DC Circuit joins other circuits in enforcing Escobar's strict materiality requirement: key takeaways

Litigation Alert

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The DC Circuit has affirmed summary judgment against the relator in United States ex rel. McBride v. Halliburton Company, et al, a False Claims Act (FCA) case alleging defendants-appellees (collectively, KBR) inflated "headcount data" that purported to track the number of US troops who frequented KBR's recreation centers at certain military camps in Iraq from July 2004 to March 2005.  --- F.3d ----, 2017 WL 655439, at *1 (D.C. Cir. Feb. 17, 2017).

On February 17, 2017, the court, relying on the Supreme Court's decision in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), affirmed the district court's grant of summary judgment for KBR, concluding qui tam relator Julie McBride failed to offer evidence that any alleged misrepresentation of "headcount data" was material to the government's decision to pay KBR.  Id.

Factual background

In 2001, the US Army awarded KBR a contract to provide a wide range of services.  Following the US military's invasion of Iraq in March 2003, the Army tasked KBR with providing morale, welfare, and recreation (MWR) services for US  troops.  As relevant here, KBR performed MWR services by maintaining recreation centers where troops could exercise, play games, watch television, and use the internet.  Id.  From November 2004 to March 2004, McBride worked for KBR as an employee at the MWR facilities at Camp Fallujah.  Id. at *2.  McBride compiled "headcount data" that purported to reflect how many troops had used the facilities each day and distributed these data to KBR personnel.  Id.

McBride alleged that KBR inflated the headcount data to overstate the number of soldiers utilizing certain MWR facilities from July 2004 to March 2005.  Id.  McBride alleged various ways that KBR inflated the data and contended KBR failed to disclose violations of its obligations to maintain accurate data to support its costs, thereby rendering its claims for payment "false" under the implied certification theory.  Id.

McBride originally filed her complaint under seal in April 2005, and it remained sealed until July 2006 after the government declined to intervene.  Id.  In October 2006, the Defense Contract Audit Agency (DCAA) investigated McBride's allegations, issuing written questions to KBR and visiting one of the MWR facilities to review records and interview KBR personnel.  Id.  The DCAA did not issue any formal findings, but neither DCAA nor any other government agency disallowed or challenged the amounts KBR had billed for its services.  Id.  

After years of discovery, on December 10, 2014, the district court granted summary judgment to KBR.  Id. at *3.  The court expressed doubt there was anything unreasonable or inherently fraudulent about KBR's conduct and concluded that McBride had failed to present any evidence that the alleged headcount practices were material to the government's payment decisions.  Id.

Legal analysis

On appeal, the DC Circuit began its analysis by isolating the contractual, regulatory or other legal requirement that KBR allegedly violated.  Id. at *5.  The court noted that KBR's contracts with the government did not require KBR to maintain or produce headcount data, and that KBR apparently voluntarily undertook to track and produce these data.  Id.  Instead, McBride invoked certain provisions of the Federal Acquisition Regulation (FAR) as the basis for her claims.  Id.  The FAR provides that costs charged to the government must be "reasonable" and holds contractors like KBR "responsible ... for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles."  48 C.F.R. § 31.201-2(d); see also § 31.201-3(a); § 31.201-3(b).  The government is entitled to disallow those costs that are unreasonable or unsubstantiated by supporting documentation.  Id. § 31.201-2.  The court expressed that "McBride refers to these and other FAR requirements as relevant to her claims, and in doing so, appears to shift between imprecise theories about unreasonable costs and faulty supporting documentation."  Id.

The court found that, while McBride alluded to the possibility that KBR may have used inflated headcounts to justify excessive staffing levels at its MWR facilities resulting in unreasonable personnel costs, she did not "set out to prove that staffing was excessive or costs were 'unreasonable.'"  Id.  Instead, McBride contended "KBR deprived the Government of the opportunity to examine records in order to determine the reasonableness, or allowability of the costs."  Id.  The court noted that McBride assumed accurate headcount data were relevant to determining the reasonableness of KBR's costs, but failed to provide evidence to support this proposition.  Id.  Additionally, KBR proffered evidence revealing: initially KBR determined staffing based on camp, not based on headcounts or actual usage; staffing determinations were impacted by factors such as the types of services available and the hours a facility was open; that headcount data had no bearing on costs billed to the government; and that there was no indication headcount data affected award fee decisions.  Id.  Accordingly, the court held that, absent any connection between headcounts and cost determinations, it was "difficult to imagine how the maintenance of false headcounts would be relevant, much less material, to the Government's decision to pay KBR."  Id. at *6. 

McBride further directed the court to an Administrative Contracting Officer's (ACO) declaration that he "might" have investigated further had he known KBR maintained false headcounts, and his investigation "might" have resulted in some charged costs being disallowed.  Id.  The court stated the “ACO's speculative statement could be true of the maintenance of any kind of false data" and did not reveal "anything special about headcounts."  Id.  The court likened the ACO's statement to the “far-too-attenuated supposition that the Government might have had the 'option to decline to pay.'"  Id. (quoting Escobar, 136 S. Ct. at 2003).  The court held that this speculative and generic statement did not rise to the "rigorous" and "demanding" materiality standard that must be met and that, accordingly, McBride had not proffered evidence sufficient to defeat summary judgment.  Id. (quoting Escobar, 136 S. Ct. at 2002-03).

Finally, the court highlighted that the DCAA had investigated McBride's allegations and did not disallow any charged costs, and that KBR continued to receive an award fee for exceptional performance under its contract, even after the government learned of McBride's allegations.  Id.  The court concluded this was
"'very strong evidence' that the requirements allegedly violated by the maintenance of inflated headcounts are not material."  Id. (quoting Escobar, 136 S. Ct. at 2003).

Key takeaways

  • The DC Circuit has joined courts in the First, Seventh, and Ninth Circuits in enforcing the strict materiality requirement for implied certification claims following the Supreme Court's decision in EscobarSee, e.g., United States ex rel. Kelly v. Serco, Inc., --- F.3d ---, 2017 WL 117154 (9th Cir. Jan. 12, 2017); D'Agostino v. ev3, Inc., 845 F.3d 1, 7-8 (1st Cir. 2016); City of Chicago v. Purdue Pharma LP, --- F. Supp. 3d ---, 2016 WL 5477522 (N.D. Ill. Sept. 29, 2016) (calling Escobar instructive in a municipal FCA action). 
  • Like those courts, the DC  Circuit indicated that, where the government pays claims despite actual knowledge certain requirements were allegedly violated, courts will follow the Supreme Court's instruction that this is "very strong evidence" that those requirements were not material under the FCA.
  • The DC Circuit's decision shows the Supreme Court's words in action: the materiality standard is demanding and "not too fact intensive" to resolve on a motion for summary judgment.  Escobar, 136 S. Ct. at 2004.  

For more information about this decision, please contact any of the authors.