Fraud_17860840MediumIn parallel decisions published yesterday in Eyak Services, LLC and Eyak Technology, LLC, the ASBCA denied the sister companies’ motions for summary judgment or dismissal and the government’s cross-motion for summary judgment. By distinguishing situations in which fraud was conducted by an appellant contractor as opposed to a subcontractor, the ASBCA was able to maintain jurisdiction. The decisions mean that the parties will continue to litigate the question of whether Eyak owes the government more than $32 million in overpayments for contracts that were allegedly tainted by fraudulent subcontracts.

The dispute raises interesting jurisdictional questions during a time of increasing fraud counterclaims and investigations. These questions should be of particular concern for contractors given that the Mandatory Disclosure Rule requires disclosure to Inspectors General of every overpayment. The decision also reminds contractors that they can be significantly affected by a subcontractor’s misconduct.

The Eyak companies appealed CO final decisions in which the Government demands more than $32 million, which is the amount of overpayments allegedly received by the companies from the Army Corps of Engineers. Eleven individuals, including two former Government employees and one former Eyak employee, pled guilty to certain crimes related to a bribery and kickback scheme. The two agency employees awarded subcontracts in exchange for bribes. And the subcontractors allegedly inflated amounts in the invoices to prime contractors (the Eyak companies), which were subsequently submitted to and paid by the agency.

In December 2012, an agency CO issued final decisions to Eyak, asserting claims for the return of the overpayments related to the bribes and inflated invoices. The CO’s decisions referred to the criminal conspiracy and described markups that were added to certified invoices.

Eyak moved for summary judgment or dismissal, arguing that the Board lacked jurisdiction because the CO’s decisions were based on fraudulent conduct of particular individuals. Eyak also contended that the CDA does not allow COs to pursue claims for penalties or forfeitures arising from fraud—and that the ASBCA does not have jurisdiction over appeals involving claims for penalties arising from fraud. The Board disagreed, stating:

The government’s claims against ESL do not arise from any alleged fraud by ESL. The government simply seeks the return of alleged overpayments that it claims ESL was not entitled to receive. The claims allege that an established, fraudulent conspiracy by others caused the government to make overpayments to ESL in amounts that were unjustifiably inflated.

The Board reasoned that the Government would not need to prove that Eyak committed fraud to prove that an overpayment occurred. Rather, the ASBCA determined that the agency could prove an overpayment occurred based on the fraudulent acts of subcontractors. The Board also rejected Eyak’s argument that allowing the CDA claims to proceed when the Government may also pursue civil and criminal penalties could lead to double recovery; that potential remedial issue did not raise a jurisdictional concern in the Board’s view.

The ASBCA summarily denied the government’s cross-motions for summary judgment, explaining that Eyak had not admitted to overpayment and that the Government had the burden of proof on the amount of the overpayments.

Government contracts practitioners have expressed concerns that contractors are increasingly reluctant to file CDA claims because of a concern that CDA claims could spur investigations, audits, and fraud counterclaims. In Eyak, the contractors didn’t bring CDA claims, but will have to defend claims based on alleged overpayments resulting from fraud-related conduct of their subcontractors. This decision provides an additional reason for contractors to be vigilant regarding the selection and oversight of subcontractors.

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