In late January, the Eleventh Circuit reversed the Northern District of Alabama in U.S. ex rel. Marsteller et al. v. Tilton et al., and revived a whistleblower suit relating to the sale of helicopters under the U.S. foreign military sale (“FMS”) program.  The court of appeals determined that the district court must consider the relator’s allegations in light of the Supreme Court’s decision on implied false certification under the False Claims Act (“FCA”) in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016).  As discussed more fully below, the ruling by the district court could have broad implications for FCA claims involving government contractors.

The defendants in Marsteller are MD Helicopters (“MD”), Patriarch Partners (“Patriarch”), Lynn Tilton (CEO of both MD and Patriarch) (“Tilton”), and Army Colonel Norbert Vergez (“Vergez”).  Vergez was a procurement official responsible for purchasing helicopters under the FMS program.  The relators are former MD employees, who allege that Tilton promised Vergez a high-paying job upon his retirement from the Army, and also provided him with other improper benefits while a federal government employee.  In return, they allege, Vergez provided Tilton with sensitive information that allowed her to inflate the prices MD charged under the FMS program.

The relators alleged that the improprieties in the relationship between Tilton, MD, and Patriarch, on the one hand, and Vergez, a procurement official, on the other hand, were sufficient to amount to potential violations of criminal law including fraud, conflict of interest, bribery or gratuity, and that the contractors’ failure to make a disclosure under Federal Acquisition Regulation (“FAR”) 52.203-13, Contractor Code of Business Ethics and Conduct, was sufficient to state a cause of action under the FCA.  FAR 52.203-13 created liability under the FCA.  FAR 52.203-13 requires that contractors timely disclose, in writing, to the Inspector General and contracting officer whenever the “contractor has credible evidence that a principal, employee, agent, or subcontractor of the contractor has committed a violation of federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code or a violation of the civil False Claims Act.”  The district court dismissed the relators’ complaint on this issue, ruling that compliance with FAR 52.203-13 is not an “express condition to payment.”  The court also determined that relators failed to establish that compliance with FAR 502.203-13 was a “material contractual requirement.”

Relators further alleged that Tilton, MD and Patriarch violated the Truth in Negotiations Act, 10 U.S.C. § 2306a  (“TINA”), which requires an offeror to certify that it has disclosed current, accurate and complete cost and pricing data in connection with price negotiations and contract awards.  The district court similarly dismissed these allegations because relators had not sufficiently alleged that compliance with TINA is a prerequisite to payment sufficient for liability under the FCA.

On appeal, the Eleventh Circuit reversed and remanded the case to the district court with instructions to analyze relators’ allegations in accordance with the Supreme Court’s Escobar decision.  As the Eleventh Circuit discussed, Escobar clarified two central and interrelated principles of FCA liability.  First, the implied certification theory can be a basis of liability at least where a party, in requesting payment, makes certain representations that are misleading because of the omission of violations of statutory, regulatory or contractual requirements; any such requirement need not be an express condition of payment for liability to attach.  Second, such an omission must be material to give rise to FCA liability.   

The district court now must consider whether a contractor’s failure to make a disclosure under either FAR 52.203-13 or TINA may be sufficient to constitute a violation of the FCA under the implied certification theory.

In light of the foregoing, contractors should take special care in their representations to the government.  This case suggests that a contractor may face liability under the FCA for failing to make a disclosure of “credible evidence” of a violation of law under Title 18 or the civil FCA under FAR 52.203-13.  The case further suggests that a contractor may face liability under the FCA for incomplete disclosures under TINA.  We will continue to track this case as it develops and we will discuss further implications for FCA actions as they arise.