The Armed Services Board of Contract Appeals (“ASBCA” or the “Board”) recently issued an opinion addressing several important, and controversial, topics of interest to government contractors.  The lengthy opinion addressed key issues related to the Board’s jurisdiction over government claims and affirmative defenses based on alleged contractor fraud, the Contract Disputes Act (“CDA”) statute of limitations, and the impact of criminal plea agreements and civil False Claims Act settlements on contract disputes.

This dispute arises out of a 2005 contract between the Defense Logistics Agency (“DLA”) and Supreme Foodservice (“Supreme”) to deliver food, bottled water, and other products to U.S. military forces servicing in Afghanistan. After award of the contract, Supreme, a Swiss company, formed Jamal Ahli Foods Co. LLC (“JAFCO”) in the United Arab Emirates, which Supreme effectively owned and controlled.  From 2005 through 2009, JAFCO marked up the goods it purchased, which increased the price that Supreme charged DLA.  In addition, Supreme failed to pass on to the Government other discounts or rebates provided by vendors.

In 2010, this conduct was the subject of a qui tam complaint filed by a former Supreme employee.  The complaint alleged that Supreme marked up its prices of Local Market Ready (“LMR”) items; falsely represented invoices of bottled water; and failed to disclose and pass on to DLA various discounts and rebates from vendors.  On December 8, 2014, Supreme entered into a civil False Claims Act settlement to resolve the qui tam allegations.  The same day, Supreme pled guilty to violations of 18 U.S.C. § 1031 (major fraud against the United States); 18 U.S.C. § 371 (conspiracy to commit major fraud against the United States); and 18 U.S.C. § 1343 (wire fraud).

The recent opinion concerns an appeal under the CDA by Supreme from the Contracting Officer’s denial of its claims for payments owed under the contract. It also addressed Supreme’s appeals from CO decisions asserting claims against Supreme, including on the  CO’s assertion that action by or attributable to Supreme rendered the contract void ab initio.  In the lead appeal, which involved contractor claims, DLA asserted multiple affirmative defenses, including conflict of interest; fraud in the inducement; and first material breach/breach of contract by Supreme.

The Board’s lengthy opinion addresses several key issues that should be of interest to government contractors. First, the opinion includes an extensive discussion of the Board’s jurisdiction over government claims and defenses based on alleged contractor fraud.  In its appeal, Supreme argued that the Board lacked CDA jurisdiction to consider DLA’s claims and defenses based on conflicts of interest and fraud, because these claims/defenses required the Board to determine whether Supreme committed common law fraud or submitted false claims in violation of the False Claims Act, or violated federal criminal conflict of interest laws–matters that traditionally have been outside the Board’s jurisdiction.  The Board rejected Supreme’s arguments on this issue.  While acknowledging that a Contracting Officer is not authorized to impose civil or criminal penalties for a fraudulent claim, per 41 U.S.C. § 7103(c)(2), it held that the Board has CDA jurisdiction to decide the parties contractual rights in a breach of contract case, even when fraud has been alleged as the basis for contract breach.  Similarly, the court held that it could decide the parties contractual rights where there were allegations of conflict of interest, because determining the parties’ contractual rights would not require adjudication of whether a crime was committed or impose any criminal punishments or civil penalties.  In sum, the Board’s decision emphasizes that, despite some jurisdictional limits, the Board is willing to consider Government allegations of contractor fraud when determining the contractual rights of parties.

Second, the opinion confirms that affirmative defenses are not subject to the CDA six-year statute of limitations.  The CDA requires that “each claim brought by the federal government against a contractor relating to a contract must be submitted within six years after the accrual of the claim.”  On appeal, Supreme alleged that certain of the DLA’s affirmative defenses were time-barred by the CDA’s six-year statute of limitations because they were effectively claims.  The Board rejected this argument, finding that DLA’s affirmative defenses were not “substantially the same” as its claims and holding that Supreme’s timeliness arguments were inapplicable to DLA’s affirmative defenses.  The Board’s express holding that affirmative defenses are not subject to the CDA statute of limitations directly addresses an important issue raised by the Federal Circuit’s decision in M. Maropakis Carpentry, Inc. v. United States, 609 F.3d 1323 (Fed. Cir. 2010).

Third, the opinion demonstrates the need for contractors to ensure that the resolution of any criminal allegations and civil False Claims Act allegations address contractual liability.  On appeal, Supreme alleged that its settlement with the government of the qui tam False Claims Act action against it released it from any civil or administrative monetary claim for the conduct covered by the settlement agreement.  The Board looked to the language of the settlement agreement and the “covered conduct” as defined by the agreement:  charging the government more than the price actually invoiced to JAFCO by manufacturers and suppliers; charging the government more for bottled water than vendors invoiced to Supreme; and failing to disclose or pass through to the government discounts and rebates.

The Board held that the settlement agreement released Supreme from any civil or administrative government monetary claims for the covered conduct, as defined by the agreement. Thus, the CO was barred from relying on such conduct as bases for the government’s claims that the contract was void ab initio.  The government was not barred from relying on such conduct as bases for its affirmative defenses, however, because the settlement agreement specifically excluded affirmative defenses from its releases.  The opinion underscores the importance of ensuring that resolutions of criminal and/or civil False Claims Act allegations resolve contractual liability to the fullest extent possible; failure to do so may allow for the covered conduct to serve as the basis of a government claim or affirmative defense.