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Fifth Circuit Holds Contractors Subject to Vicarious Liability for Employees Engaged in Kickbacks

Fifth Circuit Holds Contractors Subject to Vicarious Liability for Employees Engaged in Kickbacks

By John S. Pachter 

In an unsettling opinion, the United States Court of Appeals for the Fifth Circuit held that 41 U.S.C. § 55(a)(1), the Anti-Kickback Act, extends vicarious liability to an employer for acts of its employees acting with apparent authority, without the need for a showing that the employees were acting for the corporation’s benefit.  The statute provides for civil penalties equal to twice the amount of each kickback and punitive damages up to $11,000 for each instance.  United States ex rel. Vavra v. Kellogg Brown & Root, Inc., 5th Cir., No. 12-40447, July 19, 2013. 

The Court rejected KBR’s argument that the government must allege the employees acted with intent to benefit KBR and were of managerial level acting within the scope of their employment before the government may state a claim imputing liability to KBR. 

In a footnote, the Court emphasized that the government must provide evidence “that KBR officials acted under apparent authority in accepting kickbacks before the government may prove a knowing violation of § 55(a)(1) by KBR.”  This, according to the Court, makes it “clear that KBR cannot be exposed to an unexpected flood of liability for nefarious acts of any and every member of its worldwide workforce.”  The question of apparent authority, added the Court, will be a fact-intensive inquiry on remand.  But the Court’s assurance against the floodgate seems hardly sufficient to calm the fears of corporate risk-assessment specialists.   

The government alleged that KBR’s Corporate Traffic Supervisor for LOGCAP III and his colleagues in the transportation department accepted kickbacks from counterparts in two subcontractors calculated to “obtain favorable treatment on … subcontracts with KBR, such as overlooking service failures and continuing to award new subcontracts … despite such failures.”  The kickbacks took the form of meals, drinks, golf outings, tickets to rodeo events, baseball games, football games, and other gifts and entertainment. 

So the question is: apparent authority to do what?  To accept kickbacks?  The Court does not explain what it means to have apparent authority to accept a kickback.  Because the Court does not enunciate standards, the ruling seems to veer dangerously close to strict liability.  As Judge Jolly pointed out in his concurrence “an employee who is bribed will always have apparent authority—it would be nonsensical to give a kickback to an employee who lacked the apparent authority to accomplish its object.”  But it is fair to ask whether it is not also nonsensical to hold that an employee has apparent authority to commit an illegal act such as a kickback. 

Moreover, apparent authority usually refers to a situation where an employer puts an employee, who lacks actual authority, in a situation that makes it inequitable for the employer to deny relief to a third party who reasonably relies on the acts of the employee. This is based on the equitable doctrine of estoppel.  But equitable doctrines require clean hands and don’t work for the benefit of wrongdoers.  So the people who provided the kickbacks would not be able to enforce the bargained-for favors if they were not forthcoming from the KBR employees.  Stated another way, it is hard to shoehorn apparent authority into these facts.

Nevertheless, the District Court will need to wrestle with the apparent authority issue on remand.  Will the District Court throw up its hands and conclude that KBR can be vicariously liable if the Corporate Traffic Supervisor and his colleagues were in a position to take favorable action in return for kickbacks?  If so, that would seem to bring us closer to the KBR “managerial level” and “scope of employment” argument advanced by KBR but rejected by the Fifth Circuit.  

Finally, what precautionary measures can a company take?  Government contractors have ethics and compliance programs that include training of employees, warning them not to engage in kickbacks, on penalty of immediate dismissal.  Companies should review these training and compliance programs to make sure they are robust and enforced.  In addition, companies that have not done so should impose the same obligations on their subcontractors with appropriate advance warnings that attempted kickback schemes will result in termination of the subcontract.  Whether these measures would be enough to fend off vicarious liability under the Fifth Circuit’s ruling cannot be safely gauged, but they are minimum steps that should not be disregarded.  In any event, we should not envy the task of corporate risk-assessment specialists going forward. 

The Fifth Circuit’s opinion was reported in an article in Bloomberg BNA Federal Contracts Report citing John S. Pachter.  The article is available here.