Kellogg Brown & Root Services, Inc. v. United States
2013 U.S. App. LEXIS 18447
| Fed. Cir. | 2013Background
- KBR held a LOGCAP III cost-plus-award-fee contract to provide DFAC (dining facility) services in Iraq and subcontracted DFAC work at Camp Anaconda to Tamimi in 2003; troop increases strained performance and procurement processes.
- KBR formed "master agreements" to expedite subcontracting; two KBR food-service managers (Hall and Holmes) accepted kickbacks from Tamimi’s VP in 2003–2004.
- Tamimi invoiced KBR on a per-person-per-day (PPPD) basis; DCAA and the Army audited and challenged Tamimi/KBR charges, finding approximately $41.1 million unreasonable for July–December 2004.
- KBR withheld payments, negotiated multiple change orders (including Change Orders 6 and 9) and attempted — unsuccessfully — to self-perform, leading to contested negotiated rates and credits; the Court of Federal Claims awarded KBR ~$11.46M as reasonable costs plus overhead/interest.
- The Government counterclaimed under multiple statutes (Anti‑Kickback Act, False Claims Act, Special Plea in Fraud, common-law fraud); the trial court awarded the Government $38,000 under the AKA (strict liability) but dismissed most other counterclaims.
- The Federal Circuit affirmed the court’s reasonableness finding, affirmed dismissal of the forfeiture and FCA claims and denial of common-law fraud, but reversed as to (1) the court’s calculation of KBR’s base fee and (2) the trial court’s refusal to impute employee knowledge to KBR for purposes of enhanced AKA liability, remanding for further proceedings.
Issues
| Issue | Plaintiff's Argument (KBR) | Defendant's Argument (U.S.) | Held |
|---|---|---|---|
| Standard for cost reasonableness under FAR §31.201‑3 | KBR: costs under cost‑reimbursement contracts are payable absent gross misconduct; court should defer to contractor judgment. | Gov: FAR §31.201‑3 governs and allows disallowance where costs are not those a prudent businessperson would incur. | Court: Affirmed use of FAR reasonableness standard; rejected KBR’s higher "gross misconduct" threshold. |
| Application of facts (self‑performance, negotiations, Army directives) in determining reasonable costs | KBR: trial court improperly focused on outcomes, second‑guessed arm’s‑length negotiations, ignored urgency/direction from Army. | Gov: evidence supports trial court’s factual findings that KBR’s conduct weakened its bargaining and justified adjustments. | Court: Affirmed trial court’s factual findings and weighing of evidence (review for clear error). |
| Calculation of base fee owed under LOGCAP III (1% of fee‑bearing costs) | KBR: base fee is 1% of negotiated estimated fee‑bearing costs and should not be reduced based on later findings of unreasonable costs. | Gov: argues award of remaining base fee at close‑out but offers no basis to award now. | Court: Reversed trial court’s calculation and remanded — base fee must be calculated consistent with contract language (1% of negotiated estimated fee‑bearing costs). |
| Imputation of employee knowledge/AK A liability (§55) | KBR: mid‑level employees’ kickback receipt should not be imputed for the higher §55(a)(1) penalty; only strict liability under §55(a)(2) applies. | Gov: KBR is vicariously liable under respondeat superior for §55(a)(1); employees acted within scope so knowledge imputes to KBR. | Court: Reversed trial court; both subsections permit vicarious liability and employee knowledge may be imputed; remanded to apply §55(a)(1) (higher penalty) consistent with respondeat superior. |
Key Cases Cited
- Boeing North American, Inc. v. Roche, 298 F.3d 1274 (Fed. Cir.) (unreasonableness under FAR may be found where contractor overcharged government)
- General Dynamics Corp. v. United States, 410 F.2d 404 (Ct. Cl.) (cost reasonableness is a factual question)
- Indiana Michigan Power Co. v. United States, 422 F.3d 1369 (Fed. Cir.) (appellate review: legal conclusions de novo, facts for clear error)
- Sevenson Environmental Services, Inc. v. Shaw Environmental, Inc., 477 F.3d 1361 (Fed. Cir.) (contract interpretation reviewed de novo)
- Daewoo Eng’g & Constr. Co. v. United States, 557 F.3d 1332 (Fed. Cir.) (forfeiture under §2514 requires clear and convincing proof of intent to defraud in claim submission)
- Glendale Federal Bank, FSB v. United States, 239 F.3d 1374 (Fed. Cir.) (same standard for §2514 intent)
- Meyer v. Holley, 537 U.S. 280 (U.S.) (general rule: agent knowledge imputed to principal when acting within scope)
- Long Island Savings Bank, FSB v. United States, 503 F.3d 1234 (Fed. Cir.) (adverse‑interest exception narrow; benefit to principal defeats it)
- Godley v. United States, 5 F.3d 1473 (Fed. Cir.) (fraud must causally taint contract to void it)
- Kolstad v. American Dental Association, 527 U.S. 526 (U.S.) (limitations on imputing agent misconduct for punitive damages context)