Kellogg Brown & Root Services, Inc. v. United States

• Decision Date: 05 September 2013
• Docket Number: Nos. 2012–5106,2012–5115.,s. 2012–5106
• Court: U.S. Court of Appeals — Federal Circuit
• Parties: KELLOGG BROWN & ROOT SERVICES, INC., Plaintiff–Appellant, v. UNITED STATES, Defendant–Cross Appellant.

728 F.3d 1348

KELLOGG BROWN & ROOT SERVICES, INC., Plaintiff–Appellant,

v.UNITED STATES, Defendant–Cross Appellant.

Nos. 2012–5106, 2012–5115.

United States Court of Appeals,Federal Circuit.

Sept. 5, 2013.

John P. Elwood, Vinson & Elkin, LLP, of Washington, DC, argued for plaintiff-appellant. With him on the brief were Eric A. White, Tirzah S. Lollar and Craig D. Margolis.

J. Reid Prouty, Senior Trial Counsel, Commercial Litigation Branch, Civil Division, United States Department of Justice, of Washington, DC, argued for defendant-cross appellant. With him on the brief were Stuart F. Delery, Acting Assistant Attorney General, Jeanne E. Davidson, Director, and Alex P. Hontos, Trial Attorney.

Daniel P. Graham, Wiley Rein LLP, of Washington, DC, for amici curiae. With him on the brief were Nicole J. Owren–Wiest and Brian G. Walsh.

Before NEWMAN, LOURIE, and WALLACH, Circuit Judges.

Opinion for the court filed by Circuit Judge WALLACH.

Opinion concurring-in-part, dissenting-in-part filed by Circuit Judge NEWMAN.

WALLACH, Circuit Judge.

Before the March 2003 invasion of Iraq, Kellogg Brown & Root Services, Inc. (“KBR”) entered into multiple contracts with the United States Army for the provision of dining facility (“DFAC”) services in Iraq. The contract at issue in this case was for DFAC services at Camp Anaconda (“Anaconda”), one of the largest United States military bases in Iraq at the time. In August 2003, KBR subcontracted with Tamimi Global Company, Ltd. (“Tamimi”) to provide DFAC services in Anaconda. As troop levels increased, the Defense Contract Auditing Agency (“DCAA”) engaged in audits of multiple DFAC subcontracts. With respect to Anaconda, the DCAA ultimately concluded that KBR had charged the Government $41.1 million in unreasonable costs for services provided from July 2004 to December 2004 and declined to pay that amount to KBR.

KBR sued in the United States Court of Federal Claims, alleging the Government unreasonably withheld the suspended $41.1 million. The Government brought multiple counterclaims, including a claim under the Anti–Kickback Act (“AKA”). The Court of Federal Claims held that KBR was entitled to $11,460,940.31 in reasonable costs. The court dismissed the majority of the Government's counterclaims, but awarded $38,000.00 to the Government on its AKA claim.

KBR appeals the Court of Federal Claims's calculation of reasonable costs, and the Government cross-appeals the court's decision with respect to its counterclaims.

Because the Court of Federal Claims did not clearly err in its calculations, we affirm its determination of cost reasonableness of the contract at issue. Additionally, we affirm the dismissal of the Government's Special Plea in Fraud and False Claims Act claims and the denial of the Government's common-law fraud claim. However, because the Court of Federal Claims improperly calculated KBR's base fee and erred when it determined that the actions of KBR's employees should not be imputed to KBR for purposes of the Government's AKA claim, those claims are reversed and remanded for further proceedings.

Background

1. LOGCAP III and Master Agreements

On December 14, 2001, the Army awarded the Army Logistics Civil Augmentation Program (“LOGCAP”) Contract No. DAAA09–02–D–0007 (“LOGCAP III”) to Brown & Root Services, which was then novated and transferred to KBR on August 1, 2003. ¹Kellogg Brown & Root Servs. v. United States, 103 Fed.Cl. 714, 716 (2012) (“ KBR II ”). This contract required KBR to implement logistics support services for the Army in Kuwait and Iraq before and during Operation Iraqi Freedom pursuant to task orders issued under the contract. The compensation arrangement under LOGCAP III was a cost-plus-award-fee agreement that incorporated the provisions of Federal Acquisition Regulation (“FAR”) § 52.216–7, whereby “the Army would reimburse KBR for all costs that it incurred in contract performance, including payments to subcontractors, along with a fee determined by subcontract costs.” Id.

