CONGRESS PROPOSES CIVIL FALSE CLAIMS REWRITE; CAS AND COST ISSUES PREDOMINATE

In our last report, we discussed the many proposals now before Congress to increase contractor oversight and accountability. Many of those provisions are contained in H.R. 1585, the proposed National Defense Authorization Act for Fiscal Year 2008. On September 12, 2007, Sen. Grassley introduced S. 2041, the “False Claims Act Correction Act of 2007,” to “correct” what Sen. Grassley views as judicial errors and to increase liability for contractors.

Overall, S. 2041 would expand the universe of activity that could result in liability under the civil False Claims Act (FCA). First, S. 2041 would impose liability for “present[ing] a false or fraudulent claim for Government money or property,” rather than the current offense of “present[ing] to an officer or employee of the United States Government … a false or fraudulent claim …” This change would eliminate the requirement to “present” the claim to a government employee, thereby reversing United States ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004) (claim presented to Amtrak, not government employee).

Second, through a new definition of “Government money or property,” S. 2041 would also eliminate the requirement under current law that the U.S. Government provide any portion of the money or property which is requested or demanded. S. 2041 defines “Government money or property” to include: “(B) money or property the United States Government provides, has provided, or will reimburse to a contractor, grantee, agent or other recipient to be spent or used on the Government’s behalf or to advance Government programs; (C) money or property belonging to any administrative beneficiary …” S. 2041 defines “administrative beneficiary” to mean: “any natural person or entity, including any governmental or quasi-governmental entity, on whose behalf the United States Government, alone or with others, collects, possesses, transmits, administers, manages, or acts as custodian of money or property.” This change would reverse the decision in United States ex rel. DRC Inc. v. Custer Battles LLC, 444 F. Supp. 2d 678 (E.D. Va. 2006) (claim submitted to the Coalition Provisional Authority, not a U.S. Government entity), and would also expand liability to areas in which the government acts only as an administrator or manager of money or property unrelated to the public fisc.

Third, S. 2041 would expand conspiracy liability under the current law to anyone who “conspires to commit any substantive violation set forth in this section or otherwise to defraud the Government by getting a false or fraudulent claim for Government money or property paid or approved.” The highlighted language indicates that conspiracy to commit any act other than a substantive violation of the statute to defraud the Government, by getting a false or fraudulent claim for Government money or property paid or approved, would result in civil FCA liability.

Fourth, S. 2041 would explicitly permit government employees to sue as qui tam relators where that employee learned of the information underlying the alleged violation in the course of his/her government employment, disclosed the information to the agency inspector general, his/her supervisor and the Attorney General, and the government has not filed an action within 12 months of the disclosure.

Fifth, S. 2041 would restrict the use of the public disclosure defense by defining “public disclosure” to include “only disclosures made on the public record or that have otherwise been disseminated broadly to the general public,” and by requiring that “the allegations relating to all essential elements of liability … are based exclusively on the public disclosure of allegations or transactions in a Federal criminal, civil, or administrative hearing, in a congressional, Federal administrative, or Government Accountability Office report, hearing, audit or investigation, or from the news media.” S. 2041 states disclosure under the Freedom of Information Act does not create a public disclosure. Further, public disclosure would occur “only if the person bringing the action derived his knowledge of all essential elements of liability … from the public disclosure.”

Finally, S. 2041 would increase the statute of limitations to ten years after the date of violation, and would permit the government to share information obtained under civil investigative demands (CID) with relators.

S. 2041 would impose liability for actions heretofore determined not to be violations. Companies would potentially be liable for any claims relating to federal funds or property even though not presented to a government employee, and any claims relating to non-federal funds or property where the U.S. Government had some relationship to the administration or management of such funds or property.

II. CAS and Cost Issues Headline Recent Decisions

Three recent cases decided significant aspects of CAS; one relating to the meaning of “affected contract” for purposes of calculating a price adjustment for a voluntary change to a cost accounting practice, and two relating to pension costs. In Lockheed Martin Corp., ASBCA No. 53822 (June 27, 2007), the ASBCA considered the scope of the contractor’s “affected CAS-covered contracts” to determine whether voluntary changes in cost accounting practices “will result in increased costs being paid” by the government in the context of pricing a modification. Focusing on the “causative relationship between the changed accounting practice and any ‘increased costs,’” the board analyzed the facts relating to whether the negotiating parties knowingly repriced the contract in the modification using the changed practices, and whether the scope of the repricing effort was sufficiently comprehensive to justify a conclusion that the impact of the changed practices was fully incorporated in the contract. The board concluded that the repricing was sufficiently comprehensive and did employ the changed practices.

