In 2016, the U.S. Supreme Court in Universal Health Servs., Inc. v. United States, 136 S. Ct. 1989 (2016) held that liability can exist under the civil False Claims Act (FCA) based on the implied certification theory, resolving a split among the Federal Court of Appeals about the theory’s viability. Since that decision, Federal Circuits have begun to explore the ramifications of the holding. The Seventh Circuit Court of Appeals, in United States v. Sanford–Brown, Ltd., examined the new standard and held that the conditions for liability under an implied certification theory were not met. 840 F.3d 445, 447 (7th Cir. 2016). The Court of Appeals found that “bare speculation” regarding misleading representations is insufficient to support a claim at the summary judgment stage. Id. Second, the granting of summary judgment was affirmed because the plaintiff failed to establish the independent element of materiality. Id. The Court of Appeals strongly enforced this element of the implied certification theory, and focused on the fact that there was no evidence to support the argument that the government’s decision to pay would likely or actually have been different if it had known of the alleged misrepresentations. Id. Further, the Court of Appeals stressed that even if it was shown that the government’s knowledge of misrepresentations would have caused it to decline payment, this alone would still not be enough to meet the high standard required for the materiality element. Id. at 448. In summary, the Seventh Circuit Court of Appeals did not try to find ways to work around the Supreme Court’s decision; rather, it whole-heartedly enforced the elements outlined by the Supreme Court and showed that it will hold plaintiffs to a rigorous standard on alleged liability under the FCA based on the implied certification theory.
The Ninth Circuit Court of Appeals recently addressed the materiality element of the implied certification theory as well. United States ex rel. Kelly v. Serco, Inc., 846 F.3d 325 (9th Cir. 2017). Again, the Court of Appeals held that the claims failed because of the failure to meet the rigorous materiality standard. Id. at 333. As the Seventh Circuit Court of Appeals did, the Ninth Circuit Court of Appeals held that it is not enough to show that the government would not have paid if it knew of the alleged misrepresentation. Id. Rather, what was important here was the fact that the government did not find the reports which contained the alleged misrepresentations useful—the government found the reports to be neither necessary nor cost‑justified for their related project. Id. at 334. This indicates that the Ninth Circuit will examine the government’s use of the substance that contains the alleged misrepresentations, and that materiality will be judged partly on the utility of that use. The takeaway from this case is that the Ninth Circuit, like the Seventh Circuit, will apply a rigorous standard to meet the materiality element. Moving forward, it will be worth watching the Federal Circuits as they continue to develop and explore their treatment of the materiality element.
As more business is conducted via text messaging, new legal problems will continue to arise. Recently, a court addressed whether a letter of intent was binding based on an exchange of e-mails and text messages between real estate brokers. In St. John’s Holdings, LLC v. Two Electronics, LLC, No. 16 MISC 000090 RBF, 2016 WL 1460477 (Mass. Land Ct.), the court examined whether the parties merely engaged in negotiations regarding the purchase of certain property, or whether their text messaging gave rise to a binding and enforceable contract for the purchase and sale of the real estate.
Because this was a sale of real estate, the issue at hand was whether the text messaging was sufficient to satisfy the Statute of Frauds. To resolve this issue, the court looked at whether (a) a text message can be a writing under the Statute of Frauds, (b) whether the alleged writing contains sufficiently complete terms and an intention to be bound by those terms, (c) whether the text message is signed, and (d) whether there is an offer and acceptance.
The factual timeline in St. John’s Holdings, LLC involved a number of drafts of the letter of intent sent from the Buyer to the Seller. None of these drafts were signed by the Buyer. Eventually, the Seller’s agent sent the Buyer’s agent a text asking the Buyer to sign the letter of intent and provide a deposit. The Seller’s agent included his name at the end of this text message. The Buyer signed the letter and provided the deposit, and then texted to the Seller’s agent: “Tim, I have the signed LOI and check it is 424[pm] where can I meet you?” Thereafter, the Seller’s agent met the Buyer’s agent and accepted the signed letter and deposit. After this exchange, the Buyer’s agent sent a text message requesting a copy of the letter executed by the Seller, but was informed via text message, “[Seller] was out of town today. He will get back to us tomorrow.” The Buyer was later informed that the Seller had accepted a separate offer from a third-party, and did not close on the deal with the Buyer.
The court found that the text messages, read in the context of the negotiations and exchanges between the parties, contained sufficient terms to create a binding contract between Buyer and Seller. The court found sufficient support that multiple writings relating to the subject matter of the agreement may be read together as long as they contain all of the material terms of the agreement and are eventually authenticated by signature. Therefore, the text messages, together with the previous negotiations and draft letters exchanged, satisfied the writing element of the Statute of Frauds. The ultimate factor for the court was that “[t]he way in which the parties handled the transaction was sufficient for them to appreciate that the text message would memorialize the contractual offer and acceptance.” Therefore, the court embraced a contextual approach to effectuate the intent of the parties.
Once determining that the text messaging constituted a writing, the court liberally construes the “signature” element and inferred from the Seller’s agent adding his name to the end of the text message that it was intended to create a binding signature. The court found that “the use of his signature at the end of the February 2nd text message is evidence of his intent to have the writing be legally binding.” Therefore, the court found that the text message from the Seller’s agent, asking the Buyer to sign the letter of intent and provide a deposit, was a binding contract.
While this case concerns the purchase of real property, and therefore involves the Statute of Frauds, it does provide instruction for construction projects in the 21st century. As more and more communication is conducted informally via text messaging, parties need to be aware that text messages can and will have legal ramifications. A text message may not be as informal as one thinks, at least in the eyes of the law. Further, this case shows the importance of preserving documentation. While e-mail is routinely stored and backed-up, text messages are more prone to deletion or being lost. It is important to remember that steps must be taken to preserve text messages, as a claim could survive or fail based on text messaging documentation. Law firms should instruct clients on the need to preserve all relevant documentation, including text messaging. Issues can arise if team members are discussing change orders or potential claims via text messaging, which may also raise notice issues.
Ultimately, cases such as this remind us that the law must continually adapt to modern technologies and business practices, and that parties must be aware of how modern communication methods will be interpreted by courts.
The U.S. Supreme Court in Universal Health Servs., Inc. v. United States, 136 S. Ct. 1989, 195 L. Ed. 2d 348 (2016) recently held that the implied certification theory can be a basis for liability under the civil False Claims Act (FCA), resolving a split among the Federal Court of Appeals about the theory’s viability. Under this theory, when a contractor submits a claim, it impliedly certifies compliance with all conditions of payment. However, if the contractor fails to disclose a violation of a material statutory, regulatory, or contractual requirement, the contractor has made a misrepresentation that renders the claim “false or fraudulent” under the FCA. certification theory
The Court not only upheld the validity of the implied certification theory, but also clarified the scope of the theory. The Court held that the implied certification theory can be a basis for liability only where two conditions are satisfied. First, a claim for payment cannot “merely request payment.” The claim for payment must also “make specific representations about the goods or services provided.” Second, the contractor’s “failure to disclose noncompliance with material statutory, regulatory, or contractual requirements” must make those “representations misleading half-truths.” The Court also held that FCA liability for failing to disclose violations of legal requirements does not turn upon whether those requirements were expressly designated as conditions of payment. A contractor can be liable for violating requirements even if the requirements were not designated as conditions of payment, but not every violation of a requirement that was designated as a condition of payment triggers liability. In reaching this holding, the Court explained: “What matters is not the label the Government attaches to a requirement, but whether the defendant knowingly violated a requirement that the defendant knows is material to the Government’s payment decision.”
The Court also clarified how the materiality requirement under the FCA should be enforced. The Court emphasized that the “materiality standard is demanding.” Materiality “cannot be found where noncompliance is minor or insubstantial.” Consequently, the Government’s decision to identify a provision as a condition of payment is relevant to materiality, but “not automatically dispositive.” The Court elaborated that “proof of materiality can include … evidence that the defendant knows that the Government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement,” or, conversely, the Government’s payment of a “claim in full despite its actual knowledge that certain requirements were violated” is “strong evidence that the requirements are not material.”
While the Court upheld the implied certification theory, the true impact of the decision will depend on how the lower courts choose to implement the decision. In particular, how the lower courts read the Court’s emphasis on materiality. The focus of future litigation may be whether the Government actually cared about the alleged violations, rather than technical arguments over terms of payment.
The U.S. Court of Federal Claims recently set aside GSA’s award of a lease for the Transportation Security Administration’s (“TSA”) consolidated Northern Virginia Office. The TSA’s new office would have provided more than 600,000 square feet of rentable space for the administration. The Court of Federal Claims in Springfield Parcel C, LLC v. United States, held that a permanent injunction preventing GSA from proceeding with lease contract originally awarded to successful offeror was warranted. The court further held that GSA’s acceptance of an offer for space larger than the permitted maximum contained in the request for proposal contravened a material term in the proposal, and therefore, violated 40 U.S.C. § 3307(a). The failure to acquire appropriations for this lease, also violated the Anti-Deficiency Act, and therefore, the lease was void ab initio.
