Tuesday, May 20, 2008, 9:21 AM

Fourth Circuit emphasises the line between breach of contract and False Claims Act/fraud in the inducement

In United States ex rel. Wilson, Warren v. Kellogg, Brown & Root, the Fourth Circuit held that a relator in a quit tam False Claims Act suit cannot use the Act to recover for what is essentially an alleged breach of contract by the defendant against the government. This holding mirrors the common-law principle that a fraud in the inducement claim cannot be merely that the defendant failed to perform the contract.

Shortly after 9/11, Kellogg, Brown & Root signed a contract with the United States under which KBR would provide various military support services in Iraq, pursuant to "task orders" issued under the contract. The government issued a task order in February of 2003 that directed KBR to transport fuel and supplies in the region. The order imposed various safety and maintenance requirements on KBR, including, for example, that it maintain its trucks in a "safe operating condition" and in "good appearance". Under the contractual scheme, KBR had to execute a DD Form 1155 in order to accept the task order and its terms and conditions, and relators alleged that it would not receive payment until it did so. KBR did not execute the form until July of 2003, although the form was effective from the date the task order was issued.

Relators were two truck KBR truck drivers who were fired after complaining to KBR that it failed to maintain its trucks by, for example, failing to change oil and fuel filters and broken windshields, thereby endangering them. Relators filed suit under the False Claims Act, which allows parties to sue on behalf of the government when the defendant submits "false statements" in order to receive payment from the government or, as the Fourth Circuit has held, engages in a fraudulent "course of conduct" to induce the government to contract in the first place. Essentially, relators alleged that when KBR signed the form in July of 2003, it had already not performed under the task order by failing to maintain its equipment and it had no intention to do so in the future. The district court eventually concluded that they could state no such claim.

The Fourth Circuit agreed with the district court, concluding that the DD Form 1155 was not a "false statement"or "fraudulent course of conduct" by KBR because it did not evince an "objective falsehood," as required by the Act, because the maintenance directives at issue were fairly vague and not susceptible to the true-of-false dichotomy required by the Act. Significantly, the court distinguished the case from other False Claims Act cases where the defendants fraudulently induced the government to contract, noting that in those cases the dichotomy was clear and the claims did not rely on one party's subjective interpretation of contractual duties, but rather on allegations of bald-faced lies. By contrast, the court held, here the relators' claim relied entirely on their subjective and debatable interpretation of contractual duties. The court did not discuss whether (hypothetical) conclusive proof of a subjective intention not to perform the contract, even in the face vague contractual terms - presumably a rare scenario - would be sufficient. The court also concluded that, under the Act, the DD Form 1155 was not "material" to any fraud in the inducement because KBR signed it months after receiving the task order, which was the operative document; that the relators failed to plead fraud with particularity; and that the district court properly mandated arbitration over employment-law claims.

This case further illustrates the principle that a fraud in the inducement claim cannot be based on mere non-performance of a contract, a principle often overlooked or misunderstood by practitioners. Of course, the case centered on the "objective falsehood" requirement of the False Claims Act, not common law, but the point remains - fraud in the inducement in a different animal than non-performance of a contract.

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