In Raytheon Company, ASBCA No. 54907 (August 21, 2007), the ASBCA held that the CAS 413.50(c)(12) adjustment for a pension surplus or deficit, upon a segment closing, is a current period adjustment, allocable as a credit or charge during the cost accounting period in which the sale of the segment occurred. The board distinguished the above-discussed Lockheed opinion and decided that the CAS 413.50(c)(12) current period adjustment does not require an impact analysis of individual contracts within the segment. As such, the board decided, “this CAS adjustment does not envision the parties addressing the details of the negotiation and pricing of individual ‘affected’ contracts to determine impact …” The board also determined that the interest owed the government for a CAS noncompliance is to be compounded daily commencing, in this case, on the date of overpayment (the date of segment closing at which time the CAS 413.50(c)(12) computation showed a pension surplus) and ending on the date the contractor effects the required adjustment.

In General Motors Corp. v. United States, No. 00-40C (COFC September 14, 2007), the court analyzed “what actuarial assumptions – specifically, assumptions related to the interest rate the pension assets will earn in the future and the plan participants’ mortality rate – should be used to calculate the ‘actuarial liability’ for the closed segment” in a CAS 413.50(c)(12) adjustment, where the pension plan has not been terminated. In that case, the parties agreed that the pension plan of the closed segment had a deficit at the time of the sale of the segment. The issue in the case was the amount of the government’s share of the deficit. GM argued for the use of Pension Benefit Guarantee Corporation (PBGC) actuarial assumptions, while the government argued for the use of the actuarial assumptions GM developed under CAS 412. The court found for the government, basing its decision on the proposition that CAS 413 defines “actuarial liability” based on the CAS 412 “cost method in use.” The court rejected GM’s argument that a segment-closing adjustment is a “settlement” which requires termination assumptions; the court distinguished between actuarial assumptions used in segment closings with plan terminations from those where the plan does not terminate.

Although not a CAS case, Tecom, Inc., ASBCA Nos. 53884, 54461 (September 21, 2007), discussed the reach of Boeing North American, Inc. v. Roche, 298 F.3d 1274 (Fed. Cir. 2002) in determining allowability of legal fees and settlement costs of a sexual harassment lawsuit under Title VII of the Civil Rights Act of 1964. The government sought to impose the Boeing standard -- that the contractor was required to show that the former employee had “very little likelihood of success on the merits” in the sexual harassment lawsuit against the contractor – in order for the legal and settlement costs to be allowable. Additionally, the government argued that the payment of a settlement was a substitute for a fine or penalty and was therefore “related,” as that term is used in FAR 31.204 , to the unallowable fines and penalties in FAR 31.205-15 . The board rejected the government’s position and determined that the Boeing analysis did not reach the litigation and settlement costs of a sexual harassment lawsuit.

Finally, contractors should take note of United Medical Supply Company, Inc. v. United States, No. 03-289C (COFC June 27, 2007). There, the court determined that the government’s failure to preserve records pertaining to contractor claims resulted in sanctions precluding testimony of the government’s expert. The court also imposed costs on the government. The significant point of this case is record retention policy; the consequences could just as easily have been imposed on the contractor if the contractor had failed to preserve relevant documents. Importantly, the court noted: “One would think that document retention policies involving contract materials would consider, inter alia, the applicable statute of limitations on contract actions … [I]t should be noted that courts have repeatedly rejected claims that a party should not be subject to spoliation sanctions because it destroyed documents pursuant to a document retention/destruction policy.” Given especially the prevalence of e-mail as a substitute for contract correspondence, contractors are well advised to maintain complete files of all relevant documents, electronic and otherwise, with an eye on the related statutes of limitation.

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For a complete list of Recent Developments in Government Contracts, please see the attached index with weblinks to the source documents. If you wish to discuss these or any other government contract issues, please contact the following individuals or view our website at www.smithpachter.com to view additional attorney biographical information:

• S. 1547, National Defense Authorization Act for Fiscal Year 2008 (placed on Senate legislative calendar, June 29, 2007)
• H.R. 1585, National Defense Authorization Act for Fiscal Year 2008 (passed by House, May 17, 2007; received by Senate, June 4, 2007)
• H.R. 3033, “Contractors and Federal Spending Accountability Act of 2007” (July 12, 2007)
• H.R. 3013, “Attorney-Client Privilege Protection Act of 2007” (July 12, 2007)
• “More Dollars, Less Sense: Worsening Contracting Trends Under the Bush Administration,” Majority Staff, U.S. House of Representatives Committee on Oversight and Government Reform (June 2007)

