FAR 52.246-2 is a fundamental clause governing inspection of supplies under fixed-price contracts, and it is ordinarily construed in the course of routine contract administration. A recent Fifth Circuit decision analyzed the clause in the context of allegations under the civil False Claims Act (“FCA”). In a significant holding, the Court concluded in United States ex rel. Spicer v. Navistar Defense, L.L.C., that the delivery of nonconforming vehicles by the contractor—which had been rejected by the Government under FAR 52.246-2 (and were then replaced)—could not be the basis for FCA liability under the facts of that case. This is a helpful ruling and demonstrates an appropriate limitation on relators’ attempts to transform ordinary contract issues/disputes into FCA claims.
In Spicer, the Fifth Circuit affirmed the district court’s ruling that a bankruptcy trustee had exclusive standing to assert the FCA claims at issue. The trustee’s complaint was based on a Government contract with Navistar Defense to manufacture certain military vehicles. The contract incorporated FAR 52.246-2, which required Navistar to provide and maintain an acceptable inspection system covering supplies under the contract. The FAR clause also mandated that Navistar tender to the Government only supplies that had been inspected in conformance with the inspection system and found by Navistar to be in conformity with contract requirements.
The trustee further alleged that a lower-tier subcontractor skipped a step in the process of applying a chemical agent resistant coating (“CARC”), but included a statement on invoices sent to Navistar that its finished component parts conformed to the relevant military specification.
The trustee claimed that Navistar violated certain FCA provisions, including 31 U.S.C. § 3729(a)(1), by transmitting invoices to the Government for vehicles that did not comply with the CARC system as required by the contract.
The district court granted defendants’ motions to dismiss. On appeal, the trustee argued that FAR 52.246-2 rendered each vehicle delivery an express false statement that Navistar had inspected the vehicle and knew that the vehicle conformed to the contract requirements. The court observed that the linchpin of an FCA claim resting on a violation of a statute or regulation is the requirement of a certification of compliance, adding that a false certification of compliance, without more, does not give rise to a false claim for payment unless payment is conditioned on compliance.
The court further explained that FAR 52.246-2 provides in part that the Government has the right to either reject or require correction of nonconforming supplies. The Fifth Circuit explained that the language establishing the Government’s ability to seek a range of remedies in the event of noncompliance suggests that payment was not conditioned on Navistar’s certification of compliance. Indeed, the Government had rejected some vehicles under the Navistar contract for lack of CARC coating, and the defective parts were then replaced. The court found that the Government’s rejection of those vehicles within the terms of FAR 52.246-2 belied the notion that Navistar made a material false or fraudulent statement within the meaning of the FCA.
Government contractors see relators increasingly attempting to transform routine contract issues (and disputes) into FCA allegations. The Spicer opinion makes clear that such attempts necessarily have limits. As the Fifth Circuit noted in affirming the trial court’s rejection of a request to file a second amended complaint: “In short, the alleged violation . . . is still more properly characterized as a breach of contract, not cognizable under the FCA.”