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Fourth Circuit Rules That False Claims Act Applies to Contracting Fraud Against Iraqi Coalition Provisional Authority

Individual whistleblowers may sue a defense contractor that allegedly defrauded the Iraqi provisional government out of millions during the early part of the Iraq war, the Fourth U.S. Circuit Court of Appeals ruled April 10. United States of America ex rel. DRC Inc. v. Custer Battles LLC, No. 07-1220 (April, 2009) was a federal whistleblower lawsuit testing whether the federal False Claims Act, which allows lawsuits against contractors defrauding the federal government, applies to the multinational interim Iraqi government set up after the U.S. invasion of that country. The Fourth Circuit found that it did, reasoning that U.S. personnel working for the CPA may still have been working in their capacity as federal employees.

The case grew out of the discovery of fraud by Custer Battles LLC, a contractor hired to help the CPA replace existing Iraqi dinars that bore Saddam Hussein’s face with dinars without his face. They were paid $15 million for this work, including a $3 million check from the U.S. Treasury and other payments from the CPA’s funds authorized by U.S. personnel. The fraud was discovered after the firm’s founders accidentally left a spreadsheet at a meeting site showing they had inflated the bills submitted to the CPA for reimbursement by many thousands of dollars.

Subcontractor DRC Inc., its managing director, Robert Isakson, and former Custer Battles employee William Baldwin sued Custer Battles on behalf of the federal government under the False Claims Act. They alleged fraud on both contracts as well as illegal retaliation against Baldwin, who said he was fired after trying to investigate the fraud. The trial court dismissed parts of the claim on summary judgment and limited the plaintiffs’ recovery to the $3 million that it could trace with confidence to the U.S. Treasury. Considering only that part of the case, the jury returned the maximum possible $3 million verdict, plus $165,000 in damages for Baldwin’s retaliation claim.

Nonetheless, the district court quickly vacated that judgment by granting judgment as a matter of law to Custer Battles, saying that the fraudulent claims for payment were not presented to the U.S. government, as required by the language of the law. Plaintiffs appealed this and the limitation of the damages to $3 million.

The Fourth Circuit took their side. Using a close reading of the False Claims Act, it pointed out that the text prohibits false claims for payment made to a “grantee or any other recipient[,] if the United States Government provides any portion of the money or property which is requested or demanded.” Thus, the justices said, the existence or amount of the alleged fraud the plaintiffs may claim does not depend on how much the U.S. government paid directly. For the same reason, it also did not matter whether the U.S. government had control of funds it granted to the CPA; accepting those funds made the CPA a grantee or recipient under the language of the law. The False Claims Act applies to all of the claims Custer Battles made under the dinar contract, the court said.

The court turned next to the judgment as a matter of law. In support of the judgment, Custer Battles argued that even though the claims were presented to U.S. government officials, those people were working for the CPA at the time — not in their capacity as government officials. The court disagreed. It relied on “ample evidence” submitted by the relators that the CPA officials were working in their official U.S. government capacities, including evidence that they were authorized, supervised and paid by the government. There was no requirement that the claims be presented to U.S. government officials, so the district court erred in entering judgment as a matter of law.

Thus, the Fourth Circuit reversed the vacated judgment as well as the limitation on damages, and remanded the matter. It instructed the district court to offer the plaintiffs a new trial, and rule on the remaining issues if they did not choose a new trial. The decision was closely watched because it may open the floodgates for other whistleblower claims over fraudulent behavior of private contractors working for the CPA or quasi-government entities.

If you know about fraud against a government agency, you can blow the whistle on that fraud with a False Claims Act lawsuit. These lawsuits, filed under seal and away from the public eye, give you a chance to involve federal prosecutors in your claim and collect 15% to 25% of any money recovered. The Chicago and Wheaton qui tam and whistleblower attorneys at DiTommaso Lubin Austermuehle stand ready to represent employees and others involved in whistleblower lawsuits. Based in Chicago and near Wheaton, Ill., we handle qui tam claims at the local, state and federal levels in Illinois, Indiana, Wisconsin and nationwide. To learn more at a free, confidential consultation, please call us toll-free at 1-877-990-4990 or contact us through our Web site.