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Federal Contractor Cleared of False Claims Act Charges Based on Allegations of Intentional Underbid
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November 7, 2005
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By John A. Foust
Howrey LLP
Does a government contractor violate the federal False Claims Act by purposefully submitting an undervalued bid with the hope of making money on change orders?
That was the question considered by a federal appeals court in United States ex rel. Bettis v. Odebrecht Contractors of California, Inc., 393 F.3d 1321 (D.C. Cir. 2005).
The court held that the circumstantial evidence offered against the contractor was insufficient to prove that its bid was purposefully deflated. The court, however, stopped short of accepting the contractor's argument that a deflated bid could never by itself be a false claim within the meaning of the statute.
The False Claims Act (31 USC §§3729, et seq.) provides for civil liability against any government contractor that makes a fraudulent claim for payment. The Bettis case involved a project for the construction of the Seven Oaks Dam and Appurtenances in San Bernardino County, California. The contractor's bid of $167,777,000 was about $29 million below the second-lowest bid and $36 million below the cost estimate prepared by the U.S. Army Corps of Engineers. During the project, the contractor requested and received from the federal government more than $100 million in equitable adjustments and change orders, resulting in a total contract price of $268 million. It was undisputed that the federal government was satisfied with the contractor's work on the project, and the Corps gave the contractor its "Contractor of the Year" award for exceptional performance.
A project scheduler who worked for a consulting firm hired by the Corps to monitor the project brought an action against the contractor under the qui tam provision of the False Claims Act, which allows a private citizen to bring an action in the name of the United States. The plaintiff alleged that the contractor violated the Act by submitting an intentionally deflated bid and then profiting on nearly $100 million in change orders and equitable adjustments. In other words, the plaintiff argued that the contactor purposefully underbid the job with the express intention of making money back on false change orders and equitable adjustments to the contract price and then seeking such adjustments.
The plaintiff's theory was novel in that the False Claims Act only applies to claims for payment and a bid generally is considered to be an offer to contract rather than a claim for payment. The plaintiff, however, relied on a fraud-in-the-inducement theory to argue that the contract was induced by the fraudulent bid and that, as a result, any claim for payment made under the contract was a false claim within the meaning of the Act. There was some support for the plaintiff's theory in a Supreme Court case from 1943 holding that claims for payment under a contract that had been fraudulently induced by collusive bidding could be considered false claims within the meaning of the Act even if the claims themselves were not otherwise false.
The contractor raised two defenses against the false claims charge. First, it argued that a deflated bid could never be a false claim and asked that the court refuse to extend the fraud-in-the-inducement theory in this context. It distinguished the Supreme Court case on the ground that a contract induced by collusive bidding harms the government by resulting in an inflated contract price while the allegedly deflated bid actually benefits the government unless the contract price is later adjusted by fraudulent change orders and equitable adjustments. Thus, the contactor argued that the plaintiff should be required to show that the contractor's claims for equitable adjustments and payment requests actually were improper before there could be a false claim within the meaning of the statute.
Second, the contractor argued that the evidence offered by the plaintiff was insufficient as a matter of law to prove that it had purposefully deflated its bid with the intent of making profit on improper change orders. The plaintiff's evidence fell into three basic categories: (1) evidence suggesting that the bid did not conform to industry standards; (2) evidence that the contractor had reaffirmed the bid despite rising costs; and (3) evidence that during the project the contractor failed to use the cost-saving devises that it had relied on during bid calculation. According to the contractor, this was not evidence by which a reasonable jury could conclude that it had submitted a low bid with the intent of later pursuing fraudulent change orders.
The U.S. District Court granted the contractor summary judgment on both grounds. United States ex rel. Bettis v. Odebrecht Contractors of California, Inc., 297 F.Supp.2d 272 (D.D.C. 2004). On appeal, the U.S. Court of Appeals for the District of Columbia Circuit agreed with the contractor's second argument. It noted that none of the evidence offered by the plaintiff proved that the contractor's bid was fraudulent. By deciding the case on that basis, the court was able to avoid ruling on the contractor's other argument. Thus, the question of whether a purposefully deflated bid can be a violation of the False Claims Act remains an open issue. The U.S. government had argued, in a friend-of-the court brief, against this argument by the contractor.
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For more information about the issues covered in this report, please contact John A. Foust in our San Francisco office at 415-848-4901 or at foustj@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2005 Howrey LLP
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