United States: Fifth Circuit’s Ruling On Anti-Kickback Act May Generate More Lawsuits Against Federal Contractors

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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions