Opinion ID: 779020
Heading Depth: 3
Heading Rank: 2

Heading: The FCA and the HVIC

Text: 15 The history of the FCA dates back to 1863, when it was enacted with the principal goal of stopping the massive frauds perpetrated by large [private] contractors during the Civil War. Vt. Agency of Natural Res. v. United States ex rel. Stevens, 529 U.S. 765, 781, 120 S.Ct. 1858, 146 L.Ed.2d 836 (2000) (quotation omitted). The FCA has since become the primary means by which the Government combats and deters fraud. H.R.Rep. No. 99-660, at 18 (1986). As amended in 1986, the FCA provides for a civil penalty from $5,000 to $10,000 and treble damages when an individual knowingly acts to defraud the Government and does not fully cooperate[] with any Government investigation of such violation. 31 U.S.C. § 3729(a). The Supreme Court understands the current version of FCA damages to be essentially punitive in nature. Vt. Agency, 529 U.S. at 784, 120 S.Ct. 1858 (explaining that the Court had suggested that damages under an earlier version of the FCA were remedial rather than punitive [because] that version of the statute imposed only double damages and a civil penalty of $2,000 per claim (citations omitted)). 16 Whereas the FCA allows the Government to recoup losses from fraud, the HVIC helps to manage the costs of liability insurance. Since 1984, the Federal Acquisition Regulations (FAR) have prescribed the insertion of the HVIC in certain government contracts to limit the liability of contractors for loss of or damage to property of the Government (including the supplies delivered under th[e] contract) that (1) occurs after Government acceptance of the supplies delivered under th[e] contract and (2) results from any defects or deficiencies in the supplies. FAR § 52.246-24(a). 2 The HVIC covers the loss of or damage to a high-value item, defined as a contract end item that (a) has a high unit cost (normally exceeding $100,000 per unit) ... and (b) is designated by the contracting officer as a high-value item. Id. § 46.802. Regarding such high-value items, the Government's stated policy is to act as a self-insurer and to relieve contractors of contractual liability for loss of or damage to those items. Id. § 46.803. In short, the HVIC represents the Government's assumption of the risk that a high-value item such as Aircraft 89-0165 may be lost or damaged after acceptance as a result of a defect or deficiency in the item. It does not necessarily imply that the Government has self-insured for the damages that result from violations of federal law. 17 Boeing itself accepts the fact that, [a]ssuming the government could prove a false claim, a contractor would remain liable for penalties and, if there be any, other appropriate FCA damages, notwithstanding the HVIC. Appellant's Br. at 31. However, relying on the text and history of the HVIC, Boeing argues that the HVIC prohibits the recovery of damages under any and all causes of action, when those damages result from the fraud of non-managerial personnel, meaning that there would be no appropriate FCA damages in this case. The issue before us is whether the HVIC's limitation of contractor liability extends to cases brought under the FCA. Specifically, we must decide whether the Government has agreed to limit damages that would otherwise be recoverable under the FCA. 18 In holding that the HVIC provides no defense to claims of FCA violations, the district court first noted that the FAR limit the application of the HVIC to contractual remedies and not to claims premised under the [FCA]; indeed, the HVIC and the FCA are silent with respect to each other. Roby I, 73 F.Supp.2d at 910. Therefore, the district court declined to find them inconsistent. Id. Because FCA claims arise from the submission of a false or fraudulent claim, the district court concluded that the HVIC's limitation on contractual liability did not limit a contractor's liability under the FCA, finding no evidence in the record of any such intent on the Government's part. Id. at 910-11. Finally, the district court distinguished United States v. United States Cartridge Co., 198 F.2d 456 (8th Cir.1952), cert. denied, 345 U.S. 910, 73 S.Ct. 645, 97 L.Ed. 1345 (1953), which held that a liability-limiting contract provision did limit the Government's FCA claims, id. at 465, on the ground that the contract was made in the emergency situation preceding World War II, making the case unique. Roby I, 73 F.Supp.2d at 911-12. 19 We agree with the district court that the HVIC does not bar the Government from suing Boeing under the FCA to recover damages for Aircraft 89-0165. We look first to the language of the FCA, which holds a defendant liable for a civil penalty plus 3 times the amount of damages which the Government sustains because of the act of that person. 