Defense contractor KBR headquartered in Houston, Texas must face claims that its employees took kickbacks while shipping military equipment to Iraq and Afghanistan. Under a 2001 logistics (LOGCAP) agreement, the U.S. Army had given KBR, a former Halliburton subsidiary previously known as Kellogg, Brown and Root, discrete tasks to fulfill, which it could do on its own or by hiring subcontractors.
KBR hired two subcontractors, EGL and Panalpina, to carry out its task of transporting military equipment and supplies to Iraq, Afghanistan and Kuwait between 2002 and 2006. The government later accused KBR employees of accepting kickbacks from EGL and Panalpina to “obtain favorable treatment on subcontracts with KBR, such as overlooking service failures and continuing to award new subcontracts despite such failures" they said.
The subcontractors allegedly provided the KBR manager in charge of the Army contract, Robert Bennett, and others with meals, drinks, golf trips, tickets to sports events and other gifts. Bennett and one other employee pleaded guilty to criminal charges related to the kickbacks.
Two private individuals initially brought the False Claims Act complaint KBR as a qui tam action, and the government intervened, but a federal judge in Texas dismissed the case, reasoning that the Anti-Kickback Act does not support claims based on vicarious liability.
In reversing that holding, the 5th Circuit gave an in-depth analysis of the Anti-Kickback Act, or (AKA).
“The District Court’s reading gives individual expression to both AKA subsections (a)(1) and (a)(2), but it insufficiently accounts for the fact that both of § 55(a)’s subsections allow the government to ‘recover from a person,’” Judge Stephen Higginson wrote for the three-judge panel. “Congress defined ‘person’ broadly in the AKA, to include corporations and other business entities. By § 55(a)’s plain terms, a corporate person, and not solely its individual employees, can be held liable under both subsections (a)(1) and (a)(2).”
Going one step further, the court found that the government need not establish KBR’s employees acted with an intent to benefit KBR.
“We discern no persuasive evidence of congressional intent in to vary from the common law norm of permitting vicarious liability for employee actions taken under apparent authority,” Higginson said.
KBR failed to show that the Anti-Kickback Act, which provides that the government may penalize the guilty party $11,000 for each kickback, essentially levies punitive damages because the company may face penalties greater than the value of the kickbacks.
“The Supreme Court emphasized the insufficiency of recovering the simple, estimated dollar value of a kickback to fully compensate the government for its kickback-related losses,” the court said.
The high court also has observed that while the treble damages and civil forfeiture provisions in the FCA may be punished in some respects, treble damages certainly do not equate with classic punitive damages, which leave the jury with open-ended discretion over the amount, Higginson wrote, abbreviating False Claims Act. “We decline to apply law crafted in the context of punitive damages provisions to alter the generally applicable common law rules for a non-punitive damages law like the AKA.”
KBR response to the lawsuit
KBR argued for a heightened vicarious liability standard based on the standard applied in criminal cases and punitive damage claims. For example, KBR argued that, to recover against it under subsection (a)(1), the government should have to allege and prove that KBR’s employees had acted with an intent to benefit KBR (the act-to-benefit standard) or that they had been of managerial level and acting within the scope of their employment.
The Court refused to adopt these standards, opting instead for a more lenient one. Ultimately, the Court concluded that the government had pleaded its case against KBR in a manner sufficient to support seeking recovery against KBR under section (a)(1) of the Act.
Anti-Kickback Act
Congress enacted the Anti-Kickback Act in 1946 in response to reports that World War II defense subcontractors were paying fees to prime contractors to gain valuable military subcontracts. These payments were ultimately a burden on taxpayers, as prime contractors would pass these inflated subcontract costs along to the government.
The U.S. Supreme Court reaffirmed the purpose of the Act in a 1966 decision when it observed that “public policy requires that the United States be able to rid itself of a prime contract tainted by kickbacks.” United States v. Acme Process Equip. Co., 385 U.S. 138, 147, 87 S. Ct. 350, 356 (1966). In 1986, Congress amended the Act “to enhance the government’s ability to prevent and prosecute kickback practices.” H.R. REP. NO. 99–964, at 4 (1986), reprinted in 1986 U.S.C.C.A.N. 5960-61.
Congress explained that “these practices have become a pervasive problem in Federal procurement. This form of commercial bribery has tremendous impact. Kickbacks directly inflate contract costs paid by the taxpayer. Kickbacks destroy competition and they foster corruption.”
The Act as codified today broadly defines a “kickback” as “any money, fee, commission, credit, gift, gratuity, thing of value, or compensation of any kind that is provided to a prime contractor, prime contractor employee, subcontractor, or subcontractor employee to improperly obtain or reward favorable treatment in connection with a prime contract or a subcontract relating to a prime contract.” 41 U.S.C. § 8701(2).
The Act then prohibits a “person” from providing, attempting to provide, or offering to provide a kickback; soliciting, accepting, or attempting to accept a kickback; or including the amount of a kickback in a subcontract or prime contract price. Id. § 8702. Importantly for the KBR decision, the Act defines a “person” to include “a corporation, partnership, business association of any kind, trust, joint-stock company, or individual.” Id. § 8701(3).
Lessons Learned
The KBR decision will inspire government contractors to study the Anti-Kickback Act and to ensure that they thoroughly address the Act with their employees in training and compliance programs. Notably, the Act itself requires prime contractors to “have in place and follow reasonable procedures designed to prevent and detect violations” and to “cooperate fully with a Federal Government agency” investigating a potential violation. 41 U.S.C. § 8703(a) & (b).
The Act also sets forth specific reporting requirements: “A prime contractor or subcontractor that has reasonable grounds to believe that a violation may have occurred shall promptly report the possible violation in writing to the inspector general of the contracting agency, the head of the contracting agency if the agency does not have an inspector general, or the Attorney General.”
Id. § 8703(c)(1). Government contractors should maintain a robust Anti-Kickback program that trains employees, monitors compliance, investigates potential issues, and reports any violations to the appropriate authorities. Such a program offers the best protection against increased litigation over employee kickback activity that may otherwise result from the KBR decision.
Department of Justice (DOJ)
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