Defendant Wins False Claims Act Trial After the Government Kills $8.9M Settlement Agreement Negotiated By Relator; Affirmed By Fourth Circuit
In United States ex rel. Ubl v. IIF Data Solutions, Case No. 09-2280, 2011 WL 1474783 (4th Cir. 2011), the Fourth Circuit affirmed a verdict for a defendant in a False Claims Act trial in a case where the Government declined to intervene and held the following: (1) the district court properly refused to enforce a settlement agreement; (2) the district court correctly admitted “government knowledge” evidence at trial; and (3) the district court erred in awarding attorneys’ fees to the defendant.
The Relator’s Allegations
The relator, Ubl, brought a False Claims Act lawsuit against his former employer, IIF Data Solutions (“IIF”), alleging that IIF overcharged the Government for IT services under a government contract referred to as a multiple award schedule (MAS) contract. The General Service Administration negotiates MAS contracts to allow government agencies to purchase goods and services at certain prices associated with volume buying. Prospective vendors are required to provide the GSA with their pricing and discount information, which the GSA uses to determine the vendor’s best price with commercial customers and negotiate a price for the Government.
IIF’s MAS contract provided for rates for labor based on the education, experience and skill of certain categories of employees. Ubl alleged that IIF misrepresented the corresponding rates to commercial customers in its application for the MAS contract. Ubl also alleged that IIF improperly billed the Government at higher rates than those permissible under the contract for certain employees, billed for hours not worked, and billed for administrative activities not covered by the contract.
The Parties Fail to Reach a Settlement Approved by the Government
On the day trial was set to begin, IIF agreed to pay $8.9 million in settlement of the claims, but the agreement was conditioned on the Government’s approval. The Government objected to the agreement on the grounds that: Ubl’s 30% award was too high; Ubl should not have allocated part of the payment to his “personal claim” against IIF; and the agreement provided that Ubl would be paid $1.2 million first, leaving what the Government believed to be an uncollectable debt for its share.
The parties continued to negotiate a settlement with different terms and settlement amounts, including an offer by IIF to settle for $2.7 million, which was rejected by Ubl. IIF reiterated that the original $8.9 million settlement was void and withdrew the $2.7 million offer. Despite IIF’s withdrawal of all settlement offers, Ubl modified the terms of the original $8.9 million settlement without IIF’s consent and sought and obtained approval from the Government. The district court found that this modified settlement agreement was not binding and enforceable against IIF. The Fourth Circuit agreed, holding that the original $8.9 million settlement, which was conditioned on the Government’s approval, became void when the Government rejected the agreement.
“Government Knowledge” Evidence Properly Allowed Into Evidence at Trial
At trial, the district court permitted IIF to present evidence commonly referred to as “government knowledge” evidence to negate the scienter element of the FCA, i.e., to negate the element that IIF had “knowingly” submitted a false claim. The Fourth Circuit explained the relevance of such evidence as follows:
Evidence that the government knew about the facts underlying an allegedly false claim can serve to distinguish between the knowing submission of a false claim, which generally is actionable under the FCA, and the submission of a claim that turned out to be incorrect, which generally is not actionable under the FCA. That is, “the government’s knowledge of the facts underlying an allegedly false record or statement can negate the scienter required for an FCA violation.
The “government knowledge” evidence consisted of evidence that the National Guard Bureau, to which IIF had provided IT services, was pleased with IIF’s work. The Fourth Circuit held that this evidence “fit sufficiently within the scope of what is generally referred to as the government-knowledge defense or inference.”
The Fourth Circuit rejected Ubl’s argument that the government knowledge argument was inapplicable because the invoices were paid by GSA while the evidence of approval of the work came from the separate government agency, the National Guard Bureau. The Court held that the appropriate inquiry should be focused on IIF’s intent, and the Bureau’s knowledge was relevant to IIF’s intent.
Attorneys’ Fees Award Reversed Because Relator’s Case Was Not “Clearly Frivolous”
The FCA authorizes an award of attorney’s fees if the court finds that the action was “clearly frivolous.” The Fourth Circuit defined “clearly frivolous” as “no reasonable chance of success.” The Court found that the district court’s denial of two pre-trial motions to dismiss, and the denial of the motion for summary judgment which presented substantially the same evidence that Ubl presented at trial, weighed against a finding that Ubl had “no reasonable chance of success.” IIF argued that the district court’s attorneys’ fees award was, nonetheless, warranted because Ubl was exposed as a liar at trial. The Fourth Circuit held, however, that even if the jury did not find him credible, Ubl could have still prevailed based on documentary evidence. For example, the documentary evidence showed that IIF was billing employees at rates higher than the contract provided for based on their experience and education. The court reasoned that the jury may have ultimately found that IIF was not liable because the mistakes in billing were unintentional, and thus, IIF lacked scienter.