks directly inflate contract costs paid by the taxpayer. Kickbacks destroy competition and they foster corruption.” Id.

The Act as codified today broadly defines a “kickback” as “any money, fee, commission, credit, gift, gratuity, thing of value, or compensation of any kind that is provided to a prime contractor, prime contractor employee, subcontractor, or subcontractor employee to improperly obtain or reward favorable treatment in connection with a prime contract or a subcontract relating to a prime contract.” 41 U.S.C. § 8701(2). The Act then prohibits a “person” from providing, attempting to provide, or offering to provide a kickback; soliciting, accepting, or attempting to accept a kickback; or including the amount of a kickback in a subcontract or prime contract price. Id. § 8702. Importantly for the KBR decision, the Act defines a “person” to include “a corporation, partnership, business association of any kind, trust, joint-stock company, or individual.” Id. § 8701(3).

In KBR, the Court interpreted the Act’s civil enforcement provision, which grants the federal government authority to initiate civil actions against “persons”:

(a) The Federal Government in a civil action may recover from a person—

(1) that knowingly engages in conduct prohibited by section 8702 of this title a civil penalty equal to—

(A) twice the amount of each kickback involved in the violation; and

(B) not more than [$11,000, as adjusted pursuant to the Federal Civil Monetary Penalties Inflation Adjustment Act of 1990, 28 U.S.C. § 2461] for each occurrence of prohibited conduct; and

(2) whose employee, subcontractor, or subcontractor employee violates section 8702 of this title by providing, accepting, or charging a kickback a civil penalty equal to the amount of that kickback.

Id. § 8706(a). Qui tam relators had filed a civil lawsuit against KBR and others under the False Claims Act alleging that certain KBR employees had accepted kickbacks from two companies angling to win subcontracts under KBR’s prime contract to service American armed forces in military theaters across the globe. The federal government intervened as plaintiff and asserted claims against KBR under section 8706(a)(1) of the Anti-Kickback Act. KBR moved to dismiss the government’s complaint on the grounds that (1) section 8706(a)(1) did not permit corporate vicarious liability; and (2) in any event, the government had failed to plead facts sufficient to confer liability on KBR for the acts of its employees under the Act—namely, that the employees had been acting for KBR’s benefit when they participated in the alleged kickback scheme. The U.S. District Court for the Eastern District of Texas agreed with KBR and dismissed the government’s complaint. The government appealed that decision to the Fifth Circuit.

The appeal presented two principal issues: (1) whether section 8706(a)(1) of the Act permits holding employers vicariously liable; and (2) if so, what the appropriate standard for vicarious liability should be. These questions were important ones, as the civil penalties the government could recover under subsection (a)(1) (twice the amount of each kickback involved plus as much as $11,000 for each occurrence of prohibited conduct) were much more severe than the penalties recoverable under subsection (a)(2) (the amount of the kickback(s)).

As to the first issue, the Fifth Circuit reversed the district court and held that section 8706(a)(1) of the Act permits holding employers vicariously liable. The Court noted that the plain language of section 8706 allows the government to recover from a “person” under both subsections (a)(1) and (a)(2)—a term the Act defined to include both individuals and corporations. Because a corporation cannot act or have a mental state by itself, the Court reasoned that the only way for it to be liable under subsection (a)(1) is through attribution of the actions of its employees. The Court added that its interpretation did not render subsection (a)(2) superfluous (a point upon which the district court had based its decision) because subsection (a)(1) is limited to “knowing[]” misconduct whereas subsection (a)(2) is not.

The Court then addressed the second issue on appeal—the appropriate standard for imposing vicarious liability on an employer for the acts of its employees under subsection (a)(1). After much discussion, the Court adopted “the default, common law rule of vicarious liability” that imputes liability to an employer when its employee acts within the scope of his or her employment or takes action under apparent authority from his or her employer. Relying on the Restatement (Second) of Agency, the Court defined apparent authority as “the power to affect the legal relations of another person by transactions with third persons, professedly as agent for the other, arising from and in accordance with the other’s manifestations to such third persons.” Thus, the Court held that employers may be held liable under subsection (a)(1) when their employees act with their employer’s apparent authority and violate the Act.

