What is ‘Fraud?’: Whistleblower Case Examines Distinction Between Intent and Mistake

Litigation under the federal False Claims Act has steadily increased in recent years, prompting litigants to regularly impose upon appellate courts various questions of law and legislative interpretation. As we reported last week, the U.S. Circuit Courts are evenly split over how specific a Relator must plead claims under the FCA. Today’s case presents another issue facing several courts: what is “fraud?” In other words, how are courts to differentiate between an accidental or negligent breach of contract situation – which is not actionable under the FCA – or clear intent to defraud the government?

More specifically, if a government contract does not contain a clause requiring strict compliance with its terms prior to payment, does this trigger FCA liability following the delivery of non-conforming goods and accompanying invoice? The Fifth Circuit held in the negative, based on the following analysis.

Issues Presented by Spicer v. Westbrook

The underlying facts of Spicer v. Westbrook involve alleged fraud under a contract between Navistar, Inc. and the United States government for the delivery of Mine Resistant Ambush Protected Vehicles (“MRAPs”). Each MRAP was to be produced using Chemical Resistant Agent Coating (“CRAC”), which was subcontracted to Custom Conversions, Inc., a company specializing in this type of detail. The contract required the CRAC to be applied in four steps, one of which mandated the use of a specific epoxy primer.

The contract also contained the language found in Federal Acquisition Regulation 52.246-2, requiring the contractor to “provide and maintain an inspection system acceptable to the Government covering supplies under [the] contract” and “tender to the Government for acceptance only supplies that ha[d] been inspected in accordance with the inspection system and ha[d] been found by [Navistar Defense] to be in conformity with the contract requirements.”

According to the complaint, Custom Conversions never applied the epoxy to the vehicles, and the relator asserts he communicated with Navistar about the omission. Nonetheless, it delivered 7,000 MRAPs to the federal government for payment in 2007. Based on these deliveries, the relator filed an FCA petition against Navistar for collecting under the contract despite delivering MRAPs that did not conform with the precise requirements of the contract.

The case was initially dismissed by the District Court, after which the relator filed his appeal to the U.S. Court of Appeals for the Fifth Circuit. The three claims raised by the relator were described as follows:

• Each delivery of an MRAP to the government implied compliance with FAR 52.246.2. The MRAPs did not comply and Navistar made misrepresentations in order to receive payment;
• The invoices submitted by Custom Conversions to Navistar amounted to false statements and are prohibited by the FCA, and;
• Navistar violated the FAR by failing to comply with its inspection requirements – thereby violating the FCA.

Fifth Circuit Explains Precondition Requirement

Very succinctly, the Fifth Circuit held that in order for a violation of a government contract to amount to an FCA claim, the original contract must contain a “certification of compliance.” This certification must make compliance with the terms of the contract a precondition of payment.

Specifically, the court held that:

“even if a defendant falsely certified compliance with a contractual or regulatory requirement….the defendant still could not be liable under the FCA unless compliance with that requirement was a precondition to government payment. If a relator cannot or does not allege such precondition of payment, the case is merely a traditional breach of contract case.” (Emphasis added.)

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