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2 KBR Cases Illuminate Kickback Risks For Contractors

By John S. Pachter 

Law360, New York (December 03, 2013, 8:04 PM ET) -- 

John Pachter
John S Pachter

Two decisions in 2013, in the Fifth Circuit and the Federal Circuit, both involving Kellogg Brown & Root Services Inc. ("KBR"), dealt with vicarious liability under the Anti-Kickback Act, 41 U.S.C. §§ 51-58, for subcontractor kickbacks accepted by KBR’s employees. These decisions illuminate the risk of strict liability for contractors in kickback situations, and serve as a reminder to contractors to strengthen and reinforce corporate compliance mechanisms.

The Anti-Kickback Act contains two remedies, in §55 (a)(1) and (a)(2). Section (a)(1) provides that the Government may recover from “a person who knowingly engages” in the kickback a civil penalty equal to (a) twice the amount of each kickback and (b) not more than $10,000 for each occurrence. Section (a)(2) provides for a civil penalty in the amount of the kickback from “any person whose employee, subcontractor, or subcontractor employee” violates the statute.

United States ex rel., Vavra v. Kellogg Brown & Root Inc.

The Fifth Circuit case involved a qui tam suit based on a kickback scheme. The employees involved were KBR’s corporate traffic supervisor for LOGCAP III and four colleagues. The subcontractors were EGL Inc. and Panalpina Inc. The issue before the Fifth Circuit was whether, and to what extent, § 55(a)(1) extends vicarious liability to an employer for acts of its employees.

KBR argued that the government must plead and prove what the court called “a narrower theory of vicarious liability than apparent authority” — namely, that KBR employees acted with an intent to benefit KBR and were of managerial level acting within the scope of their employment. The court rejected this argument, holding it would not interpret the statute “to apply restrictive notions of vicarious liability.”

The Fifth Circuit held that corporations can be held vicariously liable under either subsection, depending on whether the government alleges a knowing violation under (a)(1) or seeks a penalty equal to the amount of the kickback under (a)(2) without the need to prove knowing misconduct. The court held that under the common law rule of vicarious liability, a principal is liable for the torts of its agents acting within the scope of their employment.

If the act is committed outside the scope of employment, the principal may be liable if the agent purported to act on behalf of the principal and there was reliance on apparent authority. The court reversed the district court’s ruling that granted KBR’s motion to dismiss for failure to state a claim under § 55(a)(1) and remanded the case to the district court to determine whether KBR officials acted under apparent authority in accepting kickbacks for purposes of a knowing violation of the statute.

Judge E. Grady Jolly, in a concurring opinion, stated that § 55 (a)(1), properly construed, “holds corporations liable only for the knowing violations of those employees whose authority, responsibility, or managerial role within the corporation is such that their knowledge is imputable to the corporation.” Judge Jolly noted that if apparent authority was “the entirety of the test under § 55 (a)(1), that provision would impose identical liability to § 55(a)(2): 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.”

The requirement of apparent authority, he stated, combined with “sufficient responsibility or authority within the company to attribute his knowledge to the corporation itself is therefore the distinguishing aspect of § 55(a)(1).” Judge Jolly cited the body of corporate law holding that for a corporation itself to commit an act “knowingly” requires “the knowing violations of those employees whose authority, responsibility, or managerial role within the corporation is such that their knowledge is imputable to the corporation.”

The majority opinion stated that because the record had not been sufficiently developed, it made “no determination as to the knowledge requirement” of the statute. The court said that “defining what ‘knowingly’ entails in the context of the AKA is a nuanced, fact-reliant question unsuited for resolution at the motion to dismiss stage.”

In footnote 14, the Fifth Circuit emphasized that on remand 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 KRB.” The court continued: “Under this standard, it is clear that KBR cannot be exposed to an unexpected flood of liability for nefarious acts of any and every member of its worldwide workforce.” Resolution of this issue of “apparent authority to implicate their employer” will be “a fact-intensive inquiry.”

Kellogg Brown & Root Services Inc. v. United States

In the Federal Circuit case, KBR sued in the Court of Federal Claims challenging cost disallowances. The government raised the Anti-Kickback Act allegation in a counterclaim. The KBR employees were KBR’s regional food service manager for Iraq and Kuwait and his deputy. The subcontractor was Tamimi.

KBR appealed the Court of Federal Claims' calculation of reasonable costs, and the government cross-appealed the court's decision with respect to its counterclaims. The Court of Federal Claims had found that a corporation can be held vicariously liable under both sections of the act, but the KBR officials who accepted kickbacks “were not sufficiently senior to warrant a finding of vicarious liability in this case.”

Accordingly, the Court of Federal Claims held KBR liable only for the amount of the kickback under § 55(a)(2). The Federal Circuit disagreed, holding an employee’s knowledge is imputed to the corporation when the employee acts within the scope of the employee’s authority. The court stated a narrow “adverse-interest” exception applies when the agent’s conduct is “entirely” in the agent’s interest without incidental benefit to the principal. Here, the Federal Circuit ruled that, whatever motivation the employees had in accepting kickbacks, KBR benefited by the selection of Tamimi because Tamimi provided services to KBR.