KBR argued for a heightened vicarious liability standard based on the standard applied in criminal cases and punitive damage claims. For example, KBR argued that, to recover against it under subsection (a)(1), the government should have to allege and prove that KBR’s employees had acted with an intent to benefit KBR (the act-to-benefit standard) or that they had been of managerial level and acting within the scope of their employment. The Court refused to adopt these standards, opting instead for a more lenient one. Ultimately, the Court concluded that the government had pleaded its case against KBR in a manner sufficient to support seeking recovery against KBR under section (a)(1) of the Act.

It is also worth noting that Judge Jolly, in a separate opinion, concurred with the result reached by the majority but largely disagreed with the analysis. Specifically, he interpreted the “knowing[]” requirement of subsection (a)(1) to limit the situations in which vicarious liability was appropriate to those where the employee(s) involved were “at a certain level of responsibility.” Stated differently, a basic tenet of corporation law is that the knowledge of higher-level employees may be imputed to corporations while the knowledge of lower level employees may not. Thus, concluded Judge Jolly, “knowing violations of [subsection (a)(1)] only arise when employees whose knowledge is imputable to the corporation knowingly engage in kickback activity.” Judge Jolly joined with the majority in reversing the district court, but he would have instructed the district court to determine whether the KBR employees involved were at a sufficient level within the company to impute their knowledge to KBR by conducting a “highly fact-intensive analysis” that the district court had not yet conducted.

Finally, it should be mentioned that, while the Fifth Circuit’s decision in KBR is only directly binding on federal district courts in the states of Texas, Louisiana, and Mississippi, it adopted the position of the government, which will undoubtedly cite KBR as persuasive authority in litigation throughout the country. It is also not known at this time whether KBR will appeal the court’s decision to the U.S. Supreme Court. The substantial implications of the KBR decision are best evidenced by the facts of the case itself, wherein the government alleges that KBR employees accepted kickbacks from subcontractors on no less than 148 occasions, including meals, drinks, golf outings, sports events, and other gifts and entertainment. Under subsection (a)(2), the government could have sought to recover a civil penalty from KBR equal to the amount of the alleged kickbacks, but the government chose not to pursue such a remedy, possibly because (as would be the case in many situations) the value of the kickbacks may not have justified the costs of litigation. Under subsection (a)(1), however, the government may recover twice the amount of the alleged kickbacks plus as much as $11,000 for each occurrence of prohibited conduct. With 148 alleged occurrences in KBR, the latter provision alone could permit recovery of more than $1.62 million. Based on these numbers, it is easy to see how the Fifth Circuit’s allowance of vicarious liability under subsection (a)(1) of the Anti-Kickback Act and its adoption of a lenient standard for imposing it upon employers may encourage litigation by the government under the Act, as well as qui tam lawsuits under the False Claims Act.

The KBR decision should inspire government contractors to study the Anti-Kickback Act and to ensure that they thoroughly address the Act with their employees in training and compliance programs. Notably, the Act itself requires prime contractors to “have in place and follow reasonable procedures designed to prevent and detect violations” and to “cooperate fully with a Federal Government agency” investigating a potential violation. 41 U.S.C. § 8703(a) & (b). The Act also sets forth specific reporting requirements: “A prime contractor or subcontractor that has reasonable grounds to believe that a violation . . . may have occurred shall promptly report the possible violation in writing to the inspector general of the contracting agency, the head of the contracting agency if the agency does not have an inspector general, or the Attorney General.” Id. § 8703(c)(1). Government contractors should maintain a robust Anti-Kickback program that trains employees, monitors compliance, investigates potential issues, and reports any violations to the appropriate authorities. Such a program offers the best protection against increased litigation over employee kickback activity that may otherwise result from the KBR decision.