On October 31, 2015, the U.S. Court of Federal Claims (CoFC) in Horn & Associates, Inc. v. United States (No. 08-415C) rejected three fraud-based counterclaims that were filed by the U.S. Government in response to a breach of contract action brought by the plaintiff, Horn & Associates (Horn), through a certified claim under the Contract Disputes Act (CDA). The counterclaims were asserted under the Special Plea in Fraud statute, the False Claims Act, and the CDA, respectively. The CoFC dismissed the claims because the Government could not establish that Horn had intended for its certified claim to deceive the Government.
Horn is a cautionary tale for government contractors that submit certified claims under the CDA. As discussed below, Horn was vulnerable to fraud counterclaims because its certified claim was “prepared and presented  in an unorthodox and unfamiliar manner,” with a confusing quantification and presentation of damages. Although the CoFC dismissed the counterclaims, its opinion could be limited to its particular facts, which involved an unusually difficult calculation of damages. A lesson to be learned, however, is that government contractors might avoid such confusion (and such opportunistic counterclaims) by having sufficient clarity and transparency in the preparation and presentation of their certified claims.
Horn and NASA, the Contracting Agency
Horn is a recovery audit firm—i.e., a firm that identifies payment errors and supports the recovery of erroneous payments. In 2004, it was awarded a contract by the National Aeronautics and Space Administration (NASA) to perform recovery-audit services on payments made by NASA between October 1997 and September 2003. As compensation, Horn would receive a fixed contingency fee equal to 13.5% of NASA’s recovery on improper payments identified by Horn.
During the contract, Horn submitted between 400-450 claims to NASA for collection and payment. These claims identified approximately $121 million of (allegedly) improper payments. However, NASA approved only 45 of Horn’s claims, recovering approximately $200,000. Accordingly, Horn received a payment equal to 13.5% of this recovery: approximately $27,000. Negotiations after the contract ended in 2006 resulted in an additional payment to Horn of approximately $2,000.
Horn’s Certified Claim
In November 2007, Horn submitted a certified claim under the CDA. Horn argued that NASA breached its contract by failing to pursue improper payments identified by Horn and by obstructing further recovery-audit services on other payments within the contract scope. Horn sought, among other things, “to recover fees and costs incurred by Horn for which Horn received no compensation due to material breaches of its contract.”
Nevertheless, Horn’s claim was neither simple nor straightforward, and it was difficult for Horn to calculate the amount of damages that resulted from the alleged breach. As the CoFC stated, “quantification of damages is difficult and imprecise at best, especially when trying to prove that a contingency contract has been breached.” Horn’s quantification of damages depended on whether, but for NASA’s alleged breach, Horn would have identified other improper payments, and whether NASA would have concurred and recovered those payments.
Given this uncertainty, Horn presented three alternative measures of damages. First, Horn claimed $279 million in damages based on its extrapolation that, had NASA fulfilled its obligations under the contract, the agency would have recovered approximately $2.07 billion of improper payments. Second, Horn claimed $14.7 million in damages based on improper payments that it had identified, but that NASA did not recover. Third, Horn claimed $7.028 million, which it described as the “actual costs and expenses incurred by Horn and its independent subcontractors.” Horn stated in its certified claim that these damages—the smallest of the three alternatives—“would at least compensate Horn for its out-of-pocket expenses and for the time devoted to the performance” of the contract.
NASA denied Horn’s certified claim. Subsequently, Horn filed a complaint at the CoFC. The complaint included these three alternative measures of damages. As discussed below, the third measure of damages led to the Government’s counterclaims in fraud.
Interpreting “Actual Costs Incurred”
The Government scrutinized Horn’s characterization of the $7.028 million as “actual costs and expenses incurred.” Horn “actually incurred” only a portion of this amount as out-of-pocket expenses. The remainder of the $7.028 million was based on Horn’s after-the-fact calculation of an amount to compensate it for the time it had devoted to the contract. Because Horn had been working on a contingency fee basis, contract personnel had no requirement under the contract to maintain records of expenses and hours worked. As such, to support this portion of its $7.028 million claim, Horn relied on post hoc estimates and reconstructions of expense records and time diaries.
Government auditors reviewed the certified claim and found that Horn’s “actual” costs and expenses “did not exist, were not real, were never paid and were not liabilities.” This, in the Government’s view, was “quintessential fraud” under the Special Plea in Fraud statute, the False Claims Act, and the CDA. The Government asserted that Horn should (a) forfeit its entire certified claim pursuant to the Special Plea in Fraud statute, 28 U.S.C. § 2514; (b) be liable for statutory fines under the False Claims Act, 31 U.S.C. §§ 3729, et seq., for knowingly presenting a false or fraudulent claim for payment; and (c) remit payment to the Government for the unsupported amount, plus the costs of review, pursuant to the anti-fraud provision of the CDA, 41 U.S.C. § 604 (now 41 U.S.C. § 7103(c)(2)).
In response, Horn argued that the Government’s position “could only have merit if one suspends common sense, ignores context, and relies on unproved assumptions instead of reality.” Critically, Horn’s certified claim disclosed to NASA that Horn was relying on reconstructed records and that the $7.028 million was based in part on “time devoted” to the contract. In addition, NASA knew that the contingency-based contract did not require Horn to maintain records of hours and effort. Further, according to Horn, it had put forward the three measures of damages, including the claim for “actual costs incurred,” as good-faith alternative theories of recovery, not to trick the Government. Testimony offered at trial adduced that Horn’s principals did not know that “actual costs incurred” was a term defined by the Federal Acquisition Regulation, and that they did not intend to use it as such.
The CoFC Opinion
Ultimately, the CoFC concluded that the Government did not establish that Horn “intended to deceive the government, which is required to establish liability under the False Claims Act or to warrant forfeiture under the Special Plea in Fraud statute or the antifraud provision of the [CDA].” Although there were mistakes “in how information was characterized and presented to the government,” these mistakes were not made “with a reckless disregard for the claims’ truth or falsity.” The CoFC found that Horn “attempted, as best it could, with sincerity and without malicious intent or deviousness, to meet the requirement” to present a sum certain in its certified claim. In that regard, the presentation of “multiple, alternative calculations theories of how to quantify damages for monies . . . was [Horn’s] best effort to raise the breach issues in this contingency contract.”
As noted, Horn is a cautionary tale, underscoring that government contractors must exercise appropriate care and discretion when they prepare and file certified claims under the CDA. Horn’s unorthodox method of presenting three measures of damages—including one measure for costs purportedly incurred—raised suspicions and left it vulnerable to fraud counterclaims. Although the CoFC dismissed the counterclaims, its determination that Horn did not intend to deceive the Government appears to rely heavily on the difficulty Horn had in calculating its damages and on Horn’s attempts to be clear and transparent. Were it not for these countervailing facts, the counterclaims might not have been dismissed.