The Court, with this ruling, has carved out a right for would-be lessors to seek permanent injunctive remedies if an agency lease contract does not comply with the terms approved by Congress and articulated in the Request for Lease Proposal (“RLP”). Prior to this ruling, post award bid protests pertaining to a fully executed GSA lease did not pose a real threat to the government or the awardee. After this ruling government contractors should be very careful to follow any, and all, specifications found in the RLP when submitting their bid.
Moore & Lee is pleased to announce that Michael Dockins has joined the firm as an Associate. Michael earned his law degree from the University of Texas at Austin in May 2016. Michael had previously worked at Moore & Lee as a Paralegal prior to law school and as a Summer Associate during law school.
Moore & Lee is pleased to announce that Spencer Kiggins has joined the firm as an Associate. Spencer is barred in Virginia and the District of Columbia and has been practicing complex commercial, securities, antitrust and construction litigation since 2009.
In a recent matter in the U.S. District Court for the District of Maryland, a subcontractor initiated a suit against a general contractor and its payment bond surety to recover for claims of changed work and increased costs on a construction project. MBR Constr. Servs., Inc. v. Liberty Mut. Ins. Co., No. GJH-15-14, 2016 WL 727107. The general contractor and payment bond surety filed a motion to dismiss, or in the alternative stay, the subcontractor’s action pending the completion of mandatory dispute resolution procedures between the general contractor and the owner of the project. The Court found that the subcontractor’s failure to satisfy a contractually binding “condition precedent to the initiation of . . . the instant litigation” was cause to stay the action pending resolution “of the contractual dispute resolution procedures” between the general contractor and the owner of the project. The Court held that the parties were bound to contractual procedures they agreed to in the subcontract, which required the subcontractor to allow the general contractor to exhaust the contractual remedies under the Prime Contract before the subcontractor could proceed directly against the general contractor.
In a decision issued by the United States Court of Federal Claims, Anthem Builders, Inc. v United States, 121 Fed. Cl. 24, the Court considered a Contracting Officer’s right to deny a bid on a project based on an entity’s use of an unacceptable individual surety. Proper bonding is essential, because without a safety net, the government is left with no protection if the contractor fails to meet its contractual obligations. Under FAR 28.203 an entity can use an individual surety, instead of a corporate surety, for all types of bonds, with the exception of position schedule bonds. Anthem bid on a government construction project and the bidding package included a bond secured by an individual surety. The Contracting Officer rejected the bid as “nonresponsible.”
Contractors have been careful about using an individual surety to secure bonds because of the difficulty in verifying assets and the questionable practices of some individual sureties. Since these problems arise with an individual surety a Contracting Officer is given wide latitude under FAR 28.203(a). FAR 28.203(a) gives the Contracting Officer the right to find the individual surety “nonresponsible.” The right of a Contracting Officer to reject an individual surety was cemented in Anthem Builders. The Court found that even though pursuant to FAR 52.228–15(d), the bond was supported by an individual surety, the Contracting Officer had the right to deny the bid if the individual surety was “nonresposible” and the funds were not guaranteed.
For Contracting Officers, the validation that a bid does not have to be accepted if the individual surety raises severe financial red flags for the project provides some much needed relief and mitigates a common fear of having to accept fraudulent transactions. Entities bidding on a federal government project should try and obtain bonding from a surety listed on the Treasury Department Circular. If an entity is using an individual surety as security for the bond, the entity could take steps to avoid Anthems’ fate in this case. The entity should ensure that the individual surety provides an escrow account where the Contracting Officer has the sole and unrestricted right to draw on the funds, provides proof of unencumbered assets, or provides an Irrevocable Trust Receipt that is issued by an FDIC insured financial institution.
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A Virginia-based IT contractor recently agreed to pay the government $400,000 to settle claims that its employees improperly accessed restricted information at a U.S. military installation. The allegations arose out of the contractor’s work at a U.S. Army Medical Information Technology Center. The contractor held a contract for IT services, under which its employees had access to the network, computers, and other resources solely for the purpose of performing work on the government’s information technology systems.
The Government contended that, while performing work under the contract, the contractor’s employees accessed information that they deemed useful for the contractor’s future efforts to obtain government contracts. The contractor’s employees allegedly searched for and downloaded documents from the network, including documents that were restricted or required security clearance. The documents were allegedly used to prepare proposals for three subsequent government contracts. The contractor did not secure any of those contracts and, additionally, withdrew itself from consideration for one contract before a source selection decision was made. Nevertheless, the government initiated an action against the contractor for improperly using restricted information.
Government contractors should be aware that the use of restricted government information for purposes beyond the scope of the contract, including for use in attempting to secure future contracts, can lead to government prosecution for false claims.