A recent appellate decision leaves federal contractors in a lurch when trying to assess the risk faced after defrauding the government, whether accidentally or otherwise. Federal law requires the U.S. Court of Federal Claims to declare “forfeiture” for any person who even attempts to defraud the United States Government. See 28 USC § 2514. Forfeiture means that the defrauding party loses its rights under the contract, which almost always means a contractor loses its right to payment. Unfortunately, the statute does not explain how the forfeiture penalty should be applied or how its application may change when different types of fraudulent conduct are involved. Recent court decisions have left the issue unresolved.
1. Broad vs. Narrow
From the forfeiture statute’s ambiguity arose two competing interpretations on how to apply forfeiture, referred to as the “broad” and “narrow” interpretations.[i] Under the broad interpretation, a contractor forfeits claims if any part of the contract was tainted with fraud.[ii] Under the narrow interpretation, a contractor forfeits only those claims that are themselves tainted with fraud, while allowing recovery for the value of any completed work.[iii]
For example, if a federal contractor commits fraud by submitting an invoice for work that was never actually performed, Courts interpreting narrowly would require the contractor to forfeit all claims arising from the fraudulent invoices, but would still allow the contractor to claim the value of properly invoiced work. On the other hand, Courts interpreting broadly would hold the entire contract forfeited by the one instance of fraudulent invoicing, thus requiring the contractor to forfeit all the claims on the contract and to pay back all the monies earned on the project.[iv] As this example demonstrates, the difference between applying a narrow or broad interpretation can amount to millions of dollars.
2. Types of Fraud
The type of fraudulent conduct at issue may change the application of both broad and narrow interpretations. There are two common instances of fraud in government contracts. The first is in fraudulently obtaining the award of the contract either by concealing a conflict of interest or making fraudulent misrepresentations on bid documents. Any fraud committed in obtaining the bid award makes the contract void ab initio, which means an enforceable contract never existed. In this instance, broad forfeiture would strip the contractor of any right to monies on the entire project – even the non-fraudulently performed work – because the contract is unenforceable. Narrow forfeiture would allow the contractor to recover for work actually performed, but nothing more.
The second common occurrence of fraud is where contractors invoice work that was not actually completed. In these situations, broad forfeiture would still require a contractor to forfeit all its claims on that contract even those claims based on properly invoiced work. On the other hand, narrow forfeiture would require a contract to forfeit only those claims directly related to the fraudulent invoices, but would allow claims on properly invoiced work.
3. The Federal Circuit’s Failure to Clarify
The U.S. Court of Federal Claims has used both “broad” and “narrow” interpretations without explicitly declaring one precedent over the other.[v] In 2012, the Court considered a case involving fraud both in obtaining the award and in later invoicing for unperformed work.[vi] The resulting decision was praised as a well-articulated ruling that teed up the forfeiture issues perfectly for the U.S. Court of Appeals for the Federal Circuit.[vii] The Court of Federal Claims ruled that despite fraud in obtaining the contract and the later fraudulent invoices, the contractor was entitled to recover for the value of the work performed, but was not entitled to the value of any work relating to the fraudulent invoices.[viii] Its reasoning fell squarely within the narrow application of 28 USC § 2514.
On appeal, however, the Federal Circuit reversed, holding that the contractor was not entitled to the value of validly performed work because it obtained the contract award by fraud, and forfeited all resulting claims under the contract.[ix] In an odd turn of events, however, the Federal Circuit never articulated the broad application of forfeiture. Furthermore, the Federal Circuit’s decision also appears to have misinterpreted the holding of the Court of Federal Claims on why the contractor was entitled to recovery for the value of the work it validly performed.[x] Because of this, the Federal Circuit’s ruling failed to clarify the tension between broad and narrow, leaving only inferences as to its intent.
COMMENT: Federal contractors should be aware of the potential ramifications of tainting a government contract with fraud of any kind. Acts of fraud can range from concealing a conflict of interest in a bid to falsifying information in bidding documents, or even improperly invoicing work during the project. Until the Federal Courts explicitly resolve the tension between broad and narrow interpretations of 28 USC § 2514, federal contractors should expect the worst and assume that all claims can be forfeited once a contract is tainted with fraud. Federal contractors should act with due diligence to avoid any accidental fraud in obtaining the award and throughout the life of the project.
[i] Ralph C. Nash, The Court of Federal Claims Forfeiture Statute: Broad or Narrow?, 28 Nash & Cibinic Report NL ¶ 20 (2014).
[iv] See Little v. U.S., 138 Ct. Cl. 773, 152 F. Supp. 84 (1957).
[v] See Nash, supra, note i.
[vi] Veridyne Corp. v. U.S., 105 Fed. Cl. 769 (2012).
[vii] Ralph C. Nash, Postscript: The Court of Federal Claims Forfeiture Statute, 28 Nash & Cibinic Report NL ¶ 49 (2014).
[ix] Veridyne Corp. v. U.S., 758 F.3d 1371 (Fed. Cir. 2014).