II.   REGULATIONS & POLICIES

• Final Rule, “FAR: Government Property,” 72 Fed. Reg. 27364 (May 15, 2007)
• Proposed Rule, “DFARS: Waiver of Specialty Metals Restriction for Acquisition of Commercially Available Off-the-Shelf Items,” 72 Fed. Reg. 35960 (July 2, 2007)
• Response to Public Comments, “DFARS: Contract Closeout; Systemic Issues,” 72 Fed. Reg. 28654 (May 22, 2007)
• Final Rule, “CASB: Time and Material and Labor Hour (T&M/LH) Contracts for Commercial Items,” 72 Fed. Reg. 36367 (July 3, 2007)
• Notice, “CASB: Staff Discussion Paper – Harmonization of CAS 412 and 413 with Pension Protection Act of 2006,” 72 Fed. Reg. 36508 (July 3, 2007)
• Final Rule, “CASB: Changes to Acquisition Thresholds,” 72 Fed. Reg. 32809 (June 14, 2007)
• Proposed Rule, “CASB: Contract Clauses,” 72 Fed. Reg. 32829 (June 14, 2007)
• Final Rule, “CASB: Applicability of CAS Coverage,” 72 Fed. Reg. 32546 (June 13, 2007)
• Final Rule, “NASA: Award Fee Administrative Changes,” 72 Fed. Reg. 35666 (June 29, 2007)
• Final Rule, “DOE: Implementation of DOE’s Cooperative Audit Strategy for its M&O Contracts,” 72 Fed. Reg. 29077 (May 24, 2007)
• Notice, Treasury: Prompt Payment Act and Contract Disputes Act Interest Rate, 72 Fed. Reg. 35742 (June 29, 2007)
• Interpretation, “SEC: Commission Guidance Regarding Management’s Report on Internal Control over Financial Reporting under Section 13(a) or 15(d) of the SEC Act of 1934,” 72 Fed. Reg. 35324 (June 27, 2007)
• Final Rule, “SEC: Amendments to Rules Regarding Management’s Report on Internal Control over Financial Reporting,” 72 Fed. Reg. 35310 (June 27, 2007)
• OUSD Memorandum, “Acting Director, Office of Cost, Pricing, and Finance” (July 26, 2007)
• OUSD Memorandum, “Determining Fair and Reasonable Contract Prices – Revised Procedures, Guidance and Instruction (PGI)” (June 8, 2007)
• OUSD Memorandum, “Input on Potential Revisions to DOD Contract Finance Policies” (June 4, 2007)
• OUSD Memorandum, “Input on Potential Revisions to DOD Profit Policies” (June 4, 2007)
• OMB Memorandum, “Enhancing Competition in Federal Acquisition” (May 31, 2007)
• DCAA Memorandum, “Audit Guidance on the Impact of the Pension Protection Act of 2006” (May 1, 2007)
• Professional Services Council Letter to OUSD, “DFARS 2006-D057 Excessive Pass-Through Charges” (July 6, 2007)
• CODSIA Letter to GSA, “Proposed Rule, FAR Case 2005-036, Definition of Cost or Pricing Data” (June 22, 2007)

III.   CASES

• International Data Products Corp. v. United States , No. 2006-5083, -5094 (Fed. Cir. June 27, 2007) (warranty liability survives convenience termination of contract)
• United Medical Supply Company, Inc. v. United States, No. 03-289C (COFC June 27, 2007) (government’s failure to preserve records pertaining to contractor’s claim results in sanctions precluding government expert testimony and imposing costs on government)
• ATK Thiokol, Inc. v. United States, NNo. 99-440C (COFC May 31, 2007) (court awards money damages and interest notwithstanding fact that contracts are still open)
• Sarang Corporation v. United States, No. 06-506C (COFC May 25, 2007) (Prompt Payment Act interest recoverable on settlement of claim)
• Lockheed Martin Corporation, ASBCA No. 53822 (June 27, 2007) (F-22 contract repricing resulted in exclusion of same contract from base of “affected contracts” for calculation of CAS cost impact)
• Honeywell International, Inc., ASBCA No. 54598 (June 20, 2007) (contractor claim under IDIQ contract for government’s order in excess of maximum is denied)
• ICI Americas, Inc., ASBCA No. 54877, 55078 (May 23, 2007) (sustaining in part contractor appeal from final decisions on pension cost segment closing adjustments and actuarial surpluses when pension plans were merged)
• The Boeing Company, CBCA Nos. 337-339 (contractor that violates False Claims Act may not recover defense costs as allowable under DOE contract)
• United States ex rel. Laird v. Lockheed Martin Engineering & Science Services Co., No. 06-20225 (5th Cir. June 27, 2007) (a contract underbid is not a false claim; NASA Form 533 is a planning document and not an actionable false claim)
• Public Warehousing Company v. Defense Supply Center Philadelphia, Civil Action No. 07-0502 (JDB) (D.D.C. May 22, 2007) (contractor’s action for injunctive relief against DSCP’s refusal to provide past performance evaluations is denied; proper forum held to be Court of Federal Claims)

IV.   REPORTS

• GAO 07-273, “Improved Insight and Controls Needed over DOD’s Time- and-Materials Contracts” (June 2007)
• DOD Inspector General Report No. D-2007-107, “Report on Procurement Policy for Armored Vehicles” (June 27, 2007)
• GAO 07-731G, “Government Auditing Standards” (July 2007 Revision)