After the main contingent of ground troops began the invasion of Iraq from Kuwait on March 20, 2003, the Army began to focus on establishing dining facilities throughout Iraq, requiring KBR to establish the capacity to serve hot food to thousands of troops in a multitude of camps, well beyond that envisioned in the contract.²

The typical competitive bidding process KBR used to award subcontracts was burdensome and time-consuming in light of the Army's rapidly increasing demands. In June of 2003, KBR personnel began to create an alternative system of “master agreements.” This allowed KBR to establish agreements with certain subcontractors before an Army directive was issued and abbreviate the procedural process of procuring subcontractors, thus enabling KBR to perform more quickly. The board deciding which subcontractors should receive master agreements had six members, including KBR's Regional Food Service Manager for Iraq and Kuwait, Terry Hall, and his Deputy, Luther Holmes. One of the subcontractors KBR approached to enter into such a master agreement was Tamimi. ³

2. History of Kickbacks

From April 2003 to January 2004, Mr. Hall and Mr. Holmes received multiple kickbacks from Tamimi's Vice President, Shabbir Khan. KBR II, 103 Fed.Cl. at 720–23, 776.

In April 2003, Mr. Khan agreed to finance a four-day trip that Mr. Hall took to Dubai, paying for the plane ticket and giving Mr. Hall $10,000.00, which Mr. Hall and Mr. Holmes split. Mr. Hall spent the first two days of his trip conducting business, and the second two days “hav[ing] fun.” Id. at 721 (alteration in original). Mr. Hall took another trip in early-summer 2003 to Jordan, and Mr. Khan again paid for the ticket and gave Mr. Hall $3,000.00. Additionally, in either August or September of 2003, Mr. Khan gave Mr. Hall an ATM card “with a substantial amount of money on it.” Id. at 722. Mr. Hall used some of the money for Christmas decorations for the dining facilities, but then spent approximately $3,500.00 on himself and handed over the card to Mr. Holmes.

Finally, Mr. Khan gave Mr. Hall $20,000.00 in cash in January 2004. Mr. Hall had been interested in the possibility of opening up a Golden Corral franchise after leaving the Army, and Mr. Khan's cash offer was for “exploratory” research on opening this franchise. Id. After spending approximately $7,000.00 on research for the franchise, Mr. Hall was unable to secure adequate financing and abandoned the project. He kept the remainder of Mr. Khan's money for himself.

3. Tamimi at Camp Anaconda

The master agreements KBR formed with subcontractors eventually corresponded to various regions of Iraq, with different subcontractors servicing specific regions. Not long after KBR instituted its master agreement system, the Army issued a requirement for a DFAC in Kirkuk, Iraq, a region associated with subcontractor The Event Source (“TES”). However, the Government later sent a letter directing KBR to relocate this DFAC to Camp Anaconda. Although KBR initially planned to keep TES as the subcontractor on this particular DFAC, it ultimately awarded Master Agreement 3 Work Release 3 (“WR 3”) to Tamimi. Mr. Hall and Mr. Holmes had strongly advocated choosing Tamimi over TES. Id. at 723.

“WR 3 provided that KBR would pay Tamimi a fixed per person/per day (“PPPD”) price based upon either actual headcount of troops served at the Anaconda DFAC or the projected headcount provided by the Army, whichever was greater.” Id. at 724. However, because of a confluence of factors, Tamimi began operating DFAC services at Anaconda before KBR had internally approved WR 3 or generated the necessary requisitions to pay Tamimi for its services. Id.⁴

On September 4, 2003, the Army instructed KBR to replace two of the Anaconda DFAC facilities with new, more permanent structures; however, KBR could not seek reimbursement from the Army under LOGCAP III for this work because it was in the business of providing services and not procuring buildings. A solution was devised where Tamimi would purchase the buildings and then indirectly charge KBR for the buildings through its DFAC subcontract. Id. at 725. As time elapsed, however, the Government determined that KBR should own the facilities. As the Court of Federal Claims noted, “[t]he negotiations between KBR and Tamimi regarding the construc-construction costs of these buildings played a significant role in the present dispute.” Id.

Tamimi continued to operate the DFACs at Anaconda without the benefit of a contract and without the necessary requisitions by KBR. On November 3, 2003, however, KBR issued a material requisition, pricing six months of DFAC services for all four Anaconda DFACs at $111,650,000.00. After significant negotiations, extensions, and machinations, WR 3 was officially sanctioned within KBR on April 26, 2004.

4. Inquiry Into Tamimi's Prices

Despite this approval, Tamimi's prices submitted to KBR for DFAC services throughout Iraq were increasingly scrutinized; both the Army and the DCAA objected to the costs submitted. Under this scrutiny, in early—to mid–2004, KBR had begun providing brief extensions while recompeting many of its DFAC contracts.⁵ “One group of subcontracts that had been extended, yet was recognized to need renegotiation, was Tamimi's, including WR 3.” KBR II, 103 Fed.Cl. at 730. DCAA had particular interest in Tamimi's subcontracts because Tamimi “was billing ... based on either projected or actual headcount, whichever was higher.” Id.

After discussions between KBR and Tamimi, the two negotiated modifications to WR 3, with Tamimi agreeing to a retrospective overall price reduction of $16,560,000.00 among Tamimi's nine subcontracts with $4,907,319.00 to be allocated to Anaconda.⁶ On August 12, 2004, after those negotiations, KBR and Tamimi created Change Order 6 to WR 3. A number of changes were introduced including extending Tamimi's performance period through September 15, 2004, implementing the negotiated price...