Judge Pauline Newman dissented, saying she would affirm the Court of Federal Claims ruling that the actions of KBR’s employees who accepted favors from a subcontractor should not invoke the double penalty provision of Section (a)(1). She stated: “There was no evidence” that the bribes “were known to KBR or were of benefit to KBR.” She added: “My colleagues have removed the distinction between the two subsections of § 55(a), by imposing the double penalty provision of § 55(a)(1) in circumstances that invoke only the single strict liability provision of § 55(a)(2).” Judge Newman stated the Court of Federal Claims “correctly limited KBR’s liability to § 55(a)(1)” and she would affirm the judgment of the Court of Federal Claims that KBR was strictly liable under Section (a)(2).

The Federal Circuit, in footnote 25, noted that the Fifth Circuit, in its KBR decision, held that a corporation can be vicariously liable under § 55(a)(1) and remanded the case to determine whether KBR officials acted within the scope of their employment in accepting kickbacks for purposes of a knowing violation of the act. The Federal Circuit, in contrast, stated no remand was necessary in its case because the Court of Federal Claims “already found” the individuals “were acting ‘as KBR employees and operating under LOGCAP III’ when they accepted the kickbacks.” The Federal Circuit reversed and remanded only “with instructions to calculate damages consistent with the holding that KBR is liable for AKA violations under section 55(a)(1).”

Comment

The Federal Circuit’s decision is badly flawed as it would impose “knowing” liability on a corporation under § 55(a)(1) whenever an employee accepts a bribe. Both decisions struggle to apply the doctrine of apparent authority, which is designed to serve entirely different circumstances. The Federal Circuit’s attempt to apply a “benefit” standard also falls short. Both decisions should alert contractors to a serious need to revisit ethics and compliance programs to address kickback situations.

First, in holding that “[t]he distinction between the two different provisions rests on the degree of knowledge that must be proven, not the types of persons to whom the provisions apply”, the Federal Circuit overlooked the body of corporate law recited by Judge Jolly that determines when a corporation itself can have “knowledge” of a kickback; that is, when knowledge of an employee can properly be imputed to the company. In so ruling, as Judge Newman noted (paralleling Judge Jolly’s concerns), the Federal Circuit leveled the proof requirement and made it the same for both subsections of the statute.

For knowledge to be imputed to KBR, it was enough for the Federal Circuit that the individuals “were acting ‘as KBR employees and operating under LOGCAP III’ when they accepted the kickbacks.” This gives a hollow ring to the Fifth Circuit’s assurance that “KBR cannot be exposed to an unexpected flood of liability for nefarious acts of any and every member of its worldwide workforce.” Whether that assurance holds in the remand phase of the Fifth Circuit case remains to be seen, but it is an ominous signal for litigants faced with Anti-Kickback allegations in the Court of Federal Claims.

Second, this appears to be a strange place to apply the doctrine of apparent authority. The Fifth Circuit said the company could be liable if the agent purported to act on behalf of the principal and there was reliance on apparent authority. As Judge Jolly noted, it is nonsensical to suggest that a person committing a bribe would rely on the apparent authority of the agent. The briber is not concerned whether the bribe taker has authority to bind the corporation. The doctrine of apparent authority exists to protect innocent third parties, not wrongdoers. Courts are not open to grievances by bribers who failed to seize their reward. Yet the courts seem trapped in this distortion of logic.

Third, the notion of “benefit” is also misplaced.

The Federal Circuit ruled that, whatever motivation the employees had in accepting kickbacks, KBR benefited by the selection of Tamimi because Tamimi provided services to KBR. This is a curious conclusion. To say that Tamimi provided services is not to say that KBR itself, as opposed to the individual bribe-takers, benefited from the bribe. This is what motivated Judge Newman to remark that the two KBR employees “kept the entire payments for themselves, as ‘party money’ and for sham business ventures.” Nor, she added, did any inflated price obtained by the bribe-paying subcontractor benefit KBR. To the contrary, a company is harmed, not benefited, by corrupt procurement practices. The benefit analysis is also misplaced and confusing.

Fourth, there is a serious compliance lesson for all contractors: (1) conduct thorough due diligence on all suppliers and subcontractors; (2) inform your employees and your suppliers and subcontractors of the severe consequences of attempted bribes; (3) strengthen internal controls to ensure detection and reporting of bribes; (4) intensify ethics training programs and require suppliers and subcontractors to do the same; and (5) take prompt and decisive disciplinary action after you discover a violation regarding all persons involved in a bribe as well as any who knew about the bribe but failed to report.

In this regard, note that Federal Acquisition Regulation 9.406-5 “Scope of debarment” states:

(a) The fraudulent, criminal, or other seriously improper conduct
of any officer, director, shareholder, partner, employee, or other individual associated with a contractor may be imputed to the contractor when the conduct occurred in connection with the individual’s performance of duties for or on behalf of the contractor, or with the contractor’s knowledge, approval, or acquiescence. The contractor’s acceptance of the benefits derived from the conduct shall be evidence of such knowledge, approval, or acquiescence.
 

The Federal Circuit’s decision in KBR could raise the stakes for debarment of a contractor when an employee commits a violation of the Anti-Kickback Act.

—By John S. Pachter, Smith Pachter McWhorter PLC