August 22, 2013

Meals and Golf Outings Paid For By Subcontractors May Trigger Double Damages Under Anti-Kickback Act

Holland & Knight Government Contracts Blog
David S. Black

Federal prime contractors and subcontractors should consider reviewing and updating compliance procedures and employee training relating to entertainment and other business development gratuities in the wake of the Fifth Circuit's decision on July 19, 2013, in United States ex rel. Vavra v. Kellogg Brown & Root, Inc., Civ. No. 12-40447 (5th Cir. July 19, 2013). The case is especially notable because it involved seemingly innocent business gratuities such as meals, drinks, golf outings and tickets to sporting events.

Kickbacks are a kind of commercial bribe. They include any gratuity or other thing of value provided to a prime contractor, subcontractor, and their respective employees "to improperly obtain or reward favorable treatment" in connection with a federal prime contract or subcontract. The line between customary business gratuities and improper kickbacks can be difficult to discern. For prime contractors who have multiple employees conducting business with myriad subcontractors, it can be difficult to monitor the exchanges taking place between employees of these organizations

In a case of first impression, the Fifth Circuit held that an employer can be held vicariously liable under the civil liability provisions of the Anti-Kickback Act, 41 U.S.C. § 55(a)(1), for twice the amount of kickbacks received by employees and up to $11,000 for each occurrence of prohibited conduct. 

Previously, it was undisputed that employers were liable under 41 U.S.C. § 55(a)(2) for single damages, i.e., the amount of any kickback received by employees. But it was thought by many that the double damages and per-occurrence penalty provisions of § 55(a)(1) was limited to the individual employees who received kickbacks and did not extend to employers. The Fifth Circuit analyzed the statutory language and held that Congress intended to attribute liability for these § 55(a)(1) penalties to corporate entities under a rule of vicarious liability. 

To make matters more risky for employers, the Fifth Circuit clarified that the common law standard for pleading and proving vicarious liability applies to civil actions under the Anti-Kickback Act. Specifically, an employer is liable under § 55 (a)(1) for kickbacks received by an employees either (1) "while acting in the scope of their employment" or (2) "if the act is committed outside the scope of employment, if 'the servant purported to act or to speak on behalf of the [employer] and there was reliance upon apparent authority, or he was aided in [receiving the kickback] by the existence of the agency relation." (The Fifth Circuit rejected arguments that would have narrowed vicarious liability for Anti-Kickback Act violations to employees who act with an intent to benefit their employer and were of managerial level acting within the scope of their employment.) 

The facts pled against KBR show the obstacles federal contractors face in trying to mitigate the risk of vicarious liability under the Anti-Kickback Act.  The Government's allegations involved KBR's relationship with two subcontractors under KBR's Logistics Civil Augmentation Program (LOGCAP) III contract with the Army. The two subcontractors helped KBR provide transport military equipment and supplies in Iraq, Afghanistan, and Kuwait between 2002 and 2006.  Despite multiple service failures, KBR continued awarding new subcontracts to these providers. The Government alleged that, from 2002 to 2006, KBR's Corporate Traffic Supervisor and four colleagues in the KBR transportation department accepted gratuities on 93 occasions from one subcontractor in the form of "meals, drinks, golf outings, tickets to rodeo events, baseball games, football games, and other gifts and entertainment." With regard to the other subcontractor, the Government alleged that, from 2003 to 2006, KBR's Corporate Traffic Supervisor and colleagues accepted gratuities on 55 occasions in the form of "meals, drinks, golf outings, and other gifts and entertainment." While the quantity of such entertainment should have raised questions, the type of entertainment itself was of a kind exchanged by many subcontractors and prime contractors and could have evaded detection under a soft internal control system.

In light of the Fifth Circuit's decision, federal prime contractors and subcontractors may want to review current policies, procedures, and employee training with regard to business development entertainment and compliance under the Anti-Kickback Act. Mechanisms for internal reporting investigations, audits, and enforcement may also need to be reviewed and strengthened. Without effective compliance measures, employers can be in the dark about the entertainment provided or received by their employees with respect to federal prime contractors and subcontractors. Now these employers face the risk of paying double damages and per-occurrence penalties for Anti-Kickback Act violations they fail to prevent. This will provide extra motivation for the Department of Justice, agency Inspectors General and whistleblower plaintiff’s attorneys to pursue government contractors for receipt of seemingly innocent business gratuities by their employees.

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