March 6, 2017 - Compliance, Labor/Employment

Vavra Decision Highlights Avenues for Potential Anti-Kickback Act Liability

ComplianceOn February 3, 2017, the Fifth Circuit decided US ex rel Vavra v. Kellogg Brown & Root, No. 15-41623, 2017 WL 473873 (5th Cir. 2017), determining that defendant KBR could be held vicariously liable under the enhanced penalty provisions of the Anti-Kickback Act (AKA), 41 U.S.C. § 8701-07, for one of its employee’s acceptance of kickbacks in connection with a federal government contract.  The kickbacks included meals and high-ticket sporting events; they were given with the improper purpose, a subcontractor employee testified, of getting additional future business and ensuring that KBR would not change suppliers because of service failures.  Contractors should understand that there are several avenues for potential AKA liability, including the vicarious liability theory discussed in Vavra:

First, one early theory of recovery the Government pursued in the Vavra case was breach of contract.  After it intervened in the case, the Government’s first complaint alleged that KBR had breached the contract’s AKA clause (the standard FAR Anti-Kickback clause, now at FAR 52.203-7, which requires contractors to “have in place and follow” procedures to prevent and detect possible AKA violations) and a special clause on compliance with laws, because KBR had failed to put in place a system of controls designed to control such behavior.  This theory of recovery was not discussed in the appellate opinions.  However, in another recent case (discussed here), the Government’s own nonperformance of a contract was excused because the contractor materially breached its contract by accepting subcontractor kickbacks.  Laguna Constr. Co., Inc. v. Carter, 828 F.3d 1364 (Fed. Cir. 2016).

Second, a company can be liable for the amount of kickbacks if any of its employees engage in prohibited kickback activity, regardless of the employee’s status, authority, or work responsibility.  Under § 8706(a)(2) of the AKA, the Government can recover the amount of kickbacks from a corporate “person” “whose employee, subcontractor, or subcontractor employee violates § 8702,” which prohibits soliciting, accepting, or paying kickbacks, as well as attempting to do so.  Because there is no requirement under this section that a company act with knowledge, a contractor presumably can be liable for the actions of its employees at any level and in any role.  There is at least one logical limit on such liability, however.  A kickback is defined as the giving of anything of value “to improperly obtain or reward favorable treatment.”  If a corporation’s employee lacks even apparent authority to take any action to improperly benefit the subcontractor, then a gratuity given to such an employee might not even be deemed a kickback, because it might lack the element of an improper attempt to obtain or reward favorable treatment.

Third, under § 8706(a)(1), the Government can recover enhanced penalties–twice the amount of the kickbacks, plus up to $11,000 per kickback–from a person who “knowingly engage[d] in conduct prohibited” by the AKA.  The Government sought enhanced penalties from KBR in Vavra, so the lower and appellate courts had to determine whether the KBR employees’ knowledge could be imputed to the corporation.  The court articulated a general test:  a company can be liable “only for the knowing violations of those employees whose authority, responsibility, or managerial role within the corporation is such that their knowledge is imputable to the corporation.”  The court acknowledged that this standard required a fact-dependent inquiry, including evidence of the employee’s actual authority and responsibilities.  The court determined that one employee, Robert Bennett, had imputable knowledge even though he was neither a KBR executive nor particularly high on the KBR corporate ladder, because he supervised the subcontractor’s performance and operations, communicated with the subcontractor on performance issues, reviewed the subcontractor’s invoices and submitted them for payment, and helped determine whether to exercise options in the subcontract.

Fourth, among the prohibited kickback behaviors listed in 41 U.S.C. § 8702 is including the amount of a prohibited kickback in the price that a subcontractor charges a prime contractor or that a prime contractor charges the Government.  Section 8702 (3) (formerly 41 U.S.C. § 53(3)); see United States v. KBR, 161 F. Supp. 3d. 423, 434 n. 7 (E.D. Tex. 2015) (amount of kickback must be knowingly included to be actionable). This provision may be somewhat circular – as there must be a prohibited kickback under Section 8702(1) and (2) (soliciting, accepting, offering, or paying a gratuity, or attempting to do any of these) for a violation under Section 8702 (3) to be possible–but it also appears to constitute an independent source of liability.  In Vavra, KBR’s prime contract and the subcontracts involved in the litigation were all cost-reimbursable in nature.  Further, one or more of the complaints alleged that the subcontractors’ employees included the amount of the kickbacks in their routine expense reports.  Thus, the amount of the kickbacks likely was included–knowingly–in both the subcontractors’ charges to KBR and KBR’s charges to the Government, although this theory of recovery–recovery under Section 8702(3) for including the kickback amount in the subcontractor’s or contractor’s price–was never asserted.

In sum, while the Fifth Circuit’s opinion focuses on imputation of employee conduct to the corporation, prudent contractors should understand that there are many other avenues for liability under the AKA.  A company’s failure to have, and enforce, a strict anti-kickback policy could excuse a government breach or result in Anti-Kickback Act and/or breach of contract liability.