31 U.S.C. § 3729(a). The allegedly fraudulent act in this case is Boeing's false[] represent[ation] that the helicopters conformed to contract requirements and fail[ure] to disclose their faulty manufacture to the United States Government. J.A. at 87 (Am. Compl. at ¶ 3). 3 Because of this false claim, the Government sustained the loss of Aircraft 89-0165. Therefore, the Government argues that Boeing is liable under the FCA for treble damages as well as a civil penalty. 20 At this point, Boeing would direct us to the HVIC, which limits contractor liability for high-value items in fairly broad terms: 21 Except as provided in paragraphs (b) through (e) below, and notwithstanding any other provision of this contract, the Contractor shall not be liable for loss of or damage to property of the Government (including the supplies delivered under this contract) that (1) occurs after Government acceptance of the supplies delivered under this contract and (2) results from any defects or deficiencies in the supplies. 22 FAR § 52.246-24(a). The HVIC does not reference the FCA, but it does expressly refuse to limit a contractor's liability when the Government's acceptance of [a high-value item] results from willful misconduct or lack of good faith on the part of any of the Contractor's managerial personnel. FAR § 52.246-24(b). 4 The parties have stipulated that this exception is not at issue in this case. Therefore, according to Boeing, the HVIC's limitation of liability for loss or damage is absolute, precluding the Government from recovering any damages (as opposed to a civil penalty) under the FCA. 23 We cannot dispose of the FCA claim so easily. Although the loss of Aircraft 89-0165 occurred after Government acceptance and resulted from the defective Speco gear, it was actually caused by Boeing's initial misrepresentation that the helicopter conformed to contract requirements. 5 This misrepresentation, which triggered FCA liability, is the key to this case. Boeing argues from the willful misconduct or lack of good faith language in the managerial personnel provision, FAR § 52.246-24(b), that damages for FCA violations must be covered by the general limitation of liability. We do not agree. Were the HVIC a typical insurance policy, we would consider resolving the ambiguity in Boeing's favor. Cf. North Bank v. Cincinnati Ins. Cos., 125 F.3d 983, 986-87 (6th Cir. 1997) (stating that Michigan law requires courts to construe ambiguous provisions and exclusionary clauses in insurance policies against the insurer). The aim of the HVIC, however, is to reduc[e] Government procurement costs by limiting the contractor's risk. J.A. at 434 (DPC 86 at 1). The HVIC insures contractors only indirectly; it is, by its own terms, a self-insurance policy, which means that the Government is both insurer and insured. Because nothing in the HVIC suggests that its limitation of contractor liability covers statutory violations, we hold that the district court did not err in concluding that the HVIC does not provide a defense to damages sought under the FCA. 24 On one level, the dispute in this case is essentially the same as the one in United States Cartridge Co., where the defendant operated a Government-owned ammunition plant during World War II. United States Cartridge Co., 198 F.2d at 458. The Government alleged that the defendant had presented claims for payment that were false because it fail[ed] to maintain a proper system of inspection and to produce the quality of ammunition called for by the contract. Id. In its answer, the defendant denied any wrongdoing and argued that its liability was limited by contractual terms similar to the HVIC. Id. at 459-60. After a bench trial, the district court dismissed the case, noting that the limitation of liability was stated in broad terms and did not violate public policy. Id. at 460-63. The Eighth Circuit affirmed the dismissal. Id. at 465. 25 Not surprisingly, the parties disagree as to whether and how the United States Cartridge Co. decision should affect our disposition of this case. We think that the district court correctly distinguished the two cases. See Roby I, 73 F.Supp.2d at 911-12 (emphasizing the emergency situation of war in United States Cartridge Co. and contrasting the extensive governmental control of a prime contractor in that case with the limited governmental monitoring in the case at bar). Moreover, we believe that the Government's public policy argument in this case is stronger than it was in United States Cartridge Co., where the Eighth Circuit concluded: 26 If this contract were to be regarded as one creating the conventional relationship between the Government and a commercial corporate contractor not subject to Government supervision and control, for the supplying of goods or services, and if the provisions limiting liability were to be viewed merely as an attempt to relieve such a contractor from liability for its own fraud, the Government's argument [that the limitation of liability was void] might perhaps be unanswerable. 27 But this was not a conventional Government contract made under normal conditions; it was an unusual arrangement made to meet a crisis.... The industrial units thus created are unique.    These plants embody a new and tripartite relationship among Government, labor, and management. 28 United States Cartridge Co., 198 F.2d at 464-65 (internal citation omitted). The contract in this case was a conventional one for the remanufacture of helicopters almost entirely during peacetime, and Boeing was not subject to Government supervision or control. These differences suggest that the limitation of liability in United States Cartridge Co. allocated risks in a way much more favorable to the defendant than does the HVIC. In short, we do not read the HVIC as an agreement by the Government to assume the risk of damages to high-value items that it sustains because of FCA violations. 29 Boeing implores us to hold the Government to its contractual responsibilities and points us to the Fourth Circuit's recent decision in United States v. Bankers Insurance Co., 245 F.3d 315 (4th Cir.2001), where the question on appeal was whether the existence of an FCA claim precludes arbitration of a contract dispute involving the Government. Id. at 318. The contract dispute concerned a federal agency and a private insurance company that had agreed to arbitrate any misunderstandings or disputes. Id. at 317-18. The Government contended that the Attorney General was not bound by the arbitration agreement because (1) he had not been a party to the agreement, id. at 319, and (2) arbitration would impair his exclusive authority to enforce the FCA. Id. at 324. Unpersuaded by these arguments, the Fourth Circuit ultimately required the Government to submit to nonbinding arbitration before litigating the FCA claim. Id. at 324-25. 30 According to Boeing, the holding in Bankers Insurance that the Government must satisfy its contractual obligations supports the proposition in this case that the Government may comply with the HVIC only by refraining from seeking damages under the FCA. That the Government is bound by the contracts that its authorized officials sign is incontrovertible. However, we cannot as readily agree with the inference that Boeing draws from Bankers Insurance for the resolution of this case. The Fourth Circuit recognized that FCA claims are premised on a unique statutory right and explicitly noted that the statutory authority of the Attorney General [to enforce the FCA would] not [be] compromised by making the Government honor its previous agreement to arbitrate. Bankers Ins., 245 F.3d at 325. In other words, the contract in Bankers Insurance merely deferred the litigation of the FCA claim until the nonbinding arbitration process had been completed. 31 In this case, however, Boeing's interpretation of the HVIC would absolutely foreclose the Government from recouping anything more than a $10,000 civil penalty for damages sustained because of a false claim for a high-value item, when the damages sustained could be far greater than the general $100,000 threshold for such items. Given Congress's explicit recognition while amending the FCA that a large number of fraud cases and many of the larger-dollar cases arise out of Department of Defense contracts, H.R.Rep. No. 99-660, at 20, 6 it strikes us as incongruous that the HVIC would relieve contractors for high-value items from the FCA's damages provision. After all, the motivating purpose of the FCA is to combat and to deter fraud, which would not be served in the context of defense contracts by the civil penalty alone. 32 In its brief, Boeing expounds at length on the negative implications, both fiscal and otherwise, of holding military contractors liable under the FCA for damages to high-value items. We agree with the Government and Roby that we should leave any revision of the FCA or the HVIC to Congress. In the case before us, Boeing was contractually required to ensure the quality of the parts used for the remanufacture of the Army's helicopters; its failure to do so resulted in the Government's acceptance and use of a helicopter that was not flight-ready and the subsequent loss of the helicopter. The HVIC does not foreclose the FCA as a means for the Government to recover damages for the loss of Aircraft 89-0165.