6th Circuit Draws a Bright Line Between Regulatory Non-Compliance and Fraudulent Inducement in a Defense Contracting Case

Takeaway: 6th Circuit provided a path forward for a common defense contracting fraud allegation.

In United States ex rel. USN4U, LLC v. Wolf Creek Federal Services[1] the 6th Circuit overturned the lower courts dismissal of a qui tam complaint that alleged a NASA contractor knowingly inflated the prices of its labor costs in Cost Estimates for fixed price contracts. As a result of the inflated prices, the anonymous relator alleged that NASA repeatedly overpaid for services that it never received.

The district court granted the Wolf Creek defendants’ motion to dismiss on the basis that work order proposals submitted to NASA were not “claims” under the FCA, that the relator had failed to present evidence of falsity since the relator only used “industry standards” as a comparison to demonstrate the quotes were inflated, and that the relator did not plead that inflated quotes were materials.

Specifically, the district court found that the relator had not demonstrated that the inflated quotes “were material and caused the Government to pay more money to Wolf Creek than it would have paid had it known the true labor costs” because NASA kept contracting with Wolf Creek after NASA became aware of the fraud allegations adding that “this is a logical explanation for why the Government declined to intervene in this case.”[2]

In overturning the district court’s decision, the 6th Circuit found that falsely inflated estimates could have a tendency to influence NASA’s contracting decision. Since the estimate could influence the decision to award the contract, the inflated estimates could create liability under the fraudulent inducement theory of the FCA.

Having found that the inflated cost estimates could create fraudulent inducement liability, the court determined that the Government’s decision to continue contracting with Wolf Creek “after discovering the alleged fraud is not dispositive of the materiality inquiry.”[3] The court then distinguished “regulatory non-compliance” from a “gross overpayment for labor that was not actually performed” and found that “regulatory non-compliance can be minor or insubstantial in some cases, while gross overcharging for work not done goes inherently ‘to the very essence of the bargain.’”[4] The court further reiterated the well-established point that the Government’s decision not to intervene in a particular FCA case does not imply that a claim is not material.

Of note, for fraudulent inducement claims, where the fraud is in the actual submissions and is designed to be relied on, the 6th Circuit has determined that continued payment does not invalidate materiality.

[1] No. 20-4246, — F.4th. —-, 2022 WL 1531966 (6th Cir. June 9, 2022).

[2] Id. at *2.

[3] Id. at *5 (cleaned up).

[4] Id. at *6 (quoting Universal Health Servs., Inc. v. United States, 579 U.S. 176, 194, 136 S.Ct. 1989, 195 L.Ed.2d 348 